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, 2002
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 12,367,021 as of March 31, 2002, excluding 4,417,202 shares of common
stock held by the registrant and its subsidiaries.
PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and the Results of Operations 9
Item 3: Quantitative and Qualitative Disclosure About Market Risk 20
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 6: Exhibits and Reports on Form 8-K 20
Signature 21
2
PART I: FINANCIAL INFORMATION
ITEM I: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2002 2001
-------------- --------------
ASSETS
Investments $ 165,434,184 $ 157,843,376
Cash and cash equivalents 7,071,031 17,361,624
Premiums and other receivables, net 20,428,409 18,076,561
Reinsurance receivables 27,275,197 23,783,106
Deferred policy acquisition costs 6,955,711 6,913,589
Land and related mineral rights and water rights, net 121,649,127 125,997,642
Property and equipment, net 2,581,485 2,727,931
Net deferred income taxes 7,748,663 7,299,015
Goodwill and intangibles, net 2,406,035 3,487,414
Other assets 10,230,704 9,644,256
------------- -------------
Total assets $ 371,780,546 $ 373,134,514
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 99,860,821 $ 98,449,053
Unearned premiums 28,192,317 28,143,296
Reinsurance balance payable 2,534,897 5,458,720
Bank and other borrowings 13,878,617 14,596,302
Excess of fair value of net assets acquired over purchase price 2,792,597
Other liabilities 13,802,880 13,992,803
------------- -------------
Total liabilities 158,269,532 163,432,771
------------- -------------
Minority interest 3,513,573 3,062,190
------------- -------------
Commitments and Contingencies (Note 4)
Common stock, $.001 par value; authorized 100,000,000 shares,
16,784,223 issued 16,784 16,784
Additional paid-in capital 235,844,655 235,844,655
Retained earnings 67,380,304 64,666,746
Accumulated other comprehensive loss (15,093,989) (15,759,997)
Treasury stock, at cost (common shares: 4,417,202 in 2002 and 4,415,607 in 2001) (78,150,313) (78,128,635)
------------- -------------
Total shareholders' equity 209,997,441 206,639,553
------------- -------------
Total liabilities and shareholders' equity $ 371,780,546 $ 373,134,514
============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
2002 2001
------------ ------------
Revenues:
Premium income $ 10,613,777 $ 10,039,110
Net investment income 2,379,172 2,169,044
Net realized gain (loss) on investments 281,111 (1,373,818)
Sale of land and water rights 7,364,865 9,095,100
Other 1,038,880 1,233,972
------------ ------------
Total revenues 21,677,805 21,163,408
------------ ------------
Expenses:
Loss and loss adjustment expenses 6,951,146 7,944,501
Insurance underwriting and other expenses 7,915,127 9,621,702
Cost of land and water rights sold 4,910,430 6,506,882
------------ ------------
Total expenses 19,776,703 24,073,085
------------ ------------
Equity in income (loss) of unconsolidated affiliates (397,956) 144,443
------------ ------------
Income (loss) before income taxes, minority
interest and accounting change 1,503,146 (2,765,234)
Provision (benefit) for federal, foreign and state income taxes 623,846 (1,426,363)
------------ ------------
Income (loss) before minority interest and accounting change 879,300 (1,338,871)
Minority interest in loss of subsidiaries 48,619 56,891
------------ ------------
Income (loss) before accounting change 927,919 (1,281,980)
Cumulative effect of change in accounting principle, net 1,785,639 (980,571)
------------ ------------
Net income (loss) $ 2,713,558 $ (2,262,551)
============ ============
Net income (loss) per common share - basic:
Income (loss) before accounting change $ 0.08 $ (0.10)
Cumulative effect of change in accounting principle 0.14 (0.08)
------------ ------------
Net income (loss) per common share $ 0.22 $ (0.18)
------------ ------------
Weighted average shares outstanding 12,367,021 12,390,096
============ ============
Net income (loss) per common share - diluted:
Income (loss) before accounting change $ 0.08 $ (0.10)
Cumulative effect of change in accounting principle 0.14 (0.08)
------------ ------------
Net income (loss) per common share $ 0.22 $ (0.18)
------------ ------------
Weighted average shares outstanding 12,376,660 12,390,096
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net cash provided by (used in) operating activities $ (3,222,511) $ 3,578,981
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (33,517,058) (41,047,461)
Proceeds from sale of investments 12,111,768 36,091,855
Proceeds from maturity of investments 14,842,383 6,000,000
Purchases of property and equipment (42,790) (65,778)
------------ ------------
Net cash provided by (used in) investing activities (6,605,697) 978,616
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (717,685) (2,514,673)
Repurchase of treasury stock for deferred compensation plans (21,678)
------------ ------------
Net cash used in financing activities (739,363) (2,514,673)
------------ ------------
Effect of exchange rate changes on cash 276,978 1,202,559
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,290,593) 3,245,483
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,361,624 13,644,312
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,071,031 $ 16,889,795
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 211,246 $ 399,692
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of PICO Holdings, Inc. ("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 ("US GAAP") for complete condensed
consolidated financial statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of financial
position as of March 31, 2002 and December 31, 2001, the results of
operations for the three months ended March 31, 2002 and 2001, and cash
flows for the three months ended March 31, 2002 and 2001, have been
included and are only of a normal recurring nature. Operating results for
the three months ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002.
These condensed consolidated financial statements should be read in
conjunction with the Company's audited financial statements and notes
thereto, together with Management's Discussion and Analysis of Financial
Condition and the Results of Operations and Risk Factors contained in the
Company's Annual Reports on Form 10-K for the year ended December 31, 2001
as filed with the SEC.
The preparation of financial statements in accordance with US GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses for each reporting period. The
significant estimates made in the preparation of the Company's consolidated
financial statements relate to the assessment of the carrying value of
investments, unpaid losses and loss adjustment expenses, deferred policy
acquisition costs, deferred income taxes, accounts and loans receivable,
and contingent liabilities. While management believes that the carrying
value of such assets and liabilities are appropriate as of March 31, 2002
and December 31, 2001, it is reasonably possible that actual results could
differ from the estimates upon which the carrying values were based.
2. EARNINGS (LOSS) PER SHARE
The Company applies the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." Basic earnings or loss
per share is based on the actual weighted average common shares outstanding
during the period. Diluted earnings or loss per share is similar to basic
earnings per share, except the weighted shares outstanding includes the
dilutive effect of the Company's stock options. Such securities are
dilutive if the strike price is less than the average market price of the
Company's stock during the period and the Company has earnings for the
period. In computing earnings per share, all antidilutive securities are
ignored. For the three months ended March 31, 2002, there were 9,639
shares, net added to the diluted earnings per share and 829,000 options
excluded. For the three months ended March 31, 2001, there was no
difference between basic and diluted weighted shares outstanding.
