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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 June 30, 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 12,375,610 as of June 30, 2003, excluding 4,426,313 shares of common
stock held by the registrant and its subsidiaries.
1
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
June 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations for the Three 4
And Six Months Ended June 30, 2003 and 2002 (As Restated)
Condensed Consolidated Statements of Cash Flows for 5
the Six Months Ended June 30, 2003 and 2002
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 13
Condition and the Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 23
Item 4: Controls and Procedures 24
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 24
Item 2: Changes in Securities and Use of Proceeds 24
Item 3: Defaults Upon Senior Securities 24
Item 4: Submission of Matters to a Vote of Security Holders 24
Item 5: Other Information 24
Item 6: Exhibits and Reports on Form 8-K 25
Signature 26
2
PART I: FINANCIAL INFORMATION
ITEM I: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2003 2002
------------- -------------
ASSETS
Investments $ 135,532,724 $ 95,495,170
Investments - Discontinued Operations 78,442,627
Cash and cash equivalents 18,990,313 22,079,082
Premiums and other receivables, net 8,367,954 5,472,834
Reinsurance receivables 7,229,843 7,832,708
Land and related mineral rights and water rights, net 115,580,816 116,790,891
Property and equipment, net 3,480,423 2,143,746
Net deferred income taxes 4,139,628 6,079,810
Other assets 14,547,355 9,692,945
Other assets - Discontinued Operations 52,138,398
------------- -------------
Total assets $ 307,869,056 $ 396,168,211
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 52,841,432 $ 52,703,113
Unpaid losses and loss adjustment expenses - Discontinued Operations 49,162,995
Reinsurance balance payable 743,573 538,000
Bank and other borrowings 15,065,277 14,636,017
Other liabilities 13,500,072 10,902,399
Other liabilities - Discontinued Operations 44,085,976
------------- -------------
Total liabilities 82,150,354 172,028,500
------------- -------------
Minority interest 4,290,002 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 58,175,751 59,320,715
Accumulated other comprehensive income 5,427,056 3,833,676
Treasury stock, at cost (common shares: 4,426,313 in 2003 and 4,422,681 in 2002) (78,273,612) (78,222,192)
------------- -------------
Total shareholders' equity 221,428,700 221,031,704
------------- -------------
Total liabilities and shareholders' equity $ 307,869,056 $ 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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
(AS RESTATED, (AS RESTATED,
SEE NOTE 10) SEE NOTE 10)
Revenues:
Net investment income $ 2,099,752 $ 1,687,802 $ 2,976,044 $ 3,137,573
Net realized gain (loss) on investments 1,523,593 (174,562) 975,809 (979,710)
Sale of land and water rights 2,195,940 1,551,572 2,215,854 8,916,437
Rents, royalties and lease income 278,953 429,653 723,239 873,939
Service revenue 1,583,620 1,583,620
Other 208,883 829,571 899,079 1,346,348
------------ ------------ ------------ ------------
Total revenues 7,890,741 4,324,036 9,373,645 13,294,587
------------ ------------ ------------ ------------
Costs and Expenses:
Operating and other costs 4,318,977 3,503,345 7,860,164 6,850,679
Cost of land and water rights sold 1,322,097 641,045 1,331,366 5,551,475
Cost of service revenue 1,135,673 1,135,673
Loss and loss adjustment expenses 4,008,609 (17,963) 4,022,600 (453)
Depreciation and amortization 447,252 261,490 751,957 517,515
Interest 181,500 206,223 360,757 423,541
------------ ------------ ------------ ------------
Total costs and expenses 11,414,108 4,594,140 15,462,517 13,342,757
------------ ------------ ------------ ------------
Equity in loss of unconsolidated affiliates (224,389) (532,440) (564,785) (930,396)
------------ ------------ ------------ ------------
Loss before income taxes and minority interest (3,747,756) (802,544) (6,653,657) (978,566)
Provision (benefit) for income taxes (1,089,162) (177,539) (1,867,062) 51,909
------------ ------------ ------------ ------------
Loss before minority interest (2,658,594) (625,005) (4,786,595) (1,030,475)
Minority interest in loss of subsidiaries 333,352 187,710 447,953 236,328
------------ ------------ ------------ ------------
Loss from continuing operations (2,325,242) (437,295) (4,338,642) (794,147)
Income from discontinued operations, net of tax 287,637 2,388,848 523,142
Gain on disposal of discontinued
operations, net (See Note 6) 323,848 804,830
------------ ------------ ------------ ------------
(2,001,394) (149,658) (1,144,964) (271,005)
Cumulative effect of change
in accounting principle (See Note 5) 1,984,744
------------ ------------ ------------ ------------
Net income (loss) $ (2,001,394) $ (149,658) $ (1,144,964) $ 1,713,739
============ ============ ============ ============
Net income per common share - basic and diluted:
- ------------------------------------------------
Loss from continuing operations $ (0.19) $ (0.04) $ (0.35) $ (0.06)
Discontinued operations 0.03 0.03 0.26 0.04
Cumulative effect of change in accounting principle 0.16
------------ ------------ ------------ ------------
Net income per common share $ (0.16) $ (0.01) $ (0.09) $ 0.14
============ ============ ============ ============
Weighted average shares outstanding 12,375,610 12,373,856 12,377,326 12,371,236
============ ============ ============ ============
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)
Six Months Ended June 30,
2003 2002
------------ ------------
OPERATING ACTIVITIES:
Net cash (used in) provided by operating activities $ (6,245,047) $ 1,415,144
Net cash (used in) provided by discontinued operations $ (1,448,722) $ 625,335
------------ ------------
$ (7,693,769) $ 2,040,479
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (37,201,061) (38,929,976)
Proceeds from sale of discontinued operations 25,144,350
Proceeds from sale of investments 13,463,324 13,136,305
Proceeds from maturity of investments 3,941,091 19,401,472
Purchases of property and equipment (152,790) (317,763)
Cash used to purchase shares of HyperFeed, net of cash acquired (107,253)
Proceeds from the sale of property and equipment 5,737 50,030
Investing cash flows from discontinued operations 185,278
------------ ------------
Net cash provided by (used in) investing activities 5,093,398 (6,474,654)
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (84,101) (636,974)
Proceeds from exercise of stock options 111,635
Purchase of treasury stock for deferred compensation plans (51,420) (45,850)
------------ ------------
Net cash used in financing activities (135,521) (571,189)
------------ ------------
Effect of exchange rate changes on cash (352,877) (1,326,400)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,088,769) (6,331,764)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 22,079,082 16,342,374
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,990,313 $ 10,010,610
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 259,892 $ 411,414
============ ============
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 condensed
consolidated financial statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of financial
position as of June 30, 2003 and December 31, 2002, the results of
operations for the three and six months ended June 30, 2003 and 2002, and
cash flows for the three and six months ended June 30, 2003 and 2002, have
been included and are of a normal recurring nature. Operating results for
the three and six months ended June 30, 2003 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003.
