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, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from_______to
Commission File Number: 0-18786
PICO HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2723335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
(858) 456-6022
(Address and telephone number of principal executive offices)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
The number of shares outstanding of the Registrant's common stock, $0.001 par
value, was 12,366,479 as of November 5, 2004, excluding 4,435,444 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, 2004 and December 31, 2003
Condensed Consolidated Statements of Operations for the Three 4
And Nine Months Ended September 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for 5
the Nine Months Ended September 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 22
Item 4: Controls and Procedures 23
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 23
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3: Defaults Upon Senior Securities 23
Item 4: Submission of Matters to a Vote of Security Holders 23
Item 5: Other Information 23
Item 6: Exhibits 24
Signature 25
2
PART I: FINANCIAL INFORMATION
ITEM I: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2004 2003
---------------- ----------------
ASSETS
Investments $ 163,829,362 $ 148,921,411
Cash and cash equivalents 18,649,116 24,348,693
Notes and other receivables, net 11,714,074 16,430,541
Reinsurance receivables 16,285,257 17,714,012
Real estate and water assets, net 112,560,674 112,270,280
Property and equipment, net 2,496,043 3,117,521
Other assets 7,689,896 7,276,272
Other assets - Discontinued Operations 68,095 818,537
---------------- ----------------
Total assets $ 333,292,517 $ 330,897,267
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 54,980,721 $ 60,863,884
Reinsurance balance payable 671,031 671,031
Stock appreciation rights liability 12,385,449 5,969,762
Bank and other borrowings 17,780,963 15,376,640
Other liabilities 11,941,786 10,871,288
Other liabilities - Discontinued Operations 1,033,131 2,169,879
---------------- ----------------
Total liabilities 98,793,081 95,922,484
---------------- ----------------
Minority interest 2,676,955 5,814,381
---------------- ----------------
Commitments and Contingencies (Note 4)
Common stock, $.001 par value; authorized 100,000,000 shares,
16,801,923 issued in 2004 and 2003 16,802 16,802
Additional paid-in capital 236,089,222 236,082,703
Retained earnings 44,350,271 56,082,903
Accumulated other comprehensive income 29,770,198 15,283,404
Treasury stock, at cost (common shares: 4,434,259 in 2004 and 4,428,389 in 2003) (78,404,012) (78,305,410)
---------------- ----------------
Total shareholders' equity 231,822,481 229,160,402
---------------- ----------------
Total liabilities and shareholders' equity $ 333,292,517 $ 330,897,267
================ ================
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,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Net investment income $ 1,180,360 $ 1,102,853 $ 4,655,469 $ 4,078,413
Net realized gain (loss) on investments (476,495) 341,951 (1,426,357) 1,317,760
Sale of real estate and water assets 1,151,335 2,002,422 3,523,878 4,218,276
Rents, royalties and lease income 303,654 378,141 913,336 1,101,380
Service revenue 1,914,488 479,058 4,169,049 584,049
Other 233,196 266,894 633,591 1,165,973
------------ ------------ ------------ ------------
Total revenues 4,306,538 4,571,319 12,468,966 12,465,851
------------ ------------ ------------ ------------
Costs and Expenses:
Operating and other costs 5,941,694 8,072,144 25,910,877 15,730,991
Cost of real estate and water assets sold 527,637 807,750 1,812,348 2,139,116
Cost of service revenue 370,470 402,136 1,291,935 610,372
Loss and loss adjustment expenses 61,127 4,083,727
Depreciation and amortization 608,011 573,719 1,699,871 1,358,271
Interest 252,335 193,078 619,008 553,931
------------ ------------ ------------ ------------
Total costs and expenses 7,700,147 10,109,954 31,334,039 24,476,408
------------ ------------ ------------ ------------
Equity in loss of unconsolidated affiliates (564,785)
------------ ------------ ------------ ------------
Loss before income taxes and minority interest (3,393,609) (5,538,635) (18,865,073) (12,575,342)
Benefit for income taxes (692,390) (1,447,833) (4,290,154) (3,314,895)
------------ ------------ ------------ ------------
Loss before minority interest (2,701,219) (4,090,802) (14,574,919) (9,260,447)
Minority interest in loss of subsidiaries 563,657 713,829 2,872,990 1,161,782
------------ ------------ ------------ ------------
Loss from continuing operations (2,137,562) (3,376,973) (11,701,929) (8,098,665)
Income (loss) from discontinued operations, net of tax (45,181) 186,895 (30,703) 2,958,793
Gain on disposal of discontinued operations, net (See Note 5) 804,830
------------ ------------ ------------ ------------
Net loss $ (2,182,743) $ (3,190,078) $(11,732,632) $ (4,335,042)
============ ============ ============ ============
Net loss per common share - basic and diluted:
Loss from continuing operations $ (0.18) $ (0.28) $ (0.95) $ (0.65)
Discontinued operations 0.02 0.30
------------ ------------ ------------ ------------
Net loss per common share $ (0.18) $ (0.26) $ (0.95) $ (0.35)
============ ============ ============ ============
Weighted average shares outstanding 12,367,664 12,375,610 12,368,952 12,377,326
============ ============ ============ ============
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,
2004 2003
------------ ------------
OPERATING ACTIVITIES:
Net cash used in operating activities $ (6,462,879) $ (6,645,116)
Net cash used in discontinued operations (386,306) (1,448,722)
------------ ------------
(6,849,185) (8,093,838)
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (21,939,685) (56,456,722)
Proceeds from sale of discontinued operations 25,144,350
Proceeds from sale of investments 18,450,703 20,761,811
Proceeds from maturity of investments 5,325,000 20,859,753
Purchases of property and equipment (801,125) (225,841)
Proceeds from the sale of property and equipment 40,248 5,737
Cash used to purchase shares of HyperFeed, net of cash acquired (107,253)
Purchases of minority interest in subsidiaries (1,322,124)
Capitalized software costs (1,044,631)
------------ ------------
Net cash provided by (used in) investing activities (1,291,614) 9,981,835
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (161,456) (389,721)
Proceeds from borrowings 2,595,000
Proceeds from exercise of stock options (HyperFeed) 38,212
Purchase of treasury stock for deferred compensation plans (98,602) (51,420)
------------ ------------
Net cash provided by (used in) financing activities 2,373,154 (441,141)
------------ ------------
Effect of exchange rate changes on cash 68,068 (800,012)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,699,577) 646,844
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,348,693 22,079,082
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,649,116 $ 22,725,926
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 562,368 $ 631,864
============ ============
Cash paid for taxes: $ 136,164 $ 550,000
============ ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of PICO Holdings, Inc. and Subsidiaries (the "Company" or
"PICO") have been prepared in accordance with the interim reporting
requirements of Form 10-Q, pursuant to the rules and regulations of the
United States Securities and Exchange Commission (the "SEC"). Accordingly,
they do not include all of the information and notes required by
accounting principles generally accepted in the United States of America
("US GAAP") for complete consolidated financial statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of the
financial statements presented have been included and are of a normal
recurring nature. Operating results presented are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2004 or for any future period.
These condensed consolidated financial statements should be read in
conjunction with the Company's audited financial statements and notes
thereto, together with Management's Discussion and Analysis of Financial
Condition and the Results of Operations and Risk Factors contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003
as filed with the SEC.
The preparation of condensed consolidated financial statements in
accordance with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
condensed consolidated financial statements and the reported amounts of
revenues and expenses for each reporting period. The significant estimates
made in the preparation of the Company's condensed consolidated financial
statements relate to the assessment of the carrying value of real estate
and water assets, investments, unpaid losses and loss adjustment expenses,
deferred income taxes, accounts and loans receivable, and contingent
liabilities. While management believes that the carrying value of such
assets and liabilities are appropriate as of September 30, 2004 and
December 31, 2003, it is reasonably possible that actual results could
differ from the estimates upon which the carrying values were based.
Stock-Based Compensation
On July 2, 2003, all 1,687,242 outstanding stock options were
voluntarily surrendered by employees and directors. On July 17, 2003, the
Company's shareholders voted to adopt the PICO Holdings, Inc. 2003 Stock
Appreciation Rights Program (the "SAR program") to replace the Company's
stock option plans and call option agreements. Upon adoption of the SAR
program, all 355,539 outstanding options under call option agreements were
also surrendered by the holders. The maximum number of SARs issuable under
the SAR program may not exceed 2,042,781. At the date of adoption,
1,962,781 SARs were issued to the prior option holders at an exercise
price equal to that of the surrendered options. Included in the
accompanying financial statements, in the case of in the money SARs (i.e.,
the market price of PICO stock is higher than the exercise price of the
SAR), a charge is recorded in the statement of operations. The charge
recognizes the change during the period in the difference between the
exercise price of in the money SARs and the market value of PICO stock at
the end of the period. For the three and nine months ended September 30,
2004, a charge of $346,000 and $6.5 million, respectively, was recorded.
The accrued benefit payable under this program is $12.4 million at
September 30, 2004. For the three and nine months ended September 30,
2003, a charge of $3.3 million was recorded.
In December 2002, the Financial Accounting Standards Board issued
SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure." SFAS No. 148 requires more prominent disclosures of the pro
forma effect of using the fair value method of accounting for stock-based
employee compensation as well as pro forma disclosure of the effect in
interim condensed consolidated financial statements. The Company has
elected to continue accounting for stock-based compensation under the
intrinsic value method of APB No. 25, "Accounting for Stock Issued to
Employees."
