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 September 30, 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 12,381,878 as of September 30, 2002, excluding 4,420,045 shares of
common stock held by the registrant and its subsidiaries.
PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of 3
September 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Operations for the 4
Three and Nine Months Ended September 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows for the 5
Nine Months Ended September 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 9
Condition and the Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 23
Item 4: Controls and Procedures 23
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 24
Item 2: Changes in Securities and Use of Proceeds 24
Item 3: Defaults Upon Senior Securities 24
Item 4: Submission of Matters to a Vote of Security Holders 24
Item 5: Other Information 24
Item 6: Exhibits and Reports on Form 8-K 24
Signature 25
2
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2002 2001
------------------- -------------------
ASSETS
Investments $178,940,808 $157,843,376
Cash and cash equivalents 9,696,706 17,361,624
Premiums and other receivables, net 15,838,999 18,076,561
Reinsurance receivables 26,113,230 23,783,106
Deferred policy acquisition costs 7,746,278 6,913,589
Land and related mineral rights and water rights, net 120,341,864 125,997,642
Property and equipment, net 3,048,746 2,727,931
Net deferred income taxes 6,937,065 7,299,015
Goodwill and intangibles, net 2,643,841 3,487,414
Other assets 10,616,391 9,644,256
------------------- -------------------
Total assets $381,923,928 $373,134,514
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $95,659,878 $98,449,053
Unearned premiums 31,803,008 28,143,296
Reinsurance balance payable 3,921,192 5,458,720
Bank and other borrowings 14,222,176 14,596,302
Excess of fair value of net assets acquired over purchase price 2,792,597
Other liabilities 16,790,261 13,992,803
------------------- -------------------
Total liabilities 162,396,515 163,432,771
------------------- -------------------
Minority interest 3,183,965 3,062,190
------------------- -------------------
Commitments and Contingencies (Note 4)
Common stock, $.001 par value; authorized 100,000,000 shares,
16,801,923 issued in 2002 and 16,784,223 issued in 2001 16,802 16,784
Additional paid-in capital 236,082,703 235,844,655
Retained earnings 69,533,343 64,666,746
Accumulated other comprehensive loss (11,093,831) (15,759,997)
Treasury stock, at cost (common shares: 4,420,045 in 2002 and 4,415,607 in 2001) (78,195,569) (78,128,635)
------------------- -------------------
Total shareholders' equity 216,343,448 206,639,553
------------------- -------------------
Total liabilities and shareholders' equity $381,923,928 $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 September 30, Nine Months Ended September 30,
2002 2001 2002 2001
--------------- ------------- ------------ --------------
Revenues:
Premium income $ 11,812,489 $ 10,664,561 $ 33,663,711 $ 31,239,174
Net investment income 2,291,049 2,451,414 7,310,447 7,733,542
Net realized gain (loss) on investments 5,070,607 (2,924,038) 6,047,390 (5,208,278)
Sale of land and water rights 872,113 4,486,094 9,788,550 15,635,891
Other 1,503,229 1,071,194 3,870,408 3,170,122
------------ ------------ ------------ ------------
Total revenues 21,549,487 15,749,225 60,680,506 52,570,451
------------ ------------ ------------ ------------
Costs and Expenses:
Loss and loss adjustment expenses 8,172,065 6,773,583 23,297,764 22,477,305
Insurance underwriting and other expenses 8,459,706 6,110,690 24,197,991 26,278,644
Cost of land and water rights sold 521,149 163,995 6,072,624 7,315,173
------------ ------------ ------------ ------------
Total costs and expenses 17,152,920 13,048,268 53,568,379 56,071,122
------------ ------------ ------------ ------------
Equity in loss of unconsolidated affiliates (570,008) (1,176,837) (1,500,404) (1,020,782)
------------ ------------ ------------ ------------
Income (loss) before income taxes, minority
interest and accounting change 3,826,559 1,524,120 5,611,723 (4,521,453)
Provision (benefit) for income taxes 2,240,165 186,485 2,908,992 (1,857,369)
------------ ------------ ------------ ------------
Income (loss) before minority interest
and accounting change 1,586,394 1,337,635 2,702,731 (2,664,084)
Minority interest in loss of subsidiaries 141,899 26,699 378,227 284,691
------------ ------------ ------------ ------------
Income (loss) before accounting change 1,728,293 1,364,334 3,080,958 (2,379,393)
Cumulative effect of change in accounting principle, net 1,785,639 (980,571)
------------ ------------ ------------ ------------
Net income (loss) $ 1,728,293 $ 1,364,334 $ 4,866,597 $ (3,359,964)
============ ============ ============ ============
Net income (loss) per common share - basic:
Income (loss) before accounting change $ 0.14 $ 0.11 $ 0.25 $ (0.19)
Cumulative effect of change in accounting principle 0.14 (0.08)
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.14 $ 0.11 $ 0.39 $ (0.27)
------------ ------------ ------------ ------------
Weighted average shares outstanding 12,381,878 12,390,096 12,374,235 12,390,096
============ ============ ============ ============
Net income (loss) per common share - diluted:
Income (loss) before accounting change $ 0.14 $ 0.11 $ 0.25 $ (0.19)
Cumulative effect of change in accounting principle 0.14 (0.08)
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.14 $ 0.11 $ 0.39 $ (0.27)
------------ ------------ ------------ ------------
Weighted average shares outstanding 12,381,878 12,408,408 12,395,737 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)
Nine Months Ended September 30,
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net cash provided by operating activities $ 4,244,193 $ 1,096,740
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (92,263,593) (76,281,671)
Proceeds from sale of investments 58,052,197 60,300,507
Proceeds from maturity of investments 25,924,307 9,285,000
Proceeds from the sale of Semitropic 7,586,014
Purchases of property and equipment (497,776) (678,498)
Other investing activities, net (375,574) 244,110
------------ ------------
Net cash provided by (used in) investing activities (9,160,439) 455,462
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (3,973,098) (2,479,464)
Purchase of treasury stock for deferred compensation plans (66,934)
Proceeds from exercise of stock options 238,066
Cash paid to minority partners of Fishsprings Ranch, LLC (500,000)
Proceeds from borrowings 2,604,911 2,163,255
------------ ------------
Net cash used in financing activities (1,197,055) (816,209)
------------ ------------
Effect of exchange rate changes on cash (1,551,617) (117,833)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,664,918) 618,160
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,361,624 13,644,312
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,696,706 $ 14,262,472
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 636,798 $ 639,837
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of PICO Holdings, Inc. and Subsidiaries (the "Company"or "PICO") have been
prepared in accordance with the interim reporting requirements of Form
10-Q, pursuant to the rules and regulations of the United States Securities
and Exchange Commission (the "SEC"). Accordingly, they do not include all
of the information and notes required by accounting principles generally
accepted in the United States of America ("US GAAP") for complete financial
statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of financial
position as of September 30, 2002 and December 31, 2001, the results of
operations for the three and nine months ended September 30, 2002 and 2001,
and cash flows for the nine months ended September 30, 2002 and 2001, have
been included and are only of a normal recurring nature. Operating results
for the three and nine months ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2002.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and the Results
of Operations and Risk Factors contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 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 September 30,
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, which
are options only for the Company, are ignored. The following reconciles
basic and diluted shares outstanding for the periods presented.