During the quarter ended June 30, 2003, PICO began consolidating
HyperFeed Technologies, Inc. ("HyperFeed"), a US publicly traded company,
which previously had been accounted for under the equity method of
accounting (See Note 9).
These condensed consolidated 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 condensed consolidated 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 condensed
consolidated 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 condensed 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 June 30, 2003 and December 31, 2002, it is reasonably
possible that actual results could differ from the estimates upon which the
carrying values were based.
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's 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 condensed consolidated financial
statements. The interim disclosure requirements are effective for the first
interim period ending after 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
6
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.
In April 2003, the FASB approved Statements of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This Statement is effective for contracts entered into
or modified after June 30, 2003, except as stated, and for hedging
relationships designated after June 30, 2003. In addition, except as stated,
all provisions of this Statement should be applied prospectively. SFAS 149
amends Statement 133 for certain decisions made as part of the Derivatives
Implementation Group (DIG) process. For those amendments that relate to
Statement 133 implementation guidance, the specific Statement 133
Implementation Issue necessitating the amendment is identified. If the
amendment relates to a cleared issue, the clearance date also is noted. This
Statement also amends Statement 133 to incorporate clarifications of the
definition of a derivative. This Statement contains amendments relating to
FASB Concepts Statement No. 7,, "Using Cash Flow Information and Present
Value in Accounting Measurements," and FASB Statements No. 65, "Accounting
for Certain Mortgage Banking Activities," No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases," No. 95, "Statement of Cash Flows," and
No. 126, "Exemption from Certain Required Disclosures about Financial
Instruments for Certain Nonpublic Entities." The Company does not believe
the adoption of this statement will have a material effect on its results of
operations.
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 and six months ended June 30, 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 and six months
ended June 30, 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
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 are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss) $(2,001,394) $ (149,658) $(1,144,964) $ 1,713,739
Net change in unrealized appreciation
on available for sale investments 3,920,759 5,956,010 1,565,586 6,726,824
Net change in foreign currency translation (309,637) 1,496,449 27,794 2,241,804
----------- ----------- ----------- -----------
Total comprehensive income $ 1,609,728 $ 7,302,801 $ 448,416 $10,682,367
=========== =========== =========== ===========
Total comprehensive income for the three and six months ended June 30,
2003 is net of deferred income tax charge of $507,000 and $558,000,
respectively. Total comprehensive income for the three and six months ended
June 30, 2002 is net of a deferred income tax charge of $3.3 million and
$2.8 million, respectively.
7
The components of accumulated other comprehensive income are as follows:
June 30, December 31,
2003 2002
------------ ------------
Unrealized appreciation on
available for sale investments $ 11,565,028 $ 9,999,442
Foreign currency translation (6,137,972) (6,165,766)
------------ ------------
Accumulated other comprehensive income $ 5,427,056 $ 3,833,676
============ ============
Accumulated other comprehensive income is net of deferred income tax
liability of $4 million at June 30, 2003, and $3.5 million at December 31,
2002.
4. COMMITMENTS AND CONTINGENCIES
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 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 principal and interest on the $1.2 million loan and, as a
result, Dominion Capital has been placed in receivership. Other legal action
is on-going.
When PICO acquired Citation Insurance Company ("Citation") in a reverse
merger in 1996, Citation had been a direct writer of workers compensation
insurance. In 1997, Citation reinsured 100% of its workers compensation book
of business with a subsidiary, Citation National Insurance Company ("CNIC").
Citation then sold CNIC to Fremont Indemnity Company ("Fremont"). All assets
and liabilities, including the assets which corresponded to the workers
compensation reserves reinsured with CNIC, and records, computer systems,
policy files, and reinsurance arrangements were transferred to Fremont, as
part of the sale of CNIC. Fremont merged CNIC into Fremont, and administered
and paid all workers compensation claims that had been sold to Fremont.
Since 1997, Citation has booked the losses reported by Fremont and recorded
an equal and offsetting reinsurance recoverable from Fremont, as an admitted
reinsurer, for all losses and loss adjustment expenses, resulting in no net
impact on Citation's reserves and financial statements and no net impact on
PICO's condensed consolidated financial statements.
On June 4, 2003, the California Department of Insurance obtained a
conservation order over Fremont and applied for a court order to liquidate
Fremont. On July 2, 2003 the California Superior Court placed Fremont in
liquidation.
Since Fremont went into liquidation in July 2003, Fremont is no longer
an admitted reinsurance company under the statutory basis of insurance
accounting. Consequently, Citation has reversed the $7.5 million reinsurance
recoverable from Fremont in its June 30, 2003 financial statements prepared
on the statutory basis of accounting. PICO management has made a
corresponding provision for the reinsurance recoverable from Fremont at June
30, 2003 for GAAP purposes as well which is reflected in the accompanying
condensed consolidated financial statements included herein. Citation will
make a claim to recover deposits reported as held by Fremont for Citation's
insureds; however, the ultimate outcome cannot be accurately predicted. The
Company is pursuing its rights to recover the reinsurance and to either have
the deposit assets returned or be released from the claims obligation.
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 the Company's condensed
consolidated financial statements as a cumulative effect of change in
accounting principle at January 1, 2002. The cumulative
8
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.
6. DISCONTINUED OPERATIONS
On March 31, 2003, the sale of Sequoia Insurance Company ("Sequoia")
closed for gross proceeds of $43.1 million, which consisted of $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. The final sale price that was
determined 60 days after the closing date was reduced $58,000 to
approximately $43 million. The net income from Sequoia included in PICO's
condensed consolidated results for the six months ended June 30, 2003 was
$2.4 million, which is reported as "Income from discontinued operations,
net." The Company also recorded a $443,000 gain on disposal, net of
estimated income taxes of $281,000 and selling costs of $844,000, which is
reported as "Gain on disposal of discontinued operations, net" for the six
months ended June 30, 2003.
In June 2003, HyperFeed disposed of its interest in a consolidated
subsidiary, recording a gain on sale of discontinued operations of $362,000.
This gain is included in the accompanying condensed consolidated statements
of operations in the line item titled "Gain on disposal of discontinued
operations, net" for the three months ended June 30, 2003.
