Physicians leases approximately 1,892 square feet of office space in Columbus, Ohio for its headquarters. Sequoia leases office space for its and Citation's headquarters in Monterey, California and for regional claims and underwriting offices in Modesto, Monterey, Ventura, Visalia, Orange, Pleasanton, San Jose, Bakersfield, Clovis and Sacramento, California as well as Midvale, Utah. Nevada Land leases office space in Carson City, Nevada. Vidler and Nevada Land hold significant investments in land, water rights and mineral rights in the western United States. See "Item 1 - Business-Introduction."
The Arizona State Legislature has passed several pieces of legislation which recognize the Harquahala Valley ground water as a special resource. In 1991, the expansion of irrigated farming in the Valley was prohibited, and the transfer of the ground water to municipalities was authorized. In order to protect the Harquahala Valley ground water from large commercial and industrial users which were moving into the Basin, Vidler supported legislation, which was enacted in 2000, placing restrictions on commercial and industrial users utilizing more than 100 acre-feet of water annually. These users are required to purchase irrigable land and to withdraw the water that they need from the land at no more than 3 acre-feet per annum per acre of land.
One of the constraints on beginning to supply Harquahala Valley water to municipalities is the need for the water to be conveyed through the Central Arizona Project Aqueduct. The Arizona State Legislature has passed legislation which commits the CAP to convey up to 20,000 acre-feet per annum of Harquahala groundwater to cities and communities in Arizona as an assured municipal water supply. 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, and Vidler is meeting with communities and developers in the Phoenix metropolitan area, some of whom need to secure further water to support expected growth.
Following these sales, Vidler owns or has the right to acquire approximately 50,030 acre-feet of transferable Harquahala Valley ground water.
In October 1999, Vidler announced a public/private joint venture with Lincoln County, Nevada for the location and development of water resources in Lincoln County. The joint venture has 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. Vidler anticipates that up to 40,000 acre-feet of water rights will ultimately be permitted from these applications, and put to use in Lincoln County.
Vidler has filed an application for approximately 2,000 acre-feet of water rights near Sandy Valley, Nevada.
A hearing related to the application was held in December 2001. The Nevada State Engineer is expected to announce a decision regarding the permitting of the water rights in the second quarter of 2002. When, and if, the water rights are permitted, we expect to close an agreement to supply water to support additional growth at Primm, Nevada, a resort town on the border between California and Nevada, in the Interstate 15 corridor.
During 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC and a 50% interest in V&B, LLC. These companies own the Fish Springs Ranch and other properties totaling approximately 8,600 acres in Honey Lake Valley in Washoe County, 45 miles north of Reno, Nevada. Approximately 8,000 acre-feet of permitted water rights associated with Fish Springs Ranch are transferable to the Reno/Sparks area.
Vidler is holding discussions with a number of potential users for the Fish Springs water rights, including developers and industrial users. There is strong demand for water in Nevada's north valleys, and few alternative sources of supply. If water from Fish Springs could be supplied to the north valleys, this would reduce their reliance on river water which comes through Reno, thereby providing additional water to support growth in and around Reno, an area which has been experiencing consistent growth. 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 2001, a partnership dispute was resolved which resulted in Vidler attaining full ownership and direct management of Big Springs Ranch and related assets. See Item 3, "Legal Proceedings."
In addition, there are 6,000 acre-feet of permitted water rights related to the ranch, and Vidler has filed applications for an additional 5,950 acre-feet of water rights.
On December 15, 2000, Vidler entered into a definitive agreement to sell 86 acre-feet of water rights to the East Dillon Water District for $3.1 million. The agreement must be approved by a referendum, so closing is not expected until late 2002. In the meantime, part of the senior water rights is being leased out for approximately $110,000 per annum.
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.
The Vidler Arizona Recharge Facility is the first privately owned water storage facility for the Colorado River system, which is a primary source of water for the Lower Division States of Arizona, California, and Nevada. The water storage facility is strategically located adjacent to the Central Arizona Project aqueduct, a conveyance canal running from Lake Havasu to Phoenix and Tucson. The water to be recharged will come from surplus flows of CAP water. We believe that proximity to the CAP is a competitive advantage, because it minimizes the cost of water conveyance.
Vidler is able to provide storage for users located both within Arizona and out-of-state. Potential users include industrial companies, developers, and local governmental political subdivisions in Arizona, and out-of-state users such as municipalities and water agencies in Nevada and California. The Arizona Water Banking Authority has the responsibility for intrastate and interstate storage of water for governmental entities.
We believe that a number of events in recent years have increased the scarcity value of the project's storage capacity. At a public hearing on March 14, 2000, the AWBA disclosed that the Bureau of Reclamation has indicated that, before permits are issued for new facilities to store water for interstate users, extensive environmental impact studies will be required. The AWBA also indicated that the first priority for publicly owned storage capacity in Arizona is to store water for Arizona users. At the same hearing, the states of California and Nevada again confirmed that their demand for storage far exceeds the total amount of storage available at existing facilities in Arizona. Consequently, interstate users will need to rely, at least in part, on privately owned storage capacity.
It is anticipated that Vidler will be able to recharge 100,000 acre-feet of water per year at the facility, and to store in excess of 1 million acre-feet of water in the aquifer. Vidler's estimate of the aquifer's storage volume is primarily based on a hydrological report prepared by an independent engineering firm for the Central Arizona Water Conservation District in 1990. The report concluded that there is storage capacity of 3.7 million acre-feet, which is in excess of the 1 million acre-feet indicated by Vidler.
Recharge and recovery capacity is critical, because it indicates how quickly water can be put into storage or recovered from storage. In wet years, it is important to have a high recharge capacity, so that as much available water as possible may be stored. In dry years, the crucial factor is the ability to recover water as quickly as possible. There is a long history of farmers recovering significant quantities of water from the Harquahala Valley aquifer.
Over the first 10 years of the agreement with the Semitropic Water Storage District, Vidler was required to make a minimum annual payment of $2.3 million. Vidler began making the annual payments in November 1998. In return, Vidler had the right to store up to 185,000 acre-feet of water underground over a 35-year period. Vidler had the right to recover up to 42,000 acre-feet of water in any one year, including the right to a guaranteed minimum recovery of 16,650 acre-feet every year. Vidler was also required to make an annual payment for operating expenses.
On September 30, 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, and the right to recover up to approximately 6,800 acre-feet in any one year and minimum guaranteed recovery of approximately 2,700 acre-feet every 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.
In 2001, 86% of land sales were settled for cash, and Nevada Land provided partial financing for the balance. Vendor financing has been collateralized by the land conveyed, carries a 10% interest rate, and is subject to a minimum 20% down payment.
First, commercial insurance premium volume increased as a result of new policies issued after A.M. Best Company, a leading insurance company rating service, upgraded Sequoia's claims paying ability from "B++" (Very Good) to "A"- (Excellent). This allowed Sequoia to compete for business in an additional market segment -- customers who can only purchase coverage from "A-" rated insurance companies.
Second, in May 2000, Sequoia acquired the Personal Express Insurance Services, Inc. book of business for approximately $3 million. Personal Express had few tangible assets, so the bulk of the purchase price was allocated to the book of business and recorded as an intangible asset, which is being charged off over 10 years. Personal Express markets personal insurance products to customers in the central California cities of Bakersfield and Fresno. Historically, this book of business has generated an underwriting profit. The acquisition greatly expanded Sequoia's business in personal lines of insurance, bringing approximately $7.5 million in additional premiums in 2001.
In 2000, direct written premiums increased by 33.5% to $47.1 million, as a result of both growth in the existing book of business, which was principally in commercial lines of insurance, and new policies issued after the A.M. Best upgrade and the acquisition of Personal Express.
Direct written premiums in personal lines began to increase markedly in the second quarter of 2000, as new revenues from the Personal Express book of business began. In mid-May, Sequoia began to write new policies which were generated by the Personal Express Bakersfield office. From July 1, the amount of premium written for Personal Express customers increased significantly as Sequoia had the opportunity to renew existing policies for clients of the Bakersfield office as these expired with the former carrier. Reflecting a full contribution from Personal Express, written premium in personal lines reached $6.4 million in the second half of 2000.
In 2002, Sequoia is budgeting for approximately 10% growth in direct written premiums, with approximately 84% of direct written premiums coming from commercial lines and approximately 16% from personal lines.
The growth in commercial premium volume and the acquisition of the Personal Express book of business have helped to reduce Sequoia's underwriting expense ratio (i.e., underwriting expenses as a percentage of earned premiums). Since some costs are fixed (i.e., do not vary with changes in volume), Sequoia's operating expenses have increased at a slower rate than premium volume, which has reduced Sequoia's average operating expense per policy and underwriting expense ratio.
