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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to
Commission File Number: 0-18786
PICO HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2723335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
(858) 456-6022
(Address and telephone number of principal executive offices)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO
---
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 12,379,042 as of March 31, 2003, excluding 4,422,881 shares of common
stock held by the registrant and its subsidiaries.
PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of 3
March 31, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations for the Three 4
Months Ended March 31, 2003 and 2002 (As Restated)
Condensed Consolidated Statements of Cash Flows for 5
the Three Months Ended March 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 11
Condition and the Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 19
Item 4: Controls and Procedures 20
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 20
Item 2: Changes in Securities and Use of Proceeds 20
Item 3: Defaults Upon Senior Securities 20
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits and Reports on Form 8-K 21
Signature 22
2
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2003 2002
------------------------ --------------------
ASSETS
Investments $116,086,693 $95,495,170
Investments - Discontinued Operations 78,442,627
Cash and cash equivalents 32,972,376 22,079,082
Premiums and other receivables, net 9,515,071 5,472,834
Reinsurance receivables 7,493,237 7,832,708
Land and related mineral rights and water rights, net 117,094,331 116,790,891
Property and equipment, net 2,054,057 2,143,746
Net deferred income taxes 4,791,147 6,079,810
Other assets - Discontinued Operations 52,138,398
Other assets 10,068,141 9,692,945
------------------------ --------------------
Total assets $300,075,053 $396,168,211
======================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $50,799,587 $52,703,113
Unpaid losses and loss adjustment expenses - Discontinued Operations 49,162,995
Reinsurance balance payable 538,000 538,000
Bank and other borrowings 14,770,000 14,636,017
Other liabilities - Discontinued Operations 44,085,976
Other liabilities 11,106,113 10,902,399
------------------------ --------------------
Total liabilities 77,213,700 172,028,500
------------------------ --------------------
Minority interest 2,993,407 3,108,007
------------------------ --------------------
Commitments and Contingencies (Note 4)
Common stock, $.001 par value; authorized 100,000,000 shares,
16,801,923 issued and outstanding in 2003 and 2002 16,802 16,802
Additional paid-in capital 236,082,703 236,082,703
Retained earnings 60,177,145 59,320,715
Accumulated other comprehensive income 1,815,934 3,833,676
Treasury stock, at cost (common shares: 4,422,881 in 2003 and 4,422,681 in 2002) (78,224,638) (78,222,192)
------------------------ --------------------
Total shareholders' equity 219,867,946 221,031,704
------------------------ --------------------
Total liabilities and shareholders' equity $300,075,053 $396,168,211
======================== ====================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2003 2002
------------------------ ------------------------
(AS RESTATED,
SEE NOTE 9)
Revenues:
Net investment income $ 876,292.00 $ 1,449,771.00
Net realized loss on investments (547,784) (805,148)
Sale of land and water rights 19,914 7,364,865
Rents, royalties and lease 387,097 444,286
Other 747,385 516,777
------------------------ ------------------------
Total revenues 1,482,904 8,970,551
------------------------ ------------------------
Costs and Expenses:
Operating and other costs 3,541,187 3,347,334
Cost of land and water rights sold 9,269 4,910,430
Loss and loss adjustment expenses 13,991 17,510
Depreciation and amortization 304,705 256,025
Interest 179,257 217,318
------------------------ ------------------------
Total costs and expenses 4,048,409 8,748,617
------------------------ ------------------------
Equity in loss of unconsolidated affiliates (340,396) (397,956)
------------------------ ------------------------
Loss before income taxes and minority interest (2,905,901) (176,022)
Provision (benefit) for income taxes (777,900) 229,448
------------------------ ------------------------
Loss before minority interest (2,128,001) (405,470)
Minority interest in loss of subsidiaries 114,601 48,618
------------------------ ------------------------
Loss from continuing operations (2,013,400) (356,852)
Income from discontinued operations, net of taxes of $1.3 million 2,388,848 235,505
Gain on disposal of discontinued operations, net (See Note 6) 480,982
------------------------ ------------------------
856,430 (121,347)
Cumulative effect of change in accounting principle (See Note 5) 1,984,744
------------------------ ------------------------
Net income $ 856,430 $ 1,863,397
======================== ========================
Net income per common share - basic and diluted:
- ------------------------------------------------
Loss from continuing operations $ (0.16) $ (0.03)
Discontinued operations 0.23 0.02
Cumulative effect of change in accounting principle 0.16
------------------------ ------------------------
Net income per common share $ 0.07 $ 0.15
======================== ========================
Weighted average shares outstanding 12,379,042 12,367,021
======================== ========================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
2003 2002
------------------- --------------------
OPERATING ACTIVITIES:
Net cash used in operating activities ($5,982,512) ($4,613,734)
Net cash (used in) provided by discontinued operations ($1,448,722) $1,806,611
------------------- --------------------
($7,431,234) ($2,807,123)
------------------- --------------------
INVESTING ACTIVITIES:
Purchases of investments (12,149,365) (24,352,187)
Proceeds from sale of discontinued operations 25,202,442
Proceeds from sale of investments 2,687,388 7,295,093
Proceeds from maturity of investments 3,005,000 12,592,383
Purchases of property and equipment (43,811) (37,232)
Investing cash flows from discontinued operations (2,103,754)
------------------- --------------------
Net cash provided by (used in) investing activities 18,701,654 (6,605,697)
------------------- --------------------
FINANCING ACTIVITIES:
Repayments of debt (41,501) (717,685)
Purchase of treasury stock for deferred compensation plans (2,446) (21,678)
------------------- --------------------
Net cash used in financing activities (43,947) (739,363)
------------------- --------------------
Effect of exchange rate changes on cash (333,179) 276,978
------------------- --------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,893,294 (9,875,205)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,079,082 16,342,374
------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 32,972,376 $ 6,467,169
=================== ====================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 156,805 $ 211,246
=================== ====================
Cash paid for taxes: $ 550,000
===================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of PICO Holdings, Inc. and Subsidiaries (the "Company"or "PICO") have been
prepared in accordance with the interim reporting requirements of Form
10-Q, pursuant to the rules and regulations of the United States Securities
and Exchange Commission (the "SEC"). Accordingly, they do not include all
of the information and notes required by accounting principles generally
accepted in the United States of America ("US GAAP") for complete financial
statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of financial
position as of March 31, 2003 and December 31, 2002, the results of
operations for the three months ended March 31, 2003 and 2002, and cash
flows for the three months ended March 31, 2003 and 2002, have been
included and are only of a normal recurring nature. Operating results for
the three months ended March 31, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and the Results
of Operations and Risk Factors contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 as filed with the SEC.