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net income (loss) $ 1,728,293 $ 1,364,334 $ 4,866,597 $ (3,359,964)
============ ============ ============ ============
Basic earnings (loss) per share $ 0.14 $ 0.11 $ 0.39 $ (0.27)
============ ============ ============ ============
Basic weighted average
common shares outstanding 12,381,878 12,390,096 12,374,235 12,390,096
Options 18,312 21,502
------------ ------------ ------------ ------------
Diluted weighted average
common shares outstanding 12,381,878 12,408,408 12,395,737 12,390,096
Diluted earnings (loss) per share $ 0.14 $ 0.11 $ 0.39 $ (0.27)
============ ============ ============ ============
Anti-Dilutive Options 1,772,420 832,000 1,261,048 1,628,656
============ ============ ============ ============
6
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 September 30, Nine Months Ended September 30,
2002 2001 2002 2001
---------------- ----------------- --------------- ---------------
Net income (loss) $ 1,728,293 $ 1,364,334 $4,866,597 $ (3,359,964)
Net change in unrealized depreciation
on available for sale investments (3,113,304) (1,532,359) 2,188,955 (3,936,853)
Net change in foreign currency translation 235,407 514,364 2,477,211 577,486
---------------- ----------------- --------------- ---------------
Total comprehensive income (loss) $ (1,149,604) $ 346,339 $9,532,763 $ (6,719,331)
================ ================= =============== ===============
Total comprehensive income (loss) for the three months ended September
30, 2002 is net of deferred income tax benefit of $2.5 million and for the
nine months comprehensive income is net of a deferred income tax expense of
$312,000. For the three and nine months ended September 30, 2001, total
comprehensive income (loss) is net of a deferred income tax benefit of $1.9
million and $2.8 million, respectively.
The components of accumulated comprehensive loss are as follows:
September 30, December 31,
2002 2001
------------ ------------
Unrealized depreciation
on available for sale investments $ (8,444,244) $(10,633,199)
Foreign currency translation (2,649,587) (5,126,798)
------------ ------------
Accumulated other comprehensive loss $(11,093,831) $(15,759,997)
============ ============
Accumulated other comprehensive loss is net of deferred income tax
asset of $347,000 at September 30, 2002, and a deferred income tax asset of
$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.
In 2000, PICO Holdings loaned a total of $2.2 million to Dominion
Capital Pty. Ltd. ("Dominion Capital"), a private Australian company. In
2001, $1.2 million of the loans became overdue. Negotiations between PICO
and Dominion Capital to reach a settlement agreement on both the overdue
loan of $1.2 million and the other loan of $1 million proved unsuccessful.
Accordingly, PICO has commenced a legal action through the Australian
courts against Dominion Capital to recover the total amount due to PICO
Holdings. Due to the inherent uncertainty involved in pursuing legal
action, and our ability to realize the assets collateralizing the loans,
PICO has 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 principle and interest on the $1.2 million loan and, as
a result, Dominion Capital has been placed in receivership. The court
appointed receiver is in the process of ascertaining Dominion Capital's
assets and liabilities. Discovery proceedings are under way in PICO's
lawsuit concerning the $1 million loan (with interest).
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 such litigation will not have
a material adverse effect on the consolidated financial position, results
of operations or cash flows of the Company.
5. CUMULATIVE 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
consolidated financial statements 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 positive goodwill of $1
million. The remaining balance of $2.4 million at January 1, 2002 was
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.
In August 2001, the FASB 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 for the three and nine months
ended September 30, 2002, primarily include the fluctuation in the value of
the warrants and options to purchase shares of HyperFeed Technologies, Inc.
and Australian Oil & Gas Corporation Limited, respectively. The value of
the HyperFeed 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 ranging between 4.2% to 1.0%; an expected life of one year;
and a historical 5 year cumulative volatility that has ranged from 104% to
128%. Future effects are dependent on market conditions. The value of the
publicly traded Australian Oil & Gas Corporation Limited options are valued
using a market quote and included in the statement of operations using SFAS
133 until they were sold in July, 2002.
6. SUBSEQUENT EVENT
On October 21, 2002, PICO signed a definitive agreement to sell Sequoia
Insurance Company. It is anticipated that the sale will close in the first
quarter of 2003. The sale is conditional on the approval of the California
Department of Insurance and other customary closing conditions. The final
sale price will be determined after the closing, with a base price of $40
million, which is subject to adjustment based on movement in either GAAP
shareholders' equity or statutory surplus between June 30, 2002 and the
date of closing. Sequoia's results are reported in the Property & Casualty
Insurance segment. At September 30, 2002, Sequoia had total assets of $119
million, including $73.8 million of investments and $18.3 million of
reinsurance receivables, and total liabilities of $80.6 million, including
$41.6 million of unpaid losses and loss adjustment expenses and $31.8
million in unearned premiums. At September 30, 2002, the net carrying value
of Sequoia was approximately $38.4 million.
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
THE SECURITIES LAWS. THESE INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS ABOUT THE
COMPANY'S PHILOSOPHY, PLANS FOR EXPANSION, BUSINESS EXPECTATIONS, AND REGULATORY
FACTORS. THESE STATEMENTS REFLECT OUR CURRENT VIEWS ABOUT FUTURE EVENTS WHICH
COULD AFFECT OUR FINANCIAL PERFORMANCE. WE DO NOT UNDERTAKE ANY OBLIGATION TO
UPDATE ANY "FORWARD-LOOKING STATEMENTS." 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
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001, WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH "FORWARD-LOOKING
STATEMENTS," OR FROM OUR PAST RESULTS.
RESULTS OF OPERATIONS -- THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
INTRODUCTION
PICO Holdings, Inc. is a diversified holding company. We acquire businesses
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.
Currently our major businesses 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 approximately 1.2
million acres of land in Nevada;
- - property and casualty insurance through Sequoia Insurance Company;
- - "running off" the property and casualty loss reserves of Citation Insurance
Company, and the medical professional liability insurance loss reserves of
Physicians Insurance Company of Ohio; and
- - a number of long term holdings in other public companies.
SUMMARY
THIRD QUARTER
PICO reported net income of $1.7 million, or $0.14 per basic and diluted
share, for the quarter ended September 30, 2002, compared to net income of $1.4
million, or $0.11 per diluted share, in the third quarter of 2001.
For the third quarter of 2002, income before taxes, minority interest, and
accounting changes was $3.8 million. After a provision for income taxes of $2.2
million and the addition of $142,000 in minority interest, net income was $1.7
million. The effective tax rate was approximately 59%, due to tax benefits on
foreign losses being recorded at the Swiss statutory rate of 12.6% rather than
the U.S. statutory rate of 34%.
During the quarter, shareholders' equity decreased by $1 million to $216.3
million at September 30, 2002, primarily due to net unrealized depreciation in
the value of long term holdings. Book value per share at September 30, 2002 was
$17.47. The comprehensive loss for the quarter was $1.1 million. See Note 3 of
Notes to Consolidated Financial Statements, "Comprehensive Income (Loss)."
In the third quarter of 2001, PICO generated income of $1.5 million before
taxes, minority interest, and accounting changes. After a tax provision of
$187,000 and the addition of $27,000 in minority interest, net income was $1.4
million. Comprehensive income for the third quarter of 2001 was $346,000.
