Vidler's water rights in the Harquahala Valley are primarily located in Maricopa County. According to census data, Maricopa County was the fastest growing county in the U.S. between April 1, 2000 and July 1, 2001, with 53,367 new homes added, an increase of 4.3% in 15 months. Vidler anticipates that there will be municipal demand for water from the Harquahala Valley to support the growth of the west side cities in Maricopa County, which are part of greater metropolitan Phoenix.
Any new residential development in Arizona must obtain a permit from the Arizona Department of Water Resources certifying a "designated assured water supply" sufficient to sustain the development for at least 100 years. The Harquahala Valley ground water meets the designation of assured water supply. In order for the ground water to be used by municipalities in the heavily populated parts of Arizona, the water must be "wheeled", or transported, from the Harquahala Valley to the end users. The Arizona State Legislature has passed legislation which allows Harquahala Valley ground water to be made available as assured water supply to cities and communities in Arizona through agreements with the Central Arizona Groundwater Replenishment District.
In March 2002, Vidler concluded its first sale of Harquahala Valley ground water for municipal use, with the sale of 3,645 acre-feet of water rights and 1,215 acres of land in the Harquahala Valley ground water basin, to golf course developers near Scottsdale. The sale price represents $1,450 per acre-foot of water. The sale added $5.2 million to revenues and approximately $1.9 million to gross margin in 2002.
Vidler is working jointly with Lincoln County to locate and develop water resources in Lincoln County, Nevada. Lincoln County and Vidler have filed applications for more than 100,000 acre-feet of water rights, covering substantially all of the unappropriated water in the County, with the intention of supplying water to rapidly growing communities and industrial users. We believe that this is the only known new source of water for Lincoln County.
Pending resolution of the final amount of water to be permitted, Vidler has reached tentative agreement to put this water to beneficial use within Nevada, to support additional growth at Primm, Nevada. Primm is a resort town on the border between California and Nevada, in the Interstate 15 corridor. The water rights awarded to Vidler are the only known water to support future growth in Primm and surrounding areas in Nevada near the California state line.
At December 31, 2002, Vidler owned approximately 221 acre-feet of Muddy River water rights, and had the right to acquire an additional 45.6 acre-feet. The Southern Nevada Water Authority has been acquiring Muddy River water rights as a water resource for future growth.
In October 2002, the Regional Water Planning Committee accepted the North Valley Water Supply Comparison report. This study re-evaluated the feasibility and potential cost of supplying future North Valleys water demands with continued exportation of water from the Truckee River Basin, or, alternatively, meeting the demands from Fish Springs and two other basins. The study indicated that groundwater from Fish Springs would be the most economical source of supply. Alternatively, if the capacity of nearby transmission lines can be expanded, we believe that Fish Springs Ranch would be an attractive site for gas-fired electricity generation.
During 2002, Vidler closed on two previously disclosed agreements to sell Colorado assets:
- - in March, Vidler sold its interest in Cline Ranch to Centennial Water and Sanitation District, which added $2.1 million to revenues and $119,000 to gross margin; and
- - in December, Vidler completed the sale of 86 acre-feet of water rights to the East Dillon Water District, which added $3.1 million to revenues and $401,000 to gross margin.
An agreement to sell the Wet Mountain water rights for approximately $414,000 is in escrow, and scheduled to close in 2003. Discussions are continuing to either lease or sell the remaining water rights in Colorado.
During 2000, Vidler completed the second stage of construction at its facility to "bank," or store, water underground in the Harquahala Valley, and received the necessary permits to operate a full-scale water "recharge" facility. "Recharge" is the process of placing water into storage underground. Vidler has the permitted right to recharge 100,000 acre-feet of water per year at the Vidler Arizona Recharge Facility, and anticipates being able to store in excess of 1 million acre-feet of water in the aquifer underlying much of the valley. When needed, the water will be "recovered," or removed from storage, by ground water wells.
Vidler has the only permitted, complete private water storage facility in Arizona. Given that Arizona is the only southwestern state with surplus flows of water available for storage, we believe that Vidler's is the only private water storage facility where it is practical to "bank", or store, water for users in other states, which is known as "interstate banking". Having a permitted water storage facility also allows Vidler to acquire, and store, surplus water for re-sale in future years.
The Southern Nevada Water Authority Water Resource Plan, which can be viewed at www.snwa.com, calls for 1.2 million acre-feet of water to be stored in Arizona in order to meet forecast demand after 2015. The AWBA is currently finalizing agreements to store water on behalf of Nevada. Once these agreements have been concluded, the AWBA can begin to negotiate storage for California. The AWBA will be able to store water at existing publicly owned sites and at the Vidler Arizona Recharge Facility, which is one of the largest water storage facilities. Vidler has agreed on a price of $48.00 per acre-foot of water recharged in 2003, if any of the users represented by the AWBA store water at the facility in 2003.
The strategic value of the guaranteed right to recover an amount of water from Semitropic every year -- even in drought years -- became clear to water agencies, developers, and other parties seeking a reliable water supply. For example, developers of large residential projects in Kern County and Los Angeles County must now be able to demonstrate that they have sufficient back-up supplies of water in the case of a drought year before they are permitted to begin development. Accordingly, during 2001, Vidler took advantage of current demand for water storage capacity with guaranteed recovery, and began to sell its interest in Semitropic. The strategic value of the guaranteed right to recover water was again highlighted by two court decisions in February 2003 which held that developers could not rely on water from state water projects.
In May 2001, Vidler closed the sale of 29.7% of its original interest (i.e., approximately 55,000 acre-feet of water storage capacity) to The Newhall Land and Farming Company for $3.3 million, resulting in a pre-tax gain of $1.6 million. This transaction added $1.6 million to revenues and segment income in 2001.
In September 2001, Vidler closed the sale of another 54.1% of its original interest (i.e., approximately 100,000 acre-feet of water storage capacity) to the Alameda County Water District for $6.9 million, resulting in a pre-tax gain of $4.1 million. This transaction added $4.1 million to revenues and segment income in 2001.
Vidler's remaining interest includes approximately 30,000 acre-feet of storage capacity. We have the guaranteed right to recover a minimum of approximately 2,700 acre-feet every year. In some circumstances, we have the right to recover up to approximately 6,800 acre-feet in any one year. We are considering various alternatives for the remaining interest, including sale to developers or industrial users. Currently Vidler is not storing any water at Semitropic for third parties. Vilder is required to make annual payments of $519,000 under its agreement with Semitropic Water Storage District.