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
assets and 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 land
and water rights, investments, unpaid losses and loss adjustment expenses,
deferred income taxes, accounts and loans receivable, and contingent
liabilities. While management believes that the carrying value of such
assets and liabilities are appropriate as of March 31, 2003 and December
31, 2002, it is reasonably possible that actual results could differ from
the estimates upon which the carrying values were based.
2. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net earnings by the
weighted average shares outstanding during the period. Diluted earnings
per share are computed similar to basic earnings per share except the
weighted average shares outstanding are increased to include additional
shares from the assumed exercise of stock options using the treasury
method, if dilutive. The number of additional shares is calculated by
assuming that the outstanding options and warrants were exercised, and
that the proceeds were used to acquire shares of common stock at the
average market price during the period.
For the three months ended March 31, 2003 and 2002, there is no
difference between basic and diluted earnings per share since the Company
reported a loss from continuing operations and consequently the impact of
options and warrants would be anti-dilutive. In the three months ended
March 31, 2003 and 2002, options to acquire approximately 1.7 million
shares were excluded from the calculation of the diluted weighted average
shares outstanding.
3. COMPREHENSIVE INCOME (LOSS)
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the Company includes
foreign currency translation and unrealized holding gains and losses on
available for sale securities.
The components of comprehensive income (loss) are as follows:
Three Months Ended
March 31,
2003 2002
--------------------- ---------------------
Net income $ 856,430 $ 1,863,397
Net change in unrealized (depreciation)
appreciation on available for sale investments (2,355,173) 770,814
Net change in foreign currency translation 337,431 745,355
--------------------- ---------------------
Total comprehensive income (loss) $ (1,161,312) $ 3,379,566
===================== =====================
6
Total comprehensive loss for the three months ended March 31, 2003 is
net of deferred income tax benefit of $51,000 and for the three months
ended March 31, 2002 comprehensive income is net of a deferred income tax
expense of $264,000.
The components of accumulated comprehensive income are as follows:
March 31, December 31,
2003 2002
------------------ -----------------
Unrealized appreciation
on available for sale investments $ 7,644,269 $ 9,999,442
Foreign currency translation (5,828,335) (6,165,766)
------------------ -----------------
Accumulated other comprehensive income $ 1,815,934 $ 3,833,676
================== =================
Accumulated other comprehensive income is net of deferred income tax
liability of $3.1 million at March 31, 2003, and $3.5 million at December
31, 2002.
4. COMMITMENTS AND CONTINGENCIES
Vidler Water Company, Inc., a PICO subsidiary, is party to an
operating lease to acquire 30,000 acre-feet of underground water storage
privileges and associated rights to recharge and recover water located near
the California Aqueduct, northwest of Bakersfield. The agreement requires a
minimum payment of $378,000 per year adjusted annually by the engineering
price index until 2007. PICO signed a Limited Guarantee agreement with
Semitropic Water Storage District ("Semitropic") that requires PICO to
guarantee the annual obligation up to $519,000, adjusted annually by the
engineering price index.
In 2000, PICO Holdings loaned a total of $2.2 million to Dominion
Capital Pty. Ltd. ("Dominion Capital"), a private Australian company. In
2001, $1.2 million of the loans 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 legal
action, and the Company's ability to realize the assets collateralizing the
loans, PICO recorded an allowance in 2001 for the total outstanding balance
of $2.3 million for the loans and interest. PICO has been awarded summary
judgment in relation to the principle 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. A court trial date is set for June 2003
in connection with PICO's $1 million loan and interest.
The Company is subject to various other litigation that arises in the
ordinary course of its business. Based upon information presently
available, management is of the opinion that such litigation will not have
a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Company.
5. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Company applies the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets." Consequently, goodwill and intangible assets that have indefinite
useful lives are not amortized but rather are tested at least annually, or
on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value for
impairment. The adoption of SFAS No. 142 is reflected in Company's
consolidated financial statements as a cumulative effect of change in
accounting principle at January 1, 2002. The cumulative adjustment of $2
million is comprised of negative goodwill of $2.8 million and positive
goodwill of $800,000. The positive goodwill of $800,000 was deemed impaired
based on a present value analysis of the underlying cash flows.
7
6. SALE OF SEQUOIA INSURANCE COMPANY
On March 31, 2003, the sale of Sequoia closed for gross proceeds of
$43.1 million, which was satisfied by $25.2 million in cash, and a dividend
of equity and debt securities previously held by Sequoia with a market
value of $17.9 million. However, the final sale price will not be
determined until 60 days after the closing date and is potentially subject
to change. For the three months ended March 31, 2003, net income from
Sequoia was $2.4 million, which is reported as "Income from discontinued
operations, net." The Company also recorded a $481,000 gain on disposal,
net of estimated income taxes of $301,000 and selling costs of $844,000,
which is reported as "Gain on disposal of discontinued operations, net."
7. STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure." SFAS No. 148 requires more prominent disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation as well as pro forma disclosure of the effect in
interim financial statements. The Company has elected to continue
accounting for stock-based compensation under the intrinsic value method of
APB No. 25, "Accounting for Stock Issued to Employees."
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 148, the Company's net income and
net income per share would approximate the following pro forma amounts for
the three months ended March 31:
2003 2002
--------------- -----------------
Reported net income $ 856,430 $ 1,863,397
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of income tax (40,730) (111,389)
--------------- -----------------
Pro forma net income $ 815,700 $ 1,752,008
=============== =================
Reported net income per share: basic and diluted $ 0.07 $ 0.15
=============== =================
Pro forma net income per share: basic and diluted $ 0.07 $ 0.14
=============== =================
The effects of applying SFAS No. 148 in this pro forma disclosure are
not indicative of future amounts.
8
8. SEGMENT REPORTING
PICO Holdings, Inc. is a diversified holding company engaged in four
major operating segments: Vidler Water Company, Nevada Land & Resource
Company, Business Acquisitions and Financing, and Insurance Operations in
Run Off.