3. COMPREHENSIVE INCOME (LOSS)
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the Company includes
foreign currency translation and unrealized holding gains and losses on
available for sale securities.
The components of comprehensive income (loss) are as follows:
Three Months Ended March 31,
2002 2001
----------- -----------
Net income (loss) $ 2,713,558 $(2,262,551)
Net change in unrealized depreciation
on available for sale investments (79,347) 2,815,588
Net change in foreign currency translation 745,355 (508,459)
----------- -----------
Total comprehensive income $ 3,379,566 $ 44,578
=========== ===========
6
Total comprehensive income for the three months ended March 31, 2002 is
net of deferred income tax benefit of $513,000. For the three months ended
March 31, 2001, total comprehensive income is net of a deferred income tax
charge of $1.4 million.
The components of accumulated comprehensive loss are as follows:
March 31, December 31,
2002 2001
------------ ------------
Unrealized depreciation on
available for sale investments $(10,712,546) $(10,633,199)
Foreign currency translation (4,381,443) (5,126,798)
------------ ------------
Accumulated other comprehensive loss $(15,093,989) $(15,759,997)
============ ============
Accumulated other comprehensive loss is net of deferred income tax
assets of $1.1 million at March 31, 2002, and $1.5 million at December 31,
2001.
4. COMMITMENTS AND CONTINGENCIES
Vidler Water Company, Inc., a PICO subsidiary, is party to an operating
lease to acquire 30,000 acre-feet of underground water storage privileges
and associated rights to recharge and recover water located near the
California Aqueduct, northwest of Bakersfield. The agreement requires a
minimum payment of $378,000 per year adjusted annually by the engineering
price index until 2007. PICO signed a Limited Guarantee agreement with
Semitropic Water Storage District ("Semitropic") that requires PICO to
guarantee the annual obligation up to $519,000, adjusted annually by the
engineering price index.
On January 10, 1997, Global Equity Corporation, a wholly owned PICO
subsidiary, commenced an action in British Columbia against MKG Enterprises
Corp. ("MKG") to enforce repayment of a $5 million loan made by Global
Equity to MKG. The actions and negotiations proved unsuccessful in
recovering the full amount due under the loan agreement and consequently
the loan became wholly worthless in the second quarter of 2001. The Company
recorded losses for the balance owed in previous years and the remaining
balance of $500,000 was expensed in 2001. Global Equity has concluded that
further legal actions in connection with the loan would not lead to a
recovery of any amounts due.
In connection with the sale of their interests in Nevada Land & Resource
Company, LLC, a wholly owned PICO subsidiary, by the former members, a
limited partnership agreed to act as consultant to Nevada Land in
connection with the maximization of the development with respect to the
Nevada property. In exchange for these services, the partnership was to
receive from Nevada Land a consulting fee calculated as 50% of any net
proceeds that Nevada Land actually receives from the sale, leasing or other
disposition of all or any portion of the Nevada property or refinancing of
the Nevada property provided that Nevada Land has received such net
proceeds in a threshold amount equal to the aggregate of: (i) the capital
investment by Global Equity and the Company in the Nevada property, (ii) a
20% cumulative return on such capital investment, and (iii) a sum
sufficient to pay the United States federal income tax liability, if any,
of Nevada Land in connection with such capital investment. Either party
could terminate this consulting agreement in April 2002 if the partnership
had not received or become entitled to receive by that time any amount of
the consulting fee. Nevada Land is required to deliver a report on or
before June 30, 2002 to the limited partnership calculating the amount that
would be owed by Nevada Land to the limited partnership. Management has
determined that Nevada Land has no liability to the partnership at April
2002.
In 2000, PICO Holdings loaned a total of $2.2 million to Dominion
Capital Pty. Ltd. ("Dominion Capital"), a private Australian company. In
2001, $1.2 million of the loans became overdue. Negotiations between PICO
and Dominion Capital to reach a settlement agreement on both the overdue
loan of $1.2 million and the other loan of $1 million proved unsuccessful.
Accordingly, PICO commenced a legal action through the Australian courts
against Dominion Capital to recover the total amount due to PICO Holdings.
Due to the inherent uncertainty involved in pursuing a legal action and our
ability to realize the assets collateralizing the loans, PICO recorded an
allowance for the total outstanding balance of $2.3 million for the loans
and interest. PICO has been awarded summary judgment in relation to the
principal and interest on the $1.2 million loan and, as a result, Dominion
Capital has been placed in receivership. The court appointed receiver is in
the process of ascertaining Dominion Capital's assets and liabilities. The
court trial in connection with PICO's $1 million loan (with interest) has
been adjourned pending the receiver's investigations. In addition, PICO has
commenced proceedings in Australia to secure the proceeds from the sale of
real estate in Australia offered as collateral under the $1.2 million loan.
7
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 litigation will not have a material adverse effect on the consolidated
financial position, results of operations or cash flows of the Company.
5. CUMULATIVE CHANGES IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, the Company adopted SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 prospectively prohibits the pooling of interest method of
accounting for business combinations initiated after June 30, 2001. SFAS
No. 142 also establishes a new method of testing goodwill for impairment on
an annual basis or on an interim basis if an event occurs or circumstances
change that would reduce the fair value of a reporting unit below its
carrying value. The adoption of SFAS 142 is reflected in the Company's
condensed consolidated financial statements for the quarter ending March
31, 2002 as a cumulative effect of change in accounting principle. The
cumulative adjustment of $1.8 million is comprised of negative goodwill of
$2.8 million and the write-off of $1 million of positive goodwill
determined to be impaired. The remaining balance of $2.4 million is
classified as an intangible asset with a finite life. Accordingly, it will
be amortized over its remaining life of 8 years and tested for impairment
at least annually. For comparative purposes, assuming the adoption of SFAS
142 had occurred at the beginning of 2001, net loss before cumulative
effect of change in accounting principle would have been $1.2 million
($0.10 per share) for the first quarter of 2001, compared with net income
of $928,000 ($0.08 per share) for the first quarter of 2002.
Effective January 1, 2002, the Company adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" and defines
an impairment as "the condition that exists when the carrying amount of a
long-lived asset (asset group) is not recoverable and exceeds its fair
value." Based on the SFAS No. 121 framework, this statement develops a
single accounting model for the disposal of long-lived assets, whether
previously held or newly acquired. The adoption of this statement did not
have a material impact on the consolidated financial statements.