6
Had compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS No. 148, the Company's net
income and net loss per share would approximate the following pro forma
amounts for the three and nine months ended September 30:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2004 2003 2004 2003
Reported net loss $ (2,182,743) $ (3,190,078) $(11,732,632) $ (4,335,042)
Add: stock-based compensation recorded, net of income tax 228,471 2,174,090 4,308,858 2,174,090
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of income tax (6,409,554) (6,509,234)
------------ ------------ ------------ ------------
Pro forma net loss $ (1,954,272) $ (7,425,542) $ (7,423,774) $ (8,670,186)
============ ============ ============ ============
Reported net loss per share: basic and diluted $ (0.18) $ (0.26) $ (0.95) $ (0.35)
============ ============ ============ ============
Pro forma net loss per share: basic and diluted $ (0.16) $ (0.60) $ (0.60) $ (0.70)
============ ============ ============ ============
The Black Scholes valuation model was used to estimate the fair
value of the Company's stock-based compensation which is fully vested and
non-transferable. This model requires the input of highly subjective
assumptions, including the expected stock price volatility and estimated
life of the stock-based compensation. Since the Company's stock-based
compensation has characteristics significantly different from any similar
instrument that is publicly traded, and because changes in the subjective
input assumptions can materially change the fair value estimate,
management believes that the existing model does not necessarily provide a
reliable single measure of the fair value of its stock-based compensation.
No stock-based compensation is reported in the table above for 2004
since all the awards vested on the date of grant, July 17, 2003, and no
additional grants have been made.
The effects of applying SFAS No. 148 in this pro forma disclosure
are not indicative of future amounts.
Notes and Other Receivables
At September 30, 2004, notes receivable includes a $3.9 million
receivable arising from a sale of property in West Wendover, Nevada in
2003. The property was sold for $12 million, and through September 30,
2004 the buyer had made scheduled principal and interest payments of
approximately $8 million. The balance of the receivable was due to be
repaid in full by December 31, 2004. However, the regularly scheduled
principal and interest payment due at September, 30 was not paid, and the
receivable is past due. The Company is negotiating with the buyer of the
property to work out the debt. The receivable is secured by a first Deed
of Trust over the entire property sold to the buyer. The Company has not
recorded an allowance for bad debt at September 30, 2004 because the
Company believes the receivable is fully realizable by the value of the
land secured by the first Deed of Trust.
Recently Issued Accounting Pronouncements
In March 2004, the Emerging Issues Task Force (EITF) reached
consensus on the remaining issues for Issue No. 03-1 "The Meaning of
Other Than Temporary Impairment and Its Application to Certain
Investments" and as a result reached a final consensus on an
other than temporary impairment model for debt and equity securities
within the scope of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and equity securities that are not subject to
the scope of SFAS No. 115 and not accounted for under the equity method of
accounting (i.e., cost method investments). The EITF also reached a
consensus that the three-step model used to determine other than temporary
impairments must be applied prospectively to all current and future
investments, in interim or annual reporting periods beginning after June
15, 2004. On September 30, 2004 the FASB issued FASB Staff Position (FSP)
EITF Issue 03-1-1, "Effective Date of Paragraphs 10-20 of EITF 03-1, The
Meaning of Other Than Temporary Impairment," delaying the effective date
for the recognition and measurement guidance of EITF 03-1 on impairment
loss that is other than temporary (i.e., steps two and three of the
three-step impairment model), as contained in paragraphs 10-20, until
certain implementation issues are addressed and a final FSP providing
implementation guidance is issued. The final FSP providing implementation
guidance is expected to be issued in December 2004. The disclosure
requirements of the EITF consensus remain in effect. Quantitative and
qualitative disclosure requirements for investments accounted for under
SFAS No. 115 were effective for the first annual reporting period ending
after December 15, 2003. We disclosed such quantitative and qualitative
information in the notes to our consolidated financial statements as of
December 31, 2003. All new disclosure requirements related to cost method
investments are effective for the annual reporting periods ending after
June 15, 2004. Comparative information for the periods prior to the period
of initial application is not required.
7
2. NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the
weighted average shares outstanding during the period. For the three and
nine months ended September 30, 2004 and the three months ended September
30, 2003, the Company has no common stock equivalents, and consequently,
diluted earnings per share is identical to basic earnings per share. For
the nine months ended September 30, 2003, approximately 1.6 million common
stock equivalents were anti-dilutive and excluded from the calculation.
3. COMPREHENSIVE INCOME
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the Company includes
foreign currency translation and unrealized holding gains and losses on
available for sale securities.
The components of comprehensive income are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
------------- ------------ ------------- ------------
Net loss $ (2,182,743) $ (3,190,078) $ (11,732,632) $ (4,335,042)
Net change in unrealized appreciation
on available for sale investments 4,827,714 4,366,420 14,537,798 5,932,006
Net change in foreign currency translation 250,134 75,261 (51,004) 103,055
------------ ------------ ------------- ------------
Total comprehensive income $ 2,895,105 $ 1,251,603 $ 2,754,162 $ 1,700,019
============ ============ ============= ============
Total comprehensive income for the three and nine months ended
September 30, 2004 is net of deferred income tax benefit of $79,000 and
$182,000, respectively. Total comprehensive income for the three and nine
months ended September 30, 2003 is net of a deferred income tax charge of
$1.2 million and $1.8 million, respectively.
The components of accumulated other comprehensive income are as
follows:
September 30, December 31,
2004 2003
------------- ------------
Unrealized appreciation on
available for sales investments $ 35,416,828 $ 20,879,030
Foreign currency translation (5,646,630) (5,595,626)
------------ ------------
Accumulated other comprehensive income $ 29,770,198 $ 15,283,404
============ ============
Accumulated other comprehensive income is net of deferred income tax
liability of $11.4 million at September 30, 2004 and $7.2 million at
December 31, 2003.
4. COMMITMENTS AND CONTINGENCIES
In 1997, pursuant to a Quota Share Reinsurance Agreement, Citation
Insurance Company ("Citation") ceded its workers' compensation insurance
business to Fremont Indemnity Company ("Fremont"). Fremont maintained a
security deposit for the benefit of claimants under workers' compensation
insurance policies issued, or assumed, by Fremont. A portion of that
deposit was specifically allocated for the benefit of Citation.
Consequently, Citation reduced its own workers' compensation insurance
reserves by the amount of the deposit. On June 4, 2003, the Superior Court
of the State of California for the County of Los Angeles entered an Order
of Conservation over Fremont and appointed the California Department of
Insurance Commissioner as the conservator. Pursuant to such order, the
Commissioner was granted authority to take possession of all of Fremont's
assets, including the Citation deposit. On July 2, 2003, the Liquidation
Court entered an Order appointing the Commissioner as liquidator of
Fremont.
Under Citation's interpretation of the applicable law, Citation's
allocated deposit assets are required to be (i) held by the Commissioner
in trust, "separate and apart" from Fremont's general account and other
assets of its estate, and (ii) applied solely towards the payment of the
assumed claims and allocated claims expenses arising from the workers'
compensation insurance policies that Citation ceded/transferred to Fremont
and its predecessor-in-interest. Citation requested that the Commissioner,
in his capacity as the liquidator, (i) maintain Citation's allocated
deposit assets separate and apart from other assets of the estate and (ii)
apply the same solely to the payment of the direct and assumed claims and
allocated claims expenses arising from the workers' compensation insurance
liabilities that Citation ceded/transferred to Fremont. Alternatively,
Citation requested that the Commissioner pay Citation's ceded liabilities
from the totality of Fremont's Special Schedule P Deposit on a pari passu
basis with Fremont's direct and assumed workers' compensation claims and
allocated claims expenses.
8
The Commissioner has refused to comply with Citation's request;
instead, the Commissioner indicated that he intended to transfer the
Citation deposit to the California Insurance Guarantee Association
("CIGA").
As Fremont had been placed in liquidation on July 2, 2003 and
therefore was no longer an admitted reinsurer, Citation was no longer
entitled to take a reinsurance credit for the Citation deposit under the
statutory basis of accounting. Consequently, during 2003 Citation reversed
$7.5 million reinsurance recoverable from Fremont in its financial
statements prepared on the statutory basis of accounting. In addition,
Citation made a corresponding provision for the reinsurance recoverable
from Fremont for GAAP purposes. Accordingly, Citation has, for both its
statutory and GAAP financial statements, provided for the reinsurance
recoverable from Fremont on its workers' compensation policy liabilities.
In June 2004, Citation filed litigation to recover its workers'
compensation trust deposits held by Fremont prior to the liquidation in
the amount of $7.1 million. On September 28, 2004 the court ruled against
Citation. Therefore, Citation will not receive any distributions from
Fremont or CIGA and will not receive any credit for the deposit. In
consideration of the potential cost and the apparent limited prospect of
obtaining relief, the Company has decided not to appeal.
In 2000, PICO 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 legal action, and our
ability to realize the assets collateralizing the loans, PICO recorded an
allowance in 2001 for the total outstanding balance of $2.3 million for
the loans and interest. The court appointed receiver is in the process of
ascertaining Dominion Capital's assets and liabilities. PICO has been
awarded summary judgment in relation to the principal and interest on the
loan for $1.2 million and as a result, Dominion Capital has been placed in
receivership. A trial was held in July 2003 in the Australian courts
concerning both loans. The Company received the Court's decision in August
2004 and was unsuccessful in its actions. The Company filed an appeal with
the Australian courts.
