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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, 2000
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
----- -----
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 16,781,866 as of March 31, 2000. As of such date, 4,394,127 shares of
common stock were held by the registrant and subsidiaries of the registrant.
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PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of 3
March 31, 2000 and December 31, 1999
Consolidated Statements of Operations 4
for the Three Months Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows for 5
the Three Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 26
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 26
Item 6: Exhibits and Reports on Form 8-K 26
Signature 27
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PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2000 1999
------------ ------------
ASSETS
Investments $137,754,513 $134,269,177
Cash and cash equivalents 84,838,003 36,738,373
Accrued investment income 1,527,039 1,236,919
Premiums and other receivables, net 10,452,853 12,030,709
Reinsurance receivables 39,283,103 45,040,368
Prepaid deposits and reinsurance premiums 1,307,442
Deferred policy acquisition costs 4,832,426 4,821,228
Land, mineral and water rights and water storage 123,703,533 123,671,842
Property and equipment, net 1,784,618 1,752,820
Income taxes receivable 4,368,605 3,648,577
Net deferred income taxes 1,942,827 3,087,859
Other assets 8,053,881 8,048,698
------------ ------------
Total assets $418,541,401 $375,654,012
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses, net of discount $136,032,535 $139,132,875
Unearned premiums 18,212,640 17,204,690
Reinsurance balance payable 7,149,078 7,712,602
Deferred gain on retroactive reinsurance 1,236,525 1,236,525
Other liabilities 15,162,434 16,879,994
Bank and other borrowings 15,651,374 15,704,507
Taxes Payable 4,911,141 4,867,028
Excess of fair value of net assets acquired over purchase price 3,786,570 3,928,566
------------ ------------
Total liabilities 202,142,297 206,666,787
------------ ------------
Commitments and Contingencies (Note 5)
Preferred stock, $.01 par value, authorized 2,000,000 shares,
none issued
Common stock, $.001 par value; authorized 100,000,000 shares,
issued 16,781,866 in 2000 and 13,448,533 in 1999 16,782 13,449
Additional paid-in capital 235,832,506 186,004,827
Retained earnings 62,394,270 66,718,780
Accumulated other comprehensive loss (4,014,819) (5,920,196)
Treasury stock, at cost (4,394,127 common shares in 2000 and 1999) (77,829,635) (77,829,635)
------------ ------------
Total shareholders' equity 216,399,104 168,987,225
------------ ------------
Total liabilities and shareholders' equity $418,541,401 $375,654,012
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
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PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2000 1999
----------- -----------
Revenues:
Premium income $ 7,514,156 $ 8,554,974
Net investment income 1,502,282 1,914,354
Net realized loss on investments (59,129) (344,395)
Other income 1,138,174 385,003
----------- -----------
Total revenues 10,095,483 10,509,936
----------- -----------
Expenses:
Loss and loss adjustment expenses 6,482,185 6,516,026
Insurance underwriting and other expenses 8,504,008 6,498,464
----------- -----------
Total expenses 14,986,193 13,014,490
----------- -----------
Equity in losses of unconsolidated affiliates (528,504) (361,292)
----------- -----------
Loss before income taxes and minority interest (5,419,214) (2,865,846)
Benefit for federal, foreign and state income taxes (792,691) (477,122)
----------- -----------
Loss before minority interest (4,626,523) (2,388,724)
Minority interest in loss of subsidiary 302,013
----------- -----------
Net loss $(4,324,510) $(2,388,724)
=========== ===========
Net loss per common share - basic and diluted: $ (0.47) $ (0.27)
=========== ===========
Weighted average shares outstanding 9,200,926 8,946,237
=========== ===========
The accompanying notes are an integral part of
the consolidated financial statements.
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PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2000 1999
----------- ------------
OPERATING ACTIVITIES
Net cash used in operating activities $(1,031,461) $ (9,241,651)
----------- ------------
INVESTING ACTIVITIES:
Purchases of investments (3,058,595) (19,929,083)
Proceeds from sale of investments 74,127 4,580,325
Proceeds from maturity of investments 2,000,000 2,000,000
Other investing activities, net (153,108) (1,286,985)
----------- ------------
Net cash used in investing activities (1,137,576) (14,635,743)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from rights offering, net of costs of $168,989 49,831,011
Proceeds from borrowings 10,884 7,057,405
Repayments of debt (64,017)
Purchase of treasury stock (291,593)
----------- ------------
Net cash provided by financing activities 49,777,878 6,765,812
----------- ------------
Effect of exchange rate changes on cash 490,789 127,806
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 48,099,630 (16,983,776)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,738,373 71,654,196
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $84,838,003 $ 54,670,420
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 247,264 $ 324,034
=========== ============
The accompanying notes are an integral part of
the consolidated financial statements.
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PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of PICO Holdings, Inc. ("PICO") and Subsidiaries (the "Company") 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 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, 2000 and December 31, 1999 and results of
operations and cash flows for the three months ended March 31, 2000 and
1999 have been included and are of a normal recurring nature. Operating
results for the three months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2000.
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 Results of
Operations and Risks and Uncertainties contained in the Company's Annual
Reports on Form 10-K for the year ended December 31, 1999 as filed with the
SEC.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 investments,
unpaid losses and loss adjustment expenses, deferred policy acquisition
costs, deferred income taxes and contingent liabilities. While management
believes that the carrying value of such assets and liabilities are
appropriate as of March 31, 2000 and December 31, 1999, it is reasonably
possible that actual results could differ from the estimates upon which the
carrying values were based.
2. DISPOSAL OF SUBSIDIARY
In January 2000, PICO sold its interest in Summit Global Management,
Inc. ("Summit") to Summit's Chief Executive Officer for a $100,000 note at
7% interest due January 2002. PICO realized a loss of approximately
$75,000, before taxes, on the sale. Because Summit did not represent a
major segment of the Company's business, Summit's operations have not been
classified as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business."
Following is an unaudited summary of Summit's stand alone financial
results for the month ended January 31, 2000 and the three months ended
March 31, 1999:
2000 1999
------ -------
Total revenues 81,625 205,661
Income before taxes 56,076 (3,071)
Net income 29,437 (2,027)
3. LOSS PER SHARE
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". For the three months
ended March 31, 2000 and 1999 there was no difference between basic and
diluted EPS. For the three months ended March 31, 2000 and 1999, 1 million
and 1.1 million common stock options were excluded from the calculations
because their effects were anti-dilutive.
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4. 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,
2000 1999
----------- ----------
Comprehensive income (loss):
Net loss $(4,324,510) $(2,388,724)
Net change in unrealized appreciation
on available for sale investment 2,584,928 20,376,102
Net change in foreign currency translation (679,551) 1,992,332
----------- -----------
Total comprehensive income (loss) $(2,419,133) $19,979,710
=========== ===========
Total comprehensive income (loss) is net of deferred income tax
liability of $1.4 million and $7 million for the three months ended March
31, 2000 and March 31, 1999, respectively.
The components of accumulated comprehensive loss are as follows:
March 31, December 31,
2000 1999
----------- ------------
Unrealized appreciation on
available for sale investments $ 3,411,684 $ 826,756
Foreign currency translation (7,426,503) (6,746,952)
----------- -----------
Accumulated other comprehensive loss $(4,014,819) $(5,920,196)
=========== ===========
Accumulated comprehensive loss in net of deferred income tax liability
of $2 million at March 31, 2000 and $658,000 at December 31, 1999.
5. COMMITMENTS AND CONTINGENCIES
In November 1998, Vidler entered into an operating lease to acquire
185,000 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 Vidler to pay for these
privileges and rights a minimum of $2.3 million per year for 10 years
beginning October 1998. The agreement calls for the lease payments to be
adjusted annually by the engineering price index. On October 7, 1998, PICO
signed an agreement guaranteeing payment of Vidler's obligations under the
agreement. The maximum obligation under this guarantee is $3.2 million,
adjusted annually by the engineering price index. The guarantee expires
October 7, 2008.
On January 10, 1997, Global Equity commenced an action in British
Columbia against MKG Enterprises Corp. ("MKG"), Vignoble Wines Agency Inc.
("Vignoble") to enforce repayment of a $5 million loan made by Global
Equity to MKG. On the same day, the Supreme Court of British Columbia
granted an order preventing MKG from disposing of certain assets pending
resolution of the action. Global Equity subsequently brought a motion to
have a receiver-manager appointed for MKG and Vignoble, which motion has
been adjourned. In addition, in March 1999 Global Equity filed an action in
the Supreme Court of British Columbia against a third party. This action
states the third party had fraudulently entered into loan agreements with
MKG. Accordingly, under this action Global Equity is claiming damages from
the third party and restraining the third party from further action.
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Under the terms of the joint venture agreement between Conex and the
sino-foreign joint venture in The People's Republic of China, Conex has a
commitment to fund a third tranche of financing in the amount of $5
million. This liability has been recorded in the financial statements.
During the first quarter of 2000, Conex funded $500,000 of this commitment
bringing the balance outstanding to $4.5 million.
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.
6. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including instruments
embedded in other contracts and for hedging activities. It requires
recognition of all derivatives as either assets or liabilities in the
consolidated balance sheet, and to measure those instruments at fair value.
The new standard, as amended by SFAS No. 137, becomes effective for fiscal
years beginning after June 15, 2000. Management has not assessed the
impacts this statement may have on the Company's consolidated financial
statements.