NINE MONTHS
PICO reported net income of $4.9 million, or $0.39 per basic and diluted
share, for the nine months ended September 30, 2002. This consisted of $3.1
million in income before an accounting change, or $0.25 per share, and an
accounting change which increased income by $1.8 million, or $0.14 per share.
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 of Physicians Insurance Company of Ohio and
Citation Insurance
9
Group (now known as PICO Holdings, Inc.) over the write-off of positive goodwill
items, which were determined to be impaired. See Note 5 of Notes to Consolidated
Financial Statements, "Cumulative Changes in Accounting Principle," and the
Property & Casualty Insurance segment.
Income before taxes, minority interest and accounting changes for the first
nine months of 2002 was $5.6 million. After a provision for income taxes of $2.9
million and the addition of $378,000 in minority interest, income before the
accounting change was $3.1 million. During the nine months, shareholders' equity
increased by $9.7 million. Comprehensive income was $9.5 million.
PICO reported a net loss of $3.4 million, or $0.27 per basic and diluted
share, for the nine months ended September 30, 2001. This consisted of a $2.4
million loss before an accounting change, or $0.19 per share, and an accounting
change which reduced income by $981,000, or $0.08 per share. The accounting
change related to the adoption of Statement of Financial Accounting Standards
No. 133, "Accounting For Derivative Instruments and Hedging Activities" from
January 1, 2001.
The $4.5 million loss before income taxes, minority interest and accounting
changes for the first nine months of 2001 was partially offset by $1.9 million
in income tax benefits, and the addition of $285,000 in minority interest. The
comprehensive loss for the first nine months of 2001 was $6.7 million.
Segment revenues and income (loss) before taxes, minority interest and
accounting changes for the third quarter and the first nine months of 2002 and
2001 were:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Water Rights & Water Storage Assets $ 935,000 $ 4,757,000 $ 10,074,000 $ 16,511,000
Land and Related Mineral Rights & Water Rights 714,000 737,000 1,908,000 1,711,000
Property & Casualty Insurance 14,022,000 12,732,000 39,206,000 37,577,000
Medical Professional Liability Insurance 161,000 301,000 559,000 (3,117,000)
Long Term Holdings 5,717,000 (2,778,000) 8,933,000 (112,000)
------------ ------------ ------------ ------------
$ 21,549,000 $ 15,749,000 $ 60,680,000 $ 52,570,000
============ ============ ============ ============
INCOME (LOSS) BEFORE TAXES, MINORITY
INTEREST & CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES:
Water Rights & Water Storage Assets $ (826,000) $ 3,517,000 $ (90,000) $ 4,716,000
Land and Related Mineral Rights & Water Rights 134,000 231,000 (644,000) 322,000
Property & Casualty Insurance 1,624,000 2,098,000 3,596,000 3,125,000
Medical Professional Liability Insurance 33,000 159,000 121,000 (3,610,000)
Long Term Holdings 2,862,000 (4,481,000) 2,629,000 (9,074,000)
------------ ------------ ------------ ------------
$ 3,827,000 $ 1,524,000 $ 5,612,000 $ (4,521,000)
============ ============ ============ ============
Detailed information on the performance and outlook for each segment is
contained later in this report; however, the major factors affecting PICO's
third quarter and nine month results were:
WATER RIGHTS & WATER STORAGE ASSETS
Vidler's results for the first nine months of 2002 were dominated by three
significant transactions -- two sales of ground water and related land in the
Harquahala Valley Irrigation District, and a sale of water rights in Colorado.
These transactions added $8.4 million in revenues and $2.6 million in gross
margin, and represented most of the segment's revenues and gross margin.
In the third quarter of 2001, a $4.1 million gain from the sale of part of
our interest in the Semitropic water storage facility was the principal
contributor to Vidler's revenues and segment income.
During the first nine months of 2001, Vidler completed a sale of land and
ground water in the Harquahala Valley Irrigation District, and two sales of
interests in the Semitropic water storage facility. These transactions added
$15.1 million to revenues and $8 million to income, and were the principal
contributors to segment revenues and income.
LAND AND RELATED WATER RIGHTS & MINERAL RIGHTS
Nevada Land reported a loss of $644,000 for the first nine months of 2002.
Segment expenses were unusually high in the first six months of this year due to
legal and related costs, and a one-time write-off of previously capitalized
costs.
10
PROPERTY & CASUALTY INSURANCE
Segment income increased $471,000 year over year for the nine months, but
decreased $474,000 year over year in the third quarter. Sequoia's results for
both periods in 2002 benefited from increased average premiums per commercial
policy. In the first nine months of 2002, Sequoia's claims experience was more
favorable than in the first nine months of 2001; however, the Company's claims
experience was less favorable in the third quarter of 2002 than in the third
quarter of 2001. The contribution from the Citation "run off" declined in both
periods.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
In the first nine months of 2002, revenues from the Physicians "run off"
were $559,000 and segment income was $121,000.
Segment results for the first nine months of 2001 were dominated by a $4.1
million realized loss on the sale of a mutual fund investment. Excluding the
realized loss, the segment would have generated revenues of $941,000 and income
of $448,000 for the first nine months of 2001.
LONG TERM HOLDINGS
In the third quarter of 2002, segment income was $2.9 million, compared to
a $4.5 million segment loss in the third quarter of 2001. In the third quarter
of 2002, segment income was increased by $3.9 million in net realized gains on
the sale of investments, while segment income in the third quarter of 2001 was
reduced by a $3.2 million SFAS No. 133 loss.
The segment generated income of $2.6 million in the first nine months of
2002, compared to a segment loss of $9.1 million in the first nine months of
2001. In the first nine months of 2002, segment income included $4 million in
net realized gains on the sale of investments. In the first nine months of 2001,
segment income was reduced by a $1.5 million SFAS No. 133 loss, $2.3 million in
provisions against two loans, and a $500,000 investment loss.
11
WATER RIGHTS AND WATER STORAGE ASSETS
VIDLER WATER COMPANY, INC.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------ ----------- ------------ ------------
REVENUES:
Sale of Land and Water Rights $ 500,000 $ 8,873,000 $ 9,095,000
Option Premiums Earned 300,000
Gain on sale of Semitropic Water Storage interest $ 4,086,000 5,701,000
Lease of Water 55,000 110,000 207,000 195,000
Agricultural Land Leases 168,000 201,000 521,000 606,000
Other 212,000 360,000 473,000 614,000
------------ ----------- ------------ ------------
Segment Total Revenues $ 935,000 $ 4,757,000 $ 10,074,000 $ 16,511,000
============ =========== ============ ============
EXPENSES:
Cost of Land and Water Rights Sold $ (400,000) $ (5,710,000) $ (6,524,000)
Commission and other cost of sales (17,000) (515,000) (546,000)
Depreciation and Amortization (238,000) $ (327,000) (715,000) (1,049,000)
Interest (121,000) (157,000) (379,000) (504,000)
Operations, Maintenance & Other (985,000) (756,000) (2,845,000) (3,172,000)
------------ ----------- ------------ ------------
Segment Total Expenses $(1,761,000) $(1,240,000) $(10,164,000) $(11,795,000)
------------ ----------- ------------ ------------
INCOME (LOSS) BEFORE TAX $ (826,000) $ 3,517,000 $ (90,000) $ 4,716,000
============ =========== ============ ============
Vidler's revenues and gross margin fluctuate from quarter to quarter
depending on the closing of specific transactions, so revenues and gross margin
for any individual quarter are not necessarily indicative of likely full-year
results.