In December 2000, Citation ceased writing business and is now in "run off" (i.e., handling claims arising from policies written in previous years, but not writing new policies). In 1997, 1998, and 1999, Citation took charges to increase claims reserves in the artisans/contractors line of business, including a pre-tax charge of $10.1 million in 1999. Citation did not need to increase claims reserves in the artisans/contractors line of business in 2000 or 2001. If current claims trends continue, we believe that our loss reserves in this line of business are adequate; however, if the trend in claims worsens in the future, then additional charges could be required to increase reserves.
The artisan/contractors business was written under Citation's previous management. In fact, Citation ceased writing this type of insurance coverage in 1995, the year before the reverse merger with Physicians Insurance Company of Ohio, and no artisans/contractors business was renewed after the merger. The decline in the California real estate market in the early 1990's encouraged property owners to try and improve their position by filing claims against contractors and related parties for alleged construction defects. Citation's average loss ratio (i.e., the cost of making provision to pay claims as a percentage of earned premium) for all years from 1989 to 1995 for this insurance coverage is over 375%. This experience is not unique to Citation, but is shared by all insurers who wrote this type of coverage in California in the 1980's and 1990's.
The duration of a bond portfolio measures the amount of time it would take for the cash flows from scheduled interest payments and bond maturities to equal the current value of the portfolio. Duration is important because it indicates the sensitivity of the market value of a bond portfolio to changes in interest rates. Typically, the longer the duration, the greater the sensitivity of the value of the bond portfolio to changes in interest rates.
To minimize interest rate risk (i.e., the potential decrease in the market value of the bond portfolio which would be brought on by higher interest rates), Sequoia targets a duration of 5 years or less. At December 31, 2001, the duration of Sequoia's bond portfolio was 4.4 years. The maturity of securities in Citation's bond portfolio is structured to match the projected pattern of claims payouts. At December 31, 2001, the duration of Citation's bond portfolio was 3.1 years.
Since our initial investment in HyperFeed, the Company's revenues have grown from $13.4 million in 1995 to $33.3 million in 2001.
In the fourth quarter of 2001, HyperFeed generated revenues of $6.2 million, gross margin of $3.8 million, EBITDA of $1.2 million, and a net loss of $303,000. Net cash flow from operating activities was $522,000.
PICO owns 112,672 shares of Jungfraubahn, which represents approximately 19.3% of the company.
At December 31, 2001, our investment in Jungfraubahn had a cost basis of $17.4 million, a market value of $17.7 million, and a net carrying value of $16.4 million, after allowing for taxes.
Jungfraubahn announced its result for the 2000 financial year on May 21, 2001, so the 2001 result will probably not be released until after this 10-K has been filed. Jungfraubahn described 2000 as an exceptional year, whose results "will not easily be repeated." Passenger numbers and revenues in 2000 were unusually high due to a 100-year anniversary promotion by Raiffeisen, a Swiss bank, which is estimated to have generated more than 50% of the increase in passenger visits to Jungfraujoch, and due to 22.4% growth in group travel. Revenues increased 19.7% to CHF (Swiss Francs) 110.3 million, EBITDA (i.e., earnings before depreciation, amortization, interest and tax, a non-GAAP measure which investors frequently use as a proxy for gross cash flow) increased 30.4% to CHF40.8 million, and net income increased 19.5% to CHF17.9 million, or CHF30.6 per share. Jungfraubahn's operating activities generated net cash flow of CHF35.2 million.
In the press release, Jungfraubahn indicated that it expected transport revenues of approximately CHF74.5 million for 2001, an 11.6% reduction from the record CHF84.3 million of 2000, but the second highest in the company's history. Jungfraubahn signaled that "a satisfactory result" was anticipated, "despite the reduction in numbers of guests from Asia and the USA in the fourth quarter," although the result will likely be below the previous year.
Jungfraubahn's most recent published balance sheet is as of December 31, 2000, when book value per share was CHF485. On December 31, 2001, Jungfraubahn's stock price was CHF270, and CHF1 equaled $US0.6034.
During 2000, we began to use the equity method to account for our investment in Jungfraubahn Holding AG, given that we owned approximately 19.3% of the company, that we had a representative on the board of directors, and that we received the necessary quarterly financial information in a timely manner. After we adopted the equity method, we included our proportionate share of Jungfraubahn's net income in the line "Equity Share of Investees' Net Income" in our consolidated statement of operations, and the investment was carried in our balance sheet at our proportionate share of Jungfraubahn's net assets.
During 2001, we acquired another 1,441,347 shares in AOG, lifting our shareholding to 9,867,391 shares, representing approximately 20.7% of the company at December 31, 2001.
At December 31, 2001, our investment in AOG had a cost basis of $8.2 million, a market value of $7.5 million, and a net carrying value of $7.7 million after allowing for taxes. This investment was funded in US dollars. To this point, depreciation in the Australian dollar relative to the US dollar has offset the unrealized gain in local Australian currency terms.
On February 27, 2002, AOG announced its results for the six months ended December 31, 2001. Revenues increased 26.6% to $A76.1 million ($A1.00 = $US0.5094), and net income increased 21% to $A3.7 million, or $A0.077 per share. Net cash flow from operating activities was $A10.2 million, shareholders' equity was $A100.7 million, and tangible book value per share was $A2.10. In the letter to shareholders accompanying the results, AOG indicated that "the contract book is satisfactory and the Company can look forward to continuing and increasing profitability for the rest of this calendar year."
SIHL During 2001, we participated in a restructuring and capital raising by Sihl, a Swiss public company. Sihl's core business is digital imaging, but the company has surplus property assets in and around Zurich. We own 158,056 shares in Sihl, or approximately 10.4% of the company, with a cost basis of $4.3 million, a market value of $2.1 million, and a net carrying value of $2.3 million after taxes at December 31, 2001.
At December 31, 2001, PICO's remaining alternative investments had an aggregate carrying value of $3.2 million after taxes, or 1.5% of Shareholders' Equity.
PICO's principal assets and activities comprise: - - land, water rights, and water storage assets; - - property and casualty insurance, and the "run off" of property and casualty insurance and medical professional liability insurance loss reserves; and - - long term investment in other companies.
Following is a description of what we believe to be the critical accounting policies affecting our company, and how we apply these policies.
We must estimate future claims and ensure that our loss reserves are adequate to pay those claims. This process requires us to make estimates about future events. The accuracy of these estimates will not be known for many years. For example, part of our claims reserves cover "IBNR" claims (i.e., the event giving rise to the claim has occurred, but the claim has not been reported to us). In other words, in the case of IBNR claims, we must provide for claims which we do not know about yet.
At December 31, 2001, the loss reserves, net of reinsurance, of our three insurance subsidiaries were: - - Sequoia Insurance Company, $21.2 million; - - Citation Insurance Company, $19.2 million; and - - Physicians Insurance Company of Ohio, $34.9 million. Physicians wrote its last policy in 1995. However, under current law, claims can be made until 2017 for events which allegedly occurred during the periods when we provided insurance coverage to medical professionals.
Our medical professional liability insurance reserves are certified annually by an independent actuary, as required by Ohio insurance law. Actuarial estimates of our future claims obligations have been volatile. In 2001, we reduced claims reserves by $11.2 million after actuarial studies by two independent firms concluded that Physicians' claims reserves were significantly greater than projected claims payments. However, based on actuarial analysis, we increased reserves by $2 million in 2000 and by $5 million in 1999. Accordingly, there can be no assurance that our claims reserves are adequate and there will not be reserve increases or decreases in the future.
As required by California insurance law, the loss reserves of Sequoia Insurance Company and Citation Insurance Company are reviewed quarterly, and certified annually, by an independent actuarial firm.
Our principal long-lived assets are land, water rights, and interests in water storage assets owned by Vidler, and land at Nevada Land. At December 31, 2001, the total carrying value of land, water rights, and interests in water storage assets was $126 million, or 33.7% of PICO's total assets.
As required by GAAP (i.e., generally accepted accounting principles), our long-lived assets are rigorously reviewed at least quarterly to ensure that the estimated future undiscounted cash flows from these assets will at least recover their carrying value. Our management conducts these reviews utilizing the most recent information available. The review process inevitably involves the significant use of estimates and assumptions.
In the case of investments where we have the ability to exercise significant influence over the company we have invested in, we apply the equity method under Accounting Principles Board No. 18, "The Equity Method of Accounting for Investments in Common Stock."
While the method of accounting we use clearly has no impact on the underlying performance of the investee, the use of market value accounting or the equity method can result in significantly different carrying values at discrete balance sheet dates and contributions to our statement of operations over the course of the investment. It should be noted that 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.