7. SEGMENT REPORTING
The Company is a diversified holding company engaged in five major
operating segments: Land, Mineral and Related Rights; Water Rights and
Water Storage; Property and Casualty Insurance Operations; Medical
Professional Liability ("MPL") Insurance Operations and Other Strategic
Holdings.
The accounting policies of the reportable segments are the same as
those described in the Company's 1999 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. In addition,
assets identifiable with segments are disclosed as well as capital
expenditures, and depreciation and amortization. The Company has operations
and investments both in the U.S. and abroad.
The following is a detail of revenues (charges) by segment:
Three Months Ended March 31,
2000 1999
----------- -----------
Land, Mineral and Related Water Rights $ 745,822 $ 193,664
Water Rights and Water Storage 245,415 172,179
Property and Casualty Insurance 9,064,955 9,747,923
Medical Professional Liability Insurance 513,021 548,080
Other Strategic Holdings (473,730) (151,910)
----------- -----------
Total Revenues-Continuing Operations $10,095,483 $10,509,936
=========== ===========
The following is a detail of segment profit or loss before income
taxes and minority interest:
Three Months Ended March 31,
2000 1999
----------- ------------
Land, Mineral and Related Water Rights $ 243,803 $ (68,870)
Water Rights and Water Storage (1,159,503) (628,258)
Property and Casualty Insurance (308,808) 234,708
Medical Professional Liability Insurance (281,138) (485,636)
Other Strategic Holdings (3,913,568) (1,917,790)
----------- -----------
Loss Before Taxes and Minority Interest $(5,419,214) $(2,865,846)
=========== ===========
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. THESE INCLUDE, BUT ARE
NOT LIMITED TO, STATEMENTS ABOUT THE COMPANY'S INVESTMENT PHILOSOPHY, PLANS FOR
EXPANSION, BUSINESS EXPECTATIONS AND REGULATORY FACTORS. THESE STATEMENTS
REFLECT OUR CURRENT VIEWS ABOUT FUTURE EVENTS THAT COULD AFFECT OUR FINANCIAL
PERFORMANCE. YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES (INCLUDING THOSE
LISTED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-Q) THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS OR FROM
OUR PAST RESULTS.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 AND 1999
INTRODUCTION
PICO Holdings, Inc. is a diversified holding company. We acquire interests
in companies which our management believes:
o are undervalued at the time we buy them; and
o have the potential to provide a superior rate of return over time, after
considering the risk involved.
Our over-riding objective is to generate superior long-term growth in
shareholders' equity, as measured by book value per share. To accomplish this,
we are seeking to build a profitable operating base with our land, water, and
insurance subsidiaries, and over time to realize gains from our portfolio of
strategic investment holdings. In the long term, we expect that most of the
growth in shareholders' equity will come from realized gains on the sale of
assets, rather than operating earnings. Accordingly, when analyzing our
performance, PICO's management places more weight on increased asset values than
on reported earnings.
Currently our major assets and activities are:
o owning and developing land, mineral rights, and water rights through Nevada
Land & Resource Company, LLC, which owns approximately 1,279,708 acres of
land in northern Nevada;
o owning and developing water rights and water storage operations through
Vidler Water Company, Inc.;
o property and casualty insurance through our California-based subsidiaries
Sequoia Insurance Company and Citation Insurance Company;
o "running off" the loss reserves of our Ohio-based medical professional
liability insurance companies, Physicians Insurance Company of Ohio, Inc.
and The Professionals Insurance Company; and
o making strategic investments in other public companies.
SUMMARY
PICO reported a net loss of $4.3 million, or $0.47 per basic and diluted
share, for the quarter ended March 31, 2000, compared to a net loss of $2.4
million, or $0.27 per basic and diluted share, for the same quarter in 1999.
Shareholders' equity increased to $216.4 million ($17.47 per share) at
March 31, 2000, from $169 million ($18.66 per share) at December 31, 1999.
Completion of the rights offering, which raised $49.8 million in new equity
capital after expenses, led to the increase in shareholders' equity.
The $2.4 million comprehensive loss for the quarter (see Note 4,
"Comprehensive Income/Loss") resulted in an equal reduction in shareholders'
equity. This was comprised of a $2.6 million increase in unrealized appreciation
in investments, which was more than offset by the $4.3 million net loss and
negative currency translation of $680,000 as the currencies of foreign countries
where we have investments declined relative to the US dollar. Comprehensive
income for the first quarter of 1999 was $20 million, consisting of a $2.4
million net loss, a $20.4 million increase in unrealized appreciation of
securities, and $2 million in positive foreign currency translation.
Net income for the first quarter of 2000 consisted of a $5.4 million loss
before income taxes and minority interest, partially offset by income tax
benefits of $793,000 and $86,000 of minority interest in the loss of SISCOM and
Conex. In the first quarter of 1999, a $2.9 million loss before income taxes and
minority interest was partially offset by income tax benefits of $477,000.
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First quarter 2000 revenues were $10.1 million, compared to $10.5 million
during the first quarter of 1999. This decrease primarily resulted from a $1
million decline in earned property and casualty insurance premiums, partially
offset by $423,000 in higher land sales and a $202,000 in increase in other
revenues at Nevada Land and Vidler.
Segment revenues (charges) and income (loss) before taxes and minority
interest for the first quarter of 2000 and 1999 were:
THREE MONTHS ENDED MARCH 31,
2000 1999
----------- -----------
REVENUES (CHARGES):
Land, Minerals & Related Water Rights $ 746,000 $ 194,000
Water Rights & Water Storage Assets 245,000 172,000
Property & Casualty Insurance 9,065,000 9,748,000
Medical Professional Liability Insurance 513,000 548,000
Other Strategic Holdings (474,000) (152,000)
----------- -----------
Total Revenues $10,095,000 $10,510,000
=========== ===========
INCOME (LOSS) BEFORE TAXES & MINORITY INTERESTS:
Land, Minerals & Related Water Rights $ 244,000 $ (69,000)
Water Rights & Water Storage Assets (1,159,000) (628,000)
Property & Casualty Insurance (309,000) 235,000
Medical Professional Liability Insurance (281,000) (486,000)
Other Strategic Holdings (3,914,000) (1,918,000)
----------- -----------
Loss Before Taxes & Minority Interests $(5,419,000) $(2,866,000)
=========== ===========
Detailed information on the performance and outlook for each segment is
contained later in this report, however the major factors affecting PICO's first
quarter results were:
LAND, MINERALS & RELATED WATER RIGHTS
First quarter revenues were $552,000 higher than the previous year at
Nevada Land, primarily because $423,000 of land was sold this year and no land
was sold in the 1999 quarter. The related gain resulted in a pre-tax profit of
$244,000 for Nevada Land in 2000, compared to a $69,000 pre-tax loss last year.
WATER RIGHTS & WATER STORAGE ASSETS
Vidler reported $73,000 higher revenues, but a $531,000 wider pre-tax loss
of $1.2 million. This was due to an increase in costs that we must recognize now
- -- primarily financing and operating charges-- which resulted from the
development of assets which will not produce the resultant cash flow and
earnings until future years, and the significant expansion in Vidler's asset
base. In 1999, the quantity of senior, transferable water rights controlled by
Vidler increased by 72.6%.
PROPERTY & CASUALTY INSURANCE
Segment revenues were $683,000 lower, primarily due to a $1 million decline
in earned premiums. In the first quarter of 2000 Sequoia incurred an
underwriting loss, principally due to a large number of weather-related property
damage claims. This caused a pre-tax segment loss of $309,000, versus a $235,000
profit a year earlier.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
As the "run-off" of loss reserves in this segment continues, investment
income dropped by $35,000 and the pre-tax loss narrowed by $205,000 to $281,000.
OTHER STRATEGIC HOLDINGS
This segment is comprised of investments where we own less than 50% of the
company, and our smaller subsidiaries. Our largest strategic holdings are in
HyperFeed Technologies, Inc., Jungfraubahn Holding A.G., and Australian Oil &
Gas Corporation Limited.
The segment reported net charges to revenues of $474,000 and $152,000 in
the first quarter of 2000 and 1999, respectively. This is due to the allocation
of investment income to the medical professional liability segment to offset
reserve discount accretion expense.
The segment loss widened by almost $2 million due to reduced investment
income and $1.5 million in operating losses and goodwill amortization related to
PICO's investments in Conex Continental, Inc. and SISCOM, Inc.
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The segment result does not reflect the difference between the carrying
value and the potential market value of our largest strategic investments. This
is detailed later in this report.
LAND, MINERALS AND RELATED WATER RIGHTS
- ---------------------------------------
NEVADA LAND & RESOURCE COMPANY, LLC
-----------------------------------
Three Months Ended March 31,
----------------------------
2000 1999
-------- --------
Revenues:
- ---------
Sale of Land $423,000
Lease and Other Income 323,000 $194,000
-------- --------
Segment Total Revenues $746,000 $194,000
======== ========
-------- --------
Income (loss) Before Tax: $244,000 $(69,000)
- ------------------------- ======== ========
In the first quarter of 2000, Nevada Land & Resource Company, LLC booked
$423,000 in revenue when the sale of approximately 3,484 acres of land closed.
This represents an average price of $121.50 per acre, compared to our average
acquisition cost of $34.92 per acre for the land component of Nevada Land. No
land was sold in the first quarter of 1999.