During the third quarter of 2002, Vidler closed on the previously disclosed
agreement to sell 7 acres of unimproved land near West Wendover, Nevada (see
later in this section). This transaction added $500,000 to revenues and $83,000
to gross margin. Other revenues were $435,000, other segment expenses were $1.3
million, and Vidler incurred a pre-tax loss of $826,000 for the third quarter of
2002.
Vidler's results for the first nine months of 2002 were dominated by three
significant transactions:
- - in March, Vidler closed on the sale of 3,645 acre-feet of water rights and
the related 1,215 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 was recorded in the first quarter, and added
$5.2 million to revenues and $1.9 million to gross margin in the first nine
months of 2002;
- - also in March, Vidler closed on the previously announced sale of its
interest in Cline Ranch to Centennial Water and Sanitation District, which
added $2.1 million to revenues and $120,000 to gross margin in the first
nine months of 2002; and
- - in May, Vidler closed on the sale of 480 acre-feet of water rights and the
related 240 acres of land in the HVID to an industrial user within the
Valley. The transaction was recorded in the second quarter, and added $1
million to revenues and $556,000 to gross margin in the first nine months
of 2002.
Combined, these three transactions contributed $8.4 million to revenues and $2.6
million to gross margin. Other revenues were $1.7 million, other segment
expenses were $4.4 million, and Vidler generated a $90,000 pre-tax loss for the
first nine months of 2002.
In the third quarter of 2001, Vidler sold part of its interest in the
Semitropic water storage facility which added $4.1 million to segment revenues
and $4.1 million to income. Other revenues were $671,000, other expenses were
$1.2 million, and Vidler generated a pre-tax profit of $3.5 million in the third
quarter of 2001.
Vidler's results for the first nine months of 2001 were also dominated by
three significant transactions:
- - in March 2001, Vidler closed on the sale of 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. The sale contributed total
revenues of $9.4 million and gross margin of $2.3 million in the first nine
months of 2001;
- - in May 2001, Vidler closed on the sale of 29.7% of its original interest
(i.e., approximately 55,000 acre-feet of water storage capacity) in the
Semitropic water storage facility to The Newhall Land and Farming Company.
The sale added $1.6 million to revenues and $1.6 million to gross margin in
the first nine months of 2001; and
12
- - in the transaction referenced in the preceding paragraph, in September
2001, Vidler closed on the sale of another 54.1% of its original interest
(i.e., approximately 100,000 acre-feet of water storage capacity) in the
Semitropic water storage facility to the Alameda County Water District. The
transaction was recorded in the third quarter of 2001, and added $4.1
million to revenues and $4.1 million to income in the first nine months of
2001.
Combined, these three transactions contributed $15.1 million to revenues and $8
million to income. Other revenues were $1.4 million, other segment expenses were
$4.7 million, and Vidler generated $4.7 million in income before taxes for the
first nine months of 2001.
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 nine months:
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 appropriate
time. At September 30, 2002, Vidler had recharged more than 13,000 acre-feet of
water at the facility.
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.
Vidler owns, or has the right to acquire, approximately 49,550 acre-feet of
transferable Harquahala Valley ground water. Vidler is working on further sales
of transferable Harquahala Valley ground water to both industrial users and to
communities and developers.
SANDY VALLEY, NEVADA
Vidler has received a permit for 415 acre-feet of water out of the
approximately 2,000 acre-feet of water rights applied for near Sandy Valley,
Nevada. Vidler anticipates being able to put this water to beneficial use to
support additional growth at Primm, Nevada, a resort town on the border between
California and Nevada, in the Interstate 15 corridor. Vidler has filed an appeal
regarding the balance of the water applied for.
WEST WENDOVER, NEVADA
As the result of a land exchange in 1999, Vidler acquired several parcels
of developable land near West Wendover, Nevada, totaling approximately 6,300
acres. West Wendover is adjacent to the Nevada/Utah border in the Interstate 80
corridor. West Wendover is approximately 120 miles from Salt Lake City, Utah,
and attracts a significant number of drive-in visitors from Utah, a state where
gaming is prohibited.
Vidler attained direct management of this land in 2001. The first parcel to
be developed is approximately 82 acres of industrial land. Vidler sold 7 acres
of unimproved land for $500,000 to a user who is responsible for installing
offsite utilities and access road improvements for an industrial park. We
anticipate that these improvements will allow Vidler to sell the remaining 75
acres as higher-value industrial land.
Vidler is examining alternatives for the remaining parcels, including
industrial, commercial, hotel/casino, and residential development.
13
LAND AND RELATED MINERAL RIGHTS AND WATER RIGHTS
NEVADA LAND & RESOURCE COMPANY, LLC
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES:
Sale of Land $ 372,000 $ 401,000 $ 915,000 $ 840,000
Lease and Royalty 203,000 230,000 571,000 510,000
Interest and Other 139,000 106,000 422,000 361,000
--------- --------- ----------- -----------
Segment Total Revenues $ 714,000 $ 737,000 $ 1,908,000 $ 1,711,000
========= ========= =========== ===========
EXPENSES:
Cost of Land Sales $(121,000) $(164,000) $ (362,000) $ (349,000)
Operating Expenses (459,000) (342,000) (2,190,000) (1,040,000)
--------- --------- ----------- -----------
Segment Total Expenses $(580,000) $(506,000) $(2,552,000) $(1,389,000)
========= ========= =========== ===========
INCOME (LOSS) BEFORE TAX $ 134,000 $ 231,000 $ (644,000) $ 322,000
========= ========= =========== ===========
Nevada Land does not recognize land sales contracts as revenues until the
sales transactions close. Consequently, revenues and the gross margin from land
sales fluctuate from quarter to quarter depending on the closing of specific
transactions, and land sales revenues and gross margin for any individual
quarter are not necessarily indicative of likely full-year results.
In the third quarter of 2002, Nevada Land sold approximately 1,577 acres of
land for $372,000. The average sales price was $236 per acre, and our average
basis in the land sold was $77 per acre. The gross margin on land sales was
$251,000, or $159 per acre, a gross margin percentage of 67.4%. Lease and
royalty revenues were $203,000, and interest and other revenues contributed
$139,000. Following operating expenses of $459,000, the segment reported income
of $134,000.
In the third quarter of 2001, Nevada Land sold approximately 5,200 acres of
land for $401,000. The average sales price was $77 per acre, and our average
basis in the land sold was $32 per acre. The gross margin on land sales was
$237,000, or $45 per acre, a gross margin percentage of 59.1%. Lease and royalty
revenues were $230,000, and interest and other revenues were $106,000. Following
operating expenses of $342,000, segment income was $231,000.
The $97,000 year over year decrease in the third quarter segment result is
primarily attributable to a $117,000 increase in operating expenses year over
year.
During the first nine months of 2002, Nevada Land sold approximately 7,779
acres of land for $915,000. The average sales price was $118 per acre, and our
average basis in the land sold was $47 per acre. The gross margin on land sales
was $553,000, or $71 per acre, a gross margin percentage of 60.4%. Lease and
royalty revenues were $571,000, and interest and other revenues contributed
$422,000. Following operating expenses of $2.2 million, the segment loss was
$644,000.