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 condensed consolidated 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 and six months ended June 30:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
Reported net income (loss) $(2,001,394) $ (149,658) $(1,144,964) $ 1,713,739
Stock based compensation recorded - - - -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of income tax (58,950) (111,389) (99,680) (222,778)
----------- ----------- ----------- -----------
Pro forma net income $(2,060,344) $ (261,047) $(1,244,644) $ 1,490,961
=========== =========== =========== ===========
Reported net income per share: basic and diluted $ (0.16) $ (0.01) $ (0.09) $ 0.14
=========== =========== =========== ===========
Pro forma net income per share: basic and diluted $ (0.17) $ (0.02) $ (0.10) $ 0.12
=========== =========== =========== ===========
The effects of applying SFAS No. 148 in this pro forma disclosure are
not indicative of future amounts.
On July 2, 2003, all 1,687,242 outstanding stock options were
voluntarily surrendered by employees and directors. On July 17, 2003, the
Company's shareholders voted to adopt the PICO Holdings, Inc. 2003 Stock
Appreciation Rights Program (the "SAR program") to replace the Company's
stock option plans and call option agreements. Upon adoption of the SAR
program, all 355,539 outstanding options under call option agreements were
also surrendered by the holders. The maximum number of SARs issuable under
the SAR program may not exceed 2,042,781, all of which were issued to the
prior option holders upon adoption of the SAR program at an exercise price
equal to that of the surrendered options. In future periods, in the case of
"in the money" SARs (i.e., the market price of PICO stock is higher than the
exercise price of the SAR), a charge or benefit will be recorded in the
Company's consolidated financial statements. The charge or benefit will
recognize the change during the period in the difference between the
exercise price of "in the money" SARs and the market value of PICO stock at
the end of the period. As a result of the adoption of the SAR program in
July 2003, the Company currently estimates that an initial charge of
approximately $3.3 million will be recorded in the third quarter of 2003.
The charge relates to the intrinsic value of the call options at the time of
adoption of the SAR program. No stock options were "in the money" at that
time.
9
8. SEGMENT REPORTING
PICO Holdings, Inc. is a diversified holding company engaged in five
major operating segments: Vidler Water Company, Nevada Land & Resource
Company, Business Acquisitions and Financing, HyperFeed Technologies, Inc.,
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.
Segment identifiable assets:
At June 30, At December 31,
2003 2002
------------------------------------
TOTAL ASSETS:
Vidler Water Company $ 84,237,423 $ 82,428,762
Nevada Land and Resource Company 61,304,463 60,406,824
Business Acquisitions and Financing 27,565,675 34,006,655
HyperFeed Technologies, Inc. 5,930,629
Insurance Operations in Run Off 128,830,866 219,325,970
------------ ------------
$307,869,056 $396,168,211
============ ============
Segment revenues and loss before taxes and minority interest for the
second quarter and first half of 2003 and 2002 were:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------
REVENUES:
Vidler Water Company $ 301,296 $ 1,277,615 $ 884,599 $ 9,139,027
Nevada Land & Resource Company 2,493,674 796,987 3,062,417 1,194,002
Business Acquisitions and Financing 2,751,437 1,655,902 2,525,082 1,644,945
HyperFeed Technologies, Inc. 1,585,975 1,585,975
Insurance Operations in Run Off 758,359 593,532 1,315,572 1,316,614
------------------------------------------------------------------
Total Revenues $ 7,890,741 $ 4,324,036 $ 9,373,645 $ 13,294,588
==================================================================
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (1,273,998) $ (1,094,458) $ (2,055,578) $ 735,922
Nevada Land & Resource Company 719,954 (616,808) 766,988 (777,588)
Business Acquisitions and Financing 768,997 461,554 (1,407,642) (1,803,300)
HyperFeed Technologies, Inc. (571,886) (571,886)
Insurance Operations in Run Off (3,390,823) 447,168 (3,385,719) 866,400
------------------------------------------------------------------
Loss Before Taxes and Minority Interest $ (3,747,756) $ (802,544) $ (6,653,657) $ (978,566)
==================================================================
Subsequent to June 30, 2003, Nevada Land & Resource Company closed on
the sale of 4,486 acres for $1 million.
9. CONSOLIDATION OF HYPERFEED TECHNOLOGIES, INC.
On May 15, 2003 the Company increased its ownership of HyperFeed from
44% to 51% by purchasing 4,436,229 shares for $1.2 million and accordingly,
now has a controlling financial interest through a direct ownership of a
majority voting interest. Consequently, PICO consolidated HyperFeed's
results from the date of acquisition forward. The acquisition was accounted
for using the purchase method of accounting and accordingly, the
accompanying condensed consolidated financial statements include the
revenues and expenses and costs of HyperFeed beginning May 15. Previous to
May 15, the Company accounted for its investment in HyperFeed using the
equity method of accounting. The following is an allocation of the purchase
price to the assets acquired and liabilities assumed at the date of
acquisition:
10
Purchase price $ 1,200,000
===========
Allocation of Purchase Price:
- -----------------------------
Cash 1,221,866
Receivables 761,459
Property and equipment, net 1,551,182
Other assets 2,564,765
Accounts payable and accrued liabilities (3,493,802)
Other liabilities (69,032)
Minority interest (1,336,438)
-----------
$ 1,200,000
===========
The following are the pro forma results of PICO for the six months ended
June 30, 2003 and 2002 assuming the acquisition has taken effect at the
beginning of the period:
2003 2002
-----------------------------------
Total revenues $ 15,345,472 23,968,783
Loss before taxes and minority interest (5,426,402) (944,904)
Net income (loss) (1,066,140) 1,870,466
Net income (loss) per share basic and diluted $ (0.09) $ 0.15
10. RESTATEMENT/RECAST OF PREVIOUSLY REPORTED FINANCIAL INFORMATION
Subsequent to the issuance of the Company's condensed consolidated
financial statements for the six months ended June 30, 2002, the Company
determined that it needed to record other-than-temporary impairments on
marketable securities.
During the fourth 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.
Other-Than-Temporary Impairments:
The Company has previously recorded 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 and six
months ended June 30, 2002, additional impairment charges of $623,000 and
$1.6 million, respectively were recorded.
As a result, the Company has restated its condensed consolidated
financial statements for the three and six months ended June 30, 2002 from
amounts previously reported to record other-than-temporary impairments on
marketable securities.