Lease and other income of $323,000 resulted in total revenues for the
quarter of $746,000. In the first quarter of 1999, lease and other income
contributed total revenues of $194,000, and no land was sold. Due to the gain on
the land sales, Nevada Land earned a profit of $244,000 this year, compared to a
loss of $69,000 in 1999.
The most significant developments during the quarter were:
o Nevada Land agreed to sell 61 acre-feet of certificated water rights to a
developer for $244,000 ($4,000 per acre-foot);
o Nevada Land entered into a 3-year option agreement with Duke Energy
Corporation for the sale of 480 acres of land for $455,000 ($948 per acre)
and approximately 2,896 acre-feet of permitted water rights for $347,000
($120 per acre-foot). The value of a water right depends on a number of
factors, including location, the seniority of the right, and whether or not
the right is transferable. Permitted water rights are less senior, so less
valuable, than certificated water rights; and
o Nevada Land applied for additional water rights for the beneficial use of
irrigating arable land. Where applications are successful, the value and
marketability of the associated land will increase. Nevada Land has
submitted applications for 20,480 acre-feet of water to irrigate 5,120
acres of land. Applications for a further 30,720 acre-feet of water rights
to irrigate 7,680 acres of land are imminent.
A number of smaller land sales also went into escrow during the first
quarter and the early part of the second quarter. Nevada Land will recognize
these sales as revenues when the transactions close.
Progress is continuing on a number of possible transactions involving
significantly larger parcels of land. Both sale and exchange transactions are
being discussed with a variety of potential purchasers.
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WATER RIGHTS AND WATER STORAGE ASSETS
- -------------------------------------
VIDLER WATER COMPANY, INC.
--------------------------
Three Months Ended March 31,
2000 1999
----------- ---------
Revenues:
- ---------
Water service & agricultural lease revenues $ 245,000 $ 172,000
----------- ---------
Segment Total Revenues $ 245,000 $ 172,000
=========== =========
Expenses:
- ---------
Depreciation and amortization (208,000) (199,000)
Interest (549,000) (143,000)
Operations and maintenance (227,000) (22,000)
Other (420,000) (436,000)
----------- ---------
$(1,404,000) $(800,000)
----------- ---------
Loss Before Tax: $(1,159,000) $(628,000)
- ---------------- =========== =========
During the first quarter of 2000, Vidler recorded $245,000 in revenues,
comprised of $218,000 from leasing agricultural land and $27,000 in lease income
from certain of the Company's Colorado water rights. The Colorado water rights
assets which generated the $27,000 in lease income during the quarter are leased
in perpetuity. The lease payments are indexed for inflation, with a minimum
annual escalation of 3%. Once water rights or assets are leased in perpetuity,
they cannot be leased again unless the lease is canceled, if it is cancelable.
Consequently, future revenue growth beyond the limits of these CPI escalators is
dependent upon growth in leases not subject to perpetual agreements, development
of existing assets, and acquisition of additional water rights and water-related
assets for subsequent lease or sale. The sale of water rights or assets reduces
future revenue streams from water rights and assets until those assets can be
replaced. Vidler's most significant assets are not yet generating cash flow.
Compared to the same quarter in 1999, revenues rose by $73,000 but expenses
increased by $604,000, resulting in a segment pre-tax loss of $1.2 million. The
pre-tax loss for the first quarter of 1999 was $628,000. The main factors in the
increased segment loss were:
o $406,000 of additional interest expense on non-recourse financing to
purchase 8,975 acres of land and the associated 26,926 acre-feet of water
rights in the Harquahala Valley of Arizona during 1999; and
o $216,000 higher expenses related to our interest in the Semitropic water
storage facility.
Our 1999 Form 10-K contains a detailed description of our water rights and
water storage assets. The most significant developments affecting these assets
in the first quarter were:
VIDLER ARIZONA RECHARGE FACILITY
During the second quarter of 2000, Vidler expects to receive the necessary
permits to operate a full-scale recharge facility at its water storage site in
the Harquahala Valley, approximately 75 miles northwest of metropolitan Phoenix.
Construction has started on some of the improvements required to recharge and
store water on a commercial scale in anticipation of the permits being issued.
Vidler expects construction to be completed by the end of 2000, at a cost not
exceeding $9 million. Vidler is in discussions with potential users. We expect
to enter agreements to lease storage capacity to customers before the end of
2000, and to begin recharging water and generating cash flow from the facility
in 2001.
Once Vidler has concluded agreements to store water, we will know the rate
at which customers need to be able to recover water, so that we can design,
finance and construct the final stage of the project, which will allow water to
be recovered at commercial rates. The cost of the final stage cannot be
accurately predicted until the requirements of the users are determined,
although this could equal or exceed the $9 million required for the second
stage. Vidler will not be constructing the improvements for full-scale recovery
until binding storage contracts are in place.
Recent developments have increased the scarcity value of this project's
storage capacity. At a public hearing on March 14, 2000, the Arizona Water
Banking Authority disclosed that the Bureau of Reclamation has indicated that
before permits are issued for new facilities to store water for interstate
users, extensive environmental impact studies will be required. The Arizona
Water Banking Authority also indicated that all of the publicly owned storage
capacity in Arizona will meet the needs of Arizona first, before
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accepting interstate water. At the same hearing, the states of California and
Nevada again confirmed that their demand for storage far exceeds the total
amount of storage available at existing facilities in Arizona.
SEMITROPIC WATER STORAGE FACILITY
Vidler has an 18.5% interest (right to participate) in a water storage
facility at Semitropic, near the California Aqueduct, northwest of Bakersfield.
Currently Vidler is not storing any water at Semitropic for clients; however, it
is actively pursuing a number of potential customers. Given the escalating water
supply/demand imbalance in California, it is believed that this storage capacity
has considerable strategic value.
During the first quarter of 2000, we recorded $167,000 in amortization of
the Semitropic asset, and expensed our $216,000 share of operating and
maintenance expenses.
Vidler has banked, or stored, approximately 12,500 acre-feet of water at
Semitropic with the intention of selling or leasing the water in a dry year.
Preliminary agreement has been reached to sell 3,850 acre-feet of this water to
a federal agency.
HARQUAHALA VALLEY WATER RIGHTS
Vidler controls approximately 55,913 acre-feet of transferable ground water
in the Harquahala Valley. The Arizona State Legislature has passed several
pieces of legislation which recognize the Harquahala Valley ground water as a
special resource. In 1991 the expansion of irrigated farming in the Valley was
prohibited, and the transfer of the ground water to municipalities was
authorized. In order to protect the Harquahala Valley ground water from large
commercial and industrial users which are moving into the Basin, Vidler
supported Senate Bill 1254 which recently passed into legislation. This places
restrictions on commercial and industrial users utilizing more than 100
acre-feet of water annually, by requiring them to purchase irrigable land and to
withdraw the water which they need from that land at no more than 3 acre-feet
per annum per acre of land.
Under state legislation, the Central Arizona Canal Project is committed to
convey up to 20,000 acre-feet of Harquahala ground water to cities and
communities in Arizona as an assured municipal water supply. Vidler is able to
supply this water and is meeting with communities and developers in the Phoenix
metropolitan area, some of whom need to secure further water supply to support
expected growth. Vidler expects to enter the first such agreement later in 2000.
LINCOLN COUNTY PUBLIC/PRIVATE JOINT VENTURE ("THE MESQUITE PROJECT")
The joint venture has begun a drilling program to support its applications
for more than 100,000 acre-feet of water rights. The joint venture intends to
supply water to rapidly growing communities in southern Nevada. In addition to
the previously announced agreement to supply developers near Mesquite with
17,000 acre-feet of water, tentative agreement has been reached to supply an
industrial user with 6,700 acre-feet of water.
Similar joint ventures are being discussed with two other Nevada counties.
SANDY, NEVADA
Vidler has commenced a drilling program to support its application for
approximately 2,000 acre-feet of water rights near Sandy, Nevada. Subject to
permits being obtained for the water rights, preliminary agreement has been
reached to supply the underlying water to support additional growth at Primm,
Nevada, a town in the fast-growing Interstate 15 corridor.
THE COLORADO ASSETS
Vidler is continuing its program to sell or lease all of the Colorado water
rights which are currently unutilized. Subject to approval by the Denver Water
Court, Vidler has agreed to sell its interest in Cline Ranch to Centennial Water
and Sanitation District for approximately $2.1 million. Tentative agreement has
also been reached to sell a package of water rights to the City of Golden,
Colorado for $2.65 million.
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OTHER PROJECTS
The level of activity at Vidler continues to gain momentum. In particular:
o Vidler is currently investigating the purchase of further water-righted
properties in Arizona and Nevada;
o Vidler is continuing to file applications for additional water rights; and
o Vidler continues to be approached by parties who are interested in either
obtaining a water supply or discussing joint ventures to commercially
develop water assets. We believe that Vidler has become the leading private
water rights aggregator in Arizona and Nevada, and the leading private
owner-operator of water storage in Arizona and California. Our presence in
these markets has consolidated our expertise and reputation for providing
solutions to both end-users who require water and to parties who are
otherwise unable to commercialize water assets.