During the first nine months of 2001, Nevada Land sold approximately 9,643
acres of land for $840,000. The average sales price was $87 per acre, and our
average basis in the land sold was $36 per acre. The gross margin on land sales
was $491,000, or $51 per acre, a gross margin percentage of 58.5%. Lease and
royalty revenues were $510,000, and interest and other revenues were $361,000.
Following operating expenses of $1 million, segment income was $322,000.
For the nine months, the segment result decreased by $966,000, primarily
due to an increase of $1.1 million in operating expenses. Operating expenses in
the first half of this year were unusually high due to approximately $613,000 in
legal and related expenses, and a one-time write-off of $261,000 in previously
capitalized costs.
Nevada Land is pursuing a variety of strategies to monetize the company's
assets. These strategies include bulk sales of ranch land, and transactions in
which Nevada Land divests significant acreage of land with environmental,
cultural, or historical value.
14
PROPERTY AND CASUALTY INSURANCE
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Sequoia - Earned Premiums $ 12,237,000 $ 10,623,000 $ 34,088,000 $ 31,020,000
Citation - Earned Premiums (424,000) 41,000 (424,000) 220,000
Investment Income 1,397,000 1,618,000 4,101,000 4,642,000
Realized Investment Gains 792,000 228,000 1,271,000 885,000
Other 20,000 222,000 170,000 810,000
------------ ------------ ------------ ------------
Segment Total Revenues $ 14,022,000 $ 12,732,000 $ 39,206,000 $ 37,577,000
============ ============ ============ ============
EXPENSES:
Loss & Loss Adjustment Expense $ (8,172,000) $ (6,774,000) $(23,297,000) $(22,483,000)
Underwriting Expenses (4,226,000) (3,860,000) (12,313,000) (11,969,000)
------------ ------------ ------------ ------------
Segment Total Expenses $(12,398,000) $(10,634,000) $(35,610,000) $(34,452,000)
INCOME BEFORE TAXES:
Sequoia Insurance Company $ 1,224,000 $ 1,489,000 $ 2,417,000 $ 1,139,000
Citation Insurance Company 400,000 609,000 1,179,000 1,986,000
------------ ------------ ------------ ------------
SEGMENT INCOME BEFORE TAXES $ 1,624,000 $ 2,098,000 $ 3,596,000 $ 3,125,000
============ ============ ============ ============
The Property and Casualty segment is comprised of Sequoia Insurance Company
and Citation Insurance Company.
On October 21, 2002, we announced the signing of a definitive agreement to
sell Sequoia. It is anticipated that the sale will close in the first quarter of
2003. The sale is conditional on the approval of the California Department of
Insurance and other customary closing conditions. The final sale price will be
determined after the closing, with a base price of $40 million, which is subject
to adjustment based on movement in either GAAP shareholders' equity or statutory
surplus between June 30, 2002 and the date of closing.
Sequoia's primary business is commercial property and casualty insurance in
California and Nevada, focusing on the niche markets of small to medium-sized
businesses and farms. Sequoia also writes selected lines of personal insurance.
In the past, Citation wrote commercial property and casualty insurance in
California, Nevada, and Arizona. Citation is in "run off," which means that the
company is handling claims arising from historical business, but not writing any
business. The last of Citation's policies expired in December 2001.
SEQUOIA INSURANCE COMPANY
In the third quarter of 2002, Sequoia generated $18.8 million of direct
written premiums, comprised of $14.8 million in commercial lines of insurance
and $4 million in personal lines. Direct written premiums increased $4.1
million, or 28.4%, year over year. The increase was primarily due to growth of
$3.6 million in commercial lines, resulting from a 20.4% increase in the average
premium per commercial policy year over year, and an increase of approximately
2% in the number of in-force commercial policies.
For the third quarter of 2002, Sequoia generated total revenues of $14
million, including $12.2 million in earned insurance premiums, $990,000 in
investment income, and $792,000 in realized gains on the sale of investments.
Sequoia incurred an operating loss (i.e., loss before investment income,
realized gains, and taxes) of $558,000 for the quarter. The operating loss
included a benefit of approximately $122,000 for favorable development in prior
year loss reserves during the third quarter of 2002.
The investment gains were primarily realized on the sale of bonds. The
fixed-income portfolios of our insurance companies are focused on investment
grade bonds with less than 10 years to maturity, issued by high quality
companies which generate reliable free cash flow. In particular, the bond
portfolios of our insurance companies contain no exposure to the technology,
telecommunications, utilities, energy trading, automotive, consumer finance, and
conglomerate sectors.
In the third quarter of 2001, Sequoia produced total revenues of $11.9
million, including $10.6 million in earned insurance premiums, $976,000 in
investment income, and $228,000 in realized gains. Sequoia generated an
operating profit of $285,000 for the quarter, including a benefit of
approximately $328,000 from favorable development in prior year loss reserves
during the third quarter of 2001.
The third quarter operating result decreased $843,000 year over year. In
2002, current year claims experience was less favorable than in 2001, and the
benefit recorded from favorable development in prior year loss reserves was
$206,000 less than in 2001.
15
In the first nine months of 2002, Sequoia generated $47.5 million of direct
written premiums, comprised of $40.3 million in commercial lines of insurance
and $7.2 million in personal lines. Direct written premiums increased $9.4
million, or 24.5%, year over year, primarily due to growth of $8.1 million in
commercial lines resulting from higher average premiums per commercial policy
and a slight increase in the number of in-force commercial policies.
For the first nine months of 2002, Sequoia generated total revenues of
$38.3 million, including $34.1 million in earned insurance premiums, $2.9
million in investment income, and $1.2 million in realized gains. Sequoia
incurred an operating loss of $1.6 million for the nine-month period, including
an expense of approximately $391,000 for adverse development in prior year loss
reserves.
For the first nine months of 2001, Sequoia generated total revenues of
$35.1 million, including $31 million in earned insurance premiums, $2.8 million
in investment income, and $871,000 in realized gains. Sequoia incurred an
operating loss of $2.5 million for the nine-month period. There was practically
no reserve development over the first nine months of 2001.
The nine-month operating loss decreased $891,000 year over year. This
primarily resulted from the increase in average premium per commercial policy,
slightly more favorable claims experience in 2002 than 2001 over the nine
months, and the leveraging of fixed costs over a larger premium base. These
positive factors were partially offset by a $380,000 higher expense for adverse
development in prior year loss reserves over the nine-month period.
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 third quarter and first nine months of 2002 and
2001 was:
SEQUOIA'S GAAP INDUSTRY RATIOS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2002 2001 2002 2001
------------------ ---------------- -------------------- -----------------
Loss and Loss Adjustment Expense Ratio 70.7% 62.6% 69.8% 71.6%
Underwriting Expense Ratio 34.0% 35.3% 35.5% 37.7%
------------------ ---------------- -------------------- -----------------
Combined Ratio 104.7% 97.9% 105.3% 109.3%
================== ================ ==================== =================
CITATION INSURANCE COMPANY
In 2002, the "run off" of Citation's property and casualty insurance loss
reserves has been slightly better than expected. Since Citation is in "run off,"
its combined ratio is not meaningful.