On November 2, 2004, the Company entered into a Secured Convertible
Promissory Note Agreement ("Note") with the Company's 51%-owned
subsidiary, HyperFeed Technologies, Inc. ("HyperFeed").
Under the terms of the Note, HyperFeed may borrow up to $1.5 million
from the Company, at a rate of interest of 8%. Any amounts borrowed under
this Note, together with accrued interest, are to be repaid by November 1,
2005.
The Company can elect to convert all or any part of the principal
and interest outstanding into common stock of HyperFeed. The conversion
price per share is the lower of either the price per share on the date of
the Company's election to exercise its conversion right or the price per
share as of the date of execution of the Note ($3.00). The maximum number
of shares that may be issued under these conversion rights is 611,000.
(See also Liquidity and Capital Resources section in Management's
Discussion and Analysis of Financial Condition and Results of Operations)
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. DISCONTINUED OPERATIONS
On March 31, 2003, the sale of Sequoia Insurance Company ("Sequoia")
closed for gross proceeds of $43.1 million, which consisted of $25.2
million in cash and a dividend of equity and debt securities previously
held by Sequoia with a market value of $17.9 million. The final sale price
that was determined 60 days after the closing date was reduced by $58,000.
The net income from Sequoia included in PICO's condensed consolidated
results for the nine months ended September 30, 2003 was $2.4 million,
which is reported as part of "Income (loss) from discontinued operations,
net of tax." The Company also recorded a $443,000 gain on disposal, net of
estimated income taxes of $281,000 and selling costs of $844,000, which is
reported as "Gain on disposal of discontinued operations, net" for the
nine months ended September 30, 2003.
In June 2003, HyperFeed disposed of a consolidated subsidiary,
recording a gain on sale of $362,000. In the fourth quarter of 2003,
HyperFeed sold additional operations, and recast its 2003 reported results
to classify these operations as discontinued. Included in PICO's condensed
consolidated results of operations for the three and nine months ended
September 30, 2003, is income of $187,000 and $570,000, respectively, from
HyperFeed's discontinued operations. The residual discontinued operations
reported a loss of $45,000 and $31,000 for the three and nine months ended
September 30, 2004, respectively. At September 30, 2004, discontinued
operations reported assets of $68,000 and liabilities of $1 million.
9
6. SEGMENT REPORTING
PICO Holdings, Inc. is a diversified holding company engaged in five
major operating segments: Vidler Water Company, Nevada Land & Resource
Company, Business Acquisitions and Financing, Insurance Operations in Run
Off, and HyperFeed Technologies, Inc.
The accounting policies of the reportable segments are the same as
those described in the Company's 2003 Annual Report on Form 10-K.
Management analyzes segments using the following information:
Segment assets:
At September 30, At December 31,
2004 2003
---------------- ---------------
TOTAL ASSETS:
Vidler Water Company $ 85,790,491 $ 88,134,979
Nevada Land and Resource Company 45,029,071 46,267,828
Business Acquisitions and Financing 75,291,382 68,278,691
Insurance Operations in Run Off 122,847,658 118,351,511
HyperFeed Technologies, Inc. 4,333,915 9,864,258
---------------- ---------------
$ 333,292,517 $ 330,897,267
---------------- ---------------
Segment revenues and income (loss) before taxes and minority
interest for the third quarter and first nine months of 2004 and 2003
were:
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
------------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Vidler Water Company $ 462,000 $ 661,000 $ 1,254,000 $ 1,545,000
Nevada Land & Resource Company 1,336,000 1,935,000 4,211,000 4,997,000
Business Acquisitions and Financing (244,000) 502,000 193,000 3,028,000
Insurance Operations in Run Off 837,000 990,000 2,633,000 2,306,000
HyperFeed Technologies 1,916,000 483,000 4,178,000 590,000
------------ ------------ ------------ ------------
Total Revenues $ 4,307,000 $ 4,571,000 $ 12,469,000 $ 12,466,000
============ ============ ============ ============
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (1,440,000) $ (1,349,000) $ (4,260,000) $ (3,405,000)
Nevada Land & Resource Company 461,000 1,048,000 1,108,000 1,815,000
Business Acquisitions and Financing (2,187,000) (4,351,000 (12,531,000) (5,758,000
Insurance Operations in Run Off 556,000 544,000 1,765,000 (2,842,000)
HyperFeed Technologies (784,000) (1,431,000) (4,947,000) (2,385,000)
------------ ------------ ------------ ------------
Loss Before Taxes and Minority Interest $ (3,394,000) $ (5,539,000) $(18,865,000) $(12,575,000)
============ ============ ============ ============
10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q (INCLUDING THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" SECTION) CONTAINS
"FORWARD-LOOKING STATEMENTS" REGARDING OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS, AND PROSPECTS. WORDS SUCH AS "EXPECTS," "ANTICIPATES,"
"INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," AND SIMILAR EXPRESSIONS OR
VARIATIONS OF SUCH WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS,
BUT ARE NOT THE EXCLUSIVE MEANS OF IDENTIFYING FORWARD-LOOKING STATEMENTS IN
THIS FORM 10-Q. ADDITIONALLY, STATEMENTS CONCERNING FUTURE MATTERS ARE
FORWARD-LOOKING STATEMENTS.
ALTHOUGH FORWARD-LOOKING STATEMENTS IN THE FORM 10-Q REPRESENT THE GOOD
FAITH JUDGMENT OF OUR MANAGEMENT, SUCH STATEMENTS CAN ONLY BE BASED ON FACTS AND
FACTORS CURRENTLY KNOWN BY US. CONSEQUENTLY, FORWARD-LOOKING STATEMENTS ARE
INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS AND OUTCOMES
COULD DIFFER FROM THOSE DISCUSSED IN OR ANTICIPATED BY THE FORWARD-LOOKING
STATEMENTS. FACTORS WHICH COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES IN
RESULTS AND OUTCOMES INCLUDE, WITHOUT LIMITATION, THOSE DISCUSSED UNDER THE
HEADING "RISK FACTORS" AND ELSEWHERE IN OUR 2003 ANNUAL REPORT ON FORM 10-K.
READERS ARE URGED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS FORM 10-Q. WE UNDERTAKE NO
OBLIGATION TO REVISE OR UPDATE ANY FORWARD-LOOKING STATEMENT IN ORDER TO REFLECT
ANY EVENT OR CIRCUMSTANCE WHICH MAY ARISE AFTER THE DATE OF THIS FORM 10-Q.
READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS DISCLOSURES MADE
IN THIS FORM 10-Q AND OUR 2003 ANNUAL REPORT ON FORM 10-K, WHICH ATTEMPT TO
ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS WHICH MAY AFFECT OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS, AND PROSPECTS.
The condensed consolidated financial statements and other portions of this
quarterly report on Form 10-Q for the period ended September 30, 2004, including
Item 2, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," reflect the effects of:
(1) presenting HyperFeed Technologies, Inc. as a separate segment beginning May
15, 2003; and
(2) presenting Sequoia Insurance Company and two businesses sold by HyperFeed
Technologies, Inc. as discontinued operations. See "Discontinued
Operations."
INTRODUCTION
PICO Holdings, Inc. (PICO and its subsidiaries are referred to as "PICO"
and "the Company," and by words such as "we" and "our") is a diversified holding
company. PICO seeks to acquire businesses and interests in businesses which we
identify as undervalued based on fundamental analysis -- that is, our assessment
of what the business is worth, based on the private market value of its assets,
earnings, and cash flow. We prefer long-established businesses, with a history
of operating successfully through industry cycles, recessions, and geo-political
disruptions, in basic, "old economy" industries. Typically, the businesses will
be generating free cash flow and have a low level of debt; or, alternatively,
strong interest coverage ratios or the ability to realize surplus assets. As
well as being undervalued, the business must have special qualities such as
unique assets, a potential catalyst for change, or be in an industry with
attractive economics. We are also interested in acquiring interests in companies
where there is significant unrecognized value in land and other tangible assets.
We have acquired businesses and interests in businesses by the purchase of
private companies, and shares in public companies, both directly through
participation in financing transactions and through open market purchases. When
we buy a business or an interest in a business, we have a long-term horizon,
typically 5 years or more. Selected acquisitions may become core operations;
however, we are prepared to sell businesses if the price received exceeds the
return we expect to earn if we retain ownership. We expect that most of our
interests in businesses will ultimately be sold to other companies in the same
industry seeking to expand or to gain economies of scale.
Our objective is to generate superior long-term growth in shareholders'
equity, as measured by book value per share. Over time, we anticipate that most
of our net income and growth in shareholders' equity will come from realized
gains on the sale of businesses and interests in businesses, as opposed to
ongoing operating earnings. Consequently, we anticipate that PICO's earnings
will fluctuate, and that the results for any one quarter or year are not
necessarily indicative of our future performance.
Currently our major businesses are:
- - Vidler Water Company, Inc. ("Vidler"), which owns and develops water
rights and water storage operations in the southwestern United States,
primarily in Nevada and Arizona;
- - Nevada Land & Resource Company, LLC ("Nevada Land"), which owns
approximately 1.1 million acres of land in northern Nevada, and the
mineral rights and water rights related to the property;
11
- - Physicians Insurance Company of Ohio ("Physicians"), which is "running
off" its medical professional liability insurance loss reserves, and
Citation Insurance Company ("Citation"), which is "running off" its
historical property & casualty insurance and workers' compensation
insurance loss reserves; and
- - HyperFeed Technologies, Inc. ("HyperFeed"), which became a 51%-owned
subsidiary in 2003. HyperFeed is a developer and provider of software,
ticker plant technologies, and managed services to the financial markets
industry.