The accounting policies of the reportable segments are the same as
those described in the Company's 2002 annual report on Form 10-K. Segment
performance is measured by revenues and segment profit before tax in
addition to changes in shareholders' equity. This information provides the
basis for calculation of return on shareholders' equity, which is the main
performance measurement used in analyzing segment performance.
At March 31, 2003, total assets decreased approximately $96.1 million
from December 31, 2002, primarily as a result of the sale of Sequoia.
Segment revenues and income (loss) before taxes and minority interest
for the first quarter of 2003 and 2002 were:
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
2003 2002
----------------- ----------------
REVENUES:
Vidler Water Company $ 583,303 $7,861,412
Nevada Land & Resource Company 568,742 397,015
Business Acquisitions and Financing (226,000) (10,957)
Insurance Operations in Run Off 557,353 723,081
----------------- ----------------
Total Revenues $1,482,904 $8,970,551
================= ================
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (781,580) $1,830,380
Nevada Land & Resource Company 47,034 (160,780)
Business Acquisitions and Financing (2,176,460) (2,264,854)
Insurance Operations in Run Off 5,104 419,232
----------------- ----------------
Loss Before Taxes and Minority Interest $(2,905,901) $(176,022)
================= ================
9. RESTATEMENT/RECAST OF PREVIOUSLY REPORTED FINANCIAL INFORMATION
Subsequent to the issuance of the Company's condensed consolidated
financial statements for the three months ended March 31, 2002, the Company
determined that it needed to record other-than-temporary impairments on
marketable securities.
During the last quarter of 2002, the Company classified the operations
of Sequoia Insurance Company as a discontinued operation, and recast
amounts previously reported to reflect net income from Sequoia as a single
line on the statement of operations, and condensed the assets and
liabilities on the balance sheet. As a result, the numbers shown below and
labeled "As Previously Reported and Recast" reflect this change in
presentation.
9
Other-Than-Temporary Impairments:
The Company has previously recorded realized losses from
other-than-temporary impairments on certain marketable securities. However,
the Company determined that it should have recorded additional
other-than-temporary impairment charges on other marketable securities. For
the three months ended March 31, 2002, additional impairment charges of
$947,000 were recorded.
As a result, the Company has restated its condensed consolidated
financial statements for the three months ended March 31, 2002 from amounts
previously reported to record other-than-temporary impairments on
marketable securities.
STATEMENT OF OPERATIONS
Three Months Ended
March 31, 2002
As Previously Reported and
Recast As Restated and Recast
-----------------------------------------------------
Realized gain (loss) on investments $ 142,079 $ (805,148)
Total revenues $ 9,917,778 $ 8,970,551
Income (loss) before taxes and minority
interest $ 771,205 $ (176,022)
Income tax expense $ 326,515 $ 229,448
Income (loss) from continuing
operations before minority interest $ 444,690 $ (405,470)
Net income (loss) $ 2,713,558 $ 1,863,397
Income per share - basic and diluted $ 0.22 $ 0.15
========================= =========================
COMPREHENSIVE INCOME
Three Months Ended
March 31, 2002
As Previously Reported and
Recast As Restated and Recast
-----------------------------------------------------
Net income $ 2,713,558 $ 1,863,397
Net change in unrealized appreciation
(depreciation) on available for sale
investments (79,347) 770,814
Net change in foreign currency translation
745,355 745,355
------------------------- -------------------------
Total comprehensive income $ 3,379,566 $ 3,379,566
========================= =========================
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q (INCLUDING THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SECTION) CONTAINS
"FORWARD-LOOKING STATEMENTS" REGARDING OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS, AND PROSPECTS. WORDS SUCH AS "EXPECTS," "ANTICIPATES,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," AND SIMILAR EXPRESSIONS OR
VARIATIONS OF SUCH WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS,
BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING FORWARD-LOOKING STATEMENTS IN
THIS FORM 10-Q. ADDITIONALLY, STATEMENTS CONCERNING FUTURE MATTERS ARE
FORWARD-LOOKING STATEMENTS.
ALTHOUGH FORWARD-LOOKING STATEMENTS IN THE FORM 10-Q REPRESENT THE GOOD
FAITH JUDGMENT OF OUR MANAGEMENT, SUCH STATEMENTS CAN ONLY BE BASED ON FACTS AND
FACTORS CURRENTLY KNOWN BY US. CONSEQUENTLY, FORWARD-LOOKING STATEMENTS ARE
INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS AND OUTCOMES
COULD DIFFER FROM THOSE DISCUSSED IN OR ANTICIPATED BY THE FORWARD-LOOKING
STATEMENTS. FACTORS WHICH COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES IN
RESULTS AND OUTCOMES INCLUDE, WITHOUT LIMITATION, THOSE DISCUSSED UNDER THE
HEADING "RISK FACTORS" AND ELSEWHERE IN OUR 2002 ANNUAL REPORT ON FORM 10-K.
READERS ARE URGED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS FORM 10-Q. WE UNDERTAKE NO
OBLIGATION TO REVISE OR UPDATE ANY FORWARD-LOOKING STATEMENT IN ORDER TO REFLECT
ANY EVENT OR CIRCUMSTANCE WHICH MAY ARISE AFTER THE DATE OF THIS FORM 10-Q.
READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE
IN THIS FORM 10-Q AND OUR 2002 ANNUAL REPORT ON FORM 10-K, WHICH ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS WHICH MAY AFFECT OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND PROSPECTS.
The condensed consolidated financial statements and other portions of this
quarterly report on Form 10-Q for the period ended March 31, 2003, including
Item 2, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," reflect the effects of (1) the restatement of our condensed
consolidated financial statements for the quarterly period ended March 31, 2002
as detailed in Note 9 of Notes to Condensed Consolidated Financial Statements;
and (2) presenting Sequoia Insurance Company as a discontinued operation.
INTRODUCTION
PICO Holdings, Inc. ("PICO," also referred to as "the Company," "we," and
"our") is a diversified holding company. PICO seeks to acquire businesses and
interests in businesses which we identify as undervalued based on fundamental
analysis -- that is, our assessment of what the business is worth, based on the
private market value of its assets, earnings, and cash flow. We are most
interested in long-established businesses, with a history of operating
successfully through industry cycles, recessions, and geo-political disruptions,
in basic, "old economy" industries. Typically, the businesses will be generating
free cash flow and have a low level of debt; or, alternatively, strong interest
coverage ratios or the ability to realize surplus assets. As well as being
undervalued, the business must have special qualities such as unique assets, a
potential catalyst for change, or be in an industry with attractive economics.