In the third quarter of 2002, Citation recorded income before taxes of
$400,000. This principally consisted of investment income of $407,000 and a
$482,000 benefit from favorable development in Citation's property and casualty
loss reserves, which were partially offset by $424,000 of additional reinsurance
required for the workers' compensation line of business. Reinsurance is recorded
as a reduction in earned premiums and, therefore, revenues. Citation ceased
writing workers' compensation insurance in 1997, after we took over management
of the Company. Citation is not liable for any additional reinsurance premiums
in this line of business.
In the third quarter of 2001, when the Company was still writing a minor
amount of business, revenues were $839,000, expenses were $230,000, and Citation
earned a pre-tax profit of $609,000.
For the first nine months of 2002, Citation recorded income before taxes of
$1.2 million. This principally consisted of investment income of $1.2 million
and a $482,000 benefit from favorable development in Citation's property and
casualty loss reserves, which were partially offset by $425,000 of additional
reinsurance for the discontinued workers compensation line of business.
In the first nine months of 2001, Citation's revenues were $2.5 million,
expenses were $540,000, and Citation earned a pre-tax profit of almost $2
million.
16
In 2001, Citation's revenues and income included a benefit from negative
goodwill amortization of $142,000 in the third quarter, and $426,000 in the
first nine months. When Citation Insurance Group (now known as PICO Holdings,
Inc.) acquired Physicians in the reverse merger in 1996, a $5.7 million negative
goodwill item arose. This was 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 the 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 nine months
of 2002, and did not affect the segment result in 2002. See Note 5 of Notes to
Condensed Consolidated Financial Statements, "Cumulative Changes in Accounting
Principle."
RESERVES
At September 30, 2002, our property and casualty insurance loss reserves
were $38.9 million, net of reinsurance, compared to $39 million at June 30,
2002, and $40.4 million at December 31, 2001.
PROPERTY AND CASUALTY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
SEPTEMBER 30, 2002 JUNE 30, 2002 DECEMBER 31, 2001
------------------------ ---------------------- -----------------------------
SEQUOIA INSURANCE COMPANY:
Direct Reserves $41.6 million $41.0 million $ 36.9 million
Ceded Reserves (18.1) (18.7) (15.7)
------------------------ ---------------------- -----------------------------
Net Reserves $23.5 million $22.3 million $ 21.2 million
======================== ====================== =============================
CITATION INSURANCE COMPANY:
Direct Reserves $17.5 million $19.1 million $ 21.0 million
Ceded Reserves (2.1) (2.4) (1.8)
------------------------ ---------------------- -----------------------------
Net Reserves $15.4 million $16.7 million $ 19.2 million
======================== ====================== =============================
17
MEDICAL PROFESSIONAL LIABILITY INSURANCE
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES:
Net Investment Income $ 157,000 $ 282,000 $ 554,000 $ 941,000
Realized Investment Gain (Loss) 4,000 19,000 5,000 (4,058,000)
========= ========= ========= ===========
Segment Total Revenues $ 161,000 $ 301,000 $ 559,000 $(3,117,000)
========= ========= ========= ===========
EXPENSES:
Underwriting Expenses $(128,000) $(142,000) $(438,000) $ (493,000)
--------- --------- --------- -----------
Segment Total Expenses $(128,000) $(142,000) $(438,000) $ (493,000)
========= ========= ========= ===========
INCOME (LOSS) BEFORE TAXES $ 33,000 $ 159,000 $ 121,000 $(3,610,000)
========= ========= ========= ===========
Physicians Insurance Company of Ohio is now 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 for the claims payments.
In the third quarter of 2002, segment revenues were $161,000, expenses were
$128,000, and segment income was $33,000. For the third quarter of 2001, the
segment generated revenues of $301,000, expenses were $142,000, and segment
income was $159,000.
In the first nine months of 2002, segment revenues were $559,000, expenses
were $438,000, and segment income was $121,000. For the first nine months of
2001, segment revenues were negative $3.1 million, comprised of $941,000 in net
investment income and a realized loss of $4.1 million on the sale of Physicians'
investment in the Rydex URSA mutual fund. Following operating expenses of
$493,000, the segment incurred a pre-tax loss of $3.6 million. Excluding the
realized investment loss, segment income would have been $448,000.
No unusual trends in claims emerged during the quarter.
MEDICAL PROFESSIONAL LIABILITY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
SEPTEMBER 30, 2002 JUNE 30, 2002 DECEMBER 31, 2001
------------------------ ---------------------- -----------------------------
Direct Reserves $36.5 million $38.8 million $40.6 million
Ceded Reserves (5.3) (5.4) (5.7)
------------------------ ---------------------- -----------------------------
Net Medical Professional Liability Reserves $31.2 million $33.4 million $34.9 million
======================== ====================== =============================
18
LONG TERM HOLDINGS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- ------------------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES:
Investment Income $ 599,000 $ 333,000 $ 2,195,000 $ 1,572,000
SFAS No. 133 Change in Warrants 348,000 (3,170,000) 782,000 (1,533,000)
Realized Investment Gain (Loss) 3,926,000 3,989,000 (500,000)
Other 844,000 59,000 1,967,000 349,000
----------- ----------- ----------- -----------
Segment Total Revenues $ 5,717,000 $(2,778,000) $ 8,933,000 $ (112,000)
=========== =========== =========== ===========
SEGMENT TOTAL EXPENSES (2,285,000) (526,000) (4,803,000) (7,941,000)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INVESTEE INCOME (LOSS) $ 3,432,000 $(3,304,000) $ 4,130,000 $(8,053,000)
----------- ----------- ----------- -----------
EQUITY SHARE OF INVESTEES' NET INCOME (LOSS) (570,000) (1,177,000) (1,501,000) (1,021,000)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES $ 2,862,000 $(4,481,000) $ 2,629,000 $(9,074,000)
=========== =========== =========== ===========
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.
AUSTRALIAN OIL & GAS CORPORATION LIMITED
In July 2002, PICO accepted Ensign (Australia) Holdings Pty. Ltd's cash
offer of $A2.70 for the Australian Oil & Gas Corporation Limited common shares
and $A1.50 for the AOG options owned by PICO. The sale proceeds were $21.1
million. Over the life of the investment, PICO recorded a total of $10.1 million
in pre-tax income and realized gains from AOG. The final gain on sale of $8
million (before taxes) was recorded in the fiscal third quarter.
Until one or more new long-term holdings have been identified, the proceeds
from the AOG sale have been repatriated to the U.S. and invested in short-term
fixed-income securities.
Following the AOG sale, our largest long-term holdings are HyperFeed
Technologies, Inc. and Jungfraubahn Holding AG. At September 30, 2002, these two
long-term holdings had a potential market value (before taxes) of approximately
$27.7 million, and a carrying value (before taxes) of $22.9 million. The
tax-effected carrying value was $24.3 million.