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Hedging Activities." As
amended, SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position,
measure those instruments at fair value and recognize changes in fair value
in earnings for the period of change unless the derivative qualifies as an
effective hedge that offsets certain exposure. As a result of this
adoption, the Company recorded a transition adjustment in the first quarter
of 2001 that decreased net income by approximately $1 million, net of a
$500,000 tax benefit, and increased other comprehensive income by the same
amount (no effect on shareholders' equity). These adjustments have been
reported as a cumulative effect of change in accounting principle. The
current impacts of SFAS No. 133 are included in realized investment gains
and losses on the statement of operations and primarily include the
fluctuation in the value of the warrants to purchase shares of HyperFeed
Technologies, Inc. The value of the warrants is determined each period
using the Black Scholes option pricing model. The model uses the current
market price of the common stock of HyperFeed, and various assumptions,
updated each reporting period, in calculating an estimated fair value: no
dividend yield; a risk-free interest rate of 4.2% to 2.5%; an expected life
of one year; and a historical 5 year cumulative volatility that typically
ranges from 121% to 104%. Future effects are dependent on market
conditions.
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECURITIES LAW. 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 WHICH COULD AFFECT OUR FINANCIAL PERFORMANCE. ALTHOUGH WE AIM TO PROMPTLY
DISCLOSE ANY NEW DEVELOPMENT WHICH WILL HAVE A MATERIAL EFFECT ON PICO, WE DO
NOT UNDERTAKE TO UPDATE ALL "FORWARD-LOOKING STATEMENTS" UNTIL OUR NEXT
SCHEDULED FORM 10-K OR FORM 10-Q FILING. 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 OUR
PREVIOUS SEC FILINGS, WHICH 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, 2002 AND 2001
INTRODUCTION
PICO Holdings, Inc. is a diversified holding company. We acquire
interests in companies which our management believes:
- - are undervalued at the time we buy them; and
- - 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. 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:
- - owning and developing water rights and water storage operations through
Vidler Water Company, Inc.;
- - owning and developing land and the related water rights and mineral rights
through Nevada Land & Resource Company, LLC, which owns more than 1.2
million acres of land in northern Nevada;
- - property and casualty insurance through Sequoia Insurance Company;
- - "running off" the property and casualty insurance loss reserves of Citation
Insurance Company, and the medical professional liability insurance loss
reserves of Physicians Insurance Company of Ohio; and
- - making long term value-based investments in other public companies.
SUMMARY
PICO reported net income of $2.7 million, or $0.22 per basic and diluted
share, for the quarter ended March 31, 2002. This consisted of $928,000 in
income before an accounting change, or $0.08 per share, and an accounting change
which increased income by $1.8 million, or $0.14 per share. In the first quarter
of 2001, PICO reported a net loss of $2.3 million, or $0.18 per share. This was
comprised of a loss before an accounting change of $1.3 million, or $0.10 per
share, and a separate accounting change which reduced income by $981,000
after-tax, or $0.08 per share.
Income before taxes, minority interest, and the accounting change for the
first quarter of 2002 was $1.5 million. After a provision for income taxes of
$624,000 and the addition of $49,000 in minority interest, PICO generated income
of $928,000 before the accounting change. From January 1, 2002, PICO adopted
Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible
Assets," which requires that goodwill and intangible assets with indefinite
lives be tested for impairment annually rather than amortized over time. As a
result of adopting this standard, PICO recorded income of $1.8 million. This
reflected the surplus of negative goodwill arising from the 1996 reverse merger
over the write-off of positive goodwill items, which were determined to be
impaired. See Note 5 of Notes to Condensed Consolidated Financial Statements,
"Cumulative Changes in Accounting Principle" and the Property & Casualty
Insurance segment.
During the first quarter of 2002, PICO recorded comprehensive income of
$3.4 million, principally consisting of the $2.7 million net income and a
$745,000 credit from appreciation in foreign currencies where we hold
investments relative to the US dollar. During the quarter, shareholders' equity
increased by $3.4 million to $210 million at March 31, 2002, which represents
book value per share of $16.98.
9
For the first quarter of 2001, PICO reported a $2.8 million loss before
income taxes, minority interest, and the cumulative effect of a change in
accounting principle. This was partially offset by income tax benefits of $1.4
million and the addition of $57,000 in minority interest. A change in accounting
principle due to the adoption of the Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," had the
cumulative effect of reducing income by $981,000 after taxes.
PICO recorded comprehensive income of $45,000 for the first quarter of
2001. This was comprised of the $2.3 million net loss and a $508,000 unrealized
reduction resulting from depreciation in foreign currencies relative to the US
dollar, which were partially offset by a $2.8 million reduction in unrealized
depreciation in investments.
Segment revenues and income (loss) before taxes, minority interest, and the
cumulative effect of changes in accounting principles, for the first quarter of
2002 and 2001 were:
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
------------ ------------
REVENUES:
Water Rights & Water Storage Assets $ 7,861,000 $ 9,724,000
Land and Related Mineral Rights & Water Rights 397,000 358,000
Property & Casualty Insurance 12,232,000 12,272,000
Medical Professional Liability Insurance 251,000 (1,534,000)
Long Term Holdings 937,000 343,000
------------ ------------
$ 21,678,000 $ 21,163,000
============ ============
INCOME (LOSS) BEFORE TAXES, MINORITY
INTEREST & CUMULATIVE
EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES:
Water Rights & Water Storage Assets $ 1,830,000 $ 971,000
Land and Related Mineral Rights & Water Rights (161,000) (102,000)
Property & Casualty Insurance 1,107,000 217,000
Medical Professional Liability Insurance 44,000 (1,647,000)
Long Term Holdings (1,317,000) (2,204,000)
------------ ------------
$ 1,503,000 $ (2,765,000)
============ ============
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:
WATER RIGHTS AND WATER STORAGE ASSETS
In the first quarter of 2002, Vidler closed on its first sale for municipal
use of transferable Harquahala Valley Irrigation District ground water. The sale
resulted in total revenues of $5.2 million and pre-tax income of $2.3 million,
and was primarily responsible for the segment's revenues of $7.9 million and
income of $1.8 million.
During the first quarter of 2001, Vidler completed its first major water
transaction, the sale of Harquahala Valley District ground water for industrial
use. The sale resulted in total revenues of $9.4 million and pre-tax income of
$2.3 million, and was the principal component of segment revenues of $9.7
million and segment income of $971,000.