We are also interested in acquiring companies where the real value is in land
and other tangible assets, rather than in its operating business.
We have acquired businesses and interests in businesses by the purchase of
private companies, and shares in public companies, through both open market
purchases and participation in financings. When we buy a company, we have a long
term horizon, typically 5 years or more. Selected acquisitions will become core
operations; however, we are prepared to sell companies if the price received
exceeds the return we expect to earn if we retain ownership. We expect that most
of our interests in businesses will ultimately be sold to other companies in the
same industry seeking to expand or to gain economies of scale.
Our objective is to generate superior long-term growth in shareholders'
equity, as measured by book value per share. Over time, we anticipate that most
of the growth in shareholders' equity will come from realized gains on the sale
of businesses and interests in businesses, as opposed to ongoing operating
earnings.
Currently our major businesses are:
- - Vidler Water Company, Inc. ("Vidler"), which develops and owns water rights
and water storage operations in the southwestern United States, primarily
in Nevada and Arizona;
- - Nevada Land & Resource Company, LLC ("Nevada Land"), which owns
approximately 1.2 million acres of land in Nevada, and the mineral rights
and water rights related to the property; and
- - Citation Insurance Company ("Citation"), which is "running off" its
historical property and casualty insurance loss reserves, and Physicians
Insurance Company of Ohio ("Physicians"), which is "running off" its
medical professional liability insurance loss reserves.
11
On March 31, 2003, we closed on the sale of Sequoia Insurance Company
("Sequoia"), which is accounted for in our financial statements for 2003 and
prior years as a discontinued operation. See "Net Income" and "Discontinued
Operations."
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31, 2003 AND 2002
SHAREHOLDERS' EQUITY
At March 31, 2003, PICO had shareholders' equity of $219.9 million ($17.76
per share), compared to $221 million ($17.86 per share) at December 31, 2002.
Book value per share decreased by $0.10 per share, or 0.6%, during the quarter.
The $1.1 million decrease in shareholders' equity was caused by a $2.4
million net reduction in unrealized appreciation in investments. This primarily
resulted from the realization during the first quarter of approximately $1.5
million of gains, net of tax, on bonds (most of which was included in unrealized
appreciation in investments at the end of 2002). In addition, the value of our
holdings in Swiss public companies declined, although this was partially offset
by appreciation in the value of holdings in domestic public companies. The
reduction in unrealized appreciation in investments was partially offset by the
quarter's net income of $856,000, and foreign currency translation of $337,000
due to a decline in the value of the U.S. dollar relative to other currencies
where we hold assets.
COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," PICO reports comprehensive income in addition
to net income from the Condensed Consolidated Statement of Operations.
Comprehensive income includes items resulting in unrealized changes in
shareholders' equity, such as foreign currency translation and change in
unrealized investment gains and losses on available-for-sale securities.
For the first quarter of 2003, PICO recorded a comprehensive loss of $1.2
million, consisting of the $2.4 million net reduction in unrealized appreciation
in investments, partially offset by net income of $856,000, and foreign currency
translation of $337,000.
During the first quarter of 2002, PICO recorded comprehensive income of
$3.4 million, consisting of $1.9 million in net income, unrealized appreciation
in investments of $771,000, and foreign currency translation of $745,000.
NET INCOME
PICO reported net income of $856,000 ($0.07 per basic and diluted share)
for the first quarter of 2003, ended March 31. A loss from continuing operations
of $2 million ($0.16 per share) was more than offset by $2.9 million of income
related to Sequoia. The income related to Sequoia consisted of net income earned
by Sequoia until its sale of $2.4 million after-tax, and a $481,000 after-tax
gain on the sale ($0.23 per share in total). The $2 million loss from continuing
operations consisted of a $2.9 million loss before income taxes and minority
interest, which was partially offset by an income tax benefit of $778,000, and
minority interest of $115,000.
In the first quarter of 2002, PICO reported net income of $1.9 million
($0.15 per basic and diluted share). This consisted of a $357,000 loss from
continuing operations ($0.03 per share), income from discontinued operations of
$236,000 after-tax ($0.02 per share), and a cumulative effect of change in
accounting principle which increased income by $2 million ($0.16 per share). The
$357,000 loss from continuing operations consisted of a $176,000 loss before
income taxes and minority interest, a provision for income taxes of $229,000,
and minority interest of $48,000.
From January 1, 2002, PICO adopted 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. The recognition of $2 million in net
income reflects the surplus of negative goodwill arising from the 1996 reverse
merger between Physicians and Citation Insurance Group (now known as PICO
Holdings, Inc.) over the write-off of goodwill items, which were determined to
be impaired. See Note 5 of Notes to Condensed Consolidated Financial Statements,
"Cumulative Effect of Change in Accounting Principle."
12
Segment revenues and income (loss) before taxes and minority interest for
the first quarter of 2003 and 2002 were:
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
2003 2002
----------------- ----------------
REVENUES:
Vidler Water Company $ 583,000 $7,861,000
Nevada Land & Resource Company 569,000 397,000
Business Acquisitions and Financing (226,000) (10,000)
Insurance Operations in Run Off 557,000 723,000
----------------- ----------------
Total Revenues $1,483,000 $8,971,000
================= ================
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (782,000) $1,830,000
Nevada Land & Resource Company 47,000 (161,000)
Business Acquisitions and Financing (2,176,000) (2,264,000)
Insurance Operations in Run Off 5,000 419,000
----------------- ----------------
Loss Before Taxes and Minority Interest $(2,906,000) $(176,000)
================= ================
The principal cause of the year over year $7.5 million decline in revenues
and the $2.7 million increase in loss before taxes and minority interest was the
Vidler Water Company segment. Vidler is a water resource development business,
and as such its quarterly results are affected by the timing of significant
water rights sales. In the first quarter of 2003, Vidler did not close on any
sales of water rights and related assets, whereas in the first quarter of 2002,
Vidler closed on two sales of water rights and related assets. Combined, these
two sales added approximately $7.4 million to revenues and approximately $2
million to gross margin in the first quarter of 2002, which did not recur in
2003.
VIDLER WATER COMPANY, INC.