The details of our investment in each company at the end of the quarter
were:
SEPTEMBER 30, 2002 CARRYING VALUE ACCOUNTING METHOD SHARE EQUIVALENTS MARKET PRICE
($USD)
CARRYING VALUE BEFORE TAXES:
HyperFeed Technologies, Inc. Common $1,206,000 Equity method 11,026,888 $0.58
Warrants 435,000 Fair value 3,106,163
--------------- -------------------
Total $1,641,000 14,133,051
Jungfraubahn Holding AG $21,277,000 Market value 130,177 $163.45
---------------
Total carrying value before taxes $22,918,000
Deferred taxes (1,426,000)
---------------
CARRYING VALUE, NET OF TAXES $24,344,000
HYPERFEED TECHNOLOGIES, INC.
On August 16, 2002, HyperFeed disclosed in a press release that "the
Company's Board of Directors recently rejected two conditional and non-binding
offers to purchase HYPR at prices that the Company felt did not fully recognize
the intrinsic value of its technology and the opportunities available for more
substantial creation of shareholder value by more aggressively capitalizing on
its technological advantages." During August and September, HyperFeed announced
a number of changes to senior management. On October 21, 2002, HyperFeed
announced a series of restructuring measures, including a 21% work force
reduction, the consolidation of excess facilities, and a refocusing on
profitable business segments, which the Company "expected to result in $2.2
million in annual net expense reductions."
19
During the third quarter of 2002, PICO exercised warrants to buy 949,032
new shares of HyperFeed for approximately $305,000, or $0.3215 per share, being
the average closing bid price on the NASDAQ National Market for the 20 trading
days preceding the exercise date. Including the shares obtained from the
exercise of the warrants, PICO now owns 11,026,888 HyperFeed common shares,
equivalent to 44.2% of the company. PICO still holds warrants to acquire
3,106,163 shares of HyperFeed common stock at an average price of $1.575 per
share.
On October 29, 2002, HyperFeed announced its results for the third quarter
and nine months ended September 30, 2002. For the third quarter of 2002,
HyperFeed reported total revenues of $4.7 million, gross margin of $1.5 million,
and a net loss of $900,000. For the first nine months of 2002, HyperFeed
reported total revenues of $15.3 million, gross margin of $5.5 million, and a
net loss of $1.8 million.
At September 30, 2002, HyperFeed had $1.3 million in cash and cash
equivalents. Cash flow before financing activities was $539,000 in the first
nine months of 2002.
JUNGFRAUBAHN HOLDING AG
In September 2002, we acquired 17,505 shares of Jungfraubahn for
approximately $2.7 million, increasing our investment to 130,177 shares, or
approximately 22.3% of the company. We are now the largest shareholder in
Jungfraubahn. Despite the increase in our shareholding to more than 20%, we
continue to account for this investment under SFAS No.115, "Accounting for
Certain Investments in Debt and Equity Securities." At this time, we do not
believe that we have the requisite ability to exercise "significant influence"
over the financial and operating policies of Jungfraubahn, and therefore do not
apply the equity method of accounting.
On September 9, 2002, Jungfraubahn announced its results for the six months
to June 30, 2002. In the accompanying Letter to Shareholders, Jungfraubahn
explained that the results could not be directly compared to the previous year
due to the consolidation of Grindelwald-First Aerial Cableway AG ("BGF") for the
first time in 2002. Reported revenues were CHF (Swiss Francs) 53.8 million,
EBITDA (i.e., earnings before depreciation, interest, and taxes, as calculated
by Jungfraubahn) was CHF14.2 million, and net income was CHF3.1 million, or
approximately CHF5.4 per share. The Letter to Shareholders can be viewed at
www.jungfraubahn.com in the Shareholders section of the Inside tab.
Jungfraubahn disclosed that without BGF, passenger revenues declined
approximately CHF600,000. Visitor numbers from Japan, the Company's most
important inbound market, were down heavily, and the loss was only partly made
up by increased passenger numbers from other countries.
At December 31, 2001, book value was approximately CHF505.9 per share. At
September 30, 2002, Jungfraubahn's stock price was CHF245, and CHF1 equaled
$US0.6782.
SIHL
In 2001, we acquired 158,056 shares of SIHL for $4 million through
participation in a restructuring/capital raising and on market purchases. SIHL's
core business is digital imaging, but the company has surplus property assets in
and around Zurich, including a major development project known as Sihlcity.
SIHL's operations were adversely affected by the economic downturn in late
2001 and 2002, and the Company was unable to improve profitability and reduce
debt as previously expected. On September 9, 2002, SIHL announced that
"discussions with potential partners are underway." SIHL advised that its "Board
of Directors has placed priority on options enabling a total sale, yet at this
point in time it is difficult to accurately estimate if these efforts will be
successful and if a price approximating the current share price will be
achieved." We are communicating with SIHL to ensure that the interests of
shareholders are fully represented.
Based on these developments, in the third quarter of 2002 we concluded that
the decline in SIHL's market value was other than temporary, and we recorded a
$3.9 million pre-tax provision for impairment of our investment in SIHL. This
provision was recorded as a realized loss and reduced the realizable value of
the investment to its market price of CHF6 per share at September 30, 2002.
Since the investment in SIHL had been accounted for under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," an
unrealized loss of $3.3 million, net of tax, was already reflected in
shareholders' equity at June 30, 2002. At September 30, 2002, the carrying value
of the investment is $643,000.
SEGMENT RESULTS
For the third quarter of 2002, Long Term Holdings segment revenues were
$5.7 million. Net realized gains of $3.9 million principally consisted of a $7.8
million gain on the sale of our common shares in AOG, which was partially offset
by the $3.9 million write down of SIHL. SFAS No. 133 income from pre-tax
appreciation in warrants was $348,000, consisting of a $115,000 increase in AOG
options and a $233,000 increase in the estimated fair value of warrants we own
to buy shares in other companies. Investment
20
income was $599,000 and other revenues were $844,000. After segment expenses of
$2.3 million, and our $570,000 equity share of HyperFeed's net loss, the segment
reported income before taxes of $2.9 million.
In the third quarter of 2001, Long Term Holdings segment revenues were
negative $2.8 million. Investment income of $333,000 and other revenues of
$59,000 were more than offset by a SFAS No. 133 loss of $3.2 million due to an
unrealized reduction in the estimated fair value of warrants we own, primarily
to buy shares in HyperFeed, during the third quarter of 2001. After segment
expenses of $526,000 and equity accounted losses of $1.2 million, the segment
incurred a loss of $4.5 million.
The third quarter segment result improved $7.3 million year over year. The
2002 result included the $3.9 million in net realized gains, while the 2001
result was reduced by the $3.2 million SFAS No. 133 loss. In addition, equity
accounted losses were $607,000 lower in 2002 than in the previous year. These
positive factors were partially offset by a $1.8 million year over year increase
in segment expenses. In the third quarter of 2001, segment expenses were
unusually low due to a $1.1 million benefit resulting from the effect of
appreciation in the Swiss Franc on an inter-company loan during the third
quarter of 2001. The currency benefit was immaterial ($15,000) in the third
quarter of 2002.
All 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 appreciates
relative to the US dollar, under GAAP we are required to record a benefit
through the statement of operations to reflect the fact that Global Equity SA
owes PICO more US dollars. In Global Equity SA's financial statements, an
equivalent debit is included in the foreign currency translation component of
shareholders' equity (since it owes PICO more dollars); however, this does not
go through the statement of operations. During accounting periods when the Swiss
Franc depreciates relative to the US dollar, opposite entries are made and an
expense is recorded in the statement of operations. Accordingly, we were
required to record a benefit of $1.1 million in our statement of operations in
the third quarter of 2001, even though there was no net impact on shareholders'
equity.