At December 31, 2001, PICO had shareholders' equity of $206.6 million, or $16.71 per share, compared to $205.2 million, or $16.56 per share, at the end of 2000. The principal factors leading to the $1.4 million increase in shareholders' equity were:
- - net income of $4.8 million for the year; and - - a foreign currency translation credit of $628,000; which were partially offset by - - net unrealized depreciation in investments of $3.7 million. This includes a $6.8 million reduction when we ceased to account for the investment in Jungfraubahn Holding AG under the equity method from April 1, 2001. This is explained in the Long Term Holdings section of the preceding "Company Summary, Recent Developments and Future Outlook"; and - - a $299,000 increase in treasury stock due to the purchase of PICO shares in deferred compensations plans.
The $4.8 million in net income reported in 2001 consisted of $5.8 million in net income before an accounting change, or $0.47 per share, and a change in accounting principle which had the cumulative effect of reducing income by $981,000 after taxes, or $0.08 per share. The $5.8 million in net income before an accounting change was comprised of $7.7 million in income before taxes and minority interest, a $2.3 million provision for income tax expense, and the addition of $359,000 in minority interest. This reflects the interest of minority shareholders in the losses of subsidiaries which are less than 100%-owned by PICO. The accounting change was due to the adoption of the Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This non-cash charge recognized the accumulated after-tax decline in the estimated fair value of warrants we own to buy shares in other companies (principally HyperFeed Technologies, Inc.) from the date we acquired the warrants through to January 1, 2001. The decline in the estimated fair value of warrants during 2001 is recorded in the Long Term Holdings segment.
The $2.3 million net provision for income tax expense for 2001 consists of several items, which are detailed in Note 7 of Notes to Consolidated Financial Statements, "Federal Income Tax." A gross provision for tax of approximately $2.9 million was partially offset by $630,000 in tax benefits, primarily represented by a cash refund following a successful appeal of a prior year tax ruling in Canada. We do not need to pay any taxes in cash for 2001 because prior year net operating loss carry-forwards offset our tax provision for the year.
PICO incurred a net loss of $9.5 million in 2000. The $4.5 million net loss before an accounting change consisted of a $13.5 million pre-tax loss, which was partially offset by $8.2 million in income tax benefits and the addition of $717,000 in minority interest. In addition, the cumulative effect of a change in accounting principle reduced income by $5 million after-tax. Until December 31, 1999, PICO had discounted the carrying value of its medical professional liability claims reserves, to reflect the fact that some claims will not be paid until many years in the future, but funds from the corresponding premiums can be invested in the meantime. After December 31, 1999, PICO's medical professional liability insurance subsidiaries were no longer allowed to discount claims reserves in the statements they file with the Ohio Department of Insurance, which are prepared on the statutory basis of accounting. With this change in accounting principle, we have also eliminated the discounting in our financial statements which are prepared on a GAAP basis.
The $8.2 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.
In 1999, the $6.8 million net loss was comprised of a $20.5 million pre-tax loss, which was partially offset by the addition of $12.5 million in income tax benefits, $706,000 in minority interest, and a $442,000 after-tax extraordinary gain from the early settlement of debt. The income tax benefits recognized include an $8.4 million reduction in valuation allowances that had previously been recorded to reduce income tax assets. Of this amount, $6.5 million became available as a result of changes in federal income tax legislation in 1999.
From 1998, PICO began to report comprehensive income in addition to the income reported in the Consolidated Statement of Operations. Comprehensive income includes items resulting in unrealized changes in shareholders' equity. For PICO, comprehensive income includes foreign currency translation and change in unrealized investment gains and losses on securities which are available for sale.
PICO reported comprehensive income of $1.7 million in 2001, consisting of net income of $4.8 million and a foreign currency translation credit of $628,000, which were partially offset by net unrealized depreciation in investments of $3.7 million after-tax. In 2000, PICO incurred an $18 million comprehensive loss. This was comprised of the $9.5 million net loss, a decrease in net unrealized change in investments of $7.6 million after-tax, and negative foreign currency translation of $963,000. A $3.2 million comprehensive loss was recorded in 1999, consisting of a $6.8 million net loss, a $28,000 decrease due to foreign currency translation, and a partially offsetting $3.7 million increase in net unrealized change in investments.
Property and Casualty Insurance - ------------------------------- - - segment income of $6.2 million, consisting of a $3.3 million pre-tax profit from Sequoia and $2.9 million from Citation;
We entered the water business with the realization that most of the assets which Vidler acquired were not ready for immediate commercial use, and that there would be a lead-time in developing and commercializing these assets. Vidler's water assets did not begin to generate significant revenues until the first quarter of 2001. In 2000 and prior years, Vidler was generating modest revenues from the lease and sale of water assets in Colorado and from leasing agricultural land, and incurring significant costs associated with the development of assets and expansion of the water rights portfolio. Consequently, Vidler reported operating losses until 2001.
Vidler generated total revenues of $17.8 million in 2001, compared to $3.1 million in 2000, and $1.1 million in 1999.
Total segment expenses, including the cost of water rights and other assets sold, increased from $5 million in 1999, to $8 million in 2000, and $12.8 million in 2001.
Segment operating expenses (i.e., excluding the cost of water rights and other assets sold and related selling costs, and the $40,000 Silver State write-down described in the "Land and Related Mineral Rights & Water Rights" section) were $4.8 million in 1999, $5.7 million in 2000, and $5.4 million in 2001. Segment operating expenses in 2000 and 2001 were higher than in 1999 due to growth in Vidler's asset base (e.g., the acquisition of Fish Springs Ranch), including expenses related to individual projects (e.g., depreciation and interest) which were recognized prior to the related revenues being earned.
LAND AND RELATED MINERAL RIGHTS & WATER RIGHTS NEVADA LAND & RESOURCE COMPANY, LLC
Most of the variation in revenue from year to year is caused by fluctuations in the level of land sales. In 2001, Nevada Land recorded revenues of $1.9 million from the sale of 15,632 acres of land. In 2000, we generated $3.7 million in revenues from the sale of 28,245 acres of land, compared to $5.4 million from the sale of 48,715 acres in 1999.
Lease and royalty income amounted to $734,000 in 2001, compared to $716,000 in 2000, and $980,000 in 1999. Most of this revenue comes from land leases, principally for grazing, agricultural, communications, and easements.
Interest and other revenues contributed $569,000 in 2001, compared to $321,000 in 2000, and $356,000 in 1999.
In 2000, Nevada Land sold 61 acre-feet of certificated water rights for $244,000. In 1999, we sold 125 acre-feet of certificated water rights for $379,000.
Nevada Land recorded income of $131,000 in 2001, compared to $1.9 million in 2000, and $1.1 million in 1999. 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. In 2000, segment income was $824,000 higher than 1999, principally due to a $685,000 higher gross profit from land sales and the $270,000 gain from the land exchange transaction.
As described in the Property and Casualty Insurance section of "Company Summary, Recent Developments and Future Outlook" in Item 7, the amount of premium "written" by Sequoia and Citation declined in 1998 and 1999. This led to a corresponding decrease in segment "earned" premium from $34.4 million in 1999 to $32.6 million in 2000.
In 2000, the $2.5 million segment profit was comprised of a $1.3 million pre-tax profit from Sequoia and a $1.2 million pre-tax profit from Citation. The $3.6 million increase in segment income in 2001 over 2000 is primarily due to $1.6 million higher realized investment gains and a $616,000 increase in investment income for the segment, and a $1.4 million decrease in expenses at Citation after the company went into "run off".
In 1999, when the pooling agreement with Citation was still in force, Sequoia's revenues included $16.9 million in earned premium and $2.1 million in investment income. The company earned a profit from operations of $114,000 and income before taxes of $2.2 million, including the benefit of a $401,000 credit from favorable development in prior year loss reserves.
The operating performance of insurance companies is frequently analyzed using their "combined ratio." A combined ratio below 100% indicates that the insurance company made a profit on its base insurance business, prior to investment income, realized gains or losses, taxes, extraordinary items, and other non-insurance items.
Sequoia's loss and loss adjustment expense ratio (i.e., the cost of making provision to pay claims as a percentage of earned premiums) was 69.1% in 2001 and 67.6% in 2000, compared to 53.5% in 1999. In 2001, this included an additional expense of $738,000 to recognize adverse development in prior year loss reserves, compared to an additional $252,000 expense in 2000, and a $401,000 credit from favorable development in 1999.
In 2001, Citation's revenues included investment income of $2.3 million, earned premiums of $225,000, and negative goodwill amortization of $568,000 (explained in the following paragraph). The $225,000 in earned premiums represents the final premiums earned from the policies on Citation's books when the company went into "run off." After expenses of $571,000, Citation earned income of $2.9 million before taxes for 2001. The "run off" of Citation's loss reserves appears to be proceeding in line with expectation. In 2001, an expense of just $56,000 was recorded for development in prior year loss reserves.