PICO first invested in HyperFeed in 1995 through the purchase of common stock. We invested further capital in HyperFeed as debt, which was later converted to equity, and received warrants for providing financing. In 2000 and 2001, we further increased our holding through open market purchases and the conversion of preferred stock. In August 2002, we exercised warrants to buy 949,032 new shares of HyperFeed for approximately $305,000, or $0.3215 per share, being the average closing bid price on the NASDAQ National Market for the 20 trading days preceding the exercise date. PICO now owns 11,026,888 HyperFeed common shares, increasing our voting ownership to approximately 44.1%.
On August 16, 2002, HyperFeed disclosed in a press release that "the Company's Board of Directors recently rejected two conditional and non-binding offers to purchase HYPR at prices that the Company felt did not fully recognize the intrinsic value of its technology and the opportunities available for more substantial creation of shareholder value by more aggressively capitalizing on its technological advantages." During August and September 2002, HyperFeed announced a number of changes to senior management. On October 21, 2002, HyperFeed announced a series of restructuring measures, including a 21% work force reduction, the consolidation of excess facilities, and a refocusing on profitable business segments, which HyperFeed "expected to result in $2.2 million in annual net expense reductions."
In September 2002, we acquired 17,505 shares for approximately $2.8 million, and became the largest shareholder in Jungfraubahn. Despite the increase in our shareholding to more than 20%, we continue to account for this investment under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." At this time, we do not believe that we have the requisite ability to exercise "significant influence" over the financial and operating policies of Jungfraubahn, and therefore do not apply the equity method of accounting.
In the press release, Jungfraubahn indicated that it expected transport revenues of approximately CHF (Swiss Francs) 83.7 million ($US54.5 million) for 2002. On a comparable basis, transport revenues declined by CHF 2.2 million ($US1.4 million) year over year to approximately CHF 71.9 million ($US46.8 million), however the consolidation of Grindelwald-First Aerial Cableway AG ("BGF") for the first time in 2002 added transport revenues of approximately CHF 11.8 million ($US7.7 million). As expected, visitor numbers from Japan, Jungfraubahn's most important inbound market, and the USA were down significantly, but the shortfall was partly made up by increased numbers of passengers from other countries. For example, the number of visitors to Jungfraujoch-Top of Europe declined 2.4% year over year. In addition, domestic passenger numbers were down during the summer season due to prolonged poor
In the most recent published balance sheet -- December 31, 2001 -- Jungfraubahn had book value of approximately CHF 505.9 ($US366.30) per share. At December 31, 2002, Jungfraubahn's stock price was CHF 255 ($US184.64).
ACCU HOLDING AG PICO owns 8,125 shares in Accu Holding, which represents a voting ownership interest of approximately 28.3% of the Company. Due to a number of factors, we do not have the ability to exercise significant influence over Accu Holding's activities, so the investment is carried at market value under SFAS No. 115.
Accu Holding manufactures batteries at two plants in Switzerland. Accu is adjusting its production and cost structure following a decline in demand for batteries during the economic slowdown. The Company is also preparing to redevelop the site of a former factory near Zurich, which could have significant value.
Over the past 3 years, there has been a protracted downturn in global stock markets, which has affected the stock prices of many publicly traded companies. According to Bloomberg data, during 2000, 2001, and 2002, the Wilshire 5000 Index (the best known indicator of the performance of the broad U.S. stock market) declined by 39.6%.
- - such charges for other-than-temporary impairments do not affect book value per share, as the after-tax decline in the market value of investments carried under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," is already reflected in shareholders equity in our balance sheet; and
The written-down value becomes our new basis in the investment. In future accounting periods, unrealized gains or losses from that level will be recorded in shareholders' equity, and when the investment is sold a realized gain or loss from that level will be recorded in the statement of operations. See "Results of Operations -- Years Ended December 31, 2002, 2001, and 2000."
SIHL's operations were adversely affected by the economic downturn in late 2001 and 2002, and SIHL was unable to improve profitability and reduce debt as previously expected.
In 2001, we recorded a pre-tax impairment of $2.1 million for an other-than-temporary decline in the market value of this security, primarily due to the extent and duration of the decline in the market value of the security. During 2002, the stock continued to decline which, combined with an announcement from SIHL that a total sale of the company for more than the current market value of the stock was unlikely, caused us to record a further $1.6 million pre-tax impairment for an other-than-temporary decline.
The impairments have reduced our basis in SIHL to $768,000, which is equivalent to our carrying (market) value at December 31, 2002. Such other-than-temporary impairments recorded in 2001 and 2002 did not affect PICO's shareholders' equity or book value per share.
The maturity of securities in Citation's bond portfolio is structured to match the projected pattern of claims payouts. At December 31, 2002, the duration of Citation's bond portfolio was 3.9 years, and the duration of the Physicians bond portfolio was 3.6 years. A duration of 5 years is generally regarded as medium term.
The equities portion of the insurance company portfolios primarily consists of positions in a limited number of small-capitalization value stocks in the U.S. These positions have been accumulated at a significant discount to our estimate of the private market value of each company's underlying "hard" assets (i.e., land and other tangible assets). To a lesser extent, the insurance companies buy smaller interests in fundamentally undervalued stocks with high dividend yields, in the U.S. and selected foreign markets. Dividends and realized gains or losses from stocks held in the insurance company portfolios are reported in the Insurance Operations in Run Off segment (and in the case of Sequoia, in Discontinued Operations).
Physicians wrote its last policy in 1995; however, claims can be filed until 2017 resulting from events allegedly occurring during the period when Physicians provided coverage.
Changes in assumptions about future claims trends and the cost of handling claims can lead to significant increases and decreases in our loss reserves. When loss reserves are reduced, this is referred to as favorable development. If loss reserves are increased, the development is adverse.
During 2002, our medical professional liability insurance claims reserves, net of reinsurance, decreased from $34.9 million to $30.3 million. Claims payments for the year were approximately $3.6 million, accounting for 78% of the net decrease in reserves during 2002. Due to continued favorable trends in the "severity" (size) of claims, and, to a lesser extent, the "frequency" (number) of claims, independent actuarial analysis of Physicians' loss reserves as of September 30, 2002 concluded that Physicians' reserves against claims were greater than the actuary's projections of future claims payments. Reserves were increased in 10 of Physicians' 20 accident years from 1976 until 1996 (by $3.4 million), and reduced in the other 10 accident years (by $4.4 million), resulting in a net reduction of approximately $1 million, or 2.9% of reserves at the start of the year.