For the first nine months of 2002, Long Term Holdings segment revenues were
$8.9 million. Net realized gains were almost $4 million. Investment income of
$2.2 million included Jungfraubahn's annual dividend of $718,000, $589,000 in
loan establishment and underwriting fees recorded from AOG, and interest revenue
of $598,000. SFAS No. 133 income of $782,000 consisted of a $902,000 increase in
AOG options, which was partially offset by a $120,000 reduction in the estimated
fair value of other warrants. After segment expenses of $4.8 million, and our
$1.5 million equity share of the net losses of companies accounted for under the
equity method, the segment reported income before taxes of $2.6 million.
In the first nine months of 2001, Long Term Holdings segment revenues were
negative $112,000. Investment income of $1.6 million and other revenues of
$349,000 were more than offset by a SFAS No. 133 loss of $1.5 million and a
$500,000 realized loss on the write off of our remaining investment in MKG
Enterprises Corp. After segment expenses of $7.9 million and $1 million in
equity accounted losses, the segment incurred a loss of $9.1 million.
The nine-month segment result improved $11.7 million year over year. Net
realized gains of $4 million were recorded in the first nine months of 2002 as
opposed to a $500,000 realized loss in 2001, and SFAS No. 133 income of $782,000
was recorded in 2002 compared to a $1.5 million loss the year before. In
addition, segment expenses were $3.1 million lower in 2002. This was primarily
attributable to 2001 segment expenses being unusually high due to $2.3 million
in provisions against two loans, and to the recording of a $1.5 million foreign
currency benefit in 2002 (see preceding paragraphs). The currency benefit was
immaterial ($22,000) in the first nine months of 2001.
LIQUIDITY AND CAPITAL RESOURCES - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 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 $9.7 million in cash and cash equivalents at
September 30, 2002, compared to $14.3 million at June 30, 2002, and $17.4
million at December 31, 2001.
In addition to the $9.7 million in consolidated cash and cash equivalents
as defined by GAAP, at September 30, 2002, the parent company held $29 million
in fixed-income securities maturing within the next 12 months.
21
Our cash flow position fluctuates depending on the requirements of our
operating subsidiaries for capital, and activity in our investment portfolios.
Our primary sources of funds include cash balances, cash flow from operations,
the sale of investments, and -potentially -- the proceeds of borrowings or
offerings of equity and debt. We endeavor to ensure that funds are always
available to take advantage of new investment opportunities.
In broad terms, the cash flow profile of our principal operating
subsidiaries is:
- - During the company's investment and development phase, Vidler Water
Company, Inc. utilized cash to purchase properties with significant water
rights, to construct improvements at the Vidler Arizona Recharge Facility,
to maintain and develop existing assets, to pursue applications for water
rights, and to meet financing and operating expenses. During this period,
we 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 income 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 positive cash flow;
- - It is anticipated that the sale of Sequoia Insurance Company will close in
the first quarter of 2003. Until then, we expect that Sequoia Insurance
Company will continue to 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. Until the sale closes, free cash flow generated by Sequoia will be
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 investments 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.
There was a $7.7 million net decrease in cash and cash equivalents in the
first nine months of 2002, compared to a $618,000 net increase in the first nine
months of 2001.
During the first nine months of 2002, Operating Activities generated cash
of $4.2 million. In the first nine months of 2002, the principal sources of cash
were the proceeds of water rights and land sold by Vidler and Nevada Land,
including $6.1 million from the sale of water rights in the Harquahala Valley,
and net premium inflows from Sequoia. In the first nine months of 2001,
Operating Activities generated cash of $1.1 million and the most significant
cash inflow was $9.4 million from the sale of water rights in the Harquahala
Valley. In both years, the most significant uses of cash were operating expenses
at Vidler, the payment of claims by Citation and Physicians, and group overhead.
22
Investing Activities used $9.2 million of cash in the first nine months of
2002. This primarily represented the sale of our investment in AOG for $21.1
million and the temporary reinvestment of the proceeds in fixed-income
securities, and activity in the investment portfolios of our insurance
companies. In the first nine months of 2001, Investing Activities generated
$455,000 of cash. The most significant investing cash flows in the 2001 period
were the receipt of $7.6 million from the sale of an interest in Semitropic, the
investment of $4.2 million in AOG and SIHL common shares, and temporary
investment of surplus funds in fixed-income securities.
Financing Activities used $1.2 million of cash in the first nine months of
2002, primarily due to the repayment of $796,000 in non-recourse borrowings
collateralized by the Harquahala Valley farm properties sold by Vidler, and a
net reduction of $572,000 in Swiss Franc borrowings. In the first nine months of
2001, Financing Activities used $816,000 of cash. Vidler paid off approximately
$2.5 million in non-recourse borrowings collateralized by farm properties in the
Harquahala Valley which were sold, and Global Equity SA took on an additional
$2.2 million of Swiss Franc bank borrowings to help finance the acquisition of
investments in Swiss public companies.
At September 30, 2002, PICO had no significant commitments for future
capital expenditures.
On October 15, 2002, we announced the intention to repurchase of up to $10
million of PICO common stock. The stock purchases may be made from time to time
at prevailing prices through open market, or negotiated transactions, depending
on market conditions, and will be funded from available cash.
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 generally fixes interest rates on
borrowings for periods of between three months and five years; therefore,
carrying value approximates fair value. At September 30, 2002, the Company had
$126 million of fixed maturity securities and mortgage loans, $52 million of
marketable equity securities that were subject to market risk, including $30.4
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 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 $3.7 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 $10.3 million that would impact the unrealized appreciation in
shareholders' equity. The hypothetical 20% decrease in the local currency of the
Company's net foreign denominated investments produced a loss of $4.4 million
that would impact the foreign currency translation in shareholders' equity.
ITEM 4: CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), within 90 days of the filing date of this
report. Based on their evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures are
effective.
(b) There have been no significant changes (including corrective actions
with regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above.
23
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is subject to various litigation that arises in the
ordinary course of its business. Based upon information presently available,
management is of the opinion that such litigation will not have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
None
24
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: November 7, 2002 By: /s/ Maxim C. W. Webb
-----------------------------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
25
CERTIFICATIONS
I, John R. Hart, Chief Executive Officer of PICO Holdings, Inc. (the
"Registrant") certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and
(b) any fraud whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
26
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 7, 2002 /s/ John R. Hart
---------------- --------------------------
John R. Hart
Chief Executive Officer
27
CERTIFICATIONS
I, Maxim C. W. Webb, Chief Financial Officer and Treasurer of PICO Holdings,
Inc. (the "Registrant") certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Registrant as of, and for, the periods presented in
this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the Registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the
audit committee of Registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and
b. any fraud whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
28
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 7, 2002 /s/ Maxim C. W. Webb
---------------- -------------------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
29
EXHIBITS INDEX
Exhibit
Number Description
------- -----------
++ 3.1 Amended and Restated Articles of Incorporation of PICO.
+ 3.2.2 Amended and Restated By-laws of PICO.
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
- ----------
+ 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 of same number filed
with Form 8-K dated December 4, 1996.
30