When Citation Insurance Group acquired Physicians in the reverse merger in 1996, a $5.7 million negative goodwill asset arose because the fair value of the assets acquired (i.e., Physicians) exceeded the cost of the investment (i.e., the fair value of the shares in Citation issued to Physicians shareholders). The negative goodwill was being recognized as income over a period of 10 years in this segment. From January 1, 2002, PICO is adopting Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible Assets," which requires that goodwill and intangible assets with indefinite lives be tested for impairment annually rather than amortized over time. As a result of adopting this standard, the remaining negative goodwill of approximately $2.8 million will be recognized as an extraordinary gain in 2002. See Note 1 of Notes to Consolidated Financial Statements, "Nature of Operations and Significant Accounting Policies."
was only a minor effect on book value because the unrealized depreciation, after the related tax benefit, was already reflected in shareholders' equity.
In 1999, underwriting expenses were $7.9 million. This included a pre-tax charge to increase Physicians' loss reserves by $5 million, or $3.8 million after discounting to reflect the time value of money. The addition to claims reserves was based upon actuarial analysis which indicated some deterioration of Physicians' loss experience in most coverage years, resulting in a greater than expected liability to pay claims. At that time, Physicians was receiving a higher than expected number of claims, which was compounded by the fact that many of the claims were for smaller than expected amounts. This meant that a greater proportion of each claim fell below our reinsurance deductible (i.e., the initial part of each claim which is not covered by reinsurance), so Physicians had to pay a greater proportion of each claim, and could not recover as much as previously anticipated from reinsurance. The negative effect of the increased number of claims exceeded the positive effect of the smaller average amount claimed. Medical professional liability operations reported a $4.8 million loss in 1999.
At December 31, 2001, medical professional liability reserves totaled $34.9 million, net of reinsurance, compared to $51.6 million net of reinsurance at December 31, 2000. At December 31, 1999, medical professional liability reserves were $53.7 million, net of reinsurance and discount.
A $3 million net realized investment loss was recorded in 2001. This was comprised of a $500,000 write-off of the remaining carrying value of the loan to MKG Enterprises, and a $2.5 million loss to reflect a decrease in the value of warrants we own in other companies, principally HyperFeed Technologies, Inc., during 2001. Following the introduction of Statement of Financial Accounting Standards No. 133, "Accounting For Derivative Instruments and Hedging Activities", we are now required to recognize changes in the estimated fair value of warrants (before taxes) during an accounting period through the Consolidated Statement of Operations for that period. In addition, although this did not affect the segment, a cumulative 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. See Note 4 of Notes to Consolidated Financial Statements, "Investments."
On September 8, 2000, PICO sold its investment in Conex for a nominal sum. Conex's principal asset was a 60% interest in Guizhou Jonyang Machinery Industry Limited, a joint venture which manufactures wheeled and tracked hydraulic excavation equipment in the Guizhou province of the People's Republic of China. Despite significant restructuring efforts, improved product quality, and domestic market share of over 90% for wheeled excavators, the joint venture was unable to achieve profitability.
In 1999, net realized gains of $626,000 were recorded when gains from the sale of securities from the Company's European portfolio were partially offset by the $3.2 million write-down of an oil and gas investment.
In this segment, investment income includes interest on cash and short term fixed-income investments, and dividends from long term holdings. Investment income totaled $1.9 million in 2001, compared to $988,000 in 2000, and $505,000 in 1999. In 2001, investment income was $868,000 higher than in 2000, principally due to the receipt of $391,000 in dividends from AOG in 2001 after AOG had not paid a dividend in 2000. The $483,000 increase in investment income from 1999 to 2000 was primarily due to interest revenue earned on the proceeds from the rights offering in the first quarter of 2000.
The 2001 segment loss includes investment income and other revenues of $2.3 million, which were more than offset by the $2.5 million SFAS No. 133 loss, the $500,000 realized loss related to MKG, the $1.3 million equity share of investees' losses, and segment expenses of $10.1 million. Segment expenses include parent company overhead of $4.8 million, the $2.3 million provision against loans to Dominion Capital Pty. Ltd., and SISCOM expenses of $1.7 million.
In 2000, the segment loss included equity income of $1.8 million and investment income and other revenues of $1.9 million. These were more than offset by the $7.6 million in realized losses described above, and segment expenses of $9.9 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.
In 1999, the segment loss included $626,000 in realized gains and $2.6 million in investment income and other revenues, which were more than offset by segment expenses of $11.3 million and a $1 million equity share of investees' loss. Segment expenses include a $1.8 million operating loss from Conex, and a $672,000 operating loss from SISCOM.
PICO Holdings, Inc. is a diversified holding company. Our assets primarily consist of investments in our operating subsidiaries, investments in other public companies, marketable securities, and cash and cash equivalents. On a consolidated basis, the Company had $17.4 million in cash and cash equivalents at December 31, 2001, compared to $13.6 million at December 31, 2000, and $36.7 million at December 31, 1999.
Our cash flow position fluctuates depending on the requirements of our operating subsidiaries for capital, and activity in our investment portfolios. Our primary sources of funds include cash balances, cash flow from operations, the sale of investments, and -- potentially -- the proceeds of borrowings or offerings of equity and debt. We endeavor to ensure that funds are always available to take advantage of new investment opportunities.
In broad terms, the cash flow profile of our principal operating subsidiaries is:
- - During the company's investment and development phase, Vidler Water Company, Inc. utilized cash to purchase properties with significant water rights, to construct improvements at the Vidler Arizona Recharge Facility, to maintain and develop existing assets, to pursue applications for water rights, and to meet financing and operating expenses. During this period, other group companies provided financing to meet Vidler's on-going expenses and to fund capital expenditure and the purchase of additional water-righted properties.
- - As the "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.
As shown in the Consolidated Statements of Cash Flow, there was a $3.7 million net increase in cash and cash equivalents in 2001, compared to a $23.1 million net decrease in 2000, and a $34.9 million net decrease during 1999.
In 2001, Investing Activities generated cash of $9 million. The most significant cash inflow was $10.2 million from the sale of part of our interest in Semitropic. Significant cash outflows included the investment of $3.5 million in Sihl, a Swiss public company, and $941,000 in AOG. Most of the remaining Investing Activities cash flow represents activity in the investment portfolios of our insurance companies: - - Sequoia Insurance Company, which is the only insurance company writing new business, has been realigning its bond portfolio through the purchase of high quality corporate bonds with 5 to 10 years to maturity, utilizing the proceeds from the sale of bonds with lower yields to maturity; and - - the "run off" insurance companies, Physicians and Citation, structuring their fixed-income portfolios to match the projected pattern of claims payouts, utilizing the proceeds of maturing fixed-income securities, the sale of investments, and investment income. In addition, Vidler and Nevada Land invested $7.5 million in high quality corporate bonds with less than 1 year to maturity to maximize the return on the proceeds of land and water rights sales.
In 1999, Investing Activities used $20.2 million of cash. This primarily represented the purchase of additional shares in Jungfraubahn and AOG, and the $2.3 million Semitropic payment.
In 2000, there was a $49.5 million cash inflow from Financing Activities, principally due to the rights offering which raised $49.8 million in new equity capital during the first quarter. Financing Activities resulted in a $8.4 million net inflow in 1999, as Swiss franc borrowings to finance part of PICO's portfolio of European value stocks raised $6.1 million, the exercise of PICO warrants provided $2.9 million, and the purchase of treasury stock used $292,000.
At December 31, 2001, PICO had no significant commitments for future capital expenditures, other than in the ordinary course of business.
- - PICO had no "off balance sheet" financing arrangements; - - PICO has not provided any debt guarantees; and - - PICO has no commitments to provide additional collateral for financing arrangements. PICO's Swiss subsidiary, Global Equity SA, has Swiss Franc borrowings which partially finance the Company's European stock holdings. If the market value of those stocks declines below certain levels, we could be required to provide additional collateral or to repay a portion of the Swiss Franc borrowings.
Physicians Insurance Company of Ohio has established reserves to cover losses on claims incurred under the medical malpractice liability policies including not only those claims reported to date, but also those that may have been incurred but not yet reported. The reserves for losses are estimates based on various assumptions and, in accordance with Ohio law, were discounted to reflect the time value of money for years prior to 2000. These estimates are based on actual and industry experience and assumptions and projections as to claims frequency, severity and inflationary trends and settlement payments. In accordance with Ohio law, Physicians Insurance Company of Ohio annually obtains a certification from an independent actuary that its reserves for losses are adequate. Physicians Insurance Company of Ohio also obtains a concurring actuarial opinion. Due to the inherent uncertainties in the reserving process, there is a risk that Physicians Insurance Company of Ohio's reserves for losses could prove to be inadequate. This could result in a decrease in income and shareholders' equity. If we underestimate our reserves, they could reach levels which are lower than required by law.