RESULTS OF OPERATIONS -- THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
SHAREHOLDERS' EQUITY
At September 30, 2004, PICO had shareholders' equity of $231.8 million
($18.74 per share), compared to $229 million ($18.51 per share) at June 30,
2004, and $229.2 million ($18.52 per share) at December 31, 2003.
The $2.6 million increase in shareholders' equity during the first nine
months of 2004 resulted primarily from a $14.5 million net increase in
unrealized appreciation in investments, which was partially offset by the net
loss of $11.7 million.
The $2.8 million increase in shareholders' equity during the third quarter
of 2004 principally resulted from a $4.8 million net increase in unrealized
appreciation in investments, partially offset by the quarter's net loss of $2.2
million.
COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," PICO reports comprehensive income (loss) in
addition to net income (loss) from the Condensed Consolidated Statement of
Operations. Comprehensive income (loss) includes items resulting in unrealized
changes in shareholders' equity, such as foreign currency translation and change
in unrealized investment gains and losses on available-for-sale securities.
During the first nine months of 2004, PICO recorded comprehensive income
of $2.8 million, consisting of the $14.5 million net increase in unrealized
appreciation in investments, which was partially offset by the $11.7 million net
loss and a foreign currency translation debit of $51,000.
For the third quarter of 2004, PICO recorded comprehensive income of $2.9
million, consisting of the $4.8 million net increase in unrealized appreciation
in investments and a foreign currency translation credit of $250,000, partially
offset by the $2.2 million net loss.
THIRD QUARTER NET LOSS
PICO reported a net loss of $2.2 million ($0.18 per share) for the third
quarter of 2004, consisting of a $2.1 million ($0.18 per share) loss from
continuing operations, and a $45,000 after-tax loss from discontinued operations
($0.00 per share). The $2.1 million net loss from continuing operations
consisted of a $3.4 million loss before income taxes and minority interest,
partially offset by an income tax benefit of $692,000 and minority interest of
$564,000.
In the third quarter of 2003, PICO reported a net loss of $3.2 million
($0.26 per share). The net loss consisted of a $3.4 million loss from continuing
operations ($0.28 per share), and income from discontinued operations of
$187,000 after-tax ($0.02 per share). The $3.4 million loss from continuing
operations consisted of a $5.5 million loss before income taxes and minority
interest, which was partially offset by an income tax benefit of $1.4 million,
and minority interest of $714,000.
NINE MONTHS NET LOSS
PICO reported a net loss of $11.7 million ($0.95 per share) for the first
nine months of 2004, comprised of a loss from continuing operations of $11.7
million ($0.95 per share) and a $31,000 after-tax loss from discontinued
operations ($0.00 per share). The $11.7 million loss from continuing operations
consisted of an $18.9 million loss before income taxes and minority interest,
partially offset by an income tax benefit of $4.3 million and minority interest
of $2.9 million. The consolidated income tax benefits of $692,000 for the third
quarter and $4.3 million for the first nine months that we recorded do not
include any benefit for HyperFeed's losses of $784,000 for the third quarter and
$4.9 million for the first nine months as, in the opinion of HyperFeed's
management, it is more likely than not that deferred tax assets, represented by
operating loss carryforwards, will not be realized. In addition, on September
30, 2004, the California legislature passed Assembly Bill 263. The Company is
currently appealing Notices of Action issued by the California Franchise Tax
Board (the California state tax authority) related to inter-company dividends.
The AB 263 legislation covers the treatment of inter-company dividends, but the
Company believes its current tax provisions related to the issued Notices of
Action are adequate for any ultimate liability.
12
For the first nine months of 2003, PICO reported a net loss of $4.3
million ($0.35 per share). A loss from continuing operations of $8.1 million
($0.65 per share) was partially offset by $3.8 million ($0.30 per share in
total) of after-tax income related to discontinued operations. The income from
discontinued operations consisted of $3 million in after-tax income earned by
Sequoia and the two businesses divested by HyperFeed in 2003 until their sale,
and $805,000 in after-tax gains on the sale of the Sequoia and the discontinued
operations of HyperFeed. The $8.1 million loss from continuing operations
consisted of a $12.6 million loss before income taxes and minority interest,
which was partially offset by an income tax benefit of $3.3 million and minority
interest of $1.2 million.
Segment revenues and income (loss) before taxes and minority interest for
the third quarter and first nine months of 2004 and 2003 were:
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
------------------------------ ------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Vidler Water Company $ 462,000 $ 661,000 $ 1,254,000 $ 1,545,000
Nevada Land & Resource Company 1,336,000 1,935,000 4,211,000 4,997,000
Business Acquisitions and Financing (244,000) 502,000 193,000 3,028,000
Insurance Operations in Run Off 837,000 990,000 2,633,000 2,306,000
HyperFeed Technologies 1,916,000 483,000 4,178,000 590,000
------------ ------------ ------------ ------------
Total Revenues $ 4,307,000 $ 4,571,000 $ 12,469,000 $ 12,466,000
============ ============ ============ ============
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (1,440,000) $ (1,349,000) $ (4,260,000) $ (3,405,000)
Nevada Land & Resource Company 461,000 1,048,000 1,108,000 1,815,000
Business Acquisitions and Financing (2,187,000) (4,351,000 (12,531,000) (5,758,000
Insurance Operations in Run Off 556,000 544,000 1,765,000 (2,842,000)
HyperFeed Technologies (784,000) (1,431,000) (4,947,000) (2,385,000)
------------ ------------ ------------ ------------
Loss Before Taxes and Minority Interest $ (3,394,000) $ (5,539,000) $(18,865,000) $(12,575,000)
============ ============ ============ ============
VIDLER WATER COMPANY, INC.
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
------------------------------ ------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES:
Sale of Land, Water Rights and Water $ 69,000 $ 414,000 $ 72,000 $ 414,000
Option Premiums Earned 346,000
Lease of Water 24,000 17,000 75,000 23,000
Lease of Agricultural Land 121,000 176,000 364,000 528,000
Interest 109,000 401,000 1,000
Other 139,000 54,000 342,000 233,000
----------- ----------- ----------- -----------
Segment Total Revenues $ 462,000 $ 661,000 $ 1,254,000 $ 1,545,000
=========== =========== =========== ===========
EXPENSES:
Cost of Land, Water Rights and Water Sold $ (45,000) $ (385,000) $ (47,000) $ (385,000)
Depreciation and Amortization (302,000) (268,000) (877,000) (746,000)
Interest (150,000) (113,000) (322,000) (346,000)
Overhead Expenses (357,000) (353,000) (1,175,000) (1,079,000)
Project Expenses (1,048,000) (891,000) (3,093,000) (2,394,000)
----------- ----------- ----------- -----------
Segment Total Expenses $(1,902,000) $(2,010,000) $(5,514,000) $(4,950,000)
----------- ----------- ----------- -----------
LOSS BEFORE TAX $(1,440,000) $(1,349,000) $(4,260,000) $(3,405,000)
=========== =========== =========== ===========
In the third quarter of 2004, Vidler's revenues totaled $462,000. The
largest revenue items were $121,000 from the lease of agricultural land, and
$109,000 of interest earned on two collateralized notes receivable related to
the assets at Big Springs Ranch and West Wendover sold in 2003 (see following
paragraphs). After operating expenses of $1.9 million, Vidler incurred a loss
before taxes of $1.4 million for the third quarter of 2004.
Receipt of a principal payment on the West Wendover note scheduled for
September 30, 2004 is past due, and the West Wendover note went into default in
October 2004. We are negotiating with the buyer of the property to work out the
debt, which consists of approximately $3.9 million in principal and interest.
The debt is secured by a first Deed of Trust on the property at West Wendover.
The lands were sold for $12 million, and the buyer has outlaid more than $8
million for the down payment and subsequent principal repayments.
13
The Big Springs Ranch note is current. A principal repayment of $250,000
was received in October, and the remaining principal of approximately $250,000
is scheduled to be repaid by the end of 2004.
In the third quarter of 2003, Vidler's revenues totaled $661,000. The
largest contributor to revenues was the sale of Vidler's remaining water rights
at Wet Mountain, Colorado, which added $414,000 to revenues and $29,000 to gross
margin. After all other operating expenses of $1.6 million, Vidler incurred a
loss before taxes of $1.3 million for the third quarter of 2003.
In the first nine months of 2004, Vidler's revenues totaled $1.3 million,
including $401,000 of interest earned on collateralized notes receivable from
the sale of assets at Big Springs Ranch and West Wendover, and $364,000 from the
lease of agricultural land. After operating expenses of $5.5 million, Vidler
generated a loss before taxes of $4.3 million for the first nine months of 2004.
In the first nine months of 2003, Vidler's revenues totaled $1.5 million.
The largest components of revenues were $528,000 from the lease of agricultural
land, the sale of Wet Mountain water rights for $414,000, and $346,000 of option
premiums earned when options over land and water granted to two
electricity-generating companies expired without being exercised. After
deducting the $385,000 cost of water rights sold and operating expenses of $4.6
million, Vidler generated a loss before taxes of $3.4 million for the first nine
months of 2003.
To increase transparency, the line "Operations, Maintenance, and Other
Expenses" reported in previous years is now broken into two components, Overhead
Expenses and Project Expenses.