The net reduction in reserves of approximately $1 million was primarily a product of the following factors:
- - due to a decrease in claims severity, Physicians reduced its reserve for IBNR claims by approximately $3 million;
- - in addition, two adjustments related to reinsurance had a net effect of $49,000 -- an increase in ceded reserves of $820,000, and a decrease in reserves related to retroactive reinsurance of $771,000.
The decline in severity is illustrated by the average indemnity payment declining from approximately $180,000 in 2001 to approximately $108,000 in 2002. We are currently projecting further decreases in severity in future years - at December 31, 2002, the average case reserve per open claim was approximately $73,000.
In 2000, our medical professional liability insurance claims reserves, net of reinsurance, decreased from $53.7 million to $51.6 million. An accounting change, implemented as of January 1, 2000, eliminated the discounting of loss reserves, which increased reserves by $7.3 million, to $61 million. Claims payments for the year were $10.9 million. Actuarial analysis of Physicians' loss reserves as of September 30, 2000 concluded that Physicians' direct reserves contained approximately $10 million in redundancy; however, this was more than offset by $11.5 million of redundancy in reserves ceded to our reinsurance companies. Consequently, Physicians increased reserves by approximately $1.5 million. There were no changes to key actuarial assumptions in 2000.
Citation went into "run off" from January 1, 2001. At December 31, 2002, after two years of "run off," Citation had $14.6 million in loss and loss adjustment expense reserves after reinsurance.
Changes in assumptions about future claims trends and the cost of handling claims can lead to significant increases and decreases in our loss reserves. Due to the large number of claims received in the artisans/contractors line of business in 1997, 1998, and 1999, Citation was forced to increase its reserves in each of those years. Citation reduced claims reserves by $282,000 in 2000, increased reserves by $56,000 in 2001, and reduced reserves by $889,000 in 2002. In 2002, the change in reserves was less than 5% of total reserves at the start of the relevant year. In 2001 and 2000, the reserve changes were less than 1% of beginning reserves.
During 2002, Citation's property and casualty insurance claims reserves, net of reinsurance, decreased from $19.2 million to $14.6 million. Claims payments for the year were $3.7 million, accounting for approximately 80% of the net decrease in reserves during 2002. Actuarial analysis of Citations' loss reserves as of December 31, 2002 continued to show a redundancy in the carried reserves of Citation, which we reduced during 2002 by $889,000. The reserve redundancy reflects the reduction in the "severity" (size) of claims described in preceding paragraphs.
During 2001, Citation's property and casualty insurance claims reserves, net of reinsurance, decreased from $23.4 million to $19.2 million. Claims payments for prior years reduced reserves by $4.5 million, and essentially accounted for the net reduction in reserves for the year. This was partially offset by $172,000 in incurred loss and loss adjustment expenses for the 2001 accident year, consisting of paid losses of $54,000 and additions to reserves of $118,000. A $56,000 increase in prior year loss reserves was recorded.
During our ownership, Sequoia managed its business with the aim of having a combined ratio of less than 100% each year, although this was not always achieved. Sequoia's combined ratios on a GAAP basis for the past 3 years were:
For 2002, Sequoia's combined ratio was 101.6%, compared to 105.4% in 2001, and 106.3% in 2000.
Sequoia's underwriting expense ratio (i.e., operating expenses as a percentage of earned premiums) was 35.4% in 2002, compared to 36.3% in 2001, and 38.6% in 2000. The progressive reduction in the underwriting expense ratio was primarily due to economies of scale. Sequoia's earned premiums grew by 11.3% in 2002 and 29.2% in 2001. As fixed underwriting expense items (i.e., expenses which do not change with volume) were spread over a larger base of revenue, these expenses declined as a percentage of earned premium.
- - Vidler Water Company and Nevada Land & Resource Company's land, water rights, and water storage operations;
At December 31, 2002, the loss reserves, net of reinsurance, of our three insurance subsidiaries were:
See "Insurance Operations In Run Off," and "Discontinued Operations" on preceding pages in Item 7.
Our principal long-lived assets are land, water rights, and interests in water storage operations owned by Vidler, and land at Nevada Land. At December 31, 2002, the total carrying value of land, water rights, and interests in water storage assets was $116.8 million, or 29.5% of PICO's total assets.
If we determine that the carrying value of an asset cannot be justified by the forecast future cash flows of that asset, the carrying value of the asset is written down to fair value immediately.
At December 31, 2002, PICO and its subsidiaries held equities with a carrying value of approximately $47.4 million (excluding equities held by Sequoia in Discontinued Operations). These holdings are primarily small-capitalization value stocks listed in the U.S., Switzerland, and New Zealand. Depending on the circumstances, and our judgment about the level of our involvement with the investee company, we apply one of two accounting policies.
While the method of accounting we use clearly has no impact on the underlying economic performance of the investee, the use of market value accounting or the equity method can result in significantly different carrying values at specific balance sheet dates, and contributions to our statement of operations over the course of the investment. The total impact of the investment on PICO's shareholders' equity over the entire life of the investment will be the same whichever method is adopted.
In a subsequent quarterly review, if we conclude that an unrealized loss previously determined to be temporary is other-than-temporary, an impairment loss will be recorded. The other-than-temporary impairment charge will have no impact on our financial condition or book value per share, as the decline in market value has already been recorded through shareholders' equity. However, there will be an impact on our net income before and after tax and on our reported earnings per share, due to recognition of the unrealized loss and tax effects. When a charge for other-than-temporary impairment is recorded, our basis in the security is decreased. Consequently, if the market value of the security later recovers and we sell the security, a correspondingly greater gain will be recorded in the statement of operations.
Revenue on the sale of land, water, and water rights is recognized in full when (a) there is a legally binding sale contract; (b) the profit is determinable (i.e., the collectibility of the sales price is reasonably assured, or any amount that will not be collectible can be estimated); (c) the earnings process is virtually complete (i.e., we are not obliged to perform significant activities after the sale to earn the profit, meaning we have transferred all risks and rewards to the buyer); and (d) the buyer's initial and continuing investment are adequate to demonstrate a commitment to pay for the property. If these conditions are not met, we use the deposit method of accounting. Under the deposit method of accounting, until the conditions to fully recognize a sale are met, payments by the buyer are recorded as liabilities and no gain is recognized.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
At December 31, 2002, PICO had shareholders' equity of $221 million ($17.86 per share), compared to $207.9 million ($16.81 per share) as restated at the end of 2001, and $202.1 million ($16.31 per share) as restated at the end of 2000. Book value per share increased by 6.2% in 2002, and 3.1% in 2001.