The property and casualty insurance industry has been highly cyclical. Pricing is a function of many factors, including the capacity of the property and casualty industry as a whole to underwrite business, create policyholders' surplus and generate positive returns on their investment portfolios. The level of surplus in the industry varies with returns on invested capital and regulatory barriers to withdrawal of surplus. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers. During the late 1990's, the industry was in a cyclical downturn, due primarily to competitive pressures on pricing, which resulted in lower profitability for our property and casualty insurance operations. In 2000 and 2001, competitive pressures began to ease and pricing began to improve, which is referred to as a hardening market.
Beginning in 1994, Physicians, Professionals, Citation, and Sequoia became subject to the provisions of the Risk-Based Capital for Insurers Model Act which has been adopted by the National Association of Insurance Commissioners for the purpose of helping regulators identify insurers that may be in financial difficulty. The Model Act contains a formula which takes into account asset risk, credit risk, underwriting risk and all other relevant risks. Under this formula, each insurer is required to report to regulators using formulas which measure the quality of its capital and the relationship of its modified capital base to the level of risk assumed in
WE MAY BE INADEQUATELY PROTECTED AGAINST MAN-MADE AND NATURAL CATASTROPHES, WHICH COULD REDUCE THE AMOUNT OF CAPITAL SURPLUS AVAILABLE FOR INVESTMENT OPPORTUNITIES
As with other property and casualty insurers, operating results and financial condition can be adversely affected by volatile and unpredictable natural and man-made disasters, such as hurricanes, windstorms, earthquakes, fires, and explosions. Our insurance subsidiaries generally seek to reduce their exposure to catastrophic events through individual risk selection and the purchase of reinsurance. Our insurance subsidiaries' estimates of their exposures depend on their views of the possibility of a catastrophic event in a given area and on the probable maximum loss created by that event. While our insurance subsidiaries attempt to limit their exposure to acceptable levels, it is possible that an actual catastrophic event or multiple catastrophic events could significantly exceed the maximum loss anticipated, resulting in a material adverse effect on our business, financial condition, and the results of operations and cash flows. Such events could cause unexpected insurance claims and expenses for settling claims well in excess of premiums, increasing cash needs, reducing surplus and reducing assets available for investments. Capital invested in our insurance companies may produce inferior investment returns as a result of these additional funding requirements.
OUR INSURANCE SUBSIDIARIES COULD BE DOWNGRADED, WHICH WOULD NEGATIVELY IMPACT OUR BUSINESS
Insurance policy renewals have historically accounted for a significant portion of our net revenue. We may not be able to sustain historic renewal rates for our products in the future. A decrease in renewal rates would reduce our revenues. It would also decrease our cash receipts and the amount of funds available for investments and acquisitions. If we were not able to reduce overhead expenses correspondingly, this would adversely affect our business, financial condition, and the results of operations and cash flows.
available for investments would be reduced. The additional expenses would reduce income. These factors would adversely affect our business, financial condition, and the results of operations and cash flows.
In addition to the risk of delays associated with receiving all necessary regulatory approvals and permits, we may also encounter unforeseen technical difficulties which could result in construction delays and cost increases with respect to our water development projects.
OUR WATER ACTIVITIES MAY BECOME CONCENTRATED IN A LIMITED NUMBER OF ASSETS, MAKING OUR GROWTH AND PROFITABILITY VULNERABLE TO FLUCTUATIONS IN LOCAL ECONOMIES AND GOVERNMENTAL REGULATIONS
The transfer of water rights from one use to another may affect the economic base of a community and will, in some instances, be met with local opposition. Moreover, certain of the end users of our water rights, namely municipalities, regulate the use of water in order to control or deter growth.
WE ARE DIRECTLY IMPACTED BY INTERNATIONAL AFFAIRS, WHICH DIRECTLY EXPOSES US TO THE ADVERSE EFFECTS OF ANY FOREIGN ECONOMIC OR GOVERNMENTAL INSTABILITY
- - exposure to fluctuations in exchange rates; - - the imposition of governmental controls;
OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES
The trading price of our common stock has historically been, and is expected to be, subject to fluctuations. The market price of the common stock may be significantly impacted by: - - quarterly variations in financial performance; - - shortfalls in revenue or earnings from levels forecast by securities analysts; - - changes in estimates by such analysts; - - product introductions; - - our competitors' announcements of extraordinary events such as acquisitions; - - litigation; and - - general economic conditions.
Our results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and our future results of operations could fluctuate significantly from quarter to quarter and from year to year. Causes of such fluctuations may include the inclusion or exclusion of operating earnings from newly acquired or sold operations. At December 31, 2001, the closing price of our common stock on the NASDAQ National Market was $12.50 per share, compared to $12.3125 at December 31, 1999. On a quarterly basis between these two dates, closing prices have ranged from a high of $14.62 at June 30, 2001 to a low of $11.00 at September 30, 2001. During 2001, closing prices have ranged from a low of $10.70 per share on October 9 to a high of $15.91 on July 20.
WE MAY NOT BE ABLE TO RETAIN KEY MANAGEMENT PERSONNEL WE NEED TO SUCCEED, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MAKE SOUND INVESTMENT DECISIONS
We have several key executive officers. If they depart, it could have a significant adverse effect. Messrs. Langley and Hart have entered into employment agreements with us dated as of December 31, 1997, for a period of four years. Messrs. Langley and Hart are key to the implementation of our strategic focus, and our ability to successfully develop our current strategy is dependent upon our ability to retain the services of Messrs. Langley and Hart.
New employment agreements were entered into with Mr. Langley and Mr. Hart on January 1, 2002 for a further four years. (See Part II, Item 8, Note 16, "Related-Party Transactions").
was the same rate used for statutory reporting purposes. A discount rate of 4% was used for medical professional liability insurance reserves. Discounting was discontinued effective January 1, 2000. See Notes 12 and 21 of Notes to Consolidated Financial Statements, "Reserves for Unpaid Loss and Loss Adjustment Expenses" and "Cumulative Effect of Change in Accounting Principle."
The data in the above table is based on Schedule P from each of the insurance companies' 1991 to 2001 Annual Statements, as filed with state insurance departments; however, the development table above differs from the development displayed in Schedule P, Part-2, of the insurance Annual Statements as Schedule P, Part-2, excludes unallocated loss adjustment expenses.
LOSS RESERVE EXPERIENCE The inherent uncertainties in estimating loss reserves are greater for some insurance products than for others, and are dependent on the length of the reporting lag or "tail" associated with a given product (i.e., the lapse of time between the occurrence of a claim and the report of the claim to the insurer), on the diversity of historical development patterns among various aggregations of claims, the amount of historical information available during the estimation process, the degree of impact that changing regulations and legal precedents may have on open claims, and the consistency of reinsurance programs over time, among other things. Because medical professional liability insurance and commercial casualty claims may not be fully paid for several years or more, estimating reserves for such claims can be more uncertain than estimating reserves in other lines of insurance. As a result, precise reserve estimates cannot be made for several years following a current accident year for which reserves are initially established.
Simultaneously with execution of the agreement, Physicians and Mutual entered into a reinsurance treaty pursuant to which Mutual agreed to assume all risks attaching after July 15, 1995 under medical professional liability insurance policies issued or renewed by Physicians on physicians, surgeons, nurses, and other health care providers, dental practitioner professional liability insurance policies including corporate and professional premises liability coverage issued by Physicians, and related commercial general liability insurance policies issued by Physicians, net of applicable reinsurance.
Prior to July 1, 1993, Physicians ceded a portion of the risk it wrote under numerous reinsurance treaties at various retentions and risk limits. However, during the last two accident years that Physicians wrote premium (July 1, 1993 to July 15, 1995), Physicians ceded reinsurance contracts through TIG Reinsurance Company (rated A [Strong] by Standard & Poors), Transatlantic Reinsurance Company (rated AA [Very Strong] by S&P) and Cologne Reinsurance Company of America (rated BBBpi [Good] by S&P). Physicians ceded insurance to these carriers on an automatic basis when retention limits were exceeded. Physicians retained all risks up to $200,000 per occurrence. All risks above $200,000, up to policy limits of $5 million, were transferred to reinsurers, subject to the specific terms and conditions of the various reinsurance treaties. Physicians remains primarily liable to policyholders for ceded insurance should any reinsurer be unable to meet its contractual obligations.
