(a) Includes net securities gains (losses) of $29,624,000, $124,479,000, $16,268,000, $(66,159,000) and $3,943,000 for the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively.
As of December 31, 2001, the Company's readily available cash, cash equivalents and marketable securities, excluding those amounts held by its regulated subsidiaries, totaled $805,000,000. This amount is comprised of cash and short-term bonds and notes of the United States Government and its agencies of $495,800,000 (62%), the equity investment in WMIG of $130,500,000 (16%) described below, and other publicly traded debt and equity securities aggregating $178,700,000 (22%). Additional sources of liquidity as of December 31, 2001 include $163,800,000 of cash and marketable securities collateralizing letters of credit and $102,600,000 of cash, cash equivalents and marketable securities held by Fidei.
During 2001, the Company borrowed $53,100,000 secured by its corporate aircraft. This debt bears interest based on a floating rate, requires monthly payments of principal and interest and matures in ten years. The Company has entered into an interest rate swap agreement for this financing, which fixed the interest rate at approximately 5.7%.
otherwise. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice.
In May 2001, the Company invested $75,000,000 in a new issue of restricted convertible preference shares of WMIG, which was subsequently converted into 375,000 common shares that represent approximately 4% of WMIG. At December 31, 2001, the investment is carried at its aggregate market value of $130,500,000 in the Company's consolidated balance sheet.
In December 2001, the Company invested $50,000,000 in a limited partnership that will invest primarily in securities and other obligations of highly leveraged, distressed and out of favor companies. The Company may redeem up to 50% of its investment annually beginning in June 2003 and up to 100% of its investment in December 2004, or otherwise in certain specified circumstances. The Company will account for this investment under the equity method of accounting.
In 2001 and 2000, net cash was used for operations, reflecting lower investment income on corporate investments as a result of the Dividend payment in 1999, payment of the Parent's interest and overhead expenses and a reduction of payables related to the trading portfolio. The Company's continuing business segments generated cash from operating activities, except for certain of the Company's real estate operations that required a net use of cash to fund operating expenses and working capital.
In the past, the Company has at times funded the construction and/or expansion of its manufacturing facilities with industrial revenue bonds. At December 31, 2001, the Company has $9,800,000 principal amount outstanding for such financing. The Company used $18,300,000 of its available cash resources to construct the plastics division's Belgium facility, which was completed in 2001.
During 2001, Fidei's debt declined by $83,400,000 (94,600,000 Euros) due to the maturity and early extinguishment of certain debt. The pre-tax gain on this early extinguishment was not material. As of December 31, 2001, the principal amount of Fidei's remaining Euro denominated outstanding debt, all of which is non-recourse to the Company, was $91,000,000 (103,200,000 Euros). Inasmuch as Fidei's Euro denominated cash, cash equivalents and marketable securities approximate its Euro denominated debt, the Company does not believe there is currently a need to acquire a currency hedge for Fidei's debt.
As shown below, at December 31, 2001, the Company's contractual cash obligations and commercial commitments totaled $937,100,000 and $619,000,000, respectively. The Company's debt instruments require maintenance of minimum Tangible Net Worth, limit distributions to shareholders and limit Indebtedness, as defined in the agreements. In addition, the debt instruments contain limitations on investments, liens, contingent obligations and certain other matters. The Company is in compliance with all of these restrictions, and the Company has the ability to incur substantial additional indebtedness or make substantial distributions to its shareholders and still remain in compliance with these restrictions.
The allowance for loan losses is established through a provision that is charged to expense. As of December 31, 2001, the Company's allowance for loan losses was $35,700,000 or 6.8% of the related outstanding loan receivable balance of $521,200,000. The allowance for loan losses is an amount that the Company believes will be adequate to absorb probable losses inherent in its portfolio of existing loans based on the Company's evaluations of the collectibility of loans and prior loan loss experience. Factors considered by the Company include actual experience, current economic trends, aging of the loan portfolio and collateral value. During periods of economic weakness, delinquencies, defaults, repossessions and losses generally increase. These periods may also be accompanied by decreased demand and declining values of automobiles securing outstanding loans, which weakens collateral coverage and increases the amount of a loss in the event of default. In addition, incentives offered by the automobile industry on new
As of December 31, 2001, the carrying amount of the Company's investment in the mining properties of MK Gold was approximately $51,100,000. The recoverability of this asset is entirely dependent upon the success of MK Gold's mining project at the Las Cruces copper deposit in the Pyrite Belt of Spain. Mining will be subject to obtaining required permits (currently underway), obtaining both debt and equity financing for the project, engineering and construction. Recently, the market price of copper has been depressed, reflecting generally weak global economic conditions. The amount of financing which can be obtained for the project and its related cost will be significantly affected by the assessment of potential lenders of the current and expected future market price of copper. In addition, the actual price of copper and the operating cost of the mine will affect the recoverability of this asset. Based on the current status of the project and MK Gold's estimate of future financing costs and future cash flows, the Company believes the asset is recoverable. Actual results could differ.