PROPERTY AND CASUALTY INSURANCE
Although revenues were little changed year over year in this segment,
segment income increased $890,000, principally due to an improved underwriting
result from Sequoia.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
In the first quarter of 2002, segment revenues were $251,000, expenses were
$207,000, and segment income was $44,000.
In the first quarter of 2001, a realized loss on the sale of an investment
reduced segment revenues by $2 million, and led to a segment loss of $1.6
million. Excluding the realized loss, segment revenues would have been $458,000
and income would have been $345,000.
10
LONG TERM HOLDINGS
The segment loss decreased by $887,000 year over year. This primarily
resulted from $589,000 in revenues recorded in the first quarter of 2002 related
to the AOG loan and underwriting, and a $630,000 lower expense related to
foreign currency. These factors were partially offset by a $542,000 reduction in
our equity share of the net income or loss of companies accounted for under the
equity method.
WATER RIGHTS AND WATER STORAGE ASSETS
VIDLER WATER COMPANY, INC.
Three Months Ended March 31,
---------------------------
2002 2001
----------- -----------
REVENUES:
Sale of Land, Water Rights, and Water $ 7,365,000 $ 9,095,000
Option Premiums Earned 300,000
Lease of Water 68,000 30,000
Agricultural Land Leases 189,000 202,000
Other 239,000 97,000
----------- -----------
Segment Total Revenues $ 7,861,000 $ 9,724,000
=========== ===========
EXPENSES:
Cost of Land, Water Rights, and Water Sold $(4,859,000) $(6,478,000)
Commission and Other Costs Of Sales (106,000) (546,000)
Provision for Loss on Condemnation (442,000)
Depreciation and Amortization (237,000) (349,000)
Interest (134,000) (192,000)
Operations & Maintenance (103,000) (78,000)
Other (592,000) (668,000)
----------- -----------
Segment Total Expenses $(6,031,000) $(8,753,000)
----------- -----------
INCOME BEFORE TAX $ 1,830,000 $ 971,000
=========== ===========
On March 1, 2002, Vidler closed on the sale of 3,645 acre-feet of water
rights and the related 1,217 acres of land in the Harquahala Valley Irrigation
District to golf course developers near Scottsdale, Arizona. This is Vidler's
first sale of transferable Harquahala Valley ground water for municipal use. The
transaction added $5.2 million to revenues, and $2.3 million to income in the
first quarter of 2002.
In addition, in March 2002, Vidler closed on the previously announced sale
of its interest in Cline Ranch to Centennial Water and Sanitation District. This
sale added $2.1 million to revenues and $120,000 to income in the quarter.
Other revenues were $496,000. Excluding the $4.9 million cost of water
rights and land sold, and commission and other selling costs of $106,000, other
operating expenses were $1.1 million. As a result of these factors, Vidler
generated a pre-tax profit of $1.8 million for the first quarter of 2002.
In the first quarter of 2001, Vidler sold 6,496.5 acre-feet of water rights
and 2,589 acres of land in the Harquahala Valley to a unit of Allegheny Energy,
Inc. for industrial use within the Harquahala Valley. The sale resulted in total
revenues of $9.4 million, comprised of a sales price of $9.1 million and a
$300,000 option premium received, and pre-tax income of approximately $2.3
million.
Other revenues were $329,000, and other expenses were $1.7 million.
Expenses included a $442,000 provision for loss on condemnation (i.e.,
compulsory acquisition) of a parcel of commercially zoned land in Mesa, Arizona.
The property was not part of Vidler's water rights and water storage business,
and was being held for sale. Vidler disputed the value at which the Department
condemned the land, and later in 2001 negotiated an additional payment of
$240,000 which recovered part of the provision for loss. Segment income before
taxes was $971,000.
Our 2001 Form 10-K report contains a detailed description of Vidler's water
rights and water storage operations. The following section updates this
information for significant developments during the first quarter:
11
HARQUAHALA VALLEY WATER RIGHTS
The sales price for the water rights sold to the golf course developers
near Scottsdale, Arizona, represents $1,450 per acre-foot of transferable
Harquahala Valley ground water. Following this transaction, Vidler owns, or has
the right to acquire, approximately 50,030 acre-feet of transferable Harquahala
Valley ground water.
Vidler is working on further sales of transferable Harquahala Valley ground
water to both industrial users within the Valley, to communities and developers,
some of whom need to secure further water supply to support the expected strong
growth of the Phoenix metropolitan area.
SANDY VALLEY, NEVADA
Vidler has filed an application for approximately 2,000 acre-feet of water
rights near Sandy Valley, Nevada. A hearing related to the application was held
in December 2001. The Nevada State Engineer is expected to announce a decision
regarding the permitting of the water rights in the second quarter of 2002.
When, and if, the water rights are permitted, we expect to close an agreement to
supply water to support additional growth at Primm, Nevada, a resort town on the
border between California and Nevada, in the Interstate 15 corridor.
VIDLER ARIZONA RECHARGE FACILITY
Discussions are continuing with governmental and private entities to store
water at the Facility. Although Vidler has not stored water for customers at the
Facility yet, the company has been recharging water for its own account since
1998, when the pilot facility was constructed. Vidler purchased the water from
the Central Arizona Project, and intends to resell this water at an opportune
time. At March 31, 2002, Vidler had recharged approximately 5,900 acre-feet of
water at the facility.
LAND AND RELATED MINERAL RIGHTS AND WATER RIGHTS
NEVADA LAND & RESOURCE COMPANY, LLC
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
--------- ---------
REVENUES:
Sale of Land $ 92,000 $ 67,000
Lease and Royalty 187,000 159,000
Interest and Other 118,000 132,000
--------- ---------
Segment Total Revenues $ 397,000 $ 358,000
========= =========
EXPENSES:
Cost of Land Sales $ (52,000) $ (29,000)
Operating Expenses (506,000) (431,000)
--------- ---------
Segment Total Expenses $(558,000) $(460,000)
========= =========
========= =========
LOSS BEFORE TAX $(161,000) $(102,000)
========= =========
Nevada Land does not recognize land sales contracts as revenue until the
sales transactions close. Consequently, revenues fluctuate from quarter to
quarter depending on the closing of specific transactions, and land sales
revenues for any individual quarter are not indicative of likely full-year
revenues.
In the first quarter of 2002, Nevada Land & Resource Company, LLC sold
approximately 1,641 acres of land for $92,000. The parcels of land sold were
from lower value categories, which is reflected in the average sales price of
$56 per acre, and the average basis in the land sold of $31 per acre. The gross
margin on land sales was $40,000, a gross margin percentage of 43.5%. Lease and
royalty revenues were $187,000, and interest and other revenues contributed
$118,000, resulting in segment total revenues of $397,000. Following operating
expenses of $506,000, the segment experienced a loss of $161,000.