Overhead Expenses consist of costs which are not related to the
development of specific water resources, such as salaries and benefits, rent,
and audit fees. Overhead Expenses were $357,000 in the third quarter of 2004 and
$1.2 million in the first nine months of 2004, compared to $353,000 in the third
quarter of 2003 and $1.1 million in the first nine months of 2003.
Project Expenses were $1 million in the third quarter of 2004 and $3.1
million in the first nine months of 2004, compared to $891,000 in the third
quarter of 2003 and $2.4 million in the first nine months of 2003. Project
Expenses consist of costs related to (1) the development of water resources
which do not meet the criteria to be recorded as assets; and (2) the development
and maintenance of existing water resources, such as repairs & maintenance,
property taxes, and professional fees. Project expenses are recorded as expenses
as incurred, and fluctuate from period to period depending on activity regarding
Vidler's various water resource projects.
Vidler's third quarter segment loss was $91,000 higher in 2004 than in
2003. Excluding revenues and expenses from the sale of water rights which
resulted in gross margin of $24,000 in the third quarter of 2004 and $29,000 in
2003, all other revenue items increased $146,000, and all other operating
expenses increased $232,000 year over year. The increase in all other revenues
was principally due to the $109,000 interest revenue earned in 2004, and the
increase in all other operating expenses was primarily due to a $157,000
increase in Project Expenses.
For the first nine months of 2004, Vidler's segment loss was $855,000
higher than in 2003, primarily as a result of a $902,000 increase in all other
operating expenses year over year. The principal increases in operating expenses
year over year were $699,000 in Project Expenses, $131,000 in Depreciation and
Amortization, and $96,000 in Overhead Expenses. The increase in Project Expenses
year over year was primarily due to $490,000 higher maintenance expenses at the
Vidler Arizona Recharge Facility, and approximately $379,000 in professional
studies regarding the future utilization of water from Fish Springs Ranch. These
increases were partially offset by a $227,000 reduction year over year in
professional fees related to water rights applications in the Tule Desert
Groundwater Basin. All other revenue items increased $51,000 year over year,
principally due to a $400,000 increase in interest revenue which more than
offset the $346,000 in option premiums earned in 2003 which did not recur in
2004.
COYOTE SPRINGS DEVELOPMENT PROJECT
As a result of the limited supply of land, rapid population growth, and
decreased housing affordability in the Las Vegas metropolitan area, developers
are procuring land in surrounding valleys. Vidler's water rights in southern
Nevada can be utilized to provide water supply to new developments of this type.
The Coyote Springs community is a planned mixed-use development to be
located approximately 40 miles north of Las Vegas, at the junction of U.S.
highway 93 and State Highway 168. Coyote Springs is the largest privately-held
property for development in Southern Nevada. The developer, Coyote Springs
Investment, LLC ("CSIL"), has received entitlements for approximately 50,000
residential units, 6 golf courses, and 1,200 acres of retail and commercial
development on 13,100 acres in Clark County. Pardee Homes has agreed to be the
master residential developer on the first phase of the development. CSIL expects
to receive additional entitlements for its 29,800 acres in Lincoln County. Based
on the entitlements obtained so far, it is estimated that the community will
require approximately 35,000 acre-feet of permanent water. Additional water will
be required as further entitlements are obtained. It is expected that full
absorption of the residential units will take 25 years or more.
14
Vidler recently signed a joint venture agreement with CSIL to supply
various water resources required to support the development. As previously
disclosed, Lincoln County and Vidler have jointly filed applications for water
rights in various basins in Lincoln County. We anticipate that under the
agreement, Lincoln/Vidler could provide the majority of water required for the
development project at an indicative price of $5,000 per acre-foot, indexed for
inflation.
The Vidler/developer joint venture has agreed to acquire net recharge
credits owned by Vidler in the Vidler Arizona Recharge Facility at a price of
$500 per acre-foot, subject to approval by the relevant Nevada and Arizona water
authorities. As ground water is ultimately permitted to Lincoln/Vidler from the
water rights applications in Lincoln County, we anticipate that the
Vidler/developer joint venture will acquire water at $5,000 per acre-foot,
indexed for inflation, from Lincoln/Vidler.
The final economics of the joint venture will depend on additional
agreements to be negotiated with the General Improvement District, which will
act as the water supplier for the proposed development.
The Coyote Springs Project is an example of how Vidler's water rights in
Nevada and water storage facility in Arizona could potentially interact to
provide water solutions in southern Nevada.
NEVADA LAND & RESOURCE COMPANY, LLC
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES:
Sale of Land $ 1,082,000 $ 1,588,000 $ 3,452,000 $ 3,804,000
Option Premiums Earned 137,000
Lease and Royalty 159,000 186,000 475,000 551,000
Interest and Other 95,000 161,000 284,000 505,000
----------- ----------- ----------- -----------
Segment Total Revenues $ 1,336,000 $ 1,935,000 $ 4,211,000 $ 4,997,000
=========== =========== =========== ===========
EXPENSES:
Cost of Land Sales $ (483,000) $ (423,000) $(1,765,000) $(1,754,000)
Operating Expenses (392,000) (464,000) (1,338,000) (1,428,000)
----------- ----------- ----------- -----------
Segment Total Expenses $ (875,000) $ (887,000) $(3,103,000) $(3,182,000)
----------- ----------- ----------- -----------
INCOME BEFORE TAX $ 461,000 $ 1,048,000 $ 1,108,000 $ 1,815,000
=========== =========== =========== ===========
Nevada Land recognizes revenue from land sales, and the resulting gross
profit, when the sales transactions legally close, in accordance with Financial
Accounting Standard 66 ("FAS 66"), "Accounting for Sales of Real Estate." On
closing, the entire sales price is recorded as revenue, and a gross margin is
recognized depending on the cost basis attributed to the land which was sold.
Since the date of closing determines the accounting period in which the sales
revenue and gross margin are recorded:
- - Nevada Land's reported revenues and income fluctuate from quarter to
quarter depending on the dates when specific transactions close; and
- - land sales revenues and gross margin for any individual quarter are not
necessarily indicative of likely full-year revenues or trends in gross
margin.
In the third quarter of 2004, segment total revenues were $1.3 million.
Nevada Land sold approximately 13,984 acres of land for $1.1 million. The
average sales price was $77 per acre and our average basis in the land sold was
$35 per acre. The gross margin on land sales was $599,000, which represents a
gross margin percentage of 55.4%. Lease and royalty revenues were $159,000, and
interest and other revenues contributed $95,000. After operating expenses of
$392,000, Nevada Land generated income of $461,000.
In the third quarter of 2003, segment total revenues were $1.9 million.
Nevada Land sold approximately 14,406 acres of land for $1.6 million. The
average sales price was $110 per acre and our average basis in the land sold was
$29 per acre. The gross margin on land sales was $1.2 million, which represents
a gross margin percentage of 73.4%. Lease and royalty revenues were $186,000,
and interest and other revenues contributed $161,000. After operating expenses
of $464,000, Nevada Land generated income of $1 million.
In the first nine months of 2004, segment total revenues were $4.2
million. Nevada Land sold approximately 38,993 acres of land for $3.5 million.
The average sales price was $89 per acre and our average basis in the land sold
was $45 per acre. The gross margin on land sales was $1.7 million, which
represents a gross margin percentage of 48.9%. Lease and royalty revenues were
$475,000, and interest and other revenues contributed $284,000. After operating
expenses of $1.3 million, Nevada Land generated income of $1.1 million.
15
In the first nine months of 2003, segment total revenues were $5 million.
Nevada Land sold approximately 66,813 acres of land for $3.8 million. The
average sales price was $57 per acre and our average basis in the land sold was
$26 per acre. The gross margin on land sales was $2 million, which represents a
gross margin percentage of 53.9%. Lease and royalty revenues were $551,000,
option premiums of $137,000 were earned, and interest and other revenues
contributed $505,000. After operating expenses of $1.4 million, Nevada Land
recorded income of $1.8 million.
The third quarter segment result decreased $587,000 year over year,
principally due to the gross margin on land sales in 2004 being $566,000 less
than in 2003.
The segment result for the first nine months decreased $707,000 year over
year. The gross margin on land sales decreased by $363,000 year over year. A
$434,000 decline in all other revenue items year over year, was partially offset
by a $90,000 reduction in operating expenses. The primary causes of the year
over year decline in all other revenue items were (1) a $137,000 option premium
earned in 2003 which did not recur in 2004; and (2) decreased interest revenue.
In 2004, Nevada Land held a lower level of interest-bearing temporary
investments compared to the previous year, after surplus funds were distributed
to other group companies during the latter half of 2003.
BUSINESS ACQUISITIONS AND FINANCING
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
---------------------------- --------------------------
2004 2003 2004 2003
REVENUES (CHARGES):
Realized Gains (Losses):
On Sale or Impairment of Holdings $ (530,000) $ (48,000) $(1,363,000) $ 525,000
SFAS No. 133 Change in Warrants (5,000) (9,000) (554,000) 237,000
Investment Income 198,000 349,000 1,802,000 1,801,000
Other 93,000 210,000 308,000 465,000
------------ ----------- ------------ -----------
Segment Total Revenues (Charges) $ (244,000) $ 502,000 $ 193,000 $ 3,028,000
============ =========== ============ ===========
SEGMENT TOTAL EXPENSES $ (1,943,000) $(4,853,000) $(12,724,000) $(8,221,000)
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE INVESTEE INCOME $ (2,187,000) $(4,351,000) $(12,531,000) $(5,193,000)
Equity in Loss of Unconsolidated Affiliates $ (565,000)
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE TAX $ (2,187,000) $(4,351,000) $(12,531,000) $(5,758,000)
============ =========== ============ ===========
This segment contains businesses, interests in businesses, and other
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.