At December 31, 2002, on a consolidated basis, available for sale equity securities showed a net unrealized gain of $10 million after tax. This total consists of approximately $10.2 million in gains, partially offset by $170,000 in losses. No individual equity security had an unrealized loss, net of tax, of more than $60,000.
As Sequoia is now accounted for as a Discontinued Operation, under GAAP the presentation of Sequoia's income, assets and liabilities, and cash flow in our financial statements for all years in this 10-K has changed:
- - in our Consolidated Statements of Operations, Sequoia's after-tax income is now recorded in one line, "Income from discontinued operations, net." Consequently, Sequoia's revenues, expenses, and pre-tax income are no longer reported separately, and are not included in the following segmental analysis;
- - in the Consolidated Balance Sheet, Sequoia's assets are grouped in the lines "Investments held by discontinued operations" and "Other assets of discontinued operations," and its liabilities are combined in the lines "Unpaid losses and loss adjustment expenses of discontinued operations" and "Other liabilities of discontinued operations;" and
- - in the Consolidated Statements of Cash Flows, Sequoia's cash flow is reported in one line in each category of cash flow.
- - income of $2.7 million before taxes and minority interest from continuing operations;
- - income from discontinued operations (i.e., Sequoia) of $2.3 million after-tax.
The $9.4 million in tax benefits recorded in 2000 is made up of several items. These include a $4.4 million cash refund resulting from the successful appeal of a prior year tax ruling in Canada, and a $3.3 million expense which was recognized to increase federal income tax valuation allowances recorded against tax assets in some of our subsidiaries.
COMPREHENSIVE INCOME In accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," PICO reports comprehensive income as well as net income from the Consolidated Statement of Operations. Comprehensive income includes items resulting in unrealized changes in shareholders' equity, such as foreign currency translation and change in unrealized investment gains and losses on available-for-sale securities.
- - a $17.2 million comprehensive loss in 2000. This was comprised of the $11.3 million net loss, and movements of $4.3 million in net unrealized change in investments and foreign currency translation of $1.6 million.
The principal items in the $2.7 million in income before taxes and minority interest in 2002 were:
- - income of $484,000 from Nevada Land on revenues of $4.4 million, which included $3.1 million from the sale of land and water rights;
- - $4.3 million in income from Insurance Operations in Run Off, consisting of a $2.2 million pre-tax profit from Citation and a $2.1 million pre-tax profit from Physicians.
Most of the water rights and water storage operations acquired by Vidler since we entered the water business have been development-stage assets which were not ready for immediate commercial use. Although Vidler began to generate significant revenues from the sale of water rights in 2001, the segment is still incurring costs related to long-lived assets which will not generate revenues until future years, e.g., operating, maintenance, and amortization expenses at storage facilities which are not yet storing water for customers.
- - the sale of 6,496.5 acre-feet of transferable ground water and 2,589 acres of land in Arizona's Harquahala Valley Irrigation District to a unit of Allegheny Energy, Inc. This transaction added $9.4 million to revenues, comprised of the $9.1 million sales price and a $300,000 option fee earned, and contributed $2.3 million to segment income;
- - the sale of 29.7% of Vidler's original interest in the Semitropic Water Banking and Exchange Program (i.e., approximately 55,000 acre-feet of storage capacity, out of the original 185,000 acre-feet) for $3.3 million. This transaction added $1.6 million to revenues and to segment income; and
In 2001 Vidler recognized revenues of $390,000 from the sale of water rights to the City of Golden, Colorado.
During 2000, Vidler sold water rights and the related land and tunnel assets to the City of Golden for $1 million, and 3,691 acre-feet of water which had been "banked" at the Semitropic water storage facility for $509,000.
The leasing of agricultural land generated revenues of $690,000 in 2002, $795,000 in 2001, and $959,000 in 2000. Agricultural land lease revenues have decreased as a result of the sale of farm properties in the Harquahala Valley, as described above.
Other Revenues, which include interest and various revenues from properties farmed by Vidler (e.g. sales of hay and cattle) were approximately $730,000 in 2002, $1.7 million in 2001, and $467,000 in 2000. In 2001, Other Revenues included a $600,000 gain from granting an easement to El Paso Natural Gas Company in the Harquahala Valley.
Total segment expenses, including the cost of water rights and other assets sold, increased from $8 million in 2000, to $13 million in 2001, and $14.7 million in 2002. However, excluding the cost of water rights and other assets sold and related selling costs, segment operating expenses were $5.7 million in 2000, $5.6 million in 2001, and $5.7 million in 2002.
In 2002, segment operating expenses were $68,000 higher than in 2001. Decreases of $150,000 in interest expense and $332,000 in depreciation and amortization charges were offset by a $550,000 increase in operations, maintenance, and other expenses. This was primarily a result of professional fees related to various legal issues and water rights applications in Nevada, including the 2,100 acre-feet of water rights in the Tule Desert Groundwater Basin permitted in 2002.
Segment operating expenses decreased $107,000 in 2001 from 2000, primarily as a result of decreases of $175,000 in interest expense and $229,000 in operations, maintenance, and other expenses, which were partially offset by $297,000 higher depreciation and amortization charges. Interest expense declined due to the repayment of the non-recourse debt on the Harquahala Valley farm properties which were sold during the year. The decrease in operations and maintenance expense was primarily due to a lower obligation to contribute to operations and maintenance expense at the Semitropic water storage facility, as our interest in the asset reduced. The increase in depreciation and amortization expense was primarily due to the start of amortization of improvements at the Vidler Arizona Recharge Facility. Since construction of the improvements required to recharge water was complete and the facility was ready for use, from March 1, 2001 Vidler began to amortize the improvements at the facility over 15 years. The annual amortization charge will be approximately $518,000, and the charge for 2001 was $421,000.
Nevada Land generated revenues of $4.4 million in 2002, compared to $3.2 million in 2001, and $5.3 million in 2000.
Most of the variation in revenue from year to year is caused by fluctuations in the level of land sales. In 2002, Nevada Land recorded revenues of $2.8 million from the sale of 28,451 acres of land. In 2001, we generated $1.9 million in from the sale of 15,632 acres of land, compared to $3.7 million from the sale of 28,245 acres in 2000.
In 2002, Nevada Land also generated $270,000 in revenues from the sale of 2,860 acre-feet of permitted water rights.