In the first quarter of 2001, Nevada Land & Resource Company, LLC sold
approximately 1,125 acres of land, also from lower value categories, for
$67,000. The average sales price was $60 per acre and our average basis was $26
per acre. The gross margin on land sales was $38,000, a gross margin percentage
of 56.7%. Lease and royalty revenues were $159,000, and interest and other
revenues contributed $132,000, resulting in segment total revenues of $358,000.
After operating expenses of $431,000, the segment reported a $102,000 loss.
12
The $59,000 year over year increase in the segment loss is primarily
attributable to a $75,000 increase in operating expenses, principally due to
increased professional fees.
During 2000 and 2001, Nevada Land filed applications for an additional
105,516 acre-feet of water rights on the company's lands. The applications
consist of:
- - 39,076 acre-feet of water rights for the beneficial use of irrigating the
related 9,769 acres of arable land, and 40,240 acre-feet of water rights
for municipal and industrial use, on the former railroad lands; and
- - 26,200 acre-feet of water rights for the beneficial use of irrigating
another 6,550 acres of Spring Valley Ranches.
Progress continues on a number of potential land exchange transactions, in
which Nevada Land will give up land with environmental, cultural, or historical
value, in exchange for land which is either more marketable, or suitable for
future development. In some cases, we may form joint ventures with developers in
order to participate in the upside from developing the land acquired. Nevada
Land is currently working on the following land exchange opportunities, each of
which could take up to several years to complete:
- - the exchange of mountain lands in Washoe County for land suitable for
industrial use in Lincoln County;
- - the exchange of mountain lands in Washoe County for land suitable for
residential, commercial, and industrial use near Dayton, in Lyon County;
- - the exchange of working ranch land at Spring Valley Ranches and mountain
lands in Pershing County for developable land in southeastern Nevada; and
- - the exchange of mountain lands in Elko County for land which would be
suitable for agricultural use in Independence Valley, Elko County.
Discussions are continuing with several electricity-generating companies
that are looking for sites to construct new power plants in northern Nevada.
Nevada Land has a supply of suitable land in various locations which also offer
the other essential requirements of water for cooling, access to the electricity
grid, and availability of feedstock (i.e., a fuel source) through either natural
gas transmission lines for gas-fired stations or rail transport for coal-fired
stations.
PROPERTY AND CASUALTY INSURANCE
THREE MONTHS ENDED MARCH 31,
-------------------------------
2002 2001
------------ ------------
REVENUES:
Sequoia -- Earned Premiums $ 10,614,000 $ 9,937,000
Citation -- Earned Premiums 102,000
Investment Income 1,357,000 1,471,000
Realized Investment Gains 182,000 528,000
Negative Goodwill 142,000
Other 79,000 92,000
------------ ------------
Segment Total Revenues $ 12,232,000 $ 12,272,000
============ ============
EXPENSES:
Loss and Loss Adjustment Expense $ (6,951,000) $ (7,944,000)
Underwriting Expenses (4,174,000) (4,111,000)
------------ ------------
Segment Total Expenses $(11,125,000) $(12,055,000)
INCOME BEFORE TAXES:
Sequoia Insurance Company $ 732,000 $ (392,000)
Citation Insurance Company 375,000 609,000
------------ ------------
Segment Income Before Taxes $ 1,107,000 $ 217,000
============ ============
The Property and Casualty segment is comprised of Sequoia Insurance Company
and Citation Insurance Company, which are headquartered in Monterey, California.
Sequoia is the only one of PICO's insurance subsidiaries which is writing
new business. Traditionally, Sequoia's core business has been commercial
property and casualty insurance in California and Nevada, focusing on the niche
markets of small to medium-sized businesses and farms. In May 2000, Sequoia's
book of business in personal lines of insurance increased significantly with the
acquisition of the Personal Express book of business.
13
In prior years, Citation wrote commercial property and casualty insurance
in California, Nevada, and Arizona. The business previously written by Citation
in California and Nevada has been transitioned to Sequoia, and Citation is now
in "run off." This means that Citation is handling claims arising from
historical business, but not writing any new business. The last of Citation's
policies expired in December 2001.
As a result of these factors, the individual results of Sequoia and
Citation cannot be directly compared to previous years.
SEQUOIA INSURANCE COMPANY
In the first quarter of 2002, Sequoia generated $13.7 million of direct
written premiums, comprised of $12.3 million in commercial lines of insurance
and $1.4 million in personal lines. In the first quarter of 2001, Sequoia's
direct written premiums of $11.6 million consisted of $10.6 million in
commercial lines and $974,000 in personal lines. Direct written premiums
increased $2.1 million, or 18.4%, year over year. The increase was primarily due
to growth of $1.7 million in commercial lines, resulting from a 17.4% increase
in the average premium per commercial policy year over year.
In the first quarter of 2002, Sequoia generated total revenues of $11.8
million, including $10.6 million in earned insurance premiums, $929,000 in
investment income, and $139,000 in realized gains on the sale of investments.
In the first quarter of 2001, Sequoia produced total revenues of $11.4
million, including $9.9 million in earned insurance premiums, $897,000 in
investment income, and $516,000 in realized gains.
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, which includes the winter months of January, February and March when
California experiences the bulk of its annual rainfall and storm activity.
Typically, Sequoia's loss ratio peaks during the first quarter, and an
underwriting loss is not unusual.
In the first quarter of 2002, Sequoia incurred an operating loss (i.e.,
loss before investment income, realized gains, and taxes) of $336,000. A
negligible expense was recorded for adverse development in prior year loss
reserves.
In the first quarter of 2001, Sequoia incurred an operating loss of $1.8
million, which included an expense of $107,000 for adverse development in prior
year loss reserves.
The $1.5 million year over year improvement in Sequoia's operating loss
in the first quarter of 2002 is due to:
- - more favorable claims experience. During the first quarter of 2001, a large
number of claims were received, including numerous claims from homeowners
following windstorms in Bakersfield in March 2001; and
- - the effects of the tightening of underwriting standards and higher average
premiums per policy resulting from initiatives to reduce Sequoia's loss
ratio.
The operating performance of insurance companies is frequently analyzed
using their "combined ratio." A combined ratio below 100% indicates that the
insurance company made a profit on its base insurance business, prior to
investment income, realized investment gains or losses, extraordinary items,
taxes, and other non-insurance items. Sequoia aims to have a combined ratio of
less than 100% each year; however, this is not achieved in every quarter or
year.