PROPERTY AND CASUALTY INSURANCE
- -------------------------------
Three Months Ended March 31,
----------------------------
2000 1999
----------- -----------
Revenues (Charges):
- -------------------
Sequoia - Earned Premiums $ 7,329,000 $ 4,278,000
Citation - Earned Premiums 185,000 4,277,000
Investment Income 1,287,000 1,218,000
Realized Investment Loss (185,000)
Other 264,000 160,000
----------- -----------
Segment Total Revenues $ 9,065,000 $ 9,748,000
=========== ===========
Expenses:
- ---------
Loss & Loss Adjustment Expense (6,024,000) (5,972,000)
Underwriting Expenses (3,350,000) (3,542,000)
----------- -----------
$(9,374,000) $(9,514,000)
Income (Loss) Before Taxes:
- ---------------------------
Sequoia Insurance Company $ (349,000) $ 103,000
Citation Insurance Company 40,000 132,000
----------- -----------
Segment Income (Loss) Before Taxes $ (309,000) $ 235,000
=========== ===========
The Property & Casualty segment, which is comprised of our California-based
subsidiaries Sequoia Insurance Company and Citation Insurance Company, generated
total revenues of $9.1 million in the first quarter of 2000, including earned
premiums of $7.5 million and $1.3 million in investment income. In the first
quarter of 1999, segment total revenues were $9.7 million, including earned
premiums of $8.6 million and investment income of $1.2 million.
When an insurance company writes a policy, the amount of the premium is
referred to as written premium. However, the premium is recognized as revenue,
or "earned", over the term of the policy. Therefore, there is a lag between
changes in written premium and earned premium.
In the first quarter of 2000, the segment's earned premiums were
approximately 12.2% below the first quarter of 1999. Due to the time lag between
a policy being written and the premium being earned, the drop in revenue
reflects the declining level of business which Sequoia and Citation were writing
in 1999, due to intense competition and management's very selective approach to
underwriting. As explained below, written premiums began to grow from January
2000.
In 1998 and 1999 our California-based property and casualty insurance
subsidiaries Sequoia Insurance Company and Citation Insurance Company "pooled",
or shared, most of their premiums and expenses. From January 1, 2000, this
pooling arrangement was terminated. Sequoia writes all new business in the
states of California and Nevada, and Citation only writes new business in
Arizona. Due to the termination of the pooling arrangement, and the fact that
all business in California and Nevada had been transitioned to Sequoia in recent
years, in the first quarter of 2000 Sequoia earned $7.3 million in premiums,
compared to just $185,000 for Citation. Accordingly, the individual results of
Sequoia and Citation are not directly comparable to prior years.
In the first quarter of 2000, Sequoia produced total revenues of $8
million, including $7.3 million in earned insurance premiums and $534,000 in
investment income. After several years of decline, in the first quarter of 2000
Sequoia wrote a higher volume of
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premium than in the same quarter of the previous year, although the rate of
growth was a modest 2.6%. In April, written premiums were 8.8% higher than in
the same month in 1999. The growth in written premium should lead to growth in
earned premium -- which is the figure that Sequoia reports as revenue -- from
the second half of 2000.
Due to the cyclical nature of claims, including the influence of weather,
Sequoia usually receives the highest number of claims in the first quarter of
the year. During the first quarter, the loss ratio typically peaks and a small
underwriting loss is not unusual.
Due to the high number of claims received in the first quarter, and
approximately $125,000 of adverse development in prior year loss reserves,
Sequoia recorded a pre-tax loss of $349,000, compared to a pre-tax profit of
$103,000 a year ago.
Sequoia's "combined ratio" -- a ratio which is commonly applied to
insurance companies -- calculated on the basis of generally accepted accounting
principles was:
SEQUOIA'S GAAP INDUSTRY RATIOS
- ------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
------ ------
Loss and Loss Adjustment Expense Ratio 77.2% 66.8%
Underwriting Expense Ratio 36.9% 42.9%
----- -----
Combined Ratio 114.1% 109.7%
====== =====
A combined ratio of less than 100% indicates that the insurance company is
making a profit on its base insurance business, prior to investment income,
realized investment gains or losses, extraordinary items, taxes, and other
non-insurance items. Sequoia manages its business so as to have a combined ratio
of less than 100% each year; however, this is not always achieved in every
quarter.
Since the end of the quarter, Sequoia acquired Personal Express Insurance
Services, Inc. for approximately $3 million. Personal Express markets personal
insurance products to customers in Bakersfield, California and Fresno,
California. This acquisition is expected to generate approximately $7.5 million
of additional annual premiums for Sequoia. Historically, this block of business
has produced an underwriting profit (i.e., a combined ratio below 100%). Sequoia
is considering opening additional offices in central and northern California to
test the expansion potential of the Personal Express business model, which is to
write insurance direct with the customer while providing local service for
underwriting and claims.
Citation's first-quarter revenues of $1.1 million include $185,000 of
earned premium and $753,000 of investment income. Citation generated a pre-tax
profit of $40,000 for the quarter, compared to a pre-tax profit of $131,000 last
year.
Citation's combined ratio (553.6% in 2000, versus 113.6% in 1999) is not
meaningful due to the termination of the pooling arrangement which had a number
of unusual effects. For example, Citation now has a small amount of earned
premium income relative to its underwriting and other expenses, which distorts
the combined ratio.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
- ----------------------------------------
Three Months Ended March 31,
----------------------------
2000 1999
---------- ---------
Revenues:
- ---------
Investment Income, Net of Expenses $ 513,000 $ 548,000
--------- ---------
Segment Total Revenues $ 513,000 $ 548,000
========= =========
--------- ---------
Loss Before Tax $(281,000) $(486,000)
- --------------- ========= =========
Physicians Insurance Company of Ohio, Inc. and The Professionals Insurance
Company are in "run off". This means that they are handling claims arising from
historical business, but not writing new business. The level of investment
assets and loss reserve liabilities in this segment are decreasing as claims are
paid and investments are sold when funds are needed to make the payments.
In the first quarter of 2000, the segment generated total revenues of
$513,000, which was comprised entirely of investment income. The investment
income recorded in this segment is largely offset by an expense called reserve
discount accretion. Our medical professional liability claims reserves are
discounted to reflect the fact that some claims will not be paid until future
years,
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but funds from the corresponding premiums can be invested in the meantime. Each
quarter, a portion of this discount is removed and recognized as an expense.
For the first quarter of 2000, the segment produced a pre-tax loss of
$281,000 after $459,000 of reserve discount accretion and operating expenses of
$335,000.
In 1999, the segment recorded investment income and total revenues of
$548,000, and a loss of $486,000 before taxes. Reserve discount accretion
expense was $544,000, and other expenses totaled $490,000.
No unusual trends in claims emerged during the quarter.
At March 31, 2000, our medical professional liability loss reserves stood
at $52 million, net of reinsurance and reserve discount, compared to $59.2
million at December 31, 1999.
MEDICAL PROFESSIONAL LIABILITY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
- -------------------------------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
(in millions)
Direct Reserves $ 78.0 $ 94.9
Ceded Reserves (18.9) (27.7)
Discount Of Net Reserves (7.1) (8.0)
------ ------
Net Medical Professional Liability Reserves $ 52.0 $ 59.2
====== ======
OTHER STRATEGIC HOLDINGS
- ------------------------
Three Months Ended March 31,
----------------------------
2000 1999
----------- -----------
Revenues (Charges):
- -------------------
Realized Investment Losses $ (12,000) $ (159,000)
Investment Income (411,000) (116,000)
Other Income (51,000) 123,000
----------- -----------
Segment Total Revenues $ (474,000) $ (152,000)
=========== ===========
Loss Before Taxes $(3,914,000) $(1,918,000)
- ----------------- =========== ===========
Our largest strategic holdings are in HyperFeed Technologies, Inc.,
Jungfraubahn Holding A.G., and Australian Oil & Gas Corporation Limited. The
details of our investment in each company at the end of the quarter were:
- ---------------------------------------------------------------------------------------------------
SHARE
MARCH 31, 2000 CARRYING VALUE EQUIVALENTS CLOSING PRICE
CARRYING VALUE BEFORE TAXES:
Hyperfeed Common & preferred $ 2,601,000 7,156,538 $6.00
Warrants 20,236,000 4,055,195 unlisted
----------- ----------
Total $22,837,000 11,211,733
Jungfraubahn Common 15,967,000 112,172 $142.34
Australian Oil and Gas Common 6,453,000 7,593,819 $0.85
-----------
Total carrying value before taxes $45,257,000
Deferred taxes (4,720,000)
-----------
Carrying value, net of taxes $40,537,000
- ---------------------------------------------------------------------------------------------------
At March 31, 2000, these three strategic holdings had a potential market
value (before taxes) of approximately $89.7 million, and a carrying value
(before taxes) of $45.3 million. After allowing for taxes on the net unrealized
gains, the tax-effected carrying value of the holdings was $40.5 million, or
18.8% of PICO's shareholders' equity. At May 10, 2000, these three holdings had
a potential market value (before taxes) of approximately $66.6 million.
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Currently the principal subsidiary companies in this segment are Conex
Continental, Inc. and SISCOM, Inc.:
o both Conex and SISCOM became subsidiaries during 1999; however, neither was
consolidated in the first quarter of 1999; and
o as detailed in Note 2, on January 31, 2000, we sold our interest in Summit
Global Management, Inc., and its wholly-owned subsidiary Monitor Capital,
Inc., for $100,000. Summit Global Management, Inc. had been a subsidiary in
this segment until its sale. Summit contributed a pre-tax profit of $57,000
in January, 2000. A $75,000 loss was realized on the sale, which was
recognized in the calculation of realized investment losses.