Segment operating expenses were unusually high in 2002 due to approximately $900,000 in legal and related expenses related to land development issues. In 2001, segment expenses included a $541,000 write-down of Nevada Land's interest in Silver State Land, LLC, an entity which had filed applications for approximately 51,000 acre-feet of water rights in various locations geographically unrelated to Nevada Land's properties. Since our priority is to first pursue the water rights applications filed by Lincoln/Vidler and by Nevada Land on its own properties, due to the uncertainty of realizing the value of these applications we reduced the carrying value of Silver State to zero. The Silver State water rights applications were the only water rights applications with a carrying value in our financial statements.
The $353,000 increase in segment income from 2001 to 2002 is primarily due to the higher gross margin on land sales and the contribution from the water rights sale, which exceeded the increase in operating expenses discussed in the preceding paragraph. Segment income decreased $1.8 million from 2000 to 2001, principally due to a $1.1 million reduction in the gross margin on land sales, the $541,000 write down of Silver State, and the $270,000 land exchange gain included in 2000.
The Business Acquisitions and Financing segment recorded revenues of $8.5 million in 2002, compared to negative $3.7 million in 2001, and negative $5.2 million in 2000. Revenues in this segment vary considerably from year to year, primarily due to fluctuations in net realized gains or losses on the sale or impairment of holdings. Holdings are not sold on a regular basis, but when the price of an individual security has significantly exceeded our target, or if there have been changes which we believe limit further appreciation potential on a risk-adjusted basis. Consequently, the amount of net realized gains or losses recognized during any accounting period has no predictive value.
A net realized gain of $3.4 million was recognized in 2002. This principally consisted of:
- - a $7.8 million gain on the sale of our common shares in AOG; which was partially offset by
- - a $1.6 million charge for other-than-temporary impairment of our investment in SIHL (see the SIHL section of the "Company Summary, Recent Developments and Future Outlook" portion of Item 7);
In 2001, a $6 million net realized investment loss was recorded. This was comprised of a $3 million in charges for other-than-temporary impairment of our holdings in SIHL and Solpower, a $2.5 million SFAS No. 133 loss to reflect a decrease in the value of warrants we own in other companies (principally HyperFeed Technologies, Inc.) during 2001, and a $500,000 write-off of the remaining carrying value of the loan to MKG Enterprises. In addition, although this did not affect the segment, a cumulative effect of a change in accounting principle reduced income by $981,000 to reflect the after-tax decline in the estimated fair value of warrants during the period from the acquisition of the various warrants through to December 31, 2000.
Other revenues were $2.1 million in 2002, $466,000 in 2001, and $936,000 in 2000.
PICO's equity share of investees' income (loss) represents our proportionate share of the net income (loss) and other events affecting equity in the investments which we carry under the equity method, less any dividends received from those investments. In 2002, an equity share of investees' loss of $2.2 million was recorded, compared to equity share of investees' losses of $1.5 million in 2001, and $1.3 million in 2000. Here is a summary of the principal investments which we accounted for under the equity method in each of the past three years:
In 2002, the segment loss consists of investment income of $2.5 million and other revenues of $2.1 million, which were more than offset by the $2.2 million equity share of investees' losses and segment expenses of $7.4 million. Segment expenses include the accrual of $2 million in incentive compensation, other parent company overhead of $4.6 million, and SISCOM expenses of $1.4 million. Segment expenses were reduced by a $2.7 million benefit resulting from the effect of appreciation in the Swiss Franc on an inter-company loan during 2002.
In 2000, the segment loss included investment income and other revenues of $2.5 million. These were more than offset by the $7.8 million in realized losses described above, segment expenses of $9.9 million, and our equity share of investees' losses of $1.3 million. Segment expenses include a $2.3 million operating loss from Conex for the period prior to its sale, and a $1.6 million operating loss from SISCOM. The foreign currency expense was $41,000.
Physicians' total revenues were $1.1 million in 2002, compared to $2.6 million in 2001, and $3.4 million in 2000.
In 2002, Citation generated total revenues of $1.6 million. Revenues primarily consisted of $1.6 million in investment income and realized gains of $391,000, which were partially offset by a reduction in earned premiums of $424,000 related to reinsurance. This represented additional reinsurance required for the workers compensation line of business, which Citation stopped writing in 1997, after PICO took over management of the company. Citation is not liable for any additional reinsurance in this line of business. Citation recorded approximately $889,000 of favorable development in prior year loss reserves, which more than offset operating expenses of approximately $277,000, resulting in a net underwriting recovery of $612,000. As a result of these factors, Citation generated income of $2.2 million before taxes for 2002.
In 2000, Citation's revenues included investment income of $2.6 million, earned premiums of negative $158,000, and negative goodwill amortization of $568,000. Although Citation earned $564,000 in property and casualty premiums in 2000, this was more than offset by a $722,000 reduction in earned premiums related to reinsurance. After expenses of $1.9 million, including a partially offsetting $282,000 benefit from favorable development in prior year loss reserves, Citation earned a $1.2 million pre-tax profit for 2000.
From 2000 to 2001, Citation's pre-tax profit increased $1.7 million. While revenues increased $312,000 year over year, underwriting and other expenses declined by $1.3 million after the company went into "run off."
In 2002, Sequoia's revenues included earned premiums of $47.1 million, investment income of $3.8 million, and a net realized gain on the sale of bonds and stocks of $1.3 million. Earned premiums increased 11.3% from the previous year, and consisted of $37.4 million from commercial lines and $9.7 million from personal lines. For 2002, Sequoia reported a loss from operations (i.e., income before investment income, realized gains, and taxes) of $517,000, and income before taxes of $4.6 million. This included an additional expense of $622,000 due to adverse development in prior year loss reserves, principally in the 2001 accident year. After income taxes of $1.5 million and an $199,000 after-tax expense for an accounting change, Sequoia contributed $2.8 million to net income, which is recorded in the "Income from discontinued operations, net" line in the Consolidated Statement of Operations. The accounting change represented the write-off of goodwill items determined to be impaired, following the adoption of SFAS No. 142.
In 2001, Sequoia's revenues included earned premiums of $42.3 million, investment income of $3.7 million, and realized gains of $1.5 million. For 2001, Sequoia reported a loss from operations (i.e., income before investment income, realized gains, and taxes) of $1.9 million, and income before taxes of $3.3 million. This included an additional expense of $738,000 to recognize adverse development in prior year loss reserves. After income taxes of $1 million, Sequoia contributed $2.3 million to net income.
In 2000, Sequoia's revenues included $32.7 million in earned premiums, $2.8 million in investment income, and realized gains of $99,000. For 2000, Sequoia reported a loss from operations of $1.5 million, which included an additional expense of $252,000 to recognize adverse development in prior year loss reserves, and income before taxes of $1.3 million. After income taxes of $385,000, Sequoia contributed $953,000 to net income.