Effective January 1, 2002, Sequoia increased its retention for property and casualty losses from $150,000 to $200,000 per occurrence. Therefore, reinsurance provides property coverage of $10.3 million excess of $200,000 per occurrence, and casualty coverage of $4.8 million excess of $200,000 per occurrence. In addition, Sequoia changed the umbrella reinsurance from $9.9 million excess of $100,000 per occurrence to 98% quota share reinsurance for the first $5 million. Therefore, Sequoia will retain 2% of each umbrella loss while the reinsurance provides for 98% of each umbrella loss. The reinsurance for umbrella business $5 million excess of $5 million per occurrence remains at 100%. The catastrophe treaties for 2002 provide coverage of 70% for $1.5 million excess of $1 million per occurrence, and 95% for $12.5 million per occurrence excess of $2.5 million. Citation does not require reinsurance from 2002 onwards, as its last policy expired in December 2001.
Where the reinsurers are "not admitted" for regulatory purposes, Sequoia and Citation presently maintain sufficient collateral with approved financial institutions to secure cessions of paid losses and outstanding reserves.
All policy and claims liabilities of Sequoia prior to August 1, 1995 have been 100% reinsured with Sydney Reinsurance Corporation and unconditionally guaranteed by QBE Insurance Group Limited.
PICO's financial statements as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 and the independent auditors' report is included in this report as listed in the index.
Summarized unaudited quarterly financial data (in thousands, except share and per share amounts) for 2001 and 2000 are shown below. In management's opinion, the interim financial data contains all adjustments necessary for a fair presentation of results for such interim periods and are of a normal recurring nature. In the fourth quarter of 2000, the Company received notification from the Ohio Department of Insurance that it would no longer permit the Company to discount its MPL reserves for statutory accounting practices. Accordingly, the Company discontinued discounting its MPL reserves in its statutory filing with the ODI and financial statements prepared in accordance with US GAAP for the year ended December 31, 2000. The effect for the year ended December 31, 2000 was to increase the unpaid losses and loss adjustment expenses reserve by $7.5 million and an cumulative effect of accounting principle of $5 million, or $0.43 per share, net of an income tax benefit of approximately $2.5 million.
We have audited the accompanying consolidated balance sheets of PICO Holdings, Inc. and its subsidiaries (collectively "the Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
PICO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY, CONTINUED FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
PICO Holdings, Inc. and subsidiaries (collectively, "the Company") is a diversified holding company.
The Company's primary subsidiaries as of December 31, 2001 are as follows:
Vidler Water Company, Inc. ("Vidler"). Vidler is a 96.2% owned Delaware corporation. Vidler's business involves identifying end users, namely water utilities, municipalities or developers, in the Southwest who require water, and then locating a source and supplying the demand, either by utilizing the company's own assets or securing other sources of supply. These assets comprise water rights in the states of Colorado, Arizona, and Nevada, and water storage facilities in Arizona and California.
Nevada Land & Resource Company, LLC ("Nevada Land"). In April 1997, PICO acquired Nevada Land, which then owned approximately 1.4 million acres of deeded land in northern Nevada, together with the related water, mineral and geothermal rights.
Sequoia Insurance Company ("Sequoia"). Sequoia is a California insurance company licensed to write insurance coverage for property and casualty risks ("P&C") within the states of California and Nevada. Sequoia writes business through independent agents and brokers. In recent years, Sequoia has primarily written farm and small to medium-sized commercial insurance in California and Nevada. During 2000, Sequoia significantly expanded its personal insurance business with the acquisition of the book of business of Personal Express Insurance Services, Inc.
SISCOM, Inc. ("SISCOM"). SISCOM is a Colorado corporation that is a software developer and systems integrator for video-based content management systems for the professional broadcast, sports, and entertainment industries.
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). All significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses for each reporting period. The significant estimates made in the preparation of the Company's consolidated financial statements relate to the assessment of the carrying value of investments, unpaid losses and loss adjustment expenses, deferred policy acquisition costs, land and water rights, deferred income taxes and contingent liabilities. While management believes that the carrying value of such assets and liabilities are appropriate as of December 31, 2001 and 2000, it is reasonably possible that actual results could differ from the estimates upon which the carrying values were based.
The Company's investment portfolio at December 31, 2001 and 2000 is comprised of investments with fixed maturities, including U.S. government bonds, government--sponsored enterprise bonds, and investment-grade corporate bonds; equity securities, including investments in common and preferred stocks, and warrants; convertible debt instruments and mortgage participation interests.
The Company applies the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement, among other things, requires investment securities to be divided into three categories: held to maturity, available for sale, and trading. The Company classifies all investments as available for sale. Unrealized gains or losses on investments recorded at fair value are recorded net of tax and included in accumulated other comprehensive income or loss. Accounting Principles Board ("APB") No. 18, "The Equity Method of Accounting for Investments in Common Stock," is used to account for investments where the Company has significant influence over the investee.
The Company regularly reviews the carrying value of its investments for impairment. A decline in the value of any investment below cost that is deemed other than temporary is written down to net realizable value. Adjustments for write-downs are reflected in net realized gain or loss on investments in the consolidated statements of operations. During the two years ended December 31, 2001, the Company wrote off its investment in MKG due to impairment by expensing $500,000 in 2001, and $2.5 million in 2000 (See Note 15). During 1999, the Company recorded an impairment loss of $3.2 million related to a portion of an oil and gas investment.
Land, water rights, water storage, and land improvements are carried at cost. Water rights consist of various water interests acquired independently or in conjunction with the acquisition of real properties. Water rights are stated at cost and, when applicable, consist of an allocation of the original purchase price between water rights and other assets acquired based on their relative fair values. In addition, costs directly related to the acquisition and development of water rights are capitalized. This cost includes, when applicable, the allocation of the original purchase price, costs directly related to acquisition, and interest and other costs directly related to developing land for its intended use. Amortization of land improvements is computed on the straight-line method over the estimated useful lives of the improvements ranging from 5 to 15 years. Provision is made for any diminution in value that is considered to be other than temporary.
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. The Company recorded negative goodwill (i.e., excess of fair value of assets acquired over purchase price) as a result of the reverse merger between Citation and Physicians in November 1996. Negative goodwill is amortized using the straight-line method over 10 years. At December 31, 2001 and 2000, the Company had accumulated negative goodwill amortization of $2.9 million and $2.3 million, respectively. The Company also recorded goodwill and intangibles related to its acquisitions of SISCOM, Personal Express and Sequoia and amortizes the balances over various lives not exceeding 10 years. At December 31, 2001 and 2000, the Company had $1.5 million and $1.3 million in accumulated amortization, respectively.
The Company applies the provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and periodically evaluates whether events or circumstances have occurred that may affect the estimated useful life or the recoverability of long-lived assets. Impairment of long-lived assets is triggered when the estimated future undiscounted cash flows, excluding interest charges, for the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets do not exceed the carrying amount. The Company prepares and analyzes cash flows at various levels of grouped assets. The Company reviews cash flows for significant individual assets held within a subsidiary, and for a subsidiary taken as a whole. If the events or circumstances indicate that the remaining balance may be permanently impaired, such potential impairment will be measured based upon the difference between the carrying amount and the fair value of such assets determined using the estimated future discounted cash flows, excluding interest charges, generated from the use and ultimate disposition of the respective long-lived asset.
Reserves for MPL and property and casualty insurance unpaid losses and loss adjustment expenses include amounts determined on the basis of actuarial estimates of ultimate claim settlements, which include estimates of individual reported claims and estimates of incurred but not reported claims. The methods of making such estimates and for establishing the resulting liabilities are continually reviewed and updated based on current circumstances, and any adjustments are reflected in current operations. (See Note 21).
For the year ended December 31, 2001, there was no difference between basic and diluted earnings per share because the average stock price of PICO stock during the year was less than the strike prices of the options outstanding and to include those options would be anti-dilutive to the calculation. Similarly, in 2000 and 1999, the calculation of diluted earnings per share excludes the options and warrants outstanding in those years because the Company reported a loss from operations and consequently the impact of those options and warrants would be anti-dilutive. Stock options of 1.8 million in 2001, 1.1 million in 2000, and 1 million in 1999 were excluded from the calculation of the diluted weighted average shares outstanding.
Comprehensive income or loss includes foreign currency translation, and unrealized holding gains and losses on available for sale securities. The components of accumulated other comprehensive loss are as follows:
Net unrealized loss on securities $ (10,633,199) $ (6,977,748) Foreign currency translation (5,126,798) (5,755,230) ---------------- ---------------- Accumulated other comprehensive loss $ (15,759,997) $ (12,732,978) ================ ================
Accumulated other comprehensive loss is net of deferred income tax asset of $1.5 million and $3.2 million at December 31, 2001 and 2000, respectively.
Management has estimated that the adoption of SFAS 142 will have the following effects. The initial consequence will be reflected in the Company's consolidated financial statements for the quarter ending March 31, 2002:
On September 8, 2000, the Company sold its investment in Conex for nominal consideration, and recorded a pretax loss on the sale of $4.6 million ($1.8 million after tax).