11
Statement of Operations June 30, 2002
Three Months Ended Six Months Ended
As Previously As Previously
Reported and As Restated and Reported and As Restated and
Recast Recast Recast Recast
--------------------------------- ---------------------------------
Realized gain (loss) on investments $ 448,638 $ (174,562) $ 590,718 $ (979,710)
Total revenues 4,947,236 4,324,036 14,865,015 13,294,587
Income (loss) before taxes and minority
interest (179,344) (802,544) 591,862 (978,566)
Income tax expense (benefit) (128,742) (177,539) 197,772 51,909
Income (loss) from continuing operations
before minority interest (50,601) (625,005) 394,091 (1,030,475)
Net income (loss) 424,746 (149,658) 3,138,304 1,713,739
Income (loss) per share: basic and diluted $ 0.03 $ (0.01) $ 0.25 $ 0.14
============ ============ ============ ============
Statement of Comprehensive Income June 30, 2002
Three Months Ended Six Months Ended
As Previously As Previously
Reported and As Restated and Reported and As Restated and
Recast Recast Recast Recast
------------------------------- ------------------------------
Net income (loss) $ 424,746 $ (149,658) $ 3,138,304 $ 1,713,739
Net change in unrealized appreciation
on available for sale investments 5,381,606 5,956,010 5,302,259 6,726,824
Net change in foreign currency translation 1,496,449 1,496,449 2,241,804 2,241,804
----------- ----------- ----------- -----------
Total comprehensive income $ 7,302,801 $ 7,302,801 $10,682,367 $10,682,367
=========== =========== =========== ===========
The restatements for the three and six month periods ended June 30, 2002
have no net impact on total comprehensive income and shareholders' equity
for those periods.
12
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 June 30, 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
periods ended June 30, 2002 as detailed in Note 10 of Notes to Condensed
Consolidated Financial Statements;
2. presenting Sequoia Insurance Company as a discontinued operation; and
3. presenting HyperFeed Technologies, Inc. as a separate segment from May 15,
2003, when HyperFeed became a consolidated subsidiary. See Note 9 of Notes
To Condensed Consolidated Financial Statements, "Consolidation of HyperFeed
Technologies, Inc."
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 may 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 operating 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;
13
- - 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; and
- - HyperFeed Technologies, Inc. ("HyperFeed"), which is now a 51%-owned
subsidiary. HyperFeed is a provider of Managed Exchange Platform Services
("MEPS") to users including exchanges, content providers, re-distributors,
and institutions.
On March 31, 2003, we closed on the sale of Sequoia Insurance Company
("Sequoia"), which is accounted for in our condensed consolidated financial
statements for 2003 and prior years as a discontinued operation. See "Net
Income" and "Discontinued Operations."
RESULTS OF OPERATIONS -- THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
SHAREHOLDERS' EQUITY
At June 30, 2003, PICO had shareholders' equity of $221.4 million ($17.89
per share), compared to $219.9 million ($17.76 per share) at March 31, 2003, and
$221 million ($17.86 per share) at December 31, 2002. Book value per share
increased by $0.13 per share, or 0.7%, during the second quarter, and $0.03 per
share, or 0.2%, during the first half of 2003.
The $1.5 million increase in shareholders' equity during the second quarter
primarily resulted from a $3.9 million net increase in unrealized appreciation
in investments, partially offset by the $2 million net loss.
The $397,000 increase in shareholders' equity during the first half was
principally a result of a $1.6 million net increase in unrealized appreciation
in investments, partially offset by the $1.1 million net loss.
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 second quarter of 2003, PICO recorded comprehensive income of $1.6
million, consisting of $3.9 million in unrealized appreciation in investments,
which was partially offset by the $2 million net loss and a foreign currency
translation debit of $310,000.
During the first half of 2003, PICO recorded comprehensive income of
$448,000, consisting of $1.6 million in unrealized appreciation in investments
and a foreign currency translation credit of $28,000, partially offset by the
net loss of $1.1 million.
SECOND QUARTER RESULTS
PICO reported a net loss of $2 million ($0.16 per basic and diluted share)
for the second quarter of 2003, ended June 30. The net loss consisted of a $2.3
million loss from continuing operations ($0.19 per share) and a $324,000
after-tax gain ($0.03 per share) on the disposal of discontinued operations,
primarily representing HyperFeed's divestment of its retail trading business,
PCQuote.com. The $2.3 million loss from continuing operations consisted of a
$3.8 million loss before income taxes and minority interest, which was partially
offset by an income tax benefit of $1.1 million and minority interest of
$333,000.
In the second quarter of 2002, PICO reported a net loss of $150,000 ($0.01
per basic and diluted share). This consisted of a $437,000 loss from continuing
operations ($0.04 per share), which was partially offset by income from
discontinued operations of $288,000 after-tax ($0.03 per share). The $437,000
loss from continuing operations consisted of an $803,000 loss before income
taxes and minority interest, which was partially offset by an income tax benefit
of $178,000, and minority interest of $188,000.
FIRST HALF RESULTS
PICO reported a net loss of $1.1 million ($0.09 per basic and diluted share)
for the first half of 2003, ended June 30. A loss from continuing operations of
$4.3 million ($0.35 per share) was partially offset by $3.2 million ($0.26 per
share) of after-tax income related to discontinued operations. The income from
discontinued operations consisted of the income earned by Sequoia in 2003 until
its sale (on March 31) of $2.4 million after-tax, a $443,000 after-tax gain on
the sale of Sequoia, and a $362,000 gain on HyperFeed's sale of PCQuote.com
($0.26 per share in total). The $4.3 million loss from continuing operations
consisted of a $6.7 million loss before income taxes and minority interest,
which was partially offset by an income tax benefit of $1.9 million, and
minority interest of $448,000.
14
In the first half of 2002, PICO reported net income of $1.7 million ($0.14
per basic and diluted share). This consisted of a $794,000 loss from continuing
operations ($0.06 per share), income from discontinued operations of $523,000
after-tax ($0.04 per share), and a cumulative effect of change in accounting
principle which increased income by $2 million ($0.16 per share). The $794,000
loss from continuing operations consisted of a $979,000 loss before income taxes
and minority interest and a provision for income taxes of $52,000, which were
partially offset by minority interest of $236,000.
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 that were determined to be
impaired. See Note 5 of Notes to Condensed Consolidated Financial Statements,
"Cumulative Effect of Change in Accounting Principle."
Segment revenues and income (loss) before taxes and minority interest for
the second quarter and first half of 2003 and 2002 were:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------
REVENUES:
Vidler Water Company $ 301,000 $ 1,278,000 $ 885,000 $ 9,139,000
Nevada Land & Resource Company 2,494,000 797,000 3,062,000 1,194,000
Business Acquisitions and Financing 2,752,000 1,656,000 2,525,000 1,645,000
HyperFeed Technologies, Inc. 1,586,000 1,586,000
Insurance Operations in Run Off 758,000 593,000 1,316,000 1,317,000
------------------------------------------------------------------------
Total Revenues $ 7,891,000 $ 4,324,000 $ 9,374,000 $ 13,295,000
========================================================================
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (1,274,000) $ (1,094,000) $ (2,056,000) $ 736,000
Nevada Land & Resource Company 720,000 (617,000) 767,000 (778,000)
Business Acquisitions and Financing 769,000 461,000 (1,407,000) (1,803,000)
HyperFeed Technologies, Inc. (572,000) (572,000)
Insurance Operations in Run Off (3,391,000) 447,000 (3,386,000) 866,000
------------------------------------------------------------------------
Loss Before Taxes and Minority Interest $ (3,748,000) $ (803,000) $ (6,654,000) $ (979,000)
========================================================================
Detailed information on the performance of each segment follows; however,
the major factors affecting PICO's second quarter and first half results were:
VIDLER WATER COMPANY
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 six months of 2003, Vidler did not close on any sales of water rights and
related assets. This compares to one significant sale of water rights and
related assets in the second quarter of 2002, and three significant sales of
water rights and related assets in the first half of 2002. Combined, these sales
added approximately $1 million to revenues and $556,000 to gross margin in the
second quarter of 2002, and approximately $8.4 million to revenues and $2.6
million to gross margin in the first half of 2002, which did not recur in 2003.