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
PICO Holdings, Inc. is a diversified holding company. Our assets primarily consist of our operating subsidiaries, holdings in other public companies, marketable securities, and cash and cash equivalents. On a consolidated basis, the Company had $22.1 million in cash and cash equivalents at December 31, 2002, compared to $16.3 million at December 31, 2001.
In addition to the $22.1 million in consolidated cash and cash equivalents as defined by GAAP, at December 31, 2002, the parent company held investment-grade fixed-income securities maturing during 2003 with a market value of $11.2 million.
- - As its "run off" progresses, Physicians Insurance Company of Ohio is obtaining funds to pay operating expenses and claims from the maturity of fixed-income securities, the realization of investments, and recoveries from reinsurance companies; and
The Departments of Insurance in Ohio and California prescribe minimum levels of capital and surplus for insurance companies, and set guidelines for insurance company investments. PICO's insurance subsidiaries structure the maturity of fixed-income securities to match the projected pattern of claims payments; however, it is possible that fixed-income and equity securities may occasionally need to be sold at unfavorable times when the bond market and/or the stock market are depressed.
- - in 2002, approximately $12.1 million in proceeds from water rights and land sold by Vidler and $8.5 million in cash generated by discontinued operations (Sequoia); and
- - in 2001, $9.4 million in total receipts from Vidler's sale of water rights and land in the Harquahala Valley Irrigation District. In all three years, the principal uses of cash were operating expenses at Vidler, claims payments by Physicians and Citation, and overhead expenses.
Investing Activities used $28.4 million of cash in 2000. Most of the Investing Activities cash flow represents activity in the investment portfolios of our insurance companies, where the proceeds of cash and cash equivalents and maturing fixed-income securities were reinvested in longer-dated corporate bonds and, to a lesser extent, in small-capitalization value stocks. In addition, Vidler made a $2.3 million payment related to the Semitropic Water Banking and Exchange Program.
At December 31, 2002, PICO had no significant commitments for future capital expenditures.
As of December 31, 2002, no stock had been repurchased under this authorization.
Guarantee agreement with Semitropic Water Storage District ("Semitropic") that requires PICO to guarantee Vidler's annual obligation up to $519,000, adjusted annually by the engineering price index.
The following table is included as supplementary disclosure to show the effect on book value per share, which is our key benchmark, if all outstanding stock options are exercised.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a liability be recorded in the guarantor's balance sheet upon issuance of a guarantee at its fair value. In addition, FIN 45 requires certain disclosures about each of the entity's guarantees. The Company will apply the recognition provisions of FIN 45 prospectively to guarantees issued after December 31, 2002. The disclosure provisions of FIN 45 are included herein.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires the consolidation of certain variable interest entities by the primary beneficiary of the entity if the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or if the equity investors lack the characteristics of a controlling financial interest. FIN 46 is effective for variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied in the first interim or annual period beginning after June 15, 2003. The Company believes the effect of the adoption of FIN 46 will not have any effect on its results of operations and financial position.
PICO is a diversified holding company with operations in land and related water rights and mineral rights; water rights and water storage; insurance operations in run-off, and business acquisitions and financing. Each of these areas is unique, complex in nature, and difficult to understand. In particular, water rights is a developing industry within the western United States with very little historical data, very few experts and a limited following of analysts. Because we are so complex, analysts and investors may not be able to adequately evaluate our operations, and PICO in total. This could cause them to make inaccurate evaluations of our stock, or to overlook PICO, in general. These factors could have a negative impact on the trading volume and price of our stock.
We do not know of any reliable statistical data that would enable us to predict the probability of success or failure of our acquisitions and investments, or to predict the availability of suitable investments at the time we have available cash. You will be relying on the experience and judgment of management to locate, select and develop new acquisition and investment opportunities. Sufficient opportunities may not be found and this business strategy may not be successful. We have made a number of acquisitions in the past that have been highly successful and we have also made acquisitions that have lost money. Further details of realized and unrealized gains and losses can be found in the notes 1,2,3 and 4 to the accompanying consolidated financial statements and in
PICO's financial statements as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 and the independent auditors' report is included in this report as listed in the index.
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001 AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- "running off" the loss reserves of Citation Insurance Company and Physicians Insurance Company of Ohio.
On December 16, 1998, PICO acquired the remaining 48.8% of the outstanding stock of Global Equity Corporation ("Global Equity") through a Plan of Arrangement (the "PICO/Global Equity Combination") whereby Global Equity shareholders received 0.4628 of a newly issued PICO common share for each Global Equity share surrendered. Immediately following the close of the transaction, PICO effected a 1-for-5 reverse stock split (the "Reverse Stock Split").
The Company's primary subsidiaries as of December 31, 2002 are as follows:
Investments in which the Company owns at least 20% but not more than 50% of the voting interest and, or has the ability to exercise significant influence are generally accounted for under the equity method of accounting. Accordingly, the Company's share of the income or loss of the affiliate is included in PICO's consolidated results. Currently, the only significant investment the Company classifies as an equity affiliate is HyperFeed Technologies, Inc. ("HyperFeed"). HyperFeed provides financial market data and data delivery solutions to the financial services industry. PICO owns approximately 44% of the outstanding voting stock of HyperFeed.
The Company's investment portfolio at December 31, 2002 and 2001 is comprised of investments with fixed maturities, including U.S. government bonds, government sponsored enterprise bonds, and investment-grade corporate bonds; equity securities, including common stock, and common stock purchase warrants; and mortgage participation interests.
The Company has subsidiaries and makes acquisitions in the U.S. and abroad. Approximately $41.1 million and $36.8 million of the Company's investments at December 31, 2002 and 2001, respectively, were invested internationally, including equity values of affiliates. The Company's most significant foreign currency exposure at December 31, 2002 is in Swiss francs.
Goodwill represents the difference between the purchase price and the fair value of the net assets (including tax attributes) of companies acquired in purchase transactions. Intangibles are generally assets arising out of a contractual or legal right. The Company applies the provisions of newly enacted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Consequently, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value for impairment. The adoption of SFAS No. 142 is reflected in Company's consolidated financial statements as a cumulative effect of change in accounting principle. The cumulative adjustment of $2 million is comprised of a gain from recognizing negative goodwill of $2.8 million offset by write-off's of goodwill of $800,000. The positive goodwill of $800,000 was deemed impaired based on the present value of the underlying cash flows. Included within the caption "Other assets of discontinued operations" is $2.2 million of intangible assets that are being amortized over seven years.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure". SFAS No. 148 provides alternative methods of transition for those entities that elect to voluntarily adopt the fair value accounting provision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 148 also requires more prominent disclosures of the pro forma effect of using the fair value method of accounting for stock based employee compensation as well as pro forma disclosure of the effect in interim financial statements. The transition and annual disclosure provision of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure requirements are effective for the first interim period ending after December 15, 2002. PICO has not elected to adopt the fair value accounting provisions of SFAS No. 123, but rather has elected to continue accounting for stock based compensation under the intrinsic value method of APB No. 25, "Accounting for Stock Issued to Employees."
Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS No. 148, the Company's net loss and net loss per share would approximate the following pro forma amounts for the years ended December 31:
The accumulated balance is net of deferred income tax liabilities of $3.5 million and $1.5 million at December 31, 2002 and 2001, respectively.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure". SFAS No. 148 provides alternative methods of transaction for those entities that elect to voluntarily adopt the fair value accounting provisions of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148 also requires more prominent disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation as well as pro forma disclosure of the effect in interim financial statements. The transition and annual disclosure provisions of SFAS No. 148 included herein. The interim disclosure requirements are effective for the first interim period ending December 15, 2002. The Company has not elected to adopt the fair value accounting provisions of SFAS No. 123.
On October 21, 2002, PICO signed a definitive agreement to sell Sequoia Insurance Company. It is anticipated that the sale will close on or around March 31, 2003. The sale is conditional on the approval of the California Department of Insurance, which was received on March 17, 2003, and other customary closing conditions. The final sale price will be determined after the closing, with a base price of $40 million, which is subject to adjustment based on movement in either US GAAP shareholders' equity or statutory surplus between June 30, 2002 and the date of closing. Consequently, in accordance with SFAS No. 144, Sequoia's results of operations for all periods presented have been reclassified as discontinued operations in the accompanying consolidated financial statements. Certain major assets and liabilities of Sequoia are grouped and presented on the face of the accompanying consolidated balance sheets as assets and liabilities of discontinued operations, and results of operations from discontinued operations are shown on the face of the statement of operations as a single line. The following is a detail of Sequoia's results for the period included in the accompanying consolidated financial statements:
The following is the results of operations of Conex for the period in 2000 prior to its disposition:
considered goodwill, which is no longer being amortized beginning January 1, 2002. For the year ended December 31, 2002, no goodwill was amortized given the provisions of SFAS No. 142.
At December 31, 2001, the Company's investment in HyperFeed consisted of 10,077,856 shares of common stock, representing 42.4% of the common shares outstanding; and 4,055,195 common stock warrants which on a diluted basis would represent an additional 14.5% voting interest if exercised. The common stock is recorded using the equity method of accounting and has a carrying value of $2.1 million at December 31, 2001. The difference between the carrying value of the investment and the underlying equity in the net assets or liabilities of HyperFeed is considered goodwill and was being amortized over 10 years on a straight-line basis. At December 31, 2001, the common stock warrants were valued at an estimated fair value of $527,000, prior to a $1.2 million deferred tax asset, using the Black-Scholes option-pricing model. The warrants are reported as a derivative instrument under the provisions of SFAS 133 and consequently the loss for the 2001 year is reflected in the caption "Net Realized Loss on Investments" in the Statement of Operations. The cumulative change in fair value from the date of acquisition to January 1, 2001 was a decline of $1.3 million and is recorded net of a deferred tax benefit on the Statement of Operations.
In 2001, the Company converted its HyperFeed Series A voting convertible preferred shares, and its Series B voting convertible preferred shares into 7,462,856 newly issued common shares. After the conversion, PICO owned 42.4% of the outstanding voting interest.
Finance receivables are primarily from the sale of land and at December 31, 2002, have a weighted average interest rate of 8.75% and a weighted average life to maturity of approximately 7 years.
Other accounts receivable include $2.3 million due from Dominion Capital Pty. Ltd ("Dominion"), which is affiliated with the Company through a mutual ownership in Solpower Corporation. During 2001, an allowance for the total outstanding balance owed by Dominion of $2.3 million was recorded due to the uncertainty surrounding the recovery of the balance.
Depreciation expense was $456,000, $598,000, and $617,000 in 2002, 2001, and 2000, respectively.
PICO Holdings 1995 Non-Qualified Stock Option Plan. PICO was authorized to issue 521,030 shares of common stock pursuant to awards granting non-qualified stock options to full-time employees (including officers) and directors. The options granted to employees vested at a rate of 33% upon grant and 33% per year on each of the first two anniversaries of the date of grant. A total of 512,005 options have been issued from this plan and at December 31, 2002 452,896 are outstanding. The Company granted stock options in 1996 and 1995 under this plan in the form of non-qualified stock options. All issued options from this plan are fully vested.
PICO Holdings 1998 Stock Option Agreement. PICO was authorized to issue 100,000 shares of common stock pursuant to awards granted in various forms, including incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended), non-qualified stock options, and other similar stock-based awards. In October 1998, PICO granted 100,000 non-qualified common stock options to an officer of the Company at an exercise price of $15.625 per share. These options were cancelled during 2001.
PICO Holdings 1998 Global Equity/PICO Stock Option Plan. In December 1998, PICO assumed 484,967 options to existing Global Equity option holders pursuant to the acquisition of the remaining shares of Global Equity by exchanging PICO options for Global Equity options. The options granted from this plan placed the participants in an economically equivalent position regarding the number of shares, exercise price, and with vesting according to their original terms. The options expired at December 31, 2002.
Reserves for unpaid losses and loss adjustment expenses on MPL and property and casualty business represent management's estimate of ultimate losses and loss adjustment expenses and fall within an actuarially determined range of
Physicians prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Ohio Department of Insurance ("Ohio Department"). Citation and Sequoia prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the California Department of Insurance. Prescribed statutory accounting practices include guidelines contained in various publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The Ohio Department's prescribed accounting practices do not allow for discounting of claim liabilities. However, for years prior to 2000, the Ohio Department permitted Physicians to discount its losses and loss adjustment expenses related to its MPL claims to reflect anticipated investment income. Permission was granted due primarily to the longer claims settlement period related to MPL business as compared to most other types of property and casualty insurance lines of business. In 2000 the Ohio Department of Insurance withdrew permission to discount MPL claims reserves in Physicians' statutory financial statements. In addition, Physicians no longer discounts MPL reserves in its GAAP financials. Activity in the reserve for unpaid claims and claim adjustment expenses was as follows for each of the years ended December 31:
During 2001, medical professional liability insurance claims reserves, net of reinsurance, decreased from $51.6 million to $34.9 million and during 2002 decreased from $34.9 million to $30.3 million. Actuarial analysis of Physicians' loss reserves concluded that Physicians' reserves against claims were significantly greater than the actuary's projections of future claims payments. Accordingly, Physicians reduced its claims reserves by approximately $11.2 million in 2001.