In the first quarter of 2000, the Other Strategic Holdings segment recorded
net charges against revenues of $474,000, compared to net charges against
revenues of $152,000 in 1999. Net charges against revenue arise because each
quarter we allocate sufficient investment income to the medical professional
liability insurance segment to offset its reserve discount accretion expense (as
defined and explained in the preceding section of this report). In quarters
where investment income is less than reserve discount accretion, the Other
Strategic Holdings segment reports net charges against revenues. Net charges
against revenues increased by $322,000 from the 1999 quarter due to reduced
investment income.
The Other Strategic Holdings segment pre-tax loss of $3.9 million for the
first quarter of 2000 includes:
o PICO's $172,000 equity share of HyperFeed's first-quarter net loss and
events affecting equity;
o approximately $1.5 million in operating losses and goodwill amortization
related to our investments in Conex and SISCOM; and
o unallocated parent company overhead of approximately $2 million.
The principal factors in the $2 million wider segment loss over 1999 were:
o approximately $634,000 in increased PICO overhead expenses; and
o approximately $1.2 million in additional losses from our investments in
Conex and SISCOM.
After adjustment for tax and the interest of the outside shareholders in
Conex and SISCOM, the contributions to PICO's $4.5 million net loss from Conex,
SISCOM and HyperFeed were losses of $998,000, $145,000, and $168,000,
respectively.
Highlights for the Other Strategic Holdings included:
o during the quarter, PICO invested a total of $552,000 to increase its
holding in Jungfraubahn to 19.2%, and its stake in AOG to 16.2%
(shareholding percentages as of March 31, 2000);
o on May 1, 2000, HyperFeed reported one of the strongest quarters in the
Company's history and indicated that it "likely would now reach
profitability by the second quarter." HyperFeed reported first quarter
revenue of $10.9 million, EBITDA (earnings before interest, tax,
depreciation and amortization) of $1.4 million, cash flow of approximately
$700,000, and a net loss of $149,000. Revenues rose 19.5% sequentially from
the preceding December quarter, and 46.2% from the first quarter of 1999.
Gross margin rose 39.1% sequentially to $3.4 million, and 64.4% from the
first quarter of 1999. HyperFeed attributed much of the growth in revenue
and gross margin to its higher-margin business-to-business unit which
generated 45% of the quarter's revenues; and
o Conex is exploring opportunities to manufacture and distribute additional
products utilizing its existing manufacturing capacity and distribution
infrastructure in China. The current focus is on environmental technology
products, where Conex believes there could be a large potential market in
China. During the quarter Conex announced an exclusive agreement to
distribute Quake Wireless, Inc.'s satellite-based asset security system in
China, and a 35% interest in a joint venture to manufacture and distribute
three products in China - SP34E, a refrigerant gas, and Soltron, an
enzyme-based fuel-enhancing product.
LIQUIDITY AND CAPITAL RESOURCES - THREE MONTHS ENDED MARCH 31, 2000 AND 1999
PICO continually evaluates its existing operations and searches for new
opportunities to maximize shareholder value. This strategy causes significant
fluctuations in the cash needs of PICO. PICO may need to sell investments or
borrow funds to meet operating cash requirements. In addition, it may become
necessary or advantageous for PICO to offer stock or debt through a public or
private offering. At times PICO may have excess cash. PICO attempts to invest
such cash to provide maximum returns within the constraint of remaining liquid
enough to meet expected cash requirements and to take advantage of investment
opportunities. PICO's primary sources of funds are its available cash, cash from
operations, the sale of invested assets, bank borrowings, public and private
debt and equity offerings, and management and other fees.
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Vidler's initial objective was to assemble a portfolio of water and water
storage assets that would form a viable base for further expansion. The current
priority is to develop recurring cash flow from the existing assets. In
addition, Vidler has entered into joint ventures with parties who lack the
capital or expertise to commercially develop water rights, and continues to
explore additional joint venture opportunities.
As a result of ceasing to write medical professional liability insurance,
Physicians' operating cash flows are negative and should continue to be negative
for the foreseeable future. Positive cash flows from other sources within
Physicians, primarily reinsurance recoveries and the sale of invested assets,
may partially or fully offset uses of cash. Major cash outflows will likely
include the funding of claims and loss adjustment expenses, investment
purchases, and operating costs.
PICO's insurance subsidiaries attempt to structure the duration of invested
assets to match the cash flows required to settle the related unpaid claims
liabilities. Invested assets provide adequate liquidity to fund projected claims
and loss adjustment expense payments for the coming years. The Ohio and
California Insurance Departments monitor and set guidelines for the insurance
companies' investments. The Ohio and California Insurance Departments also set
minimum levels of policyholder capital and surplus and monitor these levels
through various means.
To the extent that funds necessary for settling claims and paying operating
expenses are not provided by existing cash and cash equivalents, investment
income, reinsurance recoveries, and rental and other income, then invested
assets will be liquidated. Short term and fixed maturity investments are managed
to mature according to projected cash flow needs. Equity securities will be
converted to cash, as additional funds are required, with an anticipated maximum
liquidation lead-time of approximately six months.
Management attempts to maximize the return on all assets, including those
needed to fund the eventual wrap-up of the medical professional liability
insurance reserves through, among other things, value investing and managing the
invested assets internally rather than liquidating assets to pay a third party
to oversee the runoff of the existing claims. Management also elected to handle
the runoff of the medical professional liability insurance claims internally to
continue to maintain a high standard of claims handling and to maximize
shareholder value. While management expects that certain of PICO's current and
future investments may increase in value, offsetting some of the decline in
assets during the period of runoff, the impact of future market fluctuations on
the value of PICO's invested assets cannot be accurately predicted. Although
assets will be managed to mature or liquidate according to expected payout
projections, at times some invested assets may need to be sold when the stock
market is depressed. Such forced sales are expected to occur infrequently and
only under extreme circumstances; however, this cannot be guaranteed.
PICO's active property and casualty insurance subsidiaries, Sequoia and
Citation, should provide cash flows from operations once industry combined
ratios (See "Property and Casualty Insurance.") stabilize below 100%,
artisan/contractor claims stabilize and premiums remain at a constant or
increasing levels. At times, it may be necessary to liquidate invested assets to
provide the additional funds necessary to cover operating expenses.
Operating activities used $1 million of cash during the first quarter of
2000 compared to cash used of $9.2 million during 1999. The decline in cash used
by operations principally consisted of reductions in claims and loss adjustment
expense payments (both property and casualty and medical professional liability
insurance) and insurance operating expenses, partially offset by a decreased
level of premiums received.
Cash used in investing activities for 2000 was $1.1 million compared to
cash flow used by investing activities in 1999 of $14.6 million. During 1999,
the Company purchased 5.9 million shares of AOG.
Financing activities during 2000 include the $49.8 million, net of $169,000
of expenses from the Company's rights offering. Prior year financing activities
include proceeds from the borrowings used in part to finance the purchase of
shares of Jungfraubahn.
At March 31, 2000, PICO has no significant commitment for future capital
expenditures, other than in the ordinary course of business and as discussed
herein. PICO is committed to maintaining Sequoia's capital and statutory
policyholder surplus at a minimum of $7.5 million. At December 31, 1999, Sequoia
was well above this level. PICO is also committed to maintain Sequoia's Best
Rating at or above the "B++" (Very Good) level, which may at some time in the
future require additional capital infusions into Sequoia. See Note 16 of Notes
to Consolidated Financial Statements, "Commitments and Contingencies," in PICO's
1999 Form 10-K.
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CAPITAL RESOURCES
PICO's principal sources of funds are its available cash resources,
operating cash flow, liquidation of non-essential investment holdings,
borrowings, public and private debt and equity offerings, and funds from
consolidated tax savings. At March 31, 2000, the Company had $84.8 million in
cash and cash equivalents compared to $36.7 million at December 31, 1999.
RISK FACTORS
In addition to the risks and uncertainties discussed in the preceding
sections of "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and elsewhere in this document, the following risk
factors should be considered carefully in evaluating PICO and its business. The
statements contained in this Form 10-K that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Exchange
Act, including statements regarding our expectations, beliefs, intentions, plans
or strategies regarding the future. All forward-looking statements included in
this document are based on information available to us on the date thereof, and
we assume no obligation to update any such forward-looking statements.
BECAUSE OUR OPERATIONS ARE SO DIVERSE, ANALYSTS AND INVESTORS MAY NOT BE ABLE TO
EVALUATE OUR COMPANY ADEQUATELY, WHICH MAY NEGATIVELY INFLUENCE OUR SHARE PRICE.
PICO is a diversified holding company with operations in land, minerals and
related water rights; water rights and water storage; property and casualty
insurance; medical professional liability insurance; and other strategic
holdings. Each of these areas is unique, complex in nature, and difficult to
understand. In particular, water rights is a developing industry within the
western United States with very little historical data, very few experts and a
limited following of analysts. Because we are so complex, analysts and investors
may not be able to adequately evaluate our operations, and PICO in total. This
could cause them to make inaccurate evaluations of our stock, or to overlook
PICO, in general. These factors could have a negative impact on the volume and
price of our stock.
IF WE DO NOT SUCCESSFULLY LOCATE, SELECT AND MANAGE INVESTMENTS AND ACQUISITIONS
OR IF OUR INVESTMENTS OR ACQUISITIONS OTHERWISE FAIL OR DECLINE IN VALUE, OUR
FINANCIAL CONDITION COULD SUFFER
We invest in businesses that we believe are undervalued or that will
benefit from additional capital, restructuring of operations or improved
competitiveness through operational efficiencies.