NEVADA LAND & RESOURCE COMPANY
Land sales revenues in 2003 were significantly higher than in 2002,
principally due to a sale of approximately 48,898 acres in the second quarter of
2003 which added $2 million to revenues and $796,000 to gross margin in the
second quarter and first half of 2003.
INSURANCE OPERATIONS IN RUN OFF
The results of this segment for the second quarter and first half of 2003
were affected by two significant items. Due to continued favorable claims
experience, Physicians Insurance Company of Ohio reduced its medical
professional liability insurance loss reserves in the second quarter, which
added approximately $3.6 million to income for the quarter and the first half.
However, this was more than offset by a $7.5 million provision for a reinsurance
recoverable recorded by Citation Insurance Company, after Fremont Indemnity
Company went into liquidation in July 2003.
15
VIDLER WATER COMPANY, INC.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------
REVENUES:
Sale of Land, Water Rights, and Water $ 1,008,000 $ 8,374,000
Option Premiums Earned $ 346,000
Lease of Water $ 5,000 84,000 6,000 152,000
Lease of Agricultural Land 176,000 164,000 352,000 353,000
Other 120,000 22,000 181,000 260,000
--------------------------------------------------------------------
Segment Total Revenues $ 301,000 $ 1,278,000 $ 885,000 $ 9,139,000
====================================================================
EXPENSES:
Cost of Land, Water Rights, and Water Sold $ (452,000) $(5,311,000)
Commission and Other Costs Of Sales (392,000) (498,000)
Depreciation and Amortization $ (239,000) (240,000) $ (478,000) (477,000)
Interest (115,000) (123,000) (233,000) (257,000)
Operations, Maintenance, and Other (1,221,000) (1,165,000) (2,230,000) (1,860,000)
--------------------------------------------------------------------
Segment Total Expenses $(1,575,000) $(2,372,000) $(2,941,000) $(8,403,000)
--------------------------------------------------------------------
INCOME (LOSS) BEFORE TAX $(1,274,000) $(1,094,000) $(2,056,000) $ 736,000
====================================================================
In the first six months of 2003, Vidler did not close on any sales of water
rights and related assets.
For the second quarter of 2003, all other revenues totaled $301,000. After
operating expenses of $1.6 million, Vidler generated a loss before taxes of $1.3
million for the second quarter of 2003.
In the second quarter of 2002, Vidler closed on the sale of 480 acre-feet of
water rights and the related 240 acres of land in the Harquahala Valley
Irrigation District to an industrial user. The transaction added $1 million to
revenues and $556,000 to gross margin. All other revenues were $270,000.
Excluding the cost of land, water rights, and water sold, all other expenses
were $1.9 million. As a result of these factors, Vidler incurred a pre-tax loss
of $1.1 million for the second quarter of 2002.
The second quarter segment loss increased by $180,000 year over year. The
result for the second quarter of 2002 included $556,000 in gross margin from the
sale of water rights and land, which did not recur in 2003.
For the first six months of 2003, all other revenues totaled $885,000,
including $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 $2.9 million, Vidler generated a loss before taxes
of $2.1 million for the first half of 2003.
In the first six months of 2002, Vidler closed on three 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;
- - its interest in Cline Ranch, which added $2.1 million to revenues and
approximately $119,000 to gross margin; and
- - 480 acre-feet of water rights and the related 240 acres of land in the
Harquahala Valley Irrigation District to an industrial user, which added $1
million to revenues and $556,000 to gross margin.
All other revenues were $765,000. Excluding the cost of land, water rights, and
water sold, and commission and other selling costs, all other operating expenses
were $2.6 million. As a result of these factors, Vidler generated a pre-tax
profit of $736,000 for the first half of 2002.
The first half segment result decreased $2.8 million year over year. The
result for the first six months of 2002 included approximately $2.6 million in
gross margin from the sale of water rights and land, which did not recur in
2003.
16
NEVADA LAND & RESOURCE COMPANY, LLC
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------
REVENUES:
Sale of Land $ 2,196,000 $ 451,000 $ 2,216,000 $ 543,000
Option Premiums Earned 137,000
Lease and Royalty 155,000 182,000 365,000 369,000
Interest and Other 143,000 164,000 344,000 282,000
--------------------------------------------------------------------
Segment Total Revenues $ 2,494,000 $ 797,000 $ 3,062,000 $ 1,194,000
====================================================================
EXPENSES:
Cost of Land Sales $(1,322,000) $ (189,000) $(1,331,000) $ (241,000)
Operating Expenses (452,000) (1,225,000) (964,000) (1,731,000)
--------------------------------------------------------------------
Segment Total Expenses $(1,774,000) $(1,414,000) $(2,295,000) $(1,972,000)
--------------------------------------------------------------------
INCOME (LOSS) BEFORE TAX $ 720,000 $ (617,000) $ 767,000 $ (778,000)
====================================================================
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 the second quarter of 2003, segment total revenues were $2.5 million.
Nevada Land sold approximately 52,286 acres of land for $2.2 million. The
parcels of land sold were from low value categories, which is reflected in the
average sales price of $42 per acre. The gross margin on land sales was
$874,000. Lease and royalty revenues were $155,000, and interest and other
revenues contributed $143,000. After operating expenses of $452,000, Nevada Land
recorded income of $720,000.
In the second quarter of 2002, segment total revenues were $797,000. Nevada
Land sold approximately 4,560 acres of land for $451,000, or an average sales
price of $99 per acre. The gross margin on land sales was $262,000. Lease and
royalty revenues were $182,000, and interest and other revenues contributed
$164,000. Following operating expenses of $1.2 million, Nevada Land experienced
a loss of $617,000 for the second quarter of 2002.
The segment result improved by $1.3 million year over year, primarily due to
the $612,000 higher gross margin on land sales, and a $773,000 reduction in
operating expenses. In the second quarter of 2002, operating expenses were
unusually high due to approximately $489,000 in legal and related expenses, and
a one-time write-off of $261,000 in previously capitalized costs.
In the first six months of 2003, segment total revenues were $3.1 million.