The regulations of the Departments of Insurance in the states where the Company's insurance subsidiaries are domiciled generally restrict the ability of insurance companies to pay dividends or make other distributions. Based upon statutory financial statements filed with the insurance departments as of December 31, 2002, $4.3 million was available for distribution by the Company's wholly-owned insurance subsidiaries to the parent company without the prior approval of the Department of Insurance in the states in which the Company's insurance subsidiaries are domiciled.
The Company is subject to various other litigation that arises in the ordinary course of its business. Based upon information presently available, management is of the opinion that such litigation will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
The employment agreements entered into with Ronald Langley and John R. Hart in 1997 and renewed for 4 years on January 1, 2002 for annual base salaries of $800,000 subject to annual adjustment in January of each year in the same percentage applicable to PICO's other staff members in an amount deemed adequate to provide for inflation, cost of living, and
20 merit increases based on the CPI and major compensation studies. Each is also entitled to an incentive award based on the growth of the Company's book value per share in excess of a threshold that is calculated as 80% of the previous five year average total return for the S&P 500. At December 31, 2002, the growth in book value per share exceeded the threshold and an award was accrued in the accompanying consolidated financial statements of $1.5 million. No award was paid during 2001 or 2000 under this program.
Certain of the Company's subsidiaries had stock option arrangements with officers and other employees for stock of the respective subsidiary. Options are granted under these arrangements at the estimated fair value of the subsidiary's stock at the time of grant. Therefore, no compensation was recorded by the Company related to these arrangements. During 2000, 19,037 options to acquire 1.9% of the existing shares of Vidler were exercised for $109,000 and a loss, calculated in accordance with Staff Accounting Bulletin No. 51, of $526,000 before tax was recorded on the sale.
During 2000, the Company sold its interest in Conex Continental Inc. to Dominion Japan, a Japanese corporation. PICO and Dominion, through its parent, Dominion Capital Pty. Ltd., each have an ownership interest in the common stock of Solpower Corporation. PICO accounts for Solpower at cost and records gains or losses under SFAS 115. PICO loaned Solpower $500,000 to purchase its 50% interest in Protocol Resource Management, Inc. and PICO acquired the other 50% of Protocol. The loan bears interest at 10.8% and PICO received a warrant to purchase 1 million shares of Solpower common stock. PICO recorded its interest in Protocol using the equity method of accounting. In 2002, PICO purchased the remaining 50% of Protocol by redeeming the loan with Solpower. Later in 2002, PICO sold its entire interest in Protocol to an unrelated third party for $400,000. During 2000, PICO loaned approximately $2.2 million to Dominion Capital Pty. Limited. The loans bear interest at a weighted rate of 10.2% and were due in 2001. In May 2001, one of the loans for $1.2 million became overdue. Negotiations between PICO and Dominion Capital to reach a settlement agreement on both the overdue loan of $1.2 million and the other loan of $1 million proved unsuccessful. Accordingly, PICO has commenced legal actions through the Australian courts against Dominion Capital to recover the total amount due to PICO Holdings. Due to the inherent uncertainty involved in pursuing a legal action and our ability to realize the assets collateralizing the loans, PICO recorded an allowance for the total outstanding balance of $2.3 million for the loans and interest during 2001.
The Company and its wholly-owned insurance subsidiaries' policyholders' surplus and net income (loss) as of and for the years ended December 31, 2002, 2001 and 2000 on the statutory accounting basis are as follows:
Sequoia Insurance Company is a wholly owned subsidiary of Physicians Insurance Company of Ohio. In the table above, the statutory surplus of Sequoia ($32.3 million in 2002, $29.3 million in 2001, and $23.4 million in 2000) is also reflected in statutory surplus of Physicians.
PICO is engaged in land and related mineral rights and water rights operations through its subsidiary Nevada Land. Nevada Land owns approximately 1.2 million acres of land and related mineral and water rights in northern Nevada. Revenue is generated by land sales, land exchanges and leasing for grazing, agricultural and other uses. Revenue is also generated from the development of water rights and mineral rights in the form of outright sales and royalty agreements.
PICO seeks to acquire businesses which are as undervalued based on fundamental analysis -- that is, the assessment of what the company is worth, based on the private market value of its assets, and/or earnings and cash flow. The Company has acquired businesses and interests in businesses through the purchase of private companies and shares in public companies, both directly through participation in financings and from open market purchases. The business must have special qualities, such as unique assets, a potential catalyst for change, or it is in an industry with attractive characteristics. When buying a company, the Company has a long term horizon, typically 5 years or more, however the Company is prepared to sell if the price received
- INVESTMENT IN AFFILIATE: Investments in which the Company owns between 20% and 50%, and/or has the ability to significantly influence the operations and policies of the investee, are carried on the equity method. The balance of the investment is regularly evaluated for impairment by comparing the carrying value to quoted market prices.
- BANK AND OTHER BORROWINGS: Carrying amounts for these items approximate fair value because current interest rates and, therefore, discounted future cash flows for the terms and amounts of loans disclosed in Note 20, are not significantly different from the original terms.
At December 31, 2002 and 2001, bank and other borrowings consisted of loans and promissory notes incurred to finance the purchase of land and equity securities. The weighted average interest rate on these borrowings was approximately 5.4% and 7.2% at December 31, 2002, and 2001, respectively with principal and interest due throughout the term.
Global Equity SA has a loan facility with a Swiss bank which matures by March 2003, for a maximum of $10.9 million (15 million CHF) based on a margin not higher than 30% of the securities deposited with the bank. It is anticipated the Company will refinance the loan facility when it becomes due. The actual amount available is dependent on the value of the collateral held after a safety margin established by the bank. It may be used as an overdraft or for payment obligations arising from securities transactions. At December 31, 2002 and 2001, $8.8 million bearing interest at 3.33% and $7.8 million bearing interest at 5.58% is outstanding.
At December 31, 2002 and 2001, $5.8 million and $6.8 million, respectively of the total outstanding borrowings was held within Vidler, primarily incurred to finance the acquisition of lands in the Harquahala Valley. The weighted average rate of interest on these notes is 8.5% and is collateralized by the purchased properties.