Three Months Ended March 31,
---------------------------------------------------
2003 2002
----------------- ----------------
REVENUES:
Sale of Land, Water Rights, and Water $7,365,000
Option Premiums Earned $346,000
Lease of Water 1,000 68,000
Lease of Agricultural Land 176,000 189,000
Other 60,000 239,000
----------------- ----------------
Segment Total Revenues $583,000 $7,861,000
================= ================
EXPENSES:
Cost of Land, Water Rights, and Water Sold $(4,859,000)
Commission and Other Costs Of Sales (106,000)
Depreciation and Amortization $ (238,000) (237,000)
Interest (117,000) (134,000)
Operations, Maintenance, and Other (1,010,000) (695,000)
----------------- ----------------
Segment Total Expenses $(1,365,000) $(6,031,000)
----------------- ----------------
INCOME (LOSS) BEFORE TAX $(782,000) $1,830,000
================= ================
In the first quarter of 2003, Vidler did not close on any sales of water
rights and related assets. All other revenues totaled $583,000, the largest
component being $346,000 in option premiums earned when options over land and
water granted to two electricity-generating companies expired without being
exercised. After operating expenses of $1.4 million, Vidler generated a loss
before taxes of $782,000 for the first quarter of 2003.
In the first quarter of 2002, Vidler closed on two significant sales of
water rights and related assets:
- - 3,645 acre-feet of water rights and 1,217 acres of land in the Harquahala
Valley Irrigation District to golf course developers near Scottsdale,
Arizona, which added $5.2 million to revenues and approximately $1.9
million to gross margin; and
- - its interest in Cline Ranch, which added $2.1 million to revenues and
approximately $119,000 to gross margin.
All other revenues were $496,000. Excluding the cost of land, water rights, and
water sold, and commission and other selling costs, all other operating expenses
were $1.1 million. As a result of these factors, Vidler generated a pre-tax
profit of $1.8 million for the first quarter of 2002.
13
All other revenues increased $87,000 year over year. This was primarily due
to the $346,000 in option premiums earned in 2003, compared to zero in 2002,
which was partially offset by a $179,000 decrease in other revenues. All other
operating expenses increased by a total of $299,000, principally due to a
$315,000 increase in Operations, Maintenance, and Other Expenses. The increase
in Operations, Maintenance, and Other Expenses primarily resulted from costs,
including professional fees and engineering expenses, related to new water
rights applications and the development of existing water rights.
NEVADA LAND & RESOURCE COMPANY, LLC
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2003 2002
------------- ------------
REVENUES:
Sale of Land $20,000 $ 92,000
Option Premiums Earned 137,000
Lease and Royalty 210,000 187,000
Interest and Other 202,000 118,000
------------- ------------
Segment Total Revenues $569,000 $397,000
============= ============
EXPENSES:
Cost of Land Sales $(9,000) $(52,000)
Operating Expenses (513,000) (506,000)
------------- ------------
Segment Total Expenses $(522,000) $(558,000)
------------- ------------
INCOME (LOSS) BEFORE TAX $47,000 $(161,000)
============= ============
Nevada Land recognizes revenue from land sales, and the resulting gross
profit or loss, when the sales transactions close. On closing, the entire sales
price is recorded as revenue, and a gross margin is recognized depending on the
cost basis attributed to the land which was sold. Since the date of closing
determines the accounting period in which the sales revenue and gross margin are
recorded:
- - Nevada Land's reported revenues and income fluctuate from quarter to
quarter depending on the dates when specific transactions close; and
- - land sales revenues for any individual quarter are not indicative of likely
full-year revenues. In 2002 and 2001, land sales in the first quarter were
minimal and the lowest of the four quarters in that year.
In the first quarter of 2003, segment total revenues were $569,000. Nevada
Land sold approximately 121 acres of land for $20,000. The average sales price
was $165 per acre and our average basis in the land sold was $77 per acre. The
gross margin on land sales was $11,000, which represents a gross margin
percentage of 53.5%. Lease and royalty revenues were $210,000, option premiums
of $137,000 were earned, and interest and other revenues contributed $202,000.
After operating expenses of $513,000, Nevada Land recorded income of $47,000.
In the first quarter of 2002, segment total revenues were $397,000. Nevada
Land sold approximately 1,641 acres of land for $92,000. The parcels of land
sold were from lower value categories, which is reflected in the average sales
price of $56 per acre, and the average basis in the land sold of $31 per acre.
The gross margin on land sales was $40,000, which represents a gross margin
percentage of 43.9%. Lease and royalty revenues were $187,000, and interest and
other revenues contributed $118,000. Following operating expenses of $506,000,
Nevada Land experienced a loss of $161,000.
The $208,000 year over year improvement in the segment result primarily
resulted from the $137,000 in option premiums earned in 2003 compared to zero in
2002, and an $84,000 increase in other revenues. The increase in other revenues
was primarily attributable to higher interest income.
14
BUSINESS ACQUISITIONS AND FINANCING
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------
2003 2002
---------------- ------------------
REVENUES (CHARGES):
Realized Gains (Losses):
On Sale or Impairment of Holdings $(596,000) $(947,000)
SFAS No. 133 Change in Warrants (21,000) 100,000
Investment Income 223,000 596,000
Other 168,000 241,000
---------------- ------------------
Segment Total Charges $(226,000) $(10,000)
================ ==================
SEGMENT TOTAL EXPENSES $(1,610,000) $(1,856,000)
---------------- ------------------
LOSS BEFORE INVESTEE INCOME $(1,836,000) $(1,866,000)
Equity in Loss of Unconsolidated Affiliates $ (340,000) $ (398,000)
---------------- ------------------
LOSS BEFORE TAXES $(2,176,000) $(2,264,000)
================ ==================
This segment contains businesses, interests in businesses, and other parent
company assets. The segment was referred to as Long-Term Holdings in prior
years. Revenues and results in this segment vary considerably from quarter to
quarter, primarily due to fluctuations in net realized gains or losses on the
sale of investments.
The two largest holdings in this segment are Jungfraubahn Holding AG, and
HyperFeed Technologies, Inc. At March 31, 2003, these two holdings had a
potential market value of approximately $25.3 million, and a carrying value
(before taxes) of $22.9 million.
HYPERFEED TECHNOLOGIES, INC.
On April 28, 2003, HyperFeed announced its results for the quarter ended
March 31, 2003. HyperFeed reported total revenues of $3.7 million, gross margin
of $1.2 million, and a net loss of $775,000.