Conex accounted for its 60% interest in the sino-foreign joint venture using the equity method of accounting due the fact that it did not have majority financial control over the policies and procedures of the joint venture. The functional currency for the joint venture is the Chinese Renminbi.
The following is the results of operations of Conex for the year ended December 31, 1999 and for the period in 2000 prior to its disposition:
2000 1999 --------------- -------------- Expenses $1,393,721 $ 1,114,938 Equity in losses of unconsolidated affiliates 889,627 1,873,874 --------------- -------------- Loss from operations 2,283,348 2,988,812 Minority interest (168,988) (1,491,417) --------------- -------------- Net loss $2,114,360 $ 1,497,395 =============== ==============
At December 31, the cost and carrying value of investments were as follows:
The amortized cost and carrying value of investments in fixed maturities at December 31, 2001, by contractual maturity, are shown below. Expected maturity dates may differ from contractual maturity dates because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
During 2001, 2000 and 1999, the Company recorded $500,000, $2.5 million and $3.2 million, respectively, in permanent write downs of investments to recognize what is expected to be other than temporary declines in the value of securities.
At December 31, 2001, the Company owned 9,867,391 shares, representing a 20.7% interest in Australian Oil and Gas ("AOG"). During 2001, the Company purchased 1,026,732 shares of AOG for $941,000 and received 414,615 shares as a dividend valued at $333,000. During 2000, the Company purchased 981,584 shares of AOG for $858,000. During 1999, the Company purchased 6,166,657 shares of Australian Oil and Gas for $6.6 million and received 420,494 shares as a dividend valued at $452,000. Generally, with a voting ownership percentage of 20% or more, the investment may be recorded under the equity method unless the investor lacks the ability to exercise significant influence. PICO lacks the ability to exercise significant influence based on the inability to obtain the financial information necessary to apply equity accounting and is accounting for this investment at cost and has recorded an unrealized loss under SFAS 115.
During the fourth quarter of 2000, the Company increased its voting ownership in Accu Holding AG, a Swiss corporation, to 28.3%. As is the case with AOG, PICO lacks the ability to exercise significant influence based on the inability to obtain the financial information necessary to apply equity accounting and is accounting for this investment at cost and has recorded an unrealized loss under SFAS 115.
Jungfraubahn Holding AG ("Jungfraubahn") is a Swiss corporation engaged in the transportation, tourism and recreation sectors in Switzerland. During 2000, PICO increased ownership to 19.3%, obtained a board seat, and adopted the equity method of accounting due to management's assessment that the Company had significant influence over Jungfraubahn. Previously, the investment was held at cost and marked to market under SFAS 115. All prior year results were adjusted to reflect the investment at equity. The difference between the cost of the investment and underlying equity in the net assets of the company of approximately $18 million was considered negative goodwill and was allocated to the non-current assets of Jungfraubahn. Under the equity method of accounting, the carrying value before tax of the Company's investment in Jungfraubahn was $23.7 million at December 31, 2000. The market value of the investment at December 31, 2000 was approximately $18.9 million.
The Black Scholes pricing model incorporates assumptions in calculating an estimated fair value. The following assumptions were used in the computations: no dividend yield for all years; a risk-free interest rate of 2% - 5.6%; a one year expected life; and a historical 5 year cumulative volatility of 109% to 119%.
At December 31, 2000, the Company's investment in HyperFeed consisted of 2,602,000 shares of common stock, representing 16.5% of the common shares outstanding; 4,786,547 shares of preferred stock, representing a 23% diluted voting interest; and an additional 4,055,195 common stock warrants which on a diluted basis would represent an additional 20.5% voting interest. The common and preferred stock are recorded using the equity method of accounting for investments in common stock, and have a combined carrying value of $3.3 million at December 31, 2000. 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 is being amortized over 10 years on a straight-line basis. At December 31, 2000, the common stock warrants are carried in accordance with SFAS No. 115 at an estimated fair value of $2.9 million, prior to a $435,000 deferred tax asset, using the Black Scholes option-pricing model. The pre-tax unrealized loss on the warrants is $1.3 million.
2001 2000 ------------------ ----------------- Common stock $ 6,147,492 $ 4,065,625 Preferred stock 7,478,980 ------------------ ----------------- $ 6,147,492 $ 11,544,605 ================== =================
Through its subsidiary Nevada Land, the Company owns land and the related mineral rights and water rights. Through its subsidiary Vidler, the Company owns water rights and water storage assets consisting of various real properties in California, Arizona, Colorado and Nevada. The costs assigned to the various components at December 31, were as follows:
Vidler: Water and water rights 24,530,412 25,743,707 Land 46,803,276 55,960,544 California water storage 1,206,737 5,740,483 Land improvements, net 8,208,178 6,991,464 --------------- --------------- 80,748,603 94,436,198 --------------- --------------- $125,997,642 $137,235,241 =============== ===============
At December 31, 2001 and 2000, the book value of Vidler's interest in the Semitropic Water Storage facility was $1.2 million and $5.7 million, respectively. During the first ten years of the agreement through November 2008, Vidler is required to make a minimum annual payment. These payments are being capitalized and the asset is being amortized over its useful life of thirty-five years. In May 2001, Vidler sold 29.73% of its right, title and interest under the lease to Newhall Land and Farming Company. In September 2001, Vidler sold an additional 54.05% of its right, title and interest under the lease to Alameda County Water District. As a result, at December 31, 2001, Vidler owns the right to store 30,000 acre-feet of water and is required to make a minimum annual payment of $373,000. At December 31, 2000, Vidler owned the right to store 185,000 acre-feet and was required to make a minimum annual payment of $2.3 million. The amortization expense in 2001 and 2000 was $438,000 and $667,000, respectively. In addition, Vidler is required to pay annual operating and maintenance costs. In 2001, 2000 and 1999, operating costs of $146,000, $889,000 and $863,000, respectively, were expensed.
In July of 2000, Vidler purchased a 51% interest in Fish Springs Ranch, LLC for $4.5 million and a commitment to invest an additional $500,000 in July 2001, and also purchased a 50% interest in V&B, LLC for $1.2 million. These companies own the 8,628-acre Fish Springs Ranch, and the associated water rights. The purchase price was allocated based on estimated fair values at the date of acquisition. Vidler acts as manager and effectively controls both companies. Consequently, the companies are included in the accompanying consolidated financial statements as of the date of the investment in the companies. As a result of consolidation, water rights increased approximately $6.6 million, land increased approximately $306,000, various other assets increased $2.1 million and liabilities increased $184,000 and minority interest of $3.8 million. Also during the year, Vidler purchased Spring Valley Ranches (formerly, Robison Ranch), for approximately $4.5 million. Approximately $3.7 million of the purchase price was recorded as land.
Pre-tax loss from continuing operations for the years ended December 31 was under the following jurisdictions:
2001 2000 1999 ----------------- ---------------- ----------------- Domestic $ 8,671,794 $ (11,129,866) $ (14,593,039) Foreign (981,171) (2,350,632) (5,894,929) ----------------- ---------------- ----------------- Total $ 7,690,623 $ (13,480,498) $ (20,487,968) ================= ================ =================
Provision has not been made for U.S. or additional foreign tax on the undistributed earnings of foreign subsidiaries. It is not practical to estimate the amount of additional tax that might be payable. At December 31, 2001, the Company had no income tax payable or receivable, and at December 31, 2000 the Company had an income tax payable of $324,000. As of December 31, 2001, the company has net operating loss carryforwards of $35 million. The Company has $2.2 million, $620,000, and $6.7 million of consolidated NOL's that expire in 2014, 2016, and 2020, respectively. In addition certain subsidiaries have $25.5 million of NOL's subject to certain limitations that restrict their use and have valuation allowances established.
Depreciation expense was $969,000, $1.1 million and $1 million in 2001, 2000, and 1999, respectively.
At the Annual Meeting of Shareholders on October 19, 2000, our shareholders voted to amend the Articles of Incorporation to eliminate the Company's preferred shares. This amendment became effective January 16, 2001.
In March 2000, an investment partnership registered as PICO Equity Investors, L.P. acquired 3,333,333 shares of PICO stock for approximately $50 million. PICO Equity Investors, an entity managed by PICO Equity Investors Management, LLC, which is owned by three of PICO's current directors (including PICO's chairman of the board and PICO's president and chief executive officer), will exercise all voting and investment decisions with respect to these shares for up to 10 years. There is no monetary compensation for the management of the LLC. PICO used the $49.8 million net proceeds to develop existing water and water storage assets, acquire additional water assets, acquire investments, and for general working capital needs.