Nevada Land sold approximately 52,407 acres of land for $2.2 million, or an
average sales price of $42 per acre. The gross margin on land sales was
$884,000. Lease and royalty revenues were $365,000, option premiums of $137,000
were earned, and interest and other revenues contributed $344,000. After
operating expenses of $964,000, Nevada Land recorded income of $767,000.
In the first half of 2002, segment total revenues were $1.2 million. Nevada
Land sold approximately 6,201 acres of land for $543,000, or an average sales
price of $88 per acre. The gross margin on land sales was $302,000. Lease and
royalty revenues were $369,000, and interest and other revenues contributed
$282,000. Following operating expenses of $1.7 million, Nevada Land experienced
a loss of $778,000 for the first half of 2002.
The $1.5 million year over year improvement in the segment result primarily
resulted from the $583,000 higher gross margin on land sales, and a $767,000
reduction in operating expenses. In the first half of 2002, operating expenses
were unusually high due to approximately $599,000 in legal and related expenses,
and the one-time write-off of $261,000 in previously capitalized costs.
17
BUSINESS ACQUISITIONS AND FINANCING
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------
REVENUES:
Realized Gains (Losses):
On Sale or Impairment of Holdings $ 1,169,000 $ (561,000) $ 573,000 $(1,508,000)
SFAS No. 133 Change in Warrants 267,000 335,000 246,000 434,000
Investment Income 1,229,000 1,000,000 1,460,000 1,596,000
Other 87,000 882,000 246,000 1,123,000
--------------------------------------------------------------------
Segment Total Revenues $ 2,752,000 $ 1,656,000 $ 2,525,000 $ 1,645,000
====================================================================
SEGMENT TOTAL EXPENSES $(1,759,000) $ (662,000) $(3,367,000) $(2,518,000)
--------------------------------------------------------------------
INCOME (LOSS) BEFORE INVESTEE INCOME $ 993,000 $ 994,000 $ (842,000) $ (873,000)
Equity in Loss of Unconsolidated Affiliates $ (224,000) $ (533,000) $ (565,000) $ (930,000)
--------------------------------------------------------------------
Income (LOSS) BEFORE TAXES $ 769,000 $ 461,000 $(1,407,000) $(1,803,000)
====================================================================
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 largest holding in this segment is Jungfraubahn Holding AG. Extracts
from Jungfraubahn's 2002 Annual Report and summary financial statements can be
viewed at www.jungfraubahn.com (in the "Finances" section of the "Inside" tab).
At June 30, 2003, our holding in Jungfraubahn had both an estimated market value
and a carrying value before taxes of $24.6 million. In 2002 and 2003 until May
15, our holding in HyperFeed Technologies, Inc. was included in this segment. On
May 15, 2003 HyperFeed became a consolidated subsidiary, and its results are now
recorded in a separate segment. See HyperFeed Technologies, Inc. segment.
For the second quarter of 2003, Business Acquisitions and Financing segment
revenues were $2.8 million. Net realized investment gains were approximately
$1.4 million. Realized gains of approximately $1.6 million on the sale of two
equity securities were partially offset by a $470,000 charge for
other-than-temporary impairment of our holding in Accu Holding AG, to reflect a
decline in the market value of this holding during the second quarter. In
addition, a $267,000 increase in the estimated fair value of warrants we own to
buy shares in other companies, principally HyperFeed, was recorded as a realized
gain in accordance with Statement of Financial Accounting Standards No. 133,
"Accounting For Derivative Instruments and Hedging Activities." Investment
income was $1.2 million, including $957,000 from Jungfraubahn's annual dividend
payment, and other revenues were $87,000. After segment expenses of $1.8
million, and our $224,000 equity share of HyperFeed's net loss and other events
affecting equity (until May 15, 2003), the segment reported income before taxes
of $769,000 for the second quarter of 2003.
In the second quarter of 2002, segment revenues were $1.7 million. Net
realized investment losses were approximately $226,000. Realized losses of
$561,000 principally comprise a $623,000 charge for other-than-temporary
impairment of our holding in SIHL during the second quarter of 2002. This was
partially offset by a $335,000 increase in the estimated fair value of warrants
under SFAS No. 133. Investment income was $1 million, including a $703,000
dividend from Jungfraubahn, and other revenues were $882,000. After segment
expenses of $662,000, and our $532,000 equity share of the net losses and other
events affecting equity of companies accounted for under the equity method --
primarily HyperFeed -- the segment reported income before taxes of $461,000 for
the second quarter of 2002.
For the first half of 2003, Business Acquisitions and Financing segment
revenues were $2.5 million. Net realized investment gains were approximately
$819,000. Realized gains of approximately $1.6 million on the sale of two equity
securities were partially offset by approximately $1.1 million in charges for
other-than-temporary impairment of our holdings in Accu Holding and SIHL,
reflecting a decline in the market value of these holdings during the first six
months of 2003. In addition, a $246,000 increase in the estimated fair value of
warrants was recorded under SFAS No. 133. Investment income was $1.5 million,
including the $957,000 annual dividend from Jungfraubahn, and other revenues
were $246,000. After segment expenses of $3.4 million, and our $565,000 equity
share of HyperFeed's net loss and other events affecting equity (until May 15,
2003), the segment reported a loss before taxes of $1.4 million for the first
half of 2003.
In the first half of 2002, segment revenues were $1.6 million. Net realized
investment losses were approximately $1.1 million. Realized losses of $1.5
million principally represent a charge for other-than-temporary impairment of
our holdings in SIHL during the first six months of 2002, which was partially
offset by a $434,000 increase in the estimated fair value of warrants under SFAS
No. 133.
18
Investment income was $1.6 million including the $703,000 dividend from
Jungfraubahn, and other revenues were $1.1 million. After segment expenses of
$2.5 million, and our $930,000 equity share of the net losses and other events
affecting equity of companies accounted for under the equity method -- primarily
HyperFeed -- the segment reported a loss before taxes of $1.8 million for the
first half of 2002.
PICO's corporate overhead is the principal expense recorded in this segment.
The year over year increases in segment expenses of $1.1 million for the second
quarter and $850,000 for the first half is primarily due to fluctuation in a
non-cash expense related to foreign currency. An expense of $20,000 was recorded
in the second quarter of 2003, compared to a benefit of $1.7 million, which
reduced expenses in the second quarter of 2002. A benefit of approximately
$452,000 was recorded for the first half of 2003, compared to a benefit of
approximately $1.5 million in the first half of 2002. 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 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.
Consequently, an expense or benefit is recorded in the statement of operations
even though there is no net impact on shareholders' equity.