Failures and/or declines in the market values of businesses we invest in or
acquire, as well as our failure to successfully locate, select and manage
investment and acquisition opportunities, could have a material adverse effect
on our business, financial condition, results of operations and cash flows. Such
business failures, declines in market values, and/or failure to successfully
locate, select and manage investments and acquisitions could result in inferior
investment returns compared to those which may have been attained had we
successfully located, selected and managed new investments and acquisition
opportunities, or had our investments or acquisitions not failed or declined in
value. We could also lose part or all of our investments in these businesses and
experience reductions in our net income, cash flows, assets and shareholders'
equity.
We will continue to make selective investments, and endeavor to enhance and
realize additional value to these acquired companies through our influence and
control. This could involve the restructuring of the financing or management of
the entities in which we invest and initiating and facilitating mergers and
acquisitions. Any acquisition could result in the use of a significant portion
of our available cash, significant dilution to you, and significant
acquisition-related charges. Acquisitions may also result in the assumption of
liabilities, including liabilities that are unknown or not fully known at the
time of the acquisition, which could have a material adverse effect on us.
We do not know of any reliable statistical data that would enable us to
predict the probability of success or failure of our investments, or to predict
the availability of suitable investments at the time we have available cash. You
will be relying on the experience and judgment of management to locate, select
and develop new acquisition and investment opportunities. Sufficient
opportunities may not be found and this business strategy may not be successful.
We have made a number of investments in the past that have been highly
successful, such as Fairfield Communities, Inc., which we sold in 1996, and
Resource America, Inc., which we sold in 1997. We have also made investments
that have lost money, such as our approximate $4 million loss from the Korean
investments in 1997, an approximate $5 million write-down of investments in 1998
and a $3.2 million write-down of an oil and gas
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investment in 1999. We reported net realized investment gains in 1999 of
$441,000 and gains of $21.4 million in 1997; however, we reported a net realized
investment loss of $4.4 million for 1998. We reported a net unrealized
investment gain of $827,000 at December 31, 1999, and $3.4 million at March 31,
2000.
Our ability to achieve an acceptable rate of return on any particular
investment is subject to a number of factors which are beyond our control,
including increased competition and loss of market share, quality of management,
cyclical or uneven financial results, technological obsolescence, foreign
currency risks and regulatory delays.
Our investments may not achieve acceptable rates of return and we may not
realize the value of the funds invested; accordingly, these investments may have
to be written down or sold at their then-prevailing market values.
We may not be able to sell our investments in both private and public
companies when it appears to be advantageous to do so and we may have to sell
these investments at a discount. Investments in private companies are not as
marketable as investments in public companies. Investments in public companies
are subject to prices determined in the public markets and, therefore, values
can vary dramatically. In particular, the ability of the public markets to
absorb a large block of shares offered for sale can affect our ability to
dispose of an investment in a public company.
To successfully manage newly acquired companies, we must, among other
things, continue to attract and retain key management and other personnel. The
diversion of the attention of management from the day-to-day operations, or
difficulties encountered in the integration process, could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
WE MAY MAKE INVESTMENTS AND ACQUISITIONS THAT MAY YIELD LOW OR NEGATIVE RETURNS
FOR AN EXTENDED PERIOD OF TIME, WHICH COULD TEMPORARILY OR PERMANENTLY DEPRESS
OUR RETURN ON INVESTMENTS
We generally make strategic investments and acquisitions that tend to be
long term in nature. We invest in businesses that we believe to be undervalued
or may benefit from additional capital, restructuring of operations or
management or improved competitiveness through operational efficiencies with our
existing operations. We may not be able to develop acceptable revenue streams
and investment returns. We may lose part or all of our investment in these
assets. The negative impacts on cash flows, income, assets and shareholders'
equity may be temporary or permanent. We make investments for the purpose of
enhancing and realizing additional value by means of appropriate levels of
shareholder influence and control. This may involve restructuring of the
financing or management of the entities in which we invest and initiating or
facilitating mergers and acquisitions. These processes can consume considerable
amounts of time and resources. Consequently, costs incurred as a result of these
investments and acquisitions may exceed their revenues and/or increases in their
values for an extended period of time until we are able to develop the potential
of these investments and acquisitions and increase the revenues, profits and/or
values of these investments. Ultimately, however, we may not be able to develop
the potential of these assets that we anticipated.
IF MEDICAL MALPRACTICE INSURANCE CLAIMS TURN OUT TO BE GREATER THAN THE RESERVES
WE ESTABLISH TO PAY THEM, WE MAY NEED TO LIQUIDATE CERTAIN INVESTMENTS IN ORDER
TO SATISFY OUR RESERVE REQUIREMENTS
Under the terms of our medical malpractice liability policies, there is an
extended reporting period for claims. Under Ohio law, the statute of limitations
is one year after the cause of action accrues. Also, under Ohio law, a person
must make a claim within four years; however, the courts have determined that
the period may be longer in situations where the insured could not have
reasonably discovered the injury in that four-year period. Claims of minors must
be brought within one year of the date of majority. As a result, some claims may
be reported a number of years following the expiration of the medical
malpractice liability policy period.
Physicians Insurance Company of Ohio and The Professionals Insurance
Company have established reserves to cover losses on claims incurred under the
medical malpractice liability policies including not only those claims reported
to date, but also those that may have been incurred but not yet reported. The
reserves for losses are estimates based on various assumptions and, in
accordance with Ohio law, have been discounted to reflect the time value of
money. These estimates are based on actual and industry experience and
assumptions and projections as to claims frequency, severity and inflationary
trends and settlement payments. In accordance with Ohio law, Physicians
Insurance Company of Ohio and The Professionals Insurance Company annually
obtain a certification from an independent actuary that their respective
reserves for losses are adequate. They also obtain a concurring actuarial
opinion. Due to the inherent uncertainties in the reserving process, there is a
risk that Physicians Insurance Company of Ohio's and The Professionals Insurance
Company's reserves for losses could prove to be inadequate. This could result in
a decrease in income and shareholders' equity. If we underestimate our reserves,
they could reach levels, which are lower than required by law.
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Reserves are money that we set aside to pay insurance claims. We strive to
establish a balance between maintaining adequate reserves to pay claims while at
the same time using our cash resources to invest in new companies.
IF WE UNDERESTIMATE THE AMOUNT OF INSURANCE CLAIMS, OUR FINANCIAL CONDITION
COULD BE MATERIALLY MISSTATED AND OUR FINANCIAL CONDITION COULD SUFFER
Our insurance subsidiaries may not have established reserves adequate to
meet the ultimate cost of losses arising from claims. It has been, and will
continue to be, necessary for our insurance subsidiaries to review and make
appropriate adjustments to reserves for claims and expenses for settling claims.
Inadequate reserves could have a material adverse effect on our business,
financial condition, results of operations and cash flows. Inadequate reserves
could cause our financial condition to fluctuate from period to period and cause
our financial condition to appear to be better than it actually is for periods
in which insurance claims reserves are understated. In subsequent periods when
we discover the underestimation and pay the additional claims, our cash needs
will be greater than expected and our financial results of operations for that
period will be worse than they would have been had our reserves been accurately
estimated originally.
The inherent uncertainties in estimating loss reserves are greater for some
insurance products than for others, and are dependent on:
o the length of time in reporting claims;
o the diversity of historical losses among claims;
o the amount of historical information available during the estimation
process;
o the degree of impact that changing regulations and legal precedents may
have on open claims; and
o the consistency of reinsurance programs over time.
Because medical malpractice liability and commercial casualty claims may
not be completely paid off for several years, estimating reserves for these
types of claims can be more uncertain than estimating reserves for other types
of insurance. As a result, precise reserve estimates cannot be made for several
years following the year for which reserves were initially established.
During the past several years, the levels of the reserves for our insurance
subsidiaries have been very volatile. As a result of our claims experience, we
have had to significantly increase these reserves in the past several years.
Significant increases in the reserves may be necessary in the future, and
the level of reserves for our insurance subsidiaries may be volatile in the
future. These increases or volatility may have an adverse effect on our
business, financial condition, results of operations and cash flows.
THERE HAS BEEN A DOWNTURN IN THE PROPERTY & CASUALTY INSURANCE BUSINESS WHICH,
IN THE SHORT TERM, HINDERS OUR ABILITY TO PROFIT FROM THIS INDUSTRY
The property and casualty insurance industry has been highly cyclical, and
the industry has been in a cyclical downturn over the last several years. This
is due primarily to competitive pressures on pricing, which has resulted in
lower profitability for us. Pricing is a function of many factors, including the
capacity of the property and casualty industry as a whole to underwrite
business, create policyholders' surplus and generate positive returns on their
investment portfolios. The level of surplus in the industry varies with returns
on invested capital and regulatory barriers to withdrawal of surplus. Increases
in surplus have generally been accompanied by increased price competition among
property and casualty insurers.
The cyclical trends in the industry and the industry's profitability can
also be affected by volatile and unpredictable developments, including natural
disasters, fluctuations in interest rates, and other changes in the investment
environment which affect market prices of investments and the income generated
from those investments. Inflationary pressures affect the size of losses and
court decisions affect insurers' liabilities. These trends may adversely affect
our business, financial condition, results of operations and cash flows by
reducing revenues and profit margins, by increasing ratios of claims and
expenses to premiums, and by decreasing cash receipts. Capital invested in our
insurance companies may produce inferior investment returns during periods of
downturns in the insurance cycle due to reduced profitability.