The largest holding in this segment is Jungfraubahn Holding AG, which has
a market value and carrying value of $34.6 million (before taxes) at September
30, 2004. Extracts from Jungfraubahn's 2003 Annual Report and summary financial
statements, prepared on Swiss accounting standards, can be viewed at
www.jungfraubahn.com (in the "Finances" section of the "Inside" tab). The URL is
provided for the reader's convenience, and the contents of Jungfraubahn's web
site are not incorporated in this 10-Q.
In the third quarter of 2004, Business Acquisitions and Financing segment
charges exceeded revenues by $244,000. Investment income was $198,000. A
$530,000 net realized loss on the sale or impairment of holdings was recorded.
This was primarily due to a $587,000 charge for other-than-temporary impairment
of our holding in Accu Holding AG to reflect a further decline in the market
value of this security during the third quarter of 2004 (see next paragraph). In
addition, a $5,000 decline in the estimated fair value of warrants we own to buy
shares in HyperFeed was recorded as a realized loss in accordance with Statement
of Financial Accounting Standards No. 133, "Accounting For Derivative
Instruments and Hedging Activities." After segment expenses of $1.9 million, the
segment reported a loss before taxes of $2.2 million for the third quarter of
2004.
During the second quarter of 2004, Accu Holding AG completed a 1:1 rights
offering at CHF (i.e., Swiss Francs) 100 per share. We subscribed for our full
entitlement, and partially underwrote the rights offering. At September 30,
2004, the market price of Accu common stock was CHF105, compared to CHF130 at
June 30, 2004, and a market price of approximately CHF200 for the shares on
issue before the offering.
For the third quarter of 2003, Business Acquisitions and Financing segment
revenues were $502,000. Investment income of $349,000 and other revenues of
$210,000 were partially offset by $57,000 in net realized losses. After segment
expenses of $4.9 million, the segment reported a $4.4 million loss before taxes
for the third quarter of 2003.
16
In the first nine months of 2004, Business Acquisitions and Financing
segment revenues were $193,000. Investment income was $1.8 million, including
approximately $1 million from Jungfraubahn's annual dividend for 2003. Net
realized losses of $1.4 million were recorded, primarily consisting of $1.9
million in impairment charges, partially offset by approximately $550,000 net
realized gains on the sale of other securities. The charges consisted of $1.4
million for other than temporary impairment of our common stock holdings in Accu
Holding ($1.3 million) and Phoenix Capital, Inc. ($101,000), to reflect a
decline in the market value of these securities during the first nine months of
2004, and $537,000 for the permanent impairment of SIHL. In addition, a $554,000
decline in the estimated fair value of warrants we own to buy shares in
HyperFeed was recorded as a realized loss in accordance with SFAS No. 133. After
segment expenses of $12.7 million, the segment reported a loss before taxes of
$12.5 million for the first nine months of 2004.
For the first nine months of 2003, Business Acquisitions and Financing
segment revenues were $3 million. Investment income was $1.8 million, including
$957,000 from Jungfraubahn's annual dividend for 2002. Net realized gains were
$762,000. Realized gains of approximately $1.6 million on the sale of two equity
securities were partially offset by approximately $1.1 million in charges for
other than temporary impairment of our holdings in Accu Holding and SIHL. These
charges reflected a further decline in the market value of these holdings during
the first nine months of 2003. In addition, a $237,000 increase in the estimated
fair value of warrants we own to buy shares in other companies, principally
HyperFeed, was recorded as a realized gain in accordance with SFAS No. 133.
After segment expenses of $8.2 million, and our $565,000 equity share of
HyperFeed's net loss and other events affecting equity (during the period from
January 1, 2003 until May 14, 2003), the segment reported a loss before taxes of
$5.8 million for the first nine months of 2004.
The year over year increase in segment expenses of $4.5 million in the
first nine months of 2004 primarily resulted from expenses recorded related to
the PICO Holdings, Inc. Stock Appreciation Rights ("SAR") Program and foreign
currency.
During the third quarter of 2003, the call options and stock options
previously on issue were canceled and replaced with SAR. We believe that the
accounting treatment for SAR is more transparent than the current accounting
treatment of stock options.
Following the adoption of the SAR Program, PICO began to record the change
in the "in the money" amount (i.e., the difference between the market value of
PICO stock and the exercise price of the SAR) of SAR outstanding during each
quarter through the statement of operations. An increase in the "in the money"
amount of SAR (i.e., if the price of PICO stock rises during the quarter) is
recorded as an expense.
In effect, the balance sheet line "Stock appreciation rights liability" of
$12.4 million recognizes the cumulative "in the money" value of SAR dating back
to the time when the call and stock options were originally issued, some dating
as far back as 1993. Since the end of 1993, shortly after PICO's current
Chairman and Chief Executive Officer became involved with Physicians Insurance
Company of Ohio, the stock price has increased from approximately $3.25 per
share to $19.03 per share, on a comparable basis. Over the same period, the
market capitalization has increased from $14.5 million to $235.4 million
(including new shares issued for cash and acquisitions). After the related tax
effect, the stock appreciation rights liability reduced book value per share by
3.4% at September 30, 2004 (dilution effect).
The $6.5 million SAR expense for the first nine months of 2004 resulted
from an increase in the PICO stock price of $3.36 per share during the nine
month period, which represented a $41.6 million increase in PICO's equity market
capitalization. SAR expense for the third quarter of 2004 was $350,000,
resulting from a $0.18 increase in the PICO stock price during the quarter.
In the third quarter and first nine months of 2003, SAR expense was $3.3
million. Most the charge was one-time in nature, expensing the increase in the
"in the money" value of the options converted to SAR from the date of original
issue through to July 17, 2003, the date when the SAR Program was adopted.
The year over year change in segment expenses was also affected by
fluctuation in a non-cash expense related to foreign currency. Our interests in
Swiss public companies are held by Global Equity SA, a wholly owned subsidiary
which is incorporated in Switzerland. Part of Global Equity SA's funding comes
from a loan from PICO, which is denominated in Swiss francs. During accounting
periods when the Swiss franc 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 amount is reflected in the
foreign currency translation component of shareholders' equity (since it owes
PICO more US dollars); however, this does not go through the statement of
operations. Consequently, an expense or benefit is recorded in PICO's statement
of operations even though there is no net impact on shareholders' equity. In the
first nine months of 2003, segment expenses were reduced by a benefit of
approximately $1 million, compared to an expense of approximately $78,000 in the
first nine months of 2004. A benefit of $528,000 was recorded in the third
quarter of 2003, compared to a benefit of $83,000 in the third quarter of 2004.
17
INSURANCE OPERATIONS IN RUN OFF
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
---------------------------- ---------------------------
2004 2003 2004 2003
REVENUES:
Investment Income $ 778,000 $ 633,000 $2,142,000 $ 1,794,000
Realized Investment Gains 59,000 357,000 491,000 510,000
Other 2,000
--------- --------- ---------- ------------
Segment Total Revenues $ 837,000 $ 990,000 $2,633,000 $ 2,306,000
========= ========= ========== ============
EXPENSES:
Operating and Underwriting Expenses $(281,000) $(446,000) $ (868,000) $ (5,148,000)
--------- --------- ---------- ------------
Segment Total Expenses $(281,000) $(446,000) $ (868,000) $ (5,148,000)
INCOME (LOSS) BEFORE TAXES:
Physicians Insurance Company of Ohio $ 289,000 $ 218,000 $ 851,000 $ 3,875,000
Citation Insurance Company 267,000 326,000 914,000 (6,717,000)
--------- --------- ---------- ------------
Segment Income Before Tax $ 556,000 $ 544,000 $1,765,000 $ (2,842,000)
========= ========= ========== ============
This segment consists of Physicians Insurance Company of Ohio and Citation
Insurance Company. Both Physicians and Citation are in "run off." This means
that the companies are handling and resolving claims on expired policies, but
not writing new business. Usually, most of the revenues of "run off" insurance
companies come from investment income and realized gains or losses on the sale
of securities, which are the investments underlying the insurance company's
reserves and surplus.
Typically, Physicians and Citation hold fixed-income investments
equivalent to their claims reserves and state capital & deposit requirements,
and the remainder of their surplus is invested in small-capitalization value
equities. Over time, interest income from fixed-income securities is expected to
decline as fixed-income securities mature or are sold to provide the funds to
pay claims and expenses. Since the sale of Sequoia Insurance Company closed on
March 31, 2003, the investment portfolios of the "run off" insurance companies
have increased in value, as appreciation in the stocks component has exceeded
the decline in the fixed-income component.
The Insurance Operations in Run Off segment generated total revenues of
$837,000 in the third quarter of 2004, compared to $990,000 in the third quarter
of 2003, a decrease of $153,000 year over year. Investment income was $778,000
in the third quarter of 2004, compared to $633,000 in the third quarter of 2003,
an increase of $145,000 year over year. The increase in investment income year
over year is primarily due to increased investment in stocks with relatively
high dividend yields and, to a lesser extent, the timing of dividend receipts.
Realized investment gains were $59,000 in the third quarter of 2004, compared to
$357,000 in the third quarter of 2003, a decrease of $298,000 year over year.