Sequoia's combined ratio, determined on the basis of generally accepted
accounting principles, for the first quarter of 2002 and 2001 was:
SEQUOIA'S GAAP INDUSTRY RATIOS
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
----- -----
Loss and Loss Adjustment Expense Ratio 65.3% 79.1%
Underwriting Expense Ratio 38.6% 41.0%
----- -----
Combined Ratio 103.9% 120.1%
===== =====
14
CITATION INSURANCE COMPANY
In the first quarter of 2002, Citation generated revenues of $472,000, due
almost entirely to investment income and realized gains. After expenses of
$97,000, Citation reported a pre-tax profit of $375,000. An expense of $18,000
was recorded for adverse development in prior year loss reserves.
In 2001, Citation's first-quarter revenues of $832,000 included earned
premiums of $102,000, investment income of $574,000, and negative goodwill of
$142,000. After expenses of $223,000, Citation reported a pre-tax profit of
$609,000.
The $234,000 year over year decline in Citation's profit contribution is
primarily attributable to a $146,000 reduction in investment income and the
$142,000 in negative goodwill amortization recorded in 2001, which did not recur
in 2002.
When Citation Insurance Group acquired Physicians in the reverse merger in
1996, a $5.7 million negative goodwill asset arose because the fair value of the
assets acquired (i.e., Physicians) exceeded the cost of the investment (i.e.,
the fair value of the shares in Citation issued to Physicians shareholders). The
negative goodwill was being recognized as income over a period of 10 years in
this segment. From January 1, 2002, PICO adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Intangible Assets," which requires
that goodwill and intangible assets with indefinite lives be tested for
impairment annually rather than amortized over time. As a result of adopting
this standard, the remaining negative goodwill in this segment of approximately
$2.8 million was recorded as income. The negative goodwill was included in the
$1.8 million cumulative effect of the change in accounting principle in the
first quarter of 2002, and did not affect the segment result. See Note 5 of
Notes to Condensed Consolidated Financial Statements, "Cumulative Changes in
Accounting Principle."
Since Citation is in run off, its combined ratio is not meaningful.
RESERVES
At March 31, 2002, our property and casualty insurance loss reserves were
$39.2 million, net of reinsurance, compared to $40.4 million at December 31,
2001.
PROPERTY AND CASUALTY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
MARCH 31, 2002 DECEMBER 31, 2001
---------------------- -----------------------------
SEQUOIA INSURANCE COMPANY:
Direct Reserves $ 40.0 million $ 36.9 million
Ceded Reserves (18.9) (15.7)
---------------------- -----------------------------
Net Reserves $ 21.1 million $ 21.2 million
====================== =============================
CITATION INSURANCE COMPANY:
Direct Reserves $ 20.5 million $ 21.0 million
Ceded Reserves (2.4) (1.8)
---------------------- -----------------------------
Net Reserves $ 18.1 million $ 19.2 million
====================== =============================
MEDICAL PROFESSIONAL LIABILITY INSURANCE
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2002 2001
--------------- ---------------
REVENUES:
Net Investment Income $ 252,000 $ 458,000
Realized Investment Loss (1,000) (1,992,000)
=============== ===============
Segment Total Revenues $ 251,000 $(1,534,000)
=============== ===============
EXPENSES:
Underwriting Expenses $ (113,000)
$(207,000)
--------------- ---------------
Segment Total Expenses $(207,000) $ (113,000)
=============== ===============
=============== ===============
INCOME (LOSS) BEFORE TAXES $ 44,000 $(1,647,000)
=============== ===============
15
Physicians Insurance Company of Ohio is in "run off", which means the
company is handling claims arising from historical business, but not writing new
business. The level of loss reserve liabilities, and corresponding investment
assets, in this segment are decreasing as claims are paid and investments
mature, or are sold, to provide the funds required to make the claims payments.
In the first quarter of 2002, segment revenues were $251,000, expenses were
$207,000, and segment income was $44,000.
For the first quarter of 2001, the segment generated revenues of negative
$1.5 million, as net investment income of $458,000 was more than offset by a $2
million realized loss on the sale of approximately half of Physicians'
investment in the Rydex URSA mutual fund. Following expenses of $113,000, the
segment incurred a pre-tax loss of $1.6 million. Excluding the realized loss,
segment income was $345,000.
No unusual trends in claims emerged during the quarter.
MEDICAL PROFESSIONAL LIABILITY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
MARCH 31, 2002 DECEMBER 31, 2001
------------------------ -----------------------
Direct Reserves $39.4 million $40.6 million
Ceded Reserves (5.7) (5.7)
------------------------ -----------------------
Net Medical Professional Liability Reserves $33.7 million $34.9 million
======================== =======================
LONG TERM HOLDINGS
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
----------- -----------
REVENUES:
Investment Income $ 596,000 $ 288,000
SFAS No. 133 Change in Warrants 100,000 90,000
Other 241,000 (35,000)
----------- ===========
Segment Total Revenues $ 937,000 $ 343,000
=========== ===========
SEGMENT TOTAL EXPENSES $(1,856,000) (2,691,000)
----------- -----------
LOSS BEFORE INVESTEE INCOME $ (919,000) $(2,348,000)
Equity Share of Investee's Net Income $ (398,000) 144,000
----------- -----------
LOSS BEFORE TAXES $(1,317,000) $(2,204,000)
=========== ===========
This segment contains our long-term investments in public companies,
subsidiaries and other assets which individually are too small to constitute a
segment, and parent company assets. Revenues and results in this segment vary
considerably from quarter to quarter, primarily due to fluctuations in net
realized gains or losses on the sale of investments. Long term holdings are not
sold on a regular basis, but may be sold if the price of an individual security
has significantly exceeded our target, or if there have been changes which we
believe limit further appreciation potential on a risk-adjusted basis.
Consequently, the amount of net realized gains or losses recognized during any
accounting period has no predictive value.
Our largest long-term holdings are HyperFeed Technologies, Inc.,
Jungfraubahn Holding AG, and Australian Oil & Gas Corporation Limited. At March
31, 2002, these three long-term holdings had a potential market value (before
taxes) of approximately $36.2 million, and a carrying value (before taxes) of
$31.9 million. The tax-effected carrying value was $32.6 million.