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STATE REGULATORS COULD REQUIRE CHANGES TO THE OPERATIONS OF OUR INSURANCE
SUBSIDIARIES AND/OR TAKE THEM OVER IF WE FAIL TO MAINTAIN ADEQUATE RESERVE
LEVELS
In the past few years, the National Association of Insurance Commissioners
has developed risk-based capital measurements for both property and casualty and
life and health insurers. These measurements prescribe the reserve levels that
insurance companies must maintain. The Commissioners have delegated to the state
regulators varying levels of authority based on the adequacy of an insurer's
reserves. The insurance companies' reserve levels are reported annually in their
statutory annual statements to the insurance departments.
Failure to meet one or more reserve levels may result in state regulators
requiring the insurance company to submit a business plan demonstrating
achievement of the required reserve levels. This may include the addition of
capital, a restructuring of assets and liabilities, or changes in operations. At
or below certain lower reserve levels, state regulators may supervise the
operation of the insurance company and/or require the liquidation of the
insurance company. Such insurance department actions could adversely affect our
business, financial condition, results of operations and cash flows and decrease
the value of our investments in our insurance subsidiaries. If the insurance
departments were to require changes in the operations of our insurance
subsidiaries, we may incur additional expenses and we may lose customers. If the
insurance departments were to require additional capital in our insurance
subsidiaries or a restructuring of our assets and liabilities, our investment
returns could suffer. If the insurance departments were to place our insurance
companies under their supervision, we would lose customers, our revenues may
decrease more rapidly than our expenses, and our investment returns would
suffer. We may even lose part or all of our investments in our insurance
subsidiaries if our insurance subsidiaries are liquidated by the insurance
departments.
WE MAY BE INADEQUATELY PROTECTED AGAINST MAN MADE AND NATURAL CATASTROPHES,
WHICH COULD REDUCE THE AMOUNT OF CAPITAL SURPLUS AVAILABLE FOR INVESTMENT
OPPORTUNITIES
As with other property and casualty insurers, operating results and
financial condition can be adversely affected by volatile and unpredictable
natural and man-made disasters, such as hurricanes, windstorms, earthquakes,
fires, and explosions. Our insurance subsidiaries generally seek to reduce their
exposure to catastrophic events through individual risk selection and the
purchase of reinsurance. Our insurance subsidiaries' estimates of their
exposures depend on their views of the possibility of a catastrophic event in a
given area and on the probable maximum loss created by that event. While our
insurance subsidiaries attempt to limit their exposure to acceptable levels, it
is possible that an actual catastrophic event or multiple catastrophic events
could significantly exceed the maximum loss anticipated, resulting in a material
adverse effect on our business, financial condition, results of operations and
cash flows. Such events could cause unexpected insurance claims and expenses for
settling claims well in excess of premiums, increasing cash needs, reducing
surplus and reducing assets available for investments. Capital invested in our
insurance companies may produce inferior investment returns as a result of these
additional funding requirements.
We insure ourselves against catastrophic losses by obtaining insurance
through other insurance companies known as reinsurers. The future financial
results of our insurance subsidiaries could be adversely affected by disputes
with their reinsurers with respect to coverage and by the solvency of the
reinsurers.
OUR INSURANCE SUBSIDIARIES COULD BE DOWNGRADED WHICH WOULD NEGATIVELY IMPACT OUR
BUSINESS
Our insurance subsidiaries' ratings may not be maintained or increased, and
a downgrade would likely adversely affect our business, financial condition,
results of operations and cash flows. A.M. Best and Company's ("A.M. Best")
ratings reflect the assessment of A.M. Best of an insurer's financial condition,
as well as the expertise and experience of its management. Therefore, A.M. Best
ratings are important to policyholders. A.M. Best ratings are subject to review
and change over time. Failure to maintain or improve our A.M. Best ratings could
have a material adverse effect on the ability of our insurance subsidiaries to
underwrite new insurance policies, as well as potentially reduce their ability
to maintain or increase market share. Management believes that many potential
customers will not insure with an insurer that carries an A.M. Best rating of
less than B+, and that customers who do so will demand lower rates.
Our insurance subsidiaries are currently rated as follows:
o Sequoia Insurance Company B++ (Very Good)
o Citation Insurance Company B+ (Very Good)
o Physicians Insurance Company of Ohio NR-3 (rating procedure inapplicable)
o The Professionals Insurance Company NR-3 (rating procedure inapplicable)
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POLICY HOLDERS MAY NOT RENEW THEIR POLICIES, WHICH WOULD UNEXPECTEDLY REDUCE OUR
REVENUE STREAM
Insurance policy renewals have historically accounted for a significant
portion of our net revenue. We may not be able to sustain historic renewal rates
for our products in the future. A decrease in renewal rates would reduce our
revenues. It would also decrease our cash receipts and the amount of funds
available for investments and acquisitions. If we were not able to reduce
overhead expenses correspondingly, this would adversely affect our business,
financial condition, results of operations and cash flows.
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, THEN WE WILL BE SUBJECT
TO A SIGNIFICANT REGULATORY BURDEN
At all times we intend to conduct our business so as to avoid being
regulated as an investment company under the Investment Company Act of 1940.
However, if we were required to register as an investment company, our ability
to use debt would be substantially reduced, and we would be subject to
significant additional disclosure obligations and restrictions on our
operational activities. Because of the additional requirements imposed on an
investment company with regard to the distribution of earnings, operational
activities and the use of debt, in addition to increased expenditures due to
additional reporting responsibilities, our cash available for investments would
be reduced. The additional expenses would reduce income. These factors would
adversely affect our business, financial condition, results of operations and
cash flows.
VARIANCES IN PHYSICAL AVAILABILITY OF WATER, ALONG WITH LEGAL RESTRICTIONS AND
LEGAL IMPEDIMENTS COULD IMPACT PROFITABILITY FROM OUR WATER RIGHTS
The water rights held by us and the transferability of these rights to
other uses and places of use are governed by the laws concerning water rights in
the states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from the water rights applications or permitted rights may vary
considerably based upon physical availability and may be further limited by
applicable legal restrictions. As a result, the amounts of acre-feet anticipated
from the water rights applications or permitted rights do not in every case
represent a reliable, firm annual yield of water, but in some cases describe the
face amount of the water right claims or management's best estimate of such
entitlement. Legal impediments exist to the sale or transfer of some of these
water rights, which in turn may affect their commercial value. If we were unable
to transfer or sell our water rights, we will not be able to make a profit, we
will not have enough cash receipts to cover cash needs, and we may lose some or
all of our value in our water rights investments.
OUR FUTURE WATER REVENUES ARE UNCERTAIN AND DEPEND ON A NUMBER OF FACTORS, WHICH
MAY MAKE OUR REVENUE STREAMS AND PROFITABILITY VOLATILE
We engage in various water rights acquisition, management, development,
sale and lease activities. Accordingly, our long-term future profitability will
be primarily dependent on our ability to develop and sell or lease water and
water rights, and will be affected by various factors, including timing of
acquisitions, transportation arrangements, and changing technology. To the
extent we possess junior or conditional water rights, such rights may be
subordinated to superior water right holders in periods of low flow or drought.
Our current water rights and the transferability of these rights to other
uses and places of use are governed by the laws concerning water rights in the
states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from these rights may vary considerably based upon physical
availability and may be further limited by applicable legal restrictions. Legal
impediments exist to sale or transfer of some of these water rights which may
affect their commercial value.
In addition to the risk of delays associated with receiving all necessary
regulatory approvals and permits, we may also encounter unforeseen technical
difficulties which could result in construction delays and cost increases with
respect to our water development projects.
OUR WATER ASSETS MAY BECOME CONCENTRATED IN A LIMITED NUMBER OF FACILITIES,
MAKING OUR GROWTH AND PROFITABILITY VULNERABLE TO FLUCTUATIONS IN LOCAL
ECONOMIES AND GOVERNMENTAL REGULATIONS.
We anticipate that in the future, a significant amount of Vidler's revenues
and asset value may be derived from a single asset, the Vidler Arizona recharge
water storage facility. Currently, we have obtained only a pilot permit for the
recharge and storage of a limited amount of water at that facility. We have not
yet applied for a recovery permit and have applied for, but not yet received, a
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full-scale permit for that facility. There can be no assurance:
o that we will be able to obtain permits for the facility at the recharge,
storage or recovery levels anticipated, or at all;
o that the full-scale storage facility will have the capacity currently
anticipated; or
o that we will be able to contract with third parties for storage of water on
commercially reasonable terms, or at all.
A majority of our water revenue historically has been derived from the
Vidler Tunnel. Although we have recently begun to acquire additional water
assets, we anticipate that our revenues will be derived from a limited number of
water assets for the foreseeable future.
THE PRICE OF WATER IS VOLATILE, WHICH CAN HAVE A SIGNIFICANT EFFECT ON OUR COSTS
OF ACQUIRING WATER AND THE PRICES AT WHICH WE ARE ABLE TO SELL WATER.
Our profitability is significantly affected by changes in the market price
of water. Water prices may in the future fluctuate widely and are affected by
climatic, demographic and technologic factors affecting demand.
ENVIRONMENTAL REGULATIONS MAY DETRACT FROM OUR FUTURE REVENUE STREAMS AND
PROFITABILITY BY LIMITING OUR CUSTOMER BASE.