Operating and underwriting expenses were $281,000 in the third quarter of
2004, compared to $446,000 in the third quarter of 2003. Consequently, segment
income increased from income of $544,000 in the third quarter of 2003 to income
of $556,000 in the third quarter of 2004.
For the first nine months of 2004, the Insurance Operations in Run Off
segment generated total revenues of $2.6 million, compared to $2.3 million in
the first nine months of 2003. Investment income was $2.1 million in the first
nine months of 2004, compared to $1.8 million in 2003, an increase of $348,000
year over year. Realized investment gains were $491,000 in the first nine months
of 2004, compared to $510,000 in 2003, a decrease of $19,000 year over year.
Operating and underwriting expenses were $868,000 in the first nine months
of 2004, compared to $5.1 million in the first nine months of 2004. Operating
and underwriting expenses were unusually high in the first nine months of 2003,
principally due to two significant items: o Physicians recorded a $3.6 million
benefit from favorable development in our medical professional liability claims
reserves. The reserve reduction was booked after actuarial analysis concluded
that
- - Physicians' reserves against claims were significantly greater than the
actuary's projections of future claims payments, due to continued
favorable trends in the "severity" of claims. This was more than offset
by;
- - A $7.5 million provision against a reinsurance recoverable previously
recorded by Citation, after Fremont Indemnity Company went into
liquidation in July 2003.
Consequently, segment income increased from a loss of $2.8 million in the
first nine months of 2003 to income of $1.8 million in the first nine months of
2004.
18
PHYSICIANS INSURANCE COMPANY OF OHIO
During the third quarter of 2004, Physicians generated total revenues of
$437,000. Operating and underwriting expenses were $148,000, resulting in income
before taxes of $289,000. During the third quarter of 2003, total revenues were
$415,000, operating and underwriting expenses were $197,000, and income before
taxes was $218,000.
For the first nine months of 2004, Physicians generated total revenues of
$1.4 million, including realized gains of $225,000. Operating and underwriting
expenses were $530,000, resulting in income before taxes of $851,000. During the
first nine months of 2003, total revenues were $944,000. Regular operating and
underwriting expenses were exceeded by the reserve reduction, resulting in
income before taxes of $3.9 million.
At September 30, 2004, Physicians' loss and loss adjustment reserves were
$17.3 million, net of reinsurance, compared to $18 million at June 30, 2004, and
$19.6 million at December 31, 2003. Reserves decreased by $2.3 million during
the first nine months of 2004, due to the payment of $2.3 million in losses and
loss adjustment expenses. No unusual trends in claims were noted during the
quarter.
PHYSICIANS INSURANCE COMPANY OF OHIO -- LOSS AND LOSS ADJUSTMENT EXPENSE
RESERVES
SEPTEMBER 30, 2004 JUNE 30, 2004 DECEMBER 31, 2003
------------------ ------------- -----------------
Direct Reserves $21.3 million $22.0 million $23.6 million
Ceded Reserves (4.0) (4.0) (4.0)
------------- ------------- -------------
NET MEDICAL PROFESSIONAL LIABILITY INSURANCE RESERVES $17.3 million $18.0 million $19.6 million
============= ============= =============
CITATION INSURANCE COMPANY
During the third quarter of 2004, Citation generated revenues of $400,000,
including realized gains of $48,000. After operating and underwriting expenses
of $133,000, Citation reported income before taxes of $267,000. In the third
quarter of 2003, Citation generated revenues of $575,000, operating and
underwriting expenses were $249,000, and Citation reported income before taxes
of $326,000.
For the first nine months of 2004, Citation generated revenues of $1.3
million, including realized gains of $266,000. After operating and underwriting
expenses of $338,000, Citation reported income before taxes of $914,000. In the
first nine months of 2003, Citation generated revenues of $1.4 million,
operating and underwriting expenses were $8.1 million, and Citation reported a
loss before taxes of $6.7 million.
At September 30, 2004, Citation's insurance claims reserves were $21.4
million, net of reinsurance, consisting of $10.9 million in net property and
casualty insurance reserves and $10.5 million in net workers' compensation
reserves. Citation's insurance claims reserves, net of reinsurance, totaled
$22.1 million at June 30, 2004, and $23.8 million at December 31, 2003.
Reserves decreased by $2.4 million during the first nine months of 2004,
primarily due to the payment of approximately $3.5 million in direct losses
(i.e., claims) and loss adjustment expenses, partially offset by the recovery of
approximately $1.2 million from reinsurance companies.
CITATION INSURANCE COMPANY -- LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
SEPTEMBER 30, 2004 JUNE 30, 2004 DECEMBER 31, 2003
------------------ ------------- -----------------
PROPERTY & CASUALTY INSURANCE
Direct Reserves $ 12.1 million $ 13.0 million $ 14.8 million
Ceded Reserves (1.2) (1.4) (1.5)
-------------- -------------- --------------
Net Property & Casualty Insurance Reserves $ 10.9 million $ 11.6 million $ 13.3 million
============== ============== ==============
WORKERS' COMPENSATION INSURANCE
Direct Reserves $ 21.6 million $ 21.9 million $ 22.4 million
Ceded Reserves (11.1) (11.4) (11.9)
-------------- -------------- --------------
Net Workers' Compensation Insurance Reserves $ 10.5 million $ 10.5 million $ 10.5 million
============== ============== ==============
-------------- -------------- --------------
TOTAL RESERVES $ 21.4 million $ 22.1 million $ 23.8 million
============== ============== ==============
19
HYPERFEED TECHNOLOGIES, INC.
THREE MONTHS ENDED SEPT. 30, NINE MONTHS ENDED SEPT. 30,
---------------------------- ----------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES:
Service $ 1,915,000 $ 479,000 $ 4,169,000 $ 584,000
Investment Income 1,000 4,000 9,000 6,000
Other
----------- ----------- ----------- -----------
Segment Total Revenues $ 1,916,000 $ 483,000 $ 4,178,000 $ 590,000
EXPENSES:
Cost of service $ (371,000) $ (402,000) $(1,292,000) $ (610,000)
Depreciation and amortization (253,000) (235,000) (669,000) (401,000)
Other (2,076,000) (1,277,000) (7,164,000) (1,964,000)
----------- ----------- ----------- -----------
Segment Total Expenses $(2,700,000) $(1,914,000) $(9,125,000) $(2,975,000)
----------- ----------- ----------- -----------
SEGMENT LOSS BEFORE TAXES AND MINORITY INTEREST $ (784,000) $(1,431,000) $(4,947,000) $(2,385,000)
=========== =========== =========== ===========
During the third quarter of 2004, HyperFeed generated $1.9 million in
revenues. Service revenues were $1.9 million and the costs of service were
$371,000, resulting in gross margin of $1.5 million. After the deduction of $2.3
million in other operating expenses, HyperFeed generated a segment loss before
taxes and minority interest of $784,000. For more information, please refer to
HyperFeed's 10-Q for the third quarter of 2004, which should be filed with the
SEC on or before November 5, 2004, the contents of which are not incorporated
into this 10-Q.
During the first nine months of 2004, HyperFeed generated $4.2 million in
revenues. Service revenues were $4.2 million and the costs of service were $1.3
million, resulting in gross margin of $2.9 million. After the deduction of $7.8
million in other operating expenses, HyperFeed generated a segment loss before
taxes and minority interest of $4.9 million.
In May 2003, PICO acquired a direct controlling financial interest in
HyperFeed, through direct ownership of a majority voting interest. HyperFeed
became a separate reporting segment from May 15, 2003.
In the third quarter of 2003, the HyperFeed segment recorded revenues of
$483,000, expenses of $1.9 million, and a loss before taxes and minority
interest of $1.4 million.
For the third quarter and first nine months of 2003, representing the
period from May 15, 2003 through September 30, 2003, the HyperFeed segment
recorded revenues of $590,000, expenses of $3 million, and a loss before taxes
and minority interest of $2.4 million. See the "Business Acquisitions and
Financing" segment analysis for the impact of HyperFeed in the first nine months
of 2003, for the period from January 1, 2003 through May 14, 2003.
DISCONTINUED OPERATIONS
Discontinued operations consist of:
- - Sequoia Insurance Company. PICO closed on the sale of Sequoia on March 31,
2003; and
- - Two businesses sold by HyperFeed -- its retail trading business sold in
the second quarter of 2003, and its consolidated market data feed
customers sold in the fourth quarter of 2003.
In 2004, the discontinued operations of HyperFeed generated after-tax
losses of $45,000 in the third quarter, and $31,000 in the first nine months.
In the third quarter of 2003, the discontinued operations of HyperFeed
generated after-tax income of $187,000.
In the first nine months of 2003, income from discontinued operations was
$3 million after-tax, consisting of $2.4 million earned by Sequoia in the three
months of 2003 that PICO owned Sequoia, and $570,000 from the discontinued
businesses of HyperFeed. In addition, we recorded after-tax gains on the
disposal of discontinued operations of $805,000 in the first nine months of
2003, consisting of $443,000 from the sale of Sequoia, and $362,000 from
HyperFeed's sale of PCQuote.com.
20
LIQUIDITY AND CAPITAL RESOURCES -- THREE AND NINE MONTHS ENDED SEPTEMBER 30,
2004 AND 2003
PICO's assets primarily consist of our operating subsidiaries, holdings in
other public companies, marketable securities, and cash and cash equivalents. On
a consolidated basis, the Company had $18.6 million in cash and cash equivalents
at September 30, 2004, compared to $17.6 million at June 30, 2004, and $24.3
million at December 31, 2003.