Finance revenues, which reflect the level and mix of consumer instalment loans, increased in each of the last two years due to greater average loans outstanding. Average loans outstanding were $545,000,000, $423,000,000 and $238,600,000 for 2001, 2000 and 1999, respectively. Although finance revenues increased in 2001 as compared to 2000, pre-tax results declined primarily due to a larger provision for loan losses, changes in market values of interest rate swaps, higher interest paid on interest rate swaps, charges recorded in connection with the Company's decision to stop originating new subprime automobile loans and to consolidate all operations in Salt Lake City, and higher interest expense due to the increased customer banking deposits through September of 2001.
In an effort to increase operating efficiencies, the Company has filed an application with the OCC to merge AIB and AIF. Although the Company anticipates that the merger will be approved during the first quarter of 2002, no assurance can be given that it will be approved. As a result of its decision to stop originating new subprime automobile loans and this planned merger, the Company has been consolidating all operations in Salt Lake City. Pre-tax results for the banking and lending segment include $7,100,000 of charges related to this consolidation, primarily resulting from the closing of AIB's Indianapolis office.
The increase in finance revenues in 2000 as compared to 1999 was primarily due to the 1999 acquisition of the operations of a subprime lender and increased new loan originations. Pre-tax results declined in 2000 as compared to 1999 primarily due to an increase in the provision for loan losses, higher interest expense due to increased customer banking deposits and higher interest rates thereon, and higher salaries expense as a result of the 1999 acquisition. The higher loan losses were principally caused by the poor performance of the subprime automobile portfolio acquired in 1999, for which the actual collection experience was less than expected, a larger amount of loans outstanding, including the 1999 purchased portfolio, that were reaching the age of peak losses, generally twelve to eighteen months after origination, the increased loan originations and a weaker economy.
Fidei's revenues and pre-tax income declined in 2001 as compared to 2000 principally due to decreased rent income (due to a smaller base of remaining real estate properties) and decreased gains from sales of real estate properties. During 2001, Fidei sold 26 real estate properties, resulting in pre-tax gains of $8,200,000; 27 properties remain at December 31, 2001. The Company expects to complete the sale of Fidei's real estate holdings during 2002. Pre-tax results for 2001 also reflected lower interest expense as a result of the maturity and early extinguishment of certain debt, lower depreciation expense due to the reduction in real estate properties and lower selling, general and other expenses, which were partially offset by a charge of $4,600,000 related to value added taxes assessed for a sold property.
Fidei's revenues declined in 2000 as compared to 1999 primarily due to decreased rent income from the smaller base of remaining real estate properties and decreased gains from sales of real estate properties, partially offset by increased investment income. During 2000, Fidei sold 38 real estate properties resulting in pre-tax gains of $27,100,000. Pre-tax results for 2000 also reflected lower depreciation expense due to the reduction in real estate properties and lower selling, general and other expenses.
The reduction in revenues and pre-tax income from domestic real estate in 2001 as compared to the prior year was principally due to the foreclosure gains recorded in 2000 and less gains from property sales, net of costs. During 2001, the Company sold 696 residential sites and a school site resulting in pre-tax gains of $18,100,000 at its largest domestic real estate investment, a master-planned community project located in San Diego County.
Manufacturing revenues, gross profit and pre-tax results for the plastics division declined in 2001 as compared to 2000. Of the $11,400,000 decline in manufacturing revenues in 2001, the most significant reductions were in the consumer products market, which declined by $7,300,000. This decline was primarily due to a customer for the Asian market no longer using one of the Company's products and a lower than anticipated demand for consumer dust wipe products. In addition, increased competition in the agriculture, home furnishing and packaging markets and customer inventory reductions in the construction and certain industrial markets also contributed to the reduction in sales in 2001. Gross profit for 2001 declined primarily due to the aforementioned reduction in sales and higher fixed costs related to the Belgium manufacturing facility. The decline in pre-tax income in 2001 was partially offset by a $3,500,000 gain resulting from a contract termination payment received from a customer. For 2000, manufacturing revenues for the plastics division modestly increased to $65,000,000 as compared to $64,000,000 for 1999. Gross profit and pre-tax income for the plastics division declined slightly in 2000 primarily due to higher raw material costs.
Net securities gains (losses) for 2000 include pre-tax security gains related to the Company's investments in Fidelity National Financial, Inc. ($90,900,000) and Jordan Telecommunication Products, Inc. ($24,800,000).
At December 31, 2001, the book value of the Company's equity investment in Berkadia was negative $129,000,000. The negative carrying amount was due to Berkadia's distribution of the Berkadia Loan fees and its recognition of its share of FINOVA's losses under the equity method of accounting ($94,400,000). This loss recognized by Berkadia is a non-cash loss that will be reversed over the term of the Berkadia Loan. As a result of the application of these accounting rules, the negative carrying amount of the Company's investment in Berkadia effectively represents an unamortized discount on the Berkadia Loan, which will be amortized to income over the term of the loan.
The Company's loss related to Berkadia was partially offset by income from other equity investments, the most significant of which related to JPOF II. The Company recognized income from its investment in JPOF II of $27,100,000 and $17,300,000 in 2001 and 2000, respectively. Equity in income (losses) of associated companies increased in 2000 as compared to 1999 primarily due to income related to JPOF II.