Water we lease or sell may be subject to regulation as to quality by the
United States Environmental Protection Agency acting pursuant to the federal
Safe Drinking Water Act. While environmental regulations do not directly affect
us, the regulations regarding the quality of water distributed affects our
intended customers and may, therefore, depending on the quality of our water,
impact the price and terms upon which we may in the future sell our water or
water rights.
OUR WATER SALES MAY MEET WITH POLITICAL OPPOSITION IN CERTAIN LOCATIONS, THEREBY
LIMITING OUR GROWTH IN THESE AREAS
The transfer of water rights from one use to another may affect the
economic base of a community and will, in some instances, be met with local
opposition. Moreover, certain of the end users of our water rights, namely
municipalities, regulate the use of water in order to control or deter growth.
WE ARE DIRECTLY IMPACTED BY INTERNATIONAL AFFAIRS, WHICH DIRECTLY EXPOSES US TO
THE ADVERSE EFFECTS OF ANY FOREIGN ECONOMIC OR GOVERNMENTAL INSTABILITY
As a result of global investment diversification, our business, financial
condition, results of operations and cash flows may be adversely affected by:
o exposure to fluctuations in exchange rates;
o the imposition of governmental controls;
o the need to comply with a wide variety of foreign and U.S. export laws;
o political and economic instability;
o trade restrictions;
o changes in tariffs and taxes;
o volatile interest rates;
o changes in certain commodity prices;
o exchange controls which may limit our ability to withdraw money;
o the greater difficulty of administering business overseas; and
o general economic conditions outside the United States.
Changes in any or all of these factors could result in reduced market
values of investments, loss of assets, additional expenses, reduced investment
income, reductions in shareholders' equity due to foreign currency fluctuations
and a reduction in our global diversification.
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OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES
The trading price of our common stock has historically been, and is
expected to be, subject to fluctuations. The market price of the common stock
may be significantly impacted by:
o quarterly variations in financial performance;
o shortfalls in revenue or earnings from levels forecast by securities
analysts;
o changes in estimates by such analysts;
o product introductions;
o our competitors' announcements of extraordinary events such as
acquisitions;
o litigation; and
o general economic conditions.
Our results of operations have been subject to significant fluctuations,
particularly on a quarterly basis, and our future results of operations could
fluctuate significantly from quarter to quarter and from year to year. Causes of
such fluctuations may include the inclusion or exclusion of operating earnings
from newly acquired or sold operations. At December 31, 1997, the closing price
of our common stock on the Nasdaq National Market was $32.19 per share, compared
to $12.31 at December 31, 1999. On a quarterly basis between these two dates,
closing prices have ranged from a high of $32.19 at December 31, 1997 to a low
of $12.31 at December 31, 1999. During 2000, closing prices have ranged from a
low of $9.87 per share on March 27 to a high of $14.125 on January 18.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the markets in which we do
business or relating to us specifically could result in an immediate and adverse
effect on the market price of our common stock.
WE MAY NOT BE ABLE TO RETAIN KEY MANAGEMENT PERSONNEL WE NEED TO SUCCEED, WHICH
COULD ADVERSELY AFFECT OUR ABILITY TO MAKE SOUND INVESTMENT DECISIONS
We have several key executive officers. If they depart, it could have a
significant adverse effect. In particular, Ronald Langley, our Chairman, and
John R. Hart, our President and Chief Executive Officer, play key roles in
investment decisions. Messrs. Langley and Hart have entered into employment
agreements with us dated as of December 31, 1997, for a period of four years.
Messrs. Langley and Hart are key to the implementation of our strategic focus,
and our ability to successfully develop our current strategy is dependent upon
our ability to retain the services of Messrs. Langley and Hart.
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER, PREVENTING YOU FROM RECEIVING A
PREMIUM ON YOUR SHARES
The Board of Directors has authority to issue up to 2 million shares of
preferred stock and to fix the rights, preference, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. Your rights as common stock holders will be subject to, and
may be adversely affected by, the rights of the holders of the preferred stock.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, thereby delaying, deferring or preventing a
change in control of PICO. Furthermore, such preferred stock may have other
rights, including economic rights senior to the common stock, and, as a result,
the issuance thereof could have a material adverse effect on the market value of
the common stock.
THE FOREGOING FACTORS, INDIVIDUALLY OR IN THE AGGREGATE, COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS AND COULD MAKE COMPARISON OF HISTORIC
OPERATING RESULTS AND BALANCES DIFFICULT OR NOT MEANINGFUL.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's balance sheets include a significant amount of assets and
liabilities whose fair value are subject to market risk. Market risk is the risk
of loss arising from adverse changes in market interest rates or prices. The
Company currently has interest rate risk as it relates to its fixed maturity
securities and mortgage loans, equity price risk as it relates to its marketable
equity securities, and foreign currency risk as it relates to investments
denominated in foreign currencies. The Company's bank debt is short-term in
nature as the Company generally secures rates for periods of approximately one
to three years and therefore approximates fair value. At March 31, 2000, the
Company had $64.1 million of fixed maturity securities and mortgage loans, $73.3
million of marketable equity securities that were subject to market risk, and
$31.7 million of investments denominated in foreign currencies, primarily Swiss
francs. The Company's investment strategy is to manage the duration of the
portfolio relative to the duration of the liabilities while managing interest
rate risk.
The Company uses two models to analyze the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities, and
mortgage loans, the Company uses duration modeling to calculate changes in fair
value. For its marketable securities the Company 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 the Company
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 a 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 $475,000 for a 100 basis point increase in interest rates on its
fixed securities and mortgage loans. The hypothetical 20% decrease in fair value
of the Company's marketable equity securities produced a loss in fair value of
$10.1 million that would impact the unrealized appreciation in shareholders'
equity. The hypothetical 20% decrease in the local currency of the Company's
foreign denominated investments produced a loss of $5.2 million that would
impact the unrealized appreciation and foreign currency translation in
shareholders' equity.
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
None.
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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 15, 2000 By: /s/ Gary W. Burchfield
----------------------------------
Gary W. Burchfield
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)
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EXHIBITS INDEX
--------------
Exhibit
Number Description
------- -----------
+ 2.2 Agreement and Plan of Reorganization, dated as of May 1, 1996, among PICO,
Citation Holdings, Inc. and Physicians and amendment thereto dated August 14, 1996 and
related Merger Agreement.
+++++ 2.3 Second Amendment to Agreement and Plan of Reorganization dated November 12, 1996.
# 2.4 Agreement and Debenture, dated November 14, 1996 and November 27, 1996,
Respectively, by and between Physicians and Hyperfeed.
# 2.5 Purchase and Sale Agreement by, between and among Nevada Land and Resource Company, LLC,
GEC, Western Water Company and Western Land Joint Venture dated April 9, 1997.
+++++3.1 Amended and Restated Articles of Incorporation of PICO.
+ 3.2.2 Amended and Restated By-laws of PICO.
* 10.8 Flexible Benefit Plan
-10.55 Consulting Agreements, effective January 1, 1997, regarding retention of Ronald Langley
and John R. Hart as consultants by Physicians and GEC.
++ 10.57 PICO 1995 Stock Option Plan
-+++ 10.58 Key Employee Severance Agreement and Amendment No. 1 thereto, each made as of
November 1, 1992, between PICO and Richard H. Sharpe and Schedule A identifying
other substantially identical Key Employee Severance Agreements between PICO and
certain of the executive officers of PICO.
+++ 10.59 Agreement for Purchase and Sale of Shares, dated May 9, 1996, among Physicians,
GPG and GEC.
++ 10.60 Agreement for the Purchase and Sale of Certain Assets, dated July 14, 1995 between
Physicians, PRO and Mutual Assurance, Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney Reinsurance
Corporation and Physicians.
++ 10.62 Letter Agreement, dated September 5, 1995, between Physicians, Christopher Ondaatje and
the South East Asia Plantation Corporation Limited.
++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of Certain Assets, dated July 30, 1996
between Physicians, PRO and Mutual Assurance, Inc.
+++++ 16.1. Letter regarding change in Certifying Accountant from Deloitte & Touche LLP,
Independent auditors.
# 21. Subsidiaries of PICO.
27. Financial Data Schedule.
### 28. Form S-8, Registration Statement under the Securities Act of 1933, for the PICO Holdings,
Inc. Employees 401(k) Retirement Plan and Trust, Registration No. 333-36881.
#### 29. Form S-8, Registration Statement under the Securities Act of 1933, for the Physicians
Insurance Company of Ohio 1995 Non-Qualified Stock Option Plan and assumed by
PICO Holdings, Inc., Registration No. 333-32045.
- ----------
* Incorporated by reference to exhibit of same number filed with
Registration Statement on Form S-1 (File No. 33-36383).
+ 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 exhibit filed with Registration Statement on
Form S-4 (File no. 333-06671).
++++ Incorporated by reference to exhibit filed with Amendment No. 1 to
Registration Statement No. 333-06671 on Form S-4.
+++++ Incorporated by reference to exhibit of same number filed with Form 8-K
dated December 4, 1996.
- - Executive Compensation Plans and Agreements.
# Incorporated by reference to exhibit of same number filed with Form 10-K
dated April 15, 1997.
## Incorporated by reference to exhibit * of same number filed with 10-K/A
dated April 30, 1997.
### Incorporated by reference to Form S-8 filed with the Securities and
Exchange Commission (File No. 333-36881).
#### Incorporated by reference to Form S-8 filed with the Securities and
Exchange Commission (File No. 333-32045).
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