PICO's share of HyperFeed's net loss and other events affecting equity is
included in "Equity in Loss of Unconsolidated Affiliates" in the segment result.
The total of this line was a $340,000 loss in the first quarter of 2003,
compared to a $398,000 loss in the first quarter of 2002.
In the accompanying news release, HyperFeed Chairman and CEO Jim Porter
noted that the loss for the first quarter of 2003 was "consistent with the
fourth quarter of 2002." Mr. Porter commented that HyperFeed is "moving forward
and starting to recognize a return as our diverse customer base leverages our
ticker plant technologies in a Managed Exchange Platform Services (MEPS) model
and creates a clear sales funnel for future periods."
Mr. Porter also advised that during the second quarter of 2003, HyperFeed
will "strengthen" its "balance sheet with approximately $1.4 million in net
proceeds from a previously announced private placement" of HyperFeed common
stock. As detailed in a Proxy Statement filed by HyperFeed with the SEC in April
2003, PICO intends to purchase 4,436,229 HyperFeed common shares for
approximately $1.2 million ($0.2705 per share) in the planned private placement,
which is subject to various approvals. If the transaction is completed as
expected, this will increase PICO's holding to 15,463,117 HyperFeed common
shares, from the current holding of 11,026,888, and HyperFeed will become a
consolidated subsidiary of PICO Holdings, Inc.
SEGMENT RESULTS
For the first quarter of 2003, Business Acquisitions and Financing segment
revenues were negative $226,000, primarily due to realized losses of $617,000.
The realized losses include a $596,000 charge for other-than-temporary
impairment of our holdings in SIHL and Accu Holding, to reflect a further
decline in the market value of these investments in the first quarter of 2003,
from their written-down value at December 31, 2002. In addition, a $22,000
decline in the estimated fair value of warrants we own to buy shares in other
companies, principally HyperFeed, was recorded as a loss in accordance with
Statement of Financial Accounting Standards No. 133, "Accounting For Derivative
Instruments and Hedging Activities." Investment income was $223,000 and other
revenues were $168,000. After segment expenses of $1.6 million, and our $340,000
equity share of HyperFeed's net loss and other events affecting equity, the
segment reported a loss before taxes of $2.2 million for the first quarter of
2003.
15
In the first quarter of 2002, segment revenues were negative $10,000,
primarily due to realized losses of $847,000. The realized losses include a
$947,000 charge for other-than-temporary impairment of our holdings in SIHL and
Solpower Corporation. This was partially offset by SFAS No. 133 income of
$100,000, representing an increase in the estimated fair value of warrants we
own to buy shares in other companies. Investment income was $596,000, primarily
made up of a loan establishment fee and underwriting fee received from
Australian Oil & Gas Corporation Limited ("AOG"). After segment expenses of $1.9
million, and our $398,000 equity share of HyperFeed's net loss and other events
affecting equity, the segment reported a loss before taxes of $2.3 million.
PICO's corporate overhead is the principal expense recorded in this
segment. The $246,000 year over year reduction in expenses is primarily due to a
$660,000 change in a non-cash expense related to foreign currency, from an
expense of $188,000 in 2002 to a benefit of $472,000 in 2003. Our interests in
Swiss public companies are held by Global Equity SA, a wholly owned subsidiary
which is incorporated in Switzerland. Part of Global Equity SA's funding comes
from a loan from PICO, which is denominated in Swiss Francs. During accounting
periods when the Swiss Franc declines relative to the US dollar -- such as
the first quarter of 2003 -- under GAAP we are required to record a benefit
through the statement of operations to reflect the fact that Global Equity SA
owes PICO more US dollars. In Global Equity SA's financial statements, an
equivalent amount is reflected in the foreign currency translation component of
shareholders' equity (since it owes PICO more US dollars); however, this does
not go through the statement of operations. During accounting periods when the
Swiss Franc depreciates relative to the US dollar -- such as the first quarter
of 2002 -- opposite entries are made and an expense is recorded in PICO's
statement of operations. Accordingly, we were required to record a $472,000
benefit in PICO's statement of operations in the first quarter of 2003, and a
$188,000 expense in the first quarter of 2002, even though there was no net
impact on shareholders' equity.
INSURANCE OPERATIONS IN RUN OFF
THREE MONTHS ENDED MARCH 31,
---------------------------------------------
2003 2002
------------- ---------------
REVENUES:
Net Investment Income $491,000 $679,000
Realized Investment Gains 65,000 43,000
Other 1,000 1,000
------------- ---------------
Segment Total Revenues $557,000 $723,000
============= ===============
EXPENSES:
Operating and Underwriting Expenses (552,000) (304,000)
------------- ---------------
Segment Total Expenses $(552,000) $(304,000)
INCOME (LOSS) BEFORE TAXES:
Citation Insurance Company $ 252,000 $375,000
Physicians Insurance Company of Ohio (247,000) 44,000
------------- ---------------
Segment Income Before Taxes $ 5,000 $419,000
============= ===============
This segment consists of Citation Insurance Company and Physicians
Insurance Company of Ohio. Both Citation and Physicians are in "run off."
This means the companies are handling and resolving claims on expired
policies, but not writing new business.
Typically, most of the revenues of an insurance company in run off come
from investment income, which is expected to decline over time as fixed-income
securities mature or are sold to provide the funds to pay claims and expenses.
The Insurance Operations in Run Off segment generated total revenues of $557,000
in the first quarter of 2003, compared to $723,000 in the first quarter of 2002.
Investment income declined by $188,000 year over year, primarily due to a
reduction in the amount of fixed-income securities held in the insurance company
portfolios.
Operating and underwriting expenses were $552,000 in the first quarter of
2003, compared to $304,000 in the first quarter of 2002. Consequently, segment
income declined from $419,000 in the first quarter of 2002 to $5,000 in the
first quarter of 2003.
CITATION INSURANCE COMPANY
For the first quarter of 2003, Citation generated revenues of $388,000.
After operating and underwriting expenses of $136,000, Citation reported income
before taxes of $252,000. In the first quarter of 2002, Citation's revenues were
$472,000. After operating and underwriting expenses of $97,000, Citation
generated $375,000 in income before taxes.