PICO Holdings 1999 Stock Option Agreement. PICO is authorized to issue 10,665 shares of common stock pursuant to awards granted as non-qualified stock options and other similar stock-based awards. On January 1, 1999, PICO granted 10,665 non-qualified common stock options to an officer of the Company at an exercise price of $13.25 per share. The options were immediately vested and expire in 10 years.
PICO Holdings 2000 Non-Statutory Stock Option Plan. PICO is authorized to issue 1,200,000 shares of common stock to employees and non-employee directors of and consultants to the Company, pursuant to awards granted as non-qualified stock options. On April 7, 2000, PICO granted, subject to approval by the Company's shareholders obtained on October 19, 2000, 1,091,223 non-qualified common stock options to employees and non-employee directors of the Company (1,082,223 to employees and 9,000 to directors) at an exercise price of $15.00 per share. Of the options granted to employees, one-third vested upon grant, one-third vest April 7, 2001 and one-third vest April 7, 2002. The options granted to non-employee directors were fully vested on the grant date.
On July 9, 2001, PICO granted 100,000 non-statutory stock options to an employee at an exercise price of $15.00 per share. 66,000 of these stock options vested on July 9, 2001 and the remaining 34,000 stock options will vest on July 9, 2002. These stock options expire on July 9, 2021.
Unsecured reinsurance risk is concentrated in the companies shown in the table below. The Company remains continently liable with respect to reinsurance contracts in the event that reinsurers are unable to meet their obligations under the reinsurance agreements in force.
Prior to 2000, Physicians used a discount rate of 4% for financial reporting purposes. The method of determining the discount was based on historical payment patterns and assumed an interest rate at or below Physicians' own investment yield. The carrying value of MPL reserves gross as to reinsurance and undiscounted was approximately $40.6 million at December 31, 2001 and $58.6 million at December 31, 2000.
During 2001, our medical professional liability insurance claims reserves, net of reinsurance, decreased from $51.6 million to $34.9 million. Actuarial analysis of Physicians' loss reserves as of September 30, 2001 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 the fourth quarter of 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, 2001, $5.4 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 leases some of its offices under non-cancelable operating leases that expire at various dates through October 2008. Total rent expense was $1 million, $1 million, and $1.3 million for the years ended December 31, 2001, 2000 and 1999, respectively.
During 2000 and 2001, Global Equity entered into settlement negotiations with a third party to dispose of the remaining assets of MKG. Due to the protracted nature of these discussions and the increasing uncertainty of whether the remaining asset can be realized, Global Equity wrote off the remaining balance of $500,000 of the investment during 2001. (See Long Term Holdings in "Management's Discussion and Analysis of Financial Condition" and "Results of Operations".) Global Equity is currently reviewing its legal options before deciding if it will continue pursuing the outstanding legal actions.
November 1998, the partnership sued Nevada Land for wrongful termination of the consulting contract. On March 12, 1999, Nevada Land filed a cross-complaint against the partnership for breach of written contract, breach of fiduciary duty and seeking declaratory relief. Effective September 1, 1999, the parties entered into a settlement agreement wherein they agreed that the lawsuit would be dismissed without prejudice, and that Nevada Land would deliver a report on or before June 30, 2002 to the limited partnership of the amount of the consulting fee which would be owed by Nevada Land to the limited partnership if the consulting agreement were in effect. At December 31, 2001, Nevada Land has no liability to the partnership.
In September and December 2000, PICO Holdings loaned a total of $2.2 million to Dominion Capital Pty. Ltd. ("Dominion Capital"), a private Australian Company. 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 a legal action 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. PICO has been awarded summary judgment in relation to the principal and interest on the $1.2 million loan and, as a result, Dominion Capital has been placed in receivership. The court appointed receiver is in the process of ascertaining Dominion Capital's assets and liabilities. The court trial in connection with PICO's $1 million loan (with interest) has been adjourned pending the receiver's investigations. In addition, PICO has commenced proceedings in Australia to secure the proceeds from the sale of real estate in Australia offered as collateral under the $1.2 million loan.
On March 6, 1996, Charles E. Bancroft, the President and Chief Executive Officer of Sequoia entered into an incentive agreement with Sequoia after its acquisition by Physicians. Under the terms of this incentive agreement, Mr. Bancroft is to receive a payment equal to ten percent of the increase in Sequoia's value upon his retirement, removal from office for reasons other than cause, or the sale of Sequoia to a third party. For purposes of the incentive agreement, the increase in Sequoia's value is to be measured from August 1, 1995; the date Physicians acquired Sequoia. Mr. Bancroft was not eligible to receive any incentive payment, until he was continuously employed by Sequoia from August 1, 1995 through August 1, 1998. On March 20, 1998, this incentive agreement was clarified to include the combined increase in value of Sequoia and Citation. The increase in value of Citation will be measured from January 1, 1998. The Company recorded compensation expense related to this arrangement of $250,000, $160,000, and $210,000 during the years ended December 31, 2001, 2000 and 1999, respectively.
Certain of the Company's subsidiaries have 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 has been 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 unrealized 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 records its interest in Protocol using the equity method of accounting. 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.
(2) Deferred policy acquisition costs are expensed for statutory accounting purposes.
(5) Loss and loss adjustment expense reserves and unearned premiums are reported net of the impact of reinsurance for statutory accounting purposes.
The Company is a diversified holding company engaged in five major operating segments: Water Rights and Water Storage; Land and Related Mineral Rights and Water Rights; Property and Casualty Insurance; Medical Professional Liability ("MPL") Insurance; and Long Term Holdings.
- purchase and storage of water for resale in dry years.
Sequoia writes property and casualty insurance in California and Nevada, focusing on the niche markets of farm insurance and small to medium-sized commercial insurance. Sequoia also writes personal insurance, and expanded this line of business through the acquisition of Personal Express Insurance Services, Inc. during 2000.
As expected during the run-off process, the bulk of this segment's revenues come from investment income. The Physicians' portfolio contains some of the Company's long term holdings.
The Long Term Investments segment comprises investments where we own less than 50% of the company, or the company is too small to constitute a segment of its own.
We also have a small portfolio of alternative investments, where we have deviated from our traditional value criteria in an attempt to capitalize on areas of potentially greater growth without incurring undue risk.
- INVESTMENTS: Fair values are estimated based on quoted market prices, or dealer quotes for the actual or comparable securities. Fair value of warrants to purchase common stock of publicly traded companies is estimated based on values determined by the use of accepted valuation models at the time of acquisition. Fair value for equity securities that do not have a readily determinable fair value is estimated based on the value of the underlying common stock. The Company regularly evaluates the carrying value of securities to determine whether there has been any diminution in value that is other than temporary and adjusts the value accordingly.
- DEPOSITS WITH REINSURERS AND REINSURANCE RECOVERABLES: The carrying amounts of deposits with reinsurers and reinsurance recoverable with fixed amounts due are reasonable estimates of fair value.
2001 2000 ------------------ ----------------- 5.58% (5.58% in 2000) Swiss loans $ 7,844,084 $ 5,894,838 8% Notes due: 2007 - 2008 208,280 455,957 2012 359,218 8.5% Notes due: 2004 1,155,120 1,540,354 2008 - 2009 3,141,837 3,772,131 2019 1,563,063 2,774,894 9% Notes due: 2003 171,277 188,356 2008 512,641 564,639 ------------------ ----------------- $ 14,596,302 $ 15,550,387 ================== =================
At December 31, 2001, $6.8 million of the total outstanding debt is within Vidler, incurred with the acquisition of land in the Harquahala Valley. The weighted average rate of interest on these notes is 8.5% and is collateralized by the purchased properties.
2002 $8,199,865 2003 518,749 2004 1,376,519 2005 362,652 2006 393,826 Thereafter 3,744,691 - ---------------------------------- Total $14,596,302 ================
The current impacts of SFAS 133, are included in realized investment gains and losses on the statement of operations and primarily includes the fluctuation in the value of the warrants to purchase shares of HyperFeed Technologies, Inc. The value of the warrants is determined each period using the Black Scholes option pricing model. The model uses the current market price of the common stock of HyperFeed, and the following assumptions in calculating an estimated fair value: no dividend yield; a risk-free interest rate of 2% - 5.6%; a one year expected life; and a historical 5 year cumulative volatility of 109% to 119%. The value of our 4.1 million warrants derived from the model was $527,000 and $2.9 million at December 31, 2001 and 2000, respectively. The change in value is reported within the realized investment gain/loss in the consolidated statement of operations. Future effects on net income will depend on market conditions.
On March 1, 2002, Vidler closed a sale for 1,215 acres of land, and the related 3,645 acre-feet of water rights, to developers near the city of Scottsdale for approximately $5.3 million. The transaction resulted in a gross profit of approximately $2.3 million, which will be recorded in the first quarter of 2002.