HYPERFEED TECHNOLOGIES, INC.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------------------
REVENUES:
Service $ 1,584,000 $ 1,584,000
Investment Income 2,000 2,000
-------------------------------------------------------------------
Segment Total Revenues $ 1,586,000 $ 1,586,000
===================================================================
EXPENSES:
Cost of Service (1,136,000) (1,136,000)
Depreciation and Amortization (133,000) (133,000)
Other (889,000) (889,000)
-------------------------------------------------------------------
Segment Total Expenses $(2,159,000) (2,159,000)
-------------------------------------------------------------------
Segment Loss Before Taxes $ (572,000) $ (572,000)
===================================================================
In May 2003, PICO purchased an additional 4,436,229 HyperFeed common shares
for approximately $1.2 million, or $0.2705 per share, in a private placement,
increasing our holding to 15,463,117 HyperFeed common shares. PICO now has a
direct controlling financial interest in HyperFeed, through direct ownership of
a majority voting interest. Consequently, HyperFeed become a consolidated
subsidiary of PICO on May 15, 2003. See Note 9 of Notes to Condensed
Consolidated Financial Statements, "Consolidation of HyperFeed Technologies,
Inc."
HyperFeed's revenues and expenses are recorded in this segment for the
period from May 15, 2003 until June 30, 2003. In 2002 and 2003 until May 15,
PICO used the equity method of accounting for HyperFeed under Accounting
Principles Board ("APB") Opinion No. 18, "The Equity Method of Accounting for
Investments in Common Stock," and HyperFeed was part of the Business
Acquisitions and Financing segment.
For the three months and six months ended June 30, 2003, HyperFeed
contributed total revenues of $1.6 million. Segment expenses for the period were
$2.2 million, resulting in a segment loss before taxes of $572,000.
In addition to, and separately from, the segment result, HyperFeed recorded
a $362,000 after-tax gain on the divestment of its retail trading business,
PCQuote.com. This is included in the "Gain on the sale of discontinued
operations, net" line of the Condensed Consolidated Statement of Operations for
the second quarter and first half of 2003. For full information of HyperFeed's
second quarter and first half results, refer to HyperFeed's 10-Q for the period
ended June 30, 2003, which should be filed with the SEC on or before August 15,
2003.
19
INSURANCE OPERATIONS IN RUN OFF
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------------------
REVENUES:
Net Investment Income $ 671,000 $ 541,000 $ 1,162,000 $ 1,220,000
Realized Investment Gains 87,000 51,000 153,000 94,000
Other 1,000 1,000 3,000
--------------------------------------------------------------------
Segment Total Revenues $ 758,000 $ 593,000 $ 1,316,000 $ 1,317,000
====================================================================
EXPENSES:
Operating and Underwriting Expenses (4,149,000) (146,000) (4,702,000) (451,000)
--------------------------------------------------------------------
Segment Total Expenses $(4,149,000) $ (146,000) $(4,702,000) $ (451,000)
INCOME (LOSS) BEFORE TAXES:
Citation Insurance Company $(7,297,000) $ 404,000 $(7,045,000) $ 778,000
Physicians Insurance Company of Ohio 3,906,000 43,000 3,659,000 88,000
--------------------------------------------------------------------
Segment Income (Loss) Before Taxes $(3,391,000) $ 447,000 $(3,386,000) $ 866,000
====================================================================
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 $758,000
in the second quarter of 2003, compared to $593,000 in the second quarter of
2002. Investment income increased $130,000 year over year, primarily due to an
increase in the amount of fixed-income securities in the Physicians investment
portfolio following the receipt of the proceeds from the sale of Sequoia.
Operating and underwriting expenses were $4.1 million in the second quarter
of 2003. This principally represented two significant items:
- - Physicians recorded a $3.6 million benefit from favorable development in our
medical professional liability claims reserves. The reserve reduction was
booked after actuarial analysis concluded that Physicians' reserves against
claims were significantly greater than the actuary's projections of future
claims payments, due to continued favorable trends in the "severity" of
claims. Reserves were reduced in 14 out of 20 accident years, increased in
one accident year, and unchanged in five accident years. This was more than
offset by;
- - a $7.5 million provision against a reinsurance recoverable previously
recorded by Citation, after Fremont Indemnity Company went into liquidation
in July 2003. Until we acquired Citation in the 1996 reverse merger,
Citation had been a direct writer of workers compensation insurance. In
1997, Citation reinsured 100% of its workers compensation book of business
with a subsidiary, Citation National Insurance Company ("CNIC"). Citation
then sold CNIC to Fremont. All assets and liabilities, including the assets
which correspond to the workers compensation reserves reinsured with CNIC,
and records, computer systems, policy files, and reinsurance arrangements
were transferred to Fremont, as part of the sale of the business. Fremont
merged CNIC into Fremont, and administered and paid all workers compensation
claims that had been sold to Fremont. Fremont has been an admitted reinsurer
since 1997. Previously, Fremont filed statutory reports with the California
Department of Insurance showing that Fremont held deposits corresponding to
Citation's workers compensation claims reserves. Until June 30, 2003,
Citation has booked the losses reported by Fremont and recorded an equal and
offsetting reinsurance recoverable from Fremont, as an admitted reinsurer,
for all losses and loss adjustment expenses, resulting in no net impact on
Citation's financial statements and no net impact on PICO's condensed
consolidated financial statements.
Since Fremont went into liquidation in July 2003, Fremont is no longer an
admitted reinsurance company under the statutory basis of insurance accounting.
Consequently, Citation was required to reverse the $7.5 million reinsurance
offset from Fremont in its June 30, 2003 financial statements prepared on the
statutory basis of accounting. Our management has made a corresponding provision
against the entire reinsurance recoverable from Fremont in our June 30, 2003
GAAP condensed consolidated financial statements as well. Citation will make a
claim to recover the deposits reported as held by Fremont for Citation's
insureds; however, the ultimate outcome cannot be accurately predicted. The
Company is aggressively pursuing its rights to recover the reinsurance, and to
either have the deposit assets returned to us, or be released from the claims
obligations.
In the second quarter of 2002, operating and underwriting expenses were
$146,000. Consequently, segment income declined from $447,000 in the second
quarter of 2002 to a $3.4 million loss in the second quarter of 2003.
20
The same factors affected the segment results for the first half of 2003,
where revenues were $1.3 million, operating and underwriting expenses were $4.7
million, and the segment loss was $3.4 million. In the first six months of 2002,
segment revenues were also $1.3 million, operating and underwriting expenses
were $450,000, and the segment generated income before taxes of $866,000.
CITATION INSURANCE COMPANY
For the second quarter of 2003, Citation generated revenues of $397,000.
After operating and underwriting expenses of $7.7 million, Citation reported a
loss before taxes of $7.3 million. In the second quarter of 2002, Citation's
revenues were $446,000. After operating and underwriting expenses of $42,000,
Citation generated $404,000 in income before taxes.