16
At March 31, 2003, Citation's property and casualty insurance claims
reserves were $14.1 million, net of reinsurance, compared to $14.6 million at
December 31, 2002. The reduction was primarily due to the payment of
approximately $1 million in direct losses (i.e., claims) and loss adjustment
expenses, partially offset by the recovery of approximately $493,000 from
reinsurance companies. An expense of $14,000 was recorded in the first quarter
of 2003 due to adverse development in prior year loss reserves, compared to an
expense of $18,000 in the first quarter of 2002. There were no unusual trends in
claims during the quarter.
CITATION INSURANCE COMPANY -- LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
MARCH 31, 2003 DECEMBER 31, 2002
---------------------------------------------------
Direct Reserves $15.3 million $16.3 million
Ceded Reserves (1.2) (1.7)
---------------------------------------------------
Net Property & Casualty Insurance Reserves $14.1 million $14.6 million
===================================================
PHYSICIANS INSURANCE COMPANY OF OHIO
During the first quarter of 2003, Physicians generated total revenues of
$169,000. Operating and underwriting expenses were $416,000, resulting in a loss
before taxes of $247,000. During the first quarter of 2002, total revenues were
$251,000, operating and underwriting expenses were $207,000, and Physicians
reported income before taxes of $44,000.
At March 31, 2003, Physicians' loss and loss adjustment reserves were $29.4
million, net of reinsurance, compared to $30.3 million at December 31, 2002.
Reserves decreased by $902,000 during the quarter due to the payment of losses
and loss adjustment expenses. No unusual trends in claims were noted during the
quarter.
PHYSICIANS INSURANCE COMPANY OF OHIO -- LOSS AND LOSS
ADJUSTMENT EXPENSE RESERVES
MARCH 31, 2003 DECEMBER 31, 2002
---------------------------------------------------
Direct Reserves $35.5 million $36.4 million
Ceded Reserves (6.1) (6.1)
---------------------------------------------------
Net Medical Professional Liability Insurance Reserves $29.4 million $30.3 million
===================================================
DISCONTINUED OPERATIONS
On March 31, 2003, PICO closed on the sale of Sequoia Insurance Company.
Our financial statements for 2003 and previous years now record Sequoia as a
discontinued operation.
During the first quarter of 2003, Sequoia contributed income of $2.4
million after-tax, which is recorded in the "Income from discontinued
operations" line in the Condensed Consolidated Statement of Operations, compared
to income after-tax of $236,000 in the first quarter of 2002. The increase was
principally due to the realization of gains on the sale of bonds from Sequoia's
investment portfolio in the first quarter of 2003.
PICO also recorded an after-tax gain on the sale of Sequoia of $481,000,
which is recorded in the "Gain on disposal of discontinued operations, net" line
in the Condensed Consolidated Statement of Operations.
The gross sale proceeds were approximately $43.1 million, consisting of a
dividend of $17.9 million and the balance in cash. The dividend included the
common stocks previously held in Sequoia's investment portfolio with a value of
$16.4 million. The common stocks received in the dividend primarily consist of a
number of holdings in small-capitalization value stocks, which we believe are
still undervalued based on the private market value of the underlying assets,
earnings, and cash flow. These common stocks will be held in the investment
portfolio of Physicians, which was Sequoia's direct parent company.
17
LIQUIDITY AND CAPITAL RESOURCES -- THREE MONTHS ENDED MARCH 31, 2003 AND 2002
PICO Holdings, Inc. is a diversified holding company. Our assets primarily
consist of our operating subsidiaries, holdings in other public companies,
marketable securities, and cash and cash equivalents. On a consolidated basis,
the Company had $33 million in cash and cash equivalents at March 31, 2003,
compared to $22.1 million at December 31, 2002, and $6.5 million at March 31,
2002.
In addition to the $33 million in consolidated cash and cash equivalents as
defined by GAAP, at March 31, 2003, the parent company held investment-grade
fixed-income securities maturing in 2003 and 2004 with a market value of $15.5
million.
Our cash flow 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
holdings, 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 acquisition opportunities.
In broad terms, the cash flow profile of our principal operating
subsidiaries is:
- - As commercial use of Vidler's water assets increases, we expect that Vidler
will generate free cash flow as receipts from leasing water or storage, and
the proceeds from selling land and water rights, begin to overtake
maintenance capital expenditure, financing costs, and operating expenses.
As water lease and storage contracts are signed, we anticipate that Vidler
may be able to monetize some of the contractual revenue streams, which
could potentially provide another source of funds;
- - Nevada Land is actively selling land which has reached its highest and best
use, and is not part of PICO's long-term utilization plan for the property.
Nevada Land's principal sources of cash flow are the proceeds of cash
sales, and collections of principal and interest on sales contracts where
Nevada Land has provided vendor financing. These receipts and other
revenues exceed Nevada Land's operating costs, so Nevada Land is generating
strong positive cash flow;
- - At this stage of its run off, investment income more than covers Citation's
operating expenses. The funds required to pay claims are coming from the
maturity of fixed-income securities in the company's investment portfolio,
and recoveries from reinsurance companies; and
- - As its run off progresses, Physicians 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.
The Departments of Insurance in Ohio and California prescribe minimum
levels of capital and surplus for insurance companies, and set guidelines for
insurance company investments. Typically, PICO's insurance subsidiaries
structure the maturity of fixed-income securities to match the projected pattern
of claims payments. When interest rates are at very low levels, to insulate the
capital value of the bond portfolios against a decline in value which would be
brought on by a future increase in interest rates, the bond portfolios may have
a shorter duration than the projected pattern of claims payments.
As shown in the Condensed Consolidated Statements of Cash Flow, cash and
cash equivalents increased by $10.9 million in the first quarter of 2003,
compared to a $9.9 million net decrease in the first quarter of 2002.
During the first quarter of 2003, cash of $7.4 million was used in
Operating Activities, including $1.4 million of cash used in Sequoia's operating
activities, compared to cash used of $2.8 million in the first quarter of 2002.
The other principal uses of cash in 2003, and the principal uses of cash in
2002, included operating expenses at Vidler, the payment of claims by Citation
and Physicians, and group overhead.