16
The details of our investment in each company at the end of the quarter
were:
MARCH 31, 2002 CARRYING VALUE ACCOUNTING METHOD SHARE EQUIVALENTS MARKET PRICE
CARRYING VALUE BEFORE TAXES:
HyperFeed Technologies, Inc. Common $ 1,858,000 Equity method 10,077,856 $ 0.57
Warrants 487,000 Fair value 4,055,195
--------------- -------------------
Total $ 2,345,000 14,133,051
Jungfraubahn Holding AG $16,201,000 Market value 112,672 $143.79
Australian Oil & Gas Corporation Common $12,865,000 Market value 13,397,337 $ 0.96
Limited
Warrants 469,000 Fair value 1,431,640
--------------- -------------------
Total $13,334,000 14,828,977
Total carrying value before taxes $31,880,000
Deferred taxes 762,000
---------------
CARRYING VALUE $32,642,000
AUSTRALIAN OIL & GAS CORPORATION LIMITED
At December 31, 2001, PICO owned 9,867,391 shares of AOG, equivalent to
approximately 20.7% of the company.
On January 17, 2002, AOG announced that it was raising additional capital
to purchase a new deep capacity drilling rig and to refit two existing rigs to
perform new long term drilling contracts. In January 2002, PICO provided AOG
with a short term bridging loan of $US4 million, and agreed to underwrite a
rights offering by AOG. As a result of this process, PICO acquired the following
shares in AOG:
- - 666,666 common shares which were issued as fees for establishing the loan
facility and underwriting the rights offering, with no cash cost to PICO;
and
- - 2,863,280 common shares through the rights offering, at cash cost of $A1.20
per share (at March 31, 2002, $A1.00 equaled approximately $US0.5335). PICO
also received, for no cash cost, options to buy 1,431,640 new AOG shares,
exercisable at intervals over three years at $A1.20 per share as AOG issued
one option for every two shares subscribed for in the rights offering.
The outstanding balance of the short term bridging loan -- being the original
loan amount of $US 4 million, less the cost of the shares acquired in the
underwriting -- was repaid on March 27, 2002.
At March 31, 2002, PICO owned 13,397,337 AOG common shares, equivalent to
approximately 23.0% of the company. In addition, PICO held 1,431,640 AOG
options. If all of the options were exercised, PICO would own approximately
23.6% of AOG on a fully-diluted basis.
These transactions had the following effects on our consolidated financial
statements:
- - investment income of $589,000 was recorded from the loan establishment fee
and underwriting fee;
- - the 3,529,946 common shares acquired during the first quarter have an
accounting cost basis of $2.1 million, compared to a potential market value
of $3.4 million at March 31, 2002 (before taxes); and
- - the 1,431,640 options acquired have an accounting basis of $268,000. Income
of $201,000 was recorded under SFAS No. 133, representing the difference
between the estimated fair value at March 31, 2002 of the options acquired
($469,000), and their accounting basis ($268,000).
On March 15, 2002, Ensign Resource Service Group, Inc., announced its
intention to make a takeover bid (i.e., tender offer) for AOG at $A1.70 per
share, subject to various conditions. Ensign has also indicated that it will pay
$A0.50 for each AOG option. Ensign is based in Canada, and is one of the largest
land-based oil and natural gas drilling contractors in North America. Ensign
currently owns approximately 15.7% of AOG. At May 8, 2002, the last sale of AOG
shares on the Australian Stock Exchange was $A1.75.
Announcements and news articles about AOG are available at the Australian
Stock Exchange's web site, www.asx.com.au.
17
HYPERFEED TECHNOLOGIES, INC.
On April 29, 2002, HyperFeed announced its results for the quarter ended
March 31, 2002. HyperFeed reported total revenues of $5.6 million, gross margin
of $2.2 million, EBITDA (i.e., earnings before interest, taxes, depreciation,
and amortization, as calculated by HyperFeed) of approximately $1 million, and a
net loss of $241,000.
For the quarter ended March 31, 2001, HyperFeed reported total revenues of
$9.8 million, gross margin of $4.2 million, EBITDA of $1.9 million, and net
income of $646,000.
PICO's share of HyperFeed's net income or loss and other events affecting
equity is included in "Equity share of Investee's Net Income." The total of this
line was a $398,000 loss in the first quarter of 2002, compared to income of
$144,000 the previous year.
In the accompanying news release, HyperFeed Chairman and CEO Jim Porter
commented that "even with the slow turn in the economy we have seen the
improvement in our revenue mix that we expected when we established our new
direction towards the institutional market." HyperFeed also indicated that the
competitive landscape was "improving ... with the merger of Bridge into Reuters
last year leading to increased customer requests for other independent data feed
relationships."
SEGMENT RESULTS
For the first quarter of 2002, Long Term Holdings segment revenues were
$937,000, which includes investment income of $596,000 and SFAS No. 133 income
of $100,000 from pre-tax unrealized appreciation in warrants. Investment income
included $589,000 in revenues related to the loan establishment fee and
underwriting fee from AOG. The AOG options described in preceding paragraphs
contributed $201,000 to SFAS No. 133 income, which was partially offset by a
$101,000 reduction in the estimated fair value of warrants we own to buy shares
in companies other than AOG (primarily HyperFeed). After segment expenses of
$1.9 million, and our $398,000 equity share of the net losses of companies
accounted for under the equity method, the segment reported a pre-tax loss of
$1.3 million. The principal expenses recorded in this segment are PICO's
corporate overhead.
In the first quarter of 2001, Long Term Holdings segment revenues were
$343,000, which included investment income of $288,000 and SFAS No. 133 income
of $90,000. After segment expenses of $2.7 million and equity income of
$144,000, the segment incurred a loss of $2.2 million.
The $835,000 year over year reduction in expenses is primarily due to a
$630,000 decrease in a non-cash expense related to foreign currency. Most of our
investments in Swiss public companies are held by Global Equity SA, a wholly
owned subsidiary which is incorporated in Switzerland. Part of Global Equity
SA's funding comes from a loan from PICO, which is denominated in Swiss Francs.
During accounting periods when the Swiss Franc depreciates relative to the US
dollar, under GAAP we are required to record an expense through the statement of
operations to reflect the fact that Global Equity SA owes PICO fewer US dollars.
In Global Equity SA's financial statements, an equivalent credit is included in
the foreign currency translation component of shareholders' equity (since it
owes PICO fewer dollars); however, this does not go through the statement of
operations. Accordingly, we recorded expenses in our statement of operations of
$188,000 in the first quarter of 2002 and $818,000 in the first quarter of 2001,
although there was no net impact on shareholders' equity.
Our equity share of the net income or loss of companies accounted for under
the equity method decreased by $542,000 year over year. This was primarily due
to the decrease in HyperFeed's financial results year over year, and the fact
that Jungfraubahn was accounted for under the equity method in the first quarter
of 2001 but not in 2002.