The increase in interest expense for 2000 as compared to 1999 primarily reflects increased customer banking deposits and higher interest rates thereon, partially offset by a reduction in interest expense related to debt repurchases in 1999.
Selling, general and other expenses increased in 2001 as compared to the prior year primarily due to higher provisions for loan losses and charges recorded in connection with consolidating the banking and lending operations, and the value added taxes assessed on Fidei, all as described above, partially offset by lower expenses related to MK Gold. The increase in selling, general and other expenses in 2000 as compared to 1999 principally reflects higher provisions for loan losses at the banking and lending segment, and expenses related to MK Gold.
1999 also reflect a benefit of $3,400,000 for the favorable resolution of certain federal income tax contingencies.
In December 2001, upon approval by the Company's Board of Directors to commence an orderly liquidation of the Empire Group, the Company classified as discontinued operations the property and casualty insurance operations of the Empire Group. The Empire Group had historically engaged in commercial and personal lines of property and casualty insurance, principally in the New York metropolitan area. The Empire Group will only accept new business that it is obligated to accept by contract or New York insurance law; it will not engage in any other business activities except for its claims runoff operations. The voluntary liquidation is expected to be substantially complete by 2005. The Company has written down its investment in the Empire Group to its estimated net realizable value based on expected operating results and cash flows during the liquidation period, which indicate that the Company is unlikely to realize any value once the liquidation is complete. Accordingly, the Company recorded a $47,900,000 pre-tax charge as loss on disposal of discontinued operations to fully write-off its investment. While this estimated net realizable value represents management's best estimate, the amount the Company will ultimately realize could be, but is not expected to be, greater. The Company has no obligation to contribute additional capital to the Empire Group.
Excluding the loss on disposal, the Empire Group recorded pre-tax losses from operations of $63,600,000, $60,200,000 and $24,000,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The Empire Group's net earned premiums were $64,100,000, $108,500,000 and $145,200,000 for the years ended December 31, 2001, 2000 and 1999, respectively; these decreases resulted from the Empire Group's efforts to exit unprofitable lines of business and to terminate its relationships with unprofitable agents. The losses recorded by the Empire Group were significantly impacted by the recognition of adverse reserve development recorded during each of the last three years as described below.
During 2001, the Empire Group recorded adverse loss reserve development of $63,900,000. In addition, during 2001, the Empire Group expensed $9,100,000 of deferred policy acquisition costs, as their recoverability from premiums and related investment income was no longer anticipated.
During 2000, the Empire Group recorded adverse loss reserve development of $53,000,000, principally in the 1996 through 1999 accident years. This development was attributable to an increase in the severity of PIP claims and an increase in the frequency of liability claims in the private passenger automobile line ($9,200,000), an increase in the frequency of liability claims in the commercial automobile line ($6,200,000), an increase in the frequency and severity of PIP claims in the assigned risk automobile line ($4,800,000) and an increase in the severity of certain liability claims in the commercial package policies lines of business ($15,000,000). The increases in severity and frequency of claims in automobile lines of business, particularly with respect to PIP claims, are consistent with emerging industry trends in the New York City marketplace. In addition, the Empire Group increased its estimate for loss adjustment expenses by $11,000,000 as a result of the decision to outsource a significant amount of claim handling functions in 2000. Claim files for workers' compensation, automobile no-fault and automobile and other liability claims were outsourced at a cost greater than the reserves previously recorded to handle the claims internally. The Empire Group has also increased its reserve estimate for claims handled internally.
reviewed the impact of the implementation of SFAS 142, 143 and 144, and does not expect them to have a material effect on the Company's financial position or results of operations.
Statements included in this Report may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, fluctuations in insurance reserves, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements.
The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including general economic and market conditions, changes in foreign and domestic laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuation, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, increased competition in the reinsurance markets, the adequacy of loss reserves, prevailing interest rate levels, weather related conditions that may affect the Company's operations or investments, developments in property and casualty claims handling, including adverse litigation developments, that could adversely affect the liquidation plan of the Empire Group, the Company's ability to manage the claims runoff of the Empire Group, changes in U.S. real estate markets, including the residential market in Southern California and the commercial market in Hawaii, changes in the commercial real estate market in France, increased competition in the super premium wine industry, adverse economic, political or environmental developments in Spain that could delay or preclude the issuance of permits necessary to develop the Company's copper mining rights or could result in increased costs of bringing the project to completion, increased costs in financing the development of these mining rights, decreases in world wide copper prices, increased competition in the international and domestic plastics market and increased raw material costs, increased default rates and decreased value of assets pledged to the Company, the Company's ability to generate new loan products, the impact of the September 11, 2001 terrorist attacks on the U.S. and world economies in general, and on the business and operations of FINOVA's and the Company's subsidiaries, the ability of FINOVA Capital to repay the Berkadia Loan, further deterioration in the value of the assets pledged by FINOVA and FINOVA Capital in connection with the Berkadia Loan, and changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Report or to reflect the occurrence of unanticipated events.