Investing Activities generated $18.7 million of cash in the first quarter
of 2003. The cash inflow in 2003 primarily resulted from the sale of Sequoia for
gross proceeds of $43.1 million, less the $17.9 million dividend of common
stocks and debt securities received. The remaining 2003 Investing Activity cash
flow items principally reflect the net investment of $3 million in fixed-income
securities and the net investment of $3.7 million in stocks, being routine
activity in the investment portfolios of our insurance subsidiaries and the
temporary investment of funds held by non-insurance group companies. In the
first quarter of 2002, Investing Activities used $6.6 million of cash. The cash
used in 2002 primarily represented the net investment of $3.8 million in
fixed-income securities and the net investment of $2.2 million in stocks.
18
Financing Activities used cash of $44,000 in the first quarter of 2003,
compared to $739,000 of cash used in the first quarter of 2002. The cash used in
2002 primarily represented the $718,000 repayment of non-recourse borrowings
collateralized by the Harquahala Valley farm properties sold by Vidler during
the period.
At March 31, 2003, PICO had no significant commitments for future capital
expenditures.
SHARE REPURCHASE PROGRAM
In October 2002, PICO's Board of Directors authorized the repurchase of up
to $10 million of PICO common stock. The stock purchases may be made from time
to time at prevailing prices through open market or negotiated transactions,
depending on market conditions, and will be funded from available cash.
As of March 31, 2003, no stock had been repurchased under this
authorization.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee at its
fair value. In addition, FIN 45 requires certain disclosures about each of the
entity' guarantees. The Company will apply the recognition provisions of FIN 45
prospectively to guarantees issued after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS No. 148 provides alternative
methods of transaction for those entities that elect to voluntarily adopt the
fair value accounting provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 148 also requires more prominent disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation as well as pro forma disclosure of the effect in interim
financial statements. The interim disclosure requirements are effective for the
first interim period ending December 15, 2002. The Company has not elected to
adopt the fair value accounting provisions of SFAS No. 123.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires the consolidation of certain variable interest entities by the
primary beneficiary of the entity if the equity investment at risk is not
sufficient to permit the entity to finance its activities without additional
subordinated financial support from other parties, or if the equity investors
lack the characteristics of a controlling financial interest. FIN 46 is
effective for variable interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied in the first interim or annual
period beginning after June 15, 2003. The Company believes the effect of the
adoption of FIN 46 will not be material to its results of operations and
financial position.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PICO's balance sheet includes a significant amount of assets and
liabilities whose fair values are subject to market risk. Market risk is the
risk of loss arising from adverse changes in market interest rates or prices.
PICO currently has interest rate risk as it relates to its fixed maturity
securities and mortgage participation interests, equity price risk as it relates
to its marketable equity securities, and foreign currency risk as it relates to
investments denominated in foreign currencies. Generally, PICO's borrowings are
short to medium term in nature and therefore approximate fair value. At March
31, 2003, PICO had $50.6 million of fixed maturity securities and mortgage
participation interests, $65.3 million of marketable equity securities that were
subject to market risk, of which $41.6 million were denominated in foreign
currencies, primarily Swiss francs. PICO's investment strategy is to manage the
duration of the portfolio relative to the duration of the liabilities while
managing interest rate risk.
PICO uses two models to analyze the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities, and
mortgage participation interests, PICO uses duration modeling to calculate
changes in fair value. For its marketable securities, PICO uses a hypothetical
20% decrease in the fair value to analyze the sensitivity of its market risk
assets and liabilities. For investments denominated in foreign currencies, PICO
uses a hypothetical 20% decrease in the local currency of that investment.
Actual results may differ from the hypothetical results assumed in this
disclosure due to possible actions taken by management to mitigate adverse
changes in fair value and because the fair value of securities may be affected
by credit concerns of the issuer, prepayment rates, liquidity, and other general
market conditions. The sensitivity analysis duration model produced a loss in
fair value of $790,000 for a 100 basis point decline in interest rates on its
fixed securities and mortgage participation interests. The hypothetical 20%
decrease in fair value of PICO's marketable equity securities produced a loss in
fair value of $13.1 million that would impact the unrealized appreciation in
shareholders' equity. The hypothetical 20% decrease in the local currency of
PICO's foreign denominated investments produced a loss of $6.5 million that
would impact the foreign currency translation in shareholders' equity.
19
ITEM 4: CONTROLS AND PROCEDURES
(a) Under the supervision of and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), within 90 days of the filing date of this
report. Based on their evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective.
(b) There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is subject to various litigation that arises in the ordinary
course of its business. Based upon information presently available, management
is of the opinion that such litigation will not have a material adverse effect
on the consolidated financial position, results of operations or cash flows of
the Company.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
20
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
-------
Number Description
------ -----------
+ 3.1 Amended and Restated Articles of Incorporation of PICO.
++ 3.2 Amended and Restated By-laws of PICO.
+++ 10.57 PICO 1995 Non-Qualified Stock Option Plan.
++++ 10.58 PICO 2002 Nonstatutory Stock Option Plan
21. Subsidiaries of PICO. See Note 1 of Notes To Consolidated
Financial Statements, "Nature of Operations and Significant
Accounting Policies" in Registrant's Annual Report on Form
10-K for 2002, filed with the SEC on March 31, 2003.
99.1. Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2. Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
---------------------------------
+ Incorporated by reference to exhibit of same number filed
with Form 8-K dated December 4, 1996.
++ Filed as Appendix to the prospectus in Part I of
Registration Statement on Form S-4 (File No. 333-06671).
+++ Incorporated by reference to exhibit filed with Physicians'
Registration Statement No. 33-99352 on Form S-1 filed with
the SEC on November 14, 1995.
++++ Incorporated by reference to Proxy Statement for Annual
Meeting of Shareholders to be Held on October 19, 2000, dated
September 8, 2000, and filed with the SEC on September 11,
2000.
(b) REPORTS ON FORM 8-K
The Registrant filed a Form 8-K on April 10, 2003.
21
PICO HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PICO HOLDINGS, INC.
Dated: May 12, 2003 By: /s/ Maxim C. W. Webb
-------------------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
22
CERTIFICATIONS
I, John R. Hart, Chief Executive Officer of PICO Holdings, Inc. (the
"Registrant") certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
23
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ John R. Hart
--------------------------
John R. Hart
Chief Executive Officer
24
CERTIFICATIONS
I, Maxim C. W. Webb, Chief Financial Officer and Treasurer of PICO Holdings,
Inc. (the "Registrant") certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b. any fraud whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
25
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ Maxim C. W. Webb
---------------------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
26