LIQUIDITY AND CAPITAL RESOURCES -- THREE MONTHS ENDED MARCH 31, 2002 AND 2001
PICO Holdings, Inc. is a diversified holding company. Our assets primarily
consist of investments in our operating subsidiaries, investments in other
public companies, marketable securities, and cash and cash equivalents. On a
consolidated basis, the Company had $7.1 million in cash and cash equivalents at
March 31, 2002, compared to $17.4 million at December 31, 2001, and $16.9
million at March 31, 2001.
Our cash flow position fluctuates depending on the requirements of our
operating subsidiaries for capital, and activity in our investment portfolios.
Our primary sources of funds include cash balances, cash flow from operations,
the sale of investments, and -- potentially -- the proceeds of borrowings or
offerings of equity and debt. We endeavor to ensure that funds are always
available to take advantage of new investment opportunities.
18
In broad terms, the cash flow profile of our principal operating
subsidiaries is:
- - During the company's investment and development phase, Vidler Water
Company, Inc. utilized cash to purchase properties with significant water
rights, to construct improvements at the Vidler Arizona Recharge Facility,
to maintain and develop existing assets, to pursue applications for water
rights, and to meet financing and operating expenses. During this period,
other group companies provided financing to meet Vidler's on-going expenses
and to fund capital expenditure and the purchase of additional
water-righted properties.
Vidler's water-related assets began to generate significant cash flow in
the first quarter of 2001. As commercial use of these assets increases, we
expect that Vidler will start to generate free cash flow as receipts from
leasing water or storage, and the proceeds from selling land and water
rights, begin to overtake maintenance capital expenditure, financing costs,
and operating expenses. As water lease and storage contracts are signed, we
anticipate that Vidler may be able to monetize some of the contractual
revenue streams, which could potentially provide another source of funds;
- - Nevada Land & Resource Company, LLC is actively selling land which has
reached its highest and best use, and is not part of PICO's long-term
utilization plan for the property. Nevada Land's principal sources of cash
flow are the proceeds of cash sales, and collections of principal and
interest on sales contracts where Nevada Land has provided vendor
financing. Since these receipts and other revenues exceed Nevada Land's
operating costs, Nevada Land is generating strong positive cash flow which
provides funds to finance other group activities;
- - During 2002, we expect that Sequoia Insurance Company will generate
positive cash flow from increased written premium volume, due to growth in
the commercial insurance book of business. Shortly after a policy is
written, the premium is collected and the funds can be invested for a
period of time before they are required to pay claims. Free cash flow
generated by Sequoia is being deployed in the company's investment
portfolio;
- - Citation Insurance Company has ceased writing business and is "running off"
its existing claims reserves. Investment income more than covers Citation's
operating expenses. Most of the funds required to pay claims are coming
from the maturity of fixed-income securities in the company's investment
portfolio and recoveries from reinsurance companies; and
- - As the "run off" progresses, Physicians Insurance Company of Ohio is
obtaining funds to pay operating expenses and claims from the maturity of
fixed-income securities, the realization of investments, and recoveries
from reinsurance companies.
The Departments of Insurance in Ohio and California prescribe minimum
levels of capital and surplus for insurance companies, and set guidelines for
insurance company investments. PICO's insurance subsidiaries structure the
maturity of fixed-income securities to match the projected pattern of claims
payments; however, it is possible that fixed-income and equity securities may
occasionally need to be sold at unfavorable times when the bond market and/or
the stock market are depressed.
As shown in the Consolidated Statements of Cash Flow, there was a $10.3
million net decrease in cash and cash equivalents in the first quarter of 2002,
compared to a $3.2 million net increase in 2001.
During the first quarter of 2002, $3.2 million of cash was used in
Operating Activities. The principal uses of cash included operating expenses at
Vidler, the payment of claims by Citation and Physicians, and group overhead.
Operating Activities generated cash of $3.6 million in the 2001 quarter,
primarily due to net cash receipts of $9.1 million from land and water rights
sold by Nevada Land and Vidler. The principal uses of cash were the payment of
operating expenses at Vidler, claims payments by the "run off" insurance
companies, and group overhead.
Investing Activities used $6.6 million of cash in the first quarter of
2002, primarily due to the net investment of $3.8 million in fixed-income
securities and the net investment of $2.2 million in stocks, principally AOG. In
the first quarter of 2001, Investing Activities generated $979,000 of cash.
Financing Activities used $739,000 of cash in the first quarter of 2002.
This primarily reflected the $718,000 repayment of non-recourse borrowings
collateralized by the Harquahala Valley farm properties which Vidler sold to the
developers near Scottsdale. Financing Activities used $2.5 million of cash in
the first quarter of 2001, as Vidler paid off non-recourse borrowings
collateralized by the farm properties which it sold to Allegheny.
19
At March 31, 2002, PICO had no significant commitments for future capital
expenditures.
PICO is committed to maintaining Sequoia's capital and statutory surplus at
a minimum of $7.5 million. At March 31, 2002, Sequoia had approximately $30.8
million in capital and statutory surplus. PICO also aims to maintain Sequoia's
A.M. Best rating at or above its present "A-" (Excellent) level. At some time in
the future, this may require the injection of additional capital.
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, 2002, the
Company had $103.6 million of fixed maturity securities and mortgage
participation interests, $61.8 million of marketable equity securities that were
subject to market risk, and $41.5 million of investments denominated in foreign
currencies, primarily Swiss francs and Australian dollars. The Company's
investment strategy is to manage the duration of the portfolio relative to the
duration of the liabilities.
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 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 $3.4 million 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 $11.8 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 $6.8 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
20
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 8, 2002 By: /s/ Maxim C. W. Webb
--------------------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
21
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
Technologies, Inc.
#2.5 Purchase and Sale Agreement by, between and among Nevada Land &
Resource Company, LLC, Global Equity, 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.
++10.57 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, Guinness Peat Group plc and Global Equity.
++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.
++++10.63 Amendment No. 1 to Agreement for Purchase and Sale of Certain Assets,
dated July 30, 1996 between Physicians, PRO and Mutual Assurance,
Inc.
*10.8 Flexible Benefit Plan.
##18. Letter from Deloitte and Touche LLP regarding change in accounting
principle.
#21. Subsidiaries of PICO.
###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.
# Incorporated by reference to exhibit of same number
filed with Form 10-K/A dated April 30, 1997.
22
## Incorporated by reference to exhibit of same number filed
with Form 10-K dated March 29, 2001.
### 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).
23