For the first half of 2003, Citation generated revenues of $785,000. After
operating and underwriting expenses of $7.8 million, Citation reported a loss
before taxes of $7 million. In the first half of 2002, Citation's revenues were
$919,000. After operating and underwriting expenses of $141,000, Citation
generated $778,000 in income before taxes.
At June 30, 2003, Citation's property and casualty insurance claims reserves
were $21.1 million, net of reinsurance, compared to $14.1 million at March 31,
2003, and $14.6 million at December 31, 2002. The increase was primarily due to
the provision against the $7.5 million reinsurance recoverable from Fremont.
During the first half of 2003, net reserves were reduced by payment of
approximately $2.9 million in direct losses (i.e., claims) and loss adjustment
expenses, which were partially offset by the recovery of approximately $1.8
million from reinsurance companies.
CITATION INSURANCE COMPANY -- LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
JUNE 30, 2003 MARCH 31, 2003 DECEMBER 31, 2002
---------------------------------------------------------
Direct Reserves $22.5 million $15.3 million $16.3 million
Ceded Reserves (1.4) (1.2) (1.7)
---------------------------------------------------------
Net Property & Casualty Insurance Reserves $21.1 million $14.1 million $14.6 million
=========================================================
PHYSICIANS INSURANCE COMPANY OF OHIO
During the second quarter of 2003, Physicians generated total revenues of
$361,000. Regular operating and underwriting expenses were exceeded by the $3.6
million reserve reduction, resulting in income before taxes of $3.9 million.
During the second quarter of 2002, total revenues were $147,000, operating and
underwriting expenses were $104,000, and Physicians reported income before taxes
of $43,000.
During the first half of 2003, Physicians generated total revenues of
$531,000. Regular operating and underwriting expenses were exceeded by the $3.6
million reserve reduction, resulting in income before taxes of $3.7 million.
During the first half of 2002, total revenues were $398,000, operating and
underwriting expenses were $310,000, and Physicians reported income before taxes
of $88,000.
At June 30, 2003, Physicians' loss and loss adjustment reserves were $24.6
million, net of reinsurance, compared to $29.4 million at March 31, 2003, and
$30.3 million at December 31, 2002. Reserves decreased by $5.7 million during
the first half, due to the $3.6 million reserve reduction, and the payment of
approximately $2.1 million in losses and loss adjustment expenses.
PHYSICIANS INSURANCE COMPANY OF OHIO -- LOSS AND LOSS ADJUSTMENT EXPENSE
RESERVES
JUNE 30, 2003 MARCH 31, 2003 DECEMBER 31, 2002
----------------------------------------------------------
Direct Reserves $30.4 million $35.5 million $36.4 million
Ceded Reserves (5.8) (6.1) (6.1)
----------------------------------------------------------
Net Medical Professional Liability Insurance Reserves $24.6 million $29.4 million $30.3 million
==========================================================
21
DISCONTINUED OPERATIONS
On March 31, 2003, PICO closed on the sale of Sequoia Insurance Company. Our
condensed consolidated financial statements for 2003 and previous years now
present Sequoia as a discontinued operation.
During the three months of 2003 that PICO owned Sequoia, Sequoia contributed
income of $2.4 million after-tax, which is recorded in the "Income from
discontinued operations, net" line in the Condensed Consolidated Statement of
Operations for the six months ended June 30, 2003. Sequoia contributed income of
$288,000 after-tax in the second quarter of 2002, and income of $523,000
after-tax for the first six months of 2002.
PICO also recorded after-tax gains on the disposal of discontinued
operations of $324,000 in the second quarter, and $805,000 in the first half of
2003. The first half gain was comprised of $443,000 from the sale of Sequoia,
and $362,000 from HyperFeed's sale of PCQuote.com.
The gross sale proceeds from the sale of Sequoia 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.
LIQUIDITY AND CAPITAL RESOURCES -- THREE AND SIX MONTHS ENDED JUNE 30, 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 $19 million in cash and cash equivalents at June 30, 2003,
compared to $33 million at March 31, 2003, and $22.1 million at December 31,
2002.
In addition to the $19 million in consolidated cash and cash equivalents as
defined by GAAP, at June 30, 2003, the parent company held investment-grade
fixed-income securities maturing in 2003 and 2004 with a market value of $15.1
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.
22
As shown in the Condensed Consolidated Statements of Cash Flow, cash and
cash equivalents decreased by $3.1 million in the first half of 2003, compared
to a $6.3 million net decrease in the first half of 2002.
During the first half of 2003, cash of $7.7 million was used in Operating
Activities, including $1.4 million of cash used in Sequoia's operating
activities. In the first half of 2002, operating activities provided cash of $2
million, primarily due to the receipt of the cash proceeds from water rights and
related assets sold by Vidler. The principal uses of cash in both years included
operating expenses at Vidler, the payment of claims by Citation and Physicians,
and group overhead.
Investing Activities generated $5.1 million of cash in the first half of
2003. The cash inflow in 2003 primarily resulted from cash received of $25.1
million from the sale of Sequoia (gross proceeds of approximately $43 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 $17.1 million in fixed-income securities and the net
investment of $2.7 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 half of 2002, Investing
Activities used $6.5 million of cash. The cash used in 2002 primarily
represented the net investment of $2.5 million in fixed-income securities and
the net investment of $3.9 million in stocks.
Financing Activities used cash of $136,000 in the first half of 2003,
compared to $571,000 of cash used in the first half of 2002. The cash used in
2002 primarily represented the repayment of $637,000 in non-recourse borrowings
collateralized by the Harquahala Valley farm properties sold by Vidler during
the period.
At June 30, 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 June 30, 2003, no stock had been repurchased under this authorization.
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 June 30,
2003, PICO had $64.8 million of fixed maturity securities and mortgage
participation interests, $70.7 million of marketable equity securities that were
subject to market risk, of which $37.2 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 $995,000 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 $14.1 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 $5.6 million that
would impact the foreign currency translation in shareholders' equity.
23
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 the design and operation of our disclosure controls
and procedures, as such term is defined under Rules 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), at the end
of the period. 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
24
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
+++++ 10.59 PICO Holdings, Inc. 2003 Stock Appreciation Rights Program
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.
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1. Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2. 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 Appendix I of 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.
+++++ Incorporated by reference to Appendix I of Proxy Statement
for Annual Meeting of Shareholders to be Held on July 17,
2003, dated May 27, 2003, and filed with the SEC on April 30,
2003.
(b) REPORTS ON FORM 8-K
The Registrant filed a Form 8-K on April 10, 2003, containing detailed
information regarding the sale of Sequoia Insurance Company, which
closed on March 31, 2003.
25
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: August 13, 2003 By: /s/ Maxim C. W. Webb
----------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
26