In addition to cash and cash equivalents, at September 30, 2004 the
consolidated group held fixed-income securities with a market value of $38.1
million and equities with a market value of $125.7 million.
Our cash flow fluctuates depending on the requirements of our operating
subsidiaries for capital, and activity in our insurance company investment
portfolios. Our primary sources of funds include cash balances, cash flow from
operations, the sale of holdings, and -- potentially -- the proceeds of
borrowings or offerings of equity and debt. We endeavor to ensure that funds are
always available to take advantage of new acquisition opportunities.
In broad terms, the cash flow profile of our principal operating
subsidiaries is:
- - As commercial use of Vidler's water assets increases, we expect that
Vidler will generate free cash flow as receipts from leasing water or
storage capacity, and the proceeds from selling land and water rights,
begin to overtake maintenance capital expenditure, financing costs, and
operating expenses. As water lease and storage contracts are signed, we
anticipate that Vidler may be able to monetize some of the contractual
revenue streams, which could potentially provide another source of funds;
- - Nevada Land is actively selling land which has reached its highest and
best use, and is not part of PICO's long-term utilization plan for the
property. Nevada Land's principal sources of cash flow are the proceeds of
cash sales, and collections of principal and interest on sales contracts
where Nevada Land has provided vendor financing. These receipts and other
revenues exceed Nevada Land's operating costs, so Nevada Land is
generating strong positive cash flow;
- - As its "run off" progresses, Physicians is obtaining funds to pay
operating expenses and claims from the maturity of fixed-income
securities, the realization of investments, and recoveries from
reinsurance companies;
- - At this stage of its "run off," investment income more than covers
Citation's regular operating expenses. The funds required to pay claims
are coming from the sale or maturity of fixed-income securities in
Citation's investment portfolio, and recoveries from reinsurance
companies; and
- - HyperFeed finances its operations from its own cash and cash equivalents
balances on a stand-alone basis. At September 30, 2004, HyperFeed had
approximately $146,000 in cash and cash equivalents, and $195,000 in
borrowings.
On November 2, 2004, the Company entered into a Secured Convertible
Promissory Note Agreement ("Note") with HyperFeed for $1.5 million. (See Note 4,
"Commitments and Contingencies" in the Notes to the Condensed Consolidated
Financial Statements).
As of the date of this quarterly report on Form 10-Q for the three months
ended September 30, 2004, HyperFeed has not borrowed any funds from the Company
under the terms of this Note.
The Departments of Insurance in Ohio and California prescribe minimum
levels of capital and surplus for insurance companies, and set guidelines for
insurance company investments. Typically, PICO's insurance subsidiaries
structure the maturity of fixed-income securities to match the projected pattern
of claims payments. When interest rates are at very low levels, to insulate the
capital value of the bond portfolios against a decline in value which would be
brought on by a future increase in interest rates, the bond portfolios may have
a shorter duration than the projected pattern of claims payments. It is possible
that fixed-income and equity securities may occasionally need to be sold at
unfavorable times when the bond market, the stock market, or the prices of
individual securities are depressed.
As shown in the Condensed Consolidated Statements of Cash Flows, cash and
cash equivalents decreased by $5.7 million in the first nine months of 2004,
compared to an increase of $647,000 in the first nine months of 2003.
During the first nine months of 2004, cash of $6.8 million was used in
Operating Activities, including $386,000 of cash used in discontinued operations
of HyperFeed. Operating cash flows include the collection of $2.3 million of
principal on two collateralized notes receivable, related to Vidler's sale of
assets at Big Springs Ranch and West Wendover in 2003.
21
Receipt of a principal payment on the West Wendover note scheduled for
September 30, 2004 is past due, and the note went into default in October 2004.
PICO is negotiating with the buyer of the property to work out the debt, which
consists of approximately $3.9 million in principal and interest. PICO's
ultimate security is the ability to realize on the property at West Wendover
collateralizing the note. The lands were sold for $12 million, and the buyer has
outlaid more than $8 million for the down payment and subsequent principal
repayments.
A principal repayment of $250,000 on the Big Springs note was received in
October 2004, and the remaining principal of approximately $250,000 is scheduled
to be repaid by the end of 2004.
In the first nine months of 2003, operating activities used cash of $8.1
million, including $1.4 million in cash used in the operating activities of
discontinued operations. The principal uses of cash in 2004 and 2003 include
operating expenses at Vidler, the payment of claims by Citation and Physicians,
and group overhead.
Investing Activities used $1.3 million of cash in the first nine months of
2004, compared to $10 million of cash generated in the first nine months of
2003. In 2004, the sale and maturity of fixed-income securities exceeded new
purchases, providing a $13.8 million net cash inflow. The principal investing
cash outflows in 2004 were the net investment of $12 million in stocks, and $1.3
million to purchase the minority shareholdings in Vidler Water Company and
SISCOM Inc. The cash inflow in 2003 principally resulted from the sale of
Sequoia for gross proceeds of approximately $43.1 million, less a $17.9 million
dividend of common stocks and debt securities received. The remaining 2003
Investing Activity cash flow items primarily resulted from the net investment of
$4.9 million in stocks and the net investment of $10 million in fixed-income
securities. This represented routine activity in the investment portfolios of
our insurance subsidiaries and the temporary investment of funds held by
non-insurance group companies.
Financing Activities provided $2.4 million in the first nine months of
2004, principally due to a $2.6 million increase in Swiss franc borrowings to
fund additional purchases of stocks in Switzerland. In the first half of 2003,
Financing Activities used cash of $441,000.
At September 30, 2004, PICO had no significant commitments for future
capital expenditures.
SHARE REPURCHASE PROGRAM
In October 2002, PICO's Board of Directors authorized the repurchase of up
to $10 million of PICO common stock. The stock purchases may be made from time
to time at prevailing prices through open market or negotiated transactions,
depending on market conditions, and will be funded from available cash.
As of September 30, 2004, no stock had been repurchased under this
authorization.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PICO's condensed consolidated balance sheets include a significant amount
of assets and liabilities the fair values of which are subject to market risk.
Market risk is the risk of loss arising from adverse changes in market interest
rates or prices. PICO currently has interest rate risk as it relates to its
fixed maturity securities and mortgage participation interests, equity price
risk as it relates to its marketable equity securities, and foreign currency
risk as it relates to investments denominated in foreign currencies. Generally,
PICO's borrowings are short to medium term in nature and therefore the carrying
amounts approximate fair value. At September 30, 2004, PICO had $38 million of
fixed maturity securities and mortgage participation interests, $125.7 million
of marketable equity securities that were subject to market risk, of which $67.5
million were denominated in foreign currencies, primarily Swiss francs. PICO's
investment strategy is to manage the duration of the portfolio relative to the
duration of the liabilities while managing interest rate risk.
PICO uses two models to report the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities, and
mortgage participation interests, PICO uses duration modeling to calculate
changes in fair value. For its marketable equity securities, PICO uses a
hypothetical 20% decrease in the fair value to analyze the sensitivity of its
market risk assets and liabilities. For investments denominated in foreign
currencies, PICO uses a hypothetical 20% decrease in the local currency of that
investment. Actual results may differ from the hypothetical results assumed in
this disclosure due to possible actions taken by management to mitigate adverse
changes in fair value and because the fair value of securities may be affected
by credit concerns of the issuer, prepayment rates, liquidity, and other general
market conditions. The sensitivity analysis duration model produced a loss in
fair value of $1.2 million for a 100 basis point decline in interest rates on
its fixed-maturity securities and mortgage participation interests. The
hypothetical 20% decrease in fair value of PICO's marketable equity securities
produced a loss in fair value of $25.1 million that would impact the unrealized
appreciation in shareholders' equity, net of the related tax effect; however, if
the losses were determined to be other than temporary, they would impact net
loss. The hypothetical 20% decrease in the local currency of PICO's foreign
denominated investments produced a loss of $11 million that would impact the
foreign currency translation in shareholders' equity.
22
ITEM 4: CONTROLS AND PROCEDURES
Under the supervision of and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of our disclosure controls and procedures, as such
term is defined under Rules 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
quarterly report.
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: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------------------------------------------------------------
(d) Maximum Number (or Approximate
(b) Average (c) Total Number of Shares (or Units) Dollar Value) of Shares (or Units)
(a) Total number of Price Paid Purchased as Part of Publicly that May Yet Be Purchased
Period shares purchased per Share Announced Plans or Programs(1) Under the Plans or Programs(1)
- ---------------- ------------------- ----------- ------------------------------------- ----------------------------------
7/1/04 - 7/31/04 1,034 $18.66
8/1/04 - 8/31/04 230 $17.70
9/1/04 - 9/30/04
Note: Shares listed above are part of a deferred compensation plan for certain
directors and officers of PICO Holdings, Inc. These deferred compensation plans
are not part of a publicly announced plan and the maximum number of shares to
repurchase is unknown since the election to defer their compensation can be
increased or decreased at any time by the participating directors and officers.
(1) In October 2002, PICO's Board of Directors authorized the repurchase of up
to $10 million of PICO common stock. The stock purchases may be made from time
to time at prevailing prices through open market or negotiated transactions,
depending on market conditions, and will be funded from available cash. As of
September 30, 2004, no stock had been repurchased under this authorization.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an Annual Meeting of Shareholders on July 15, 2004. At
the meeting, Robert R. Broadbent and Carlos C. Campbell were re-elected as
directors. The vote for Mr. Broadbent was 9,105,101 in favor, none against, and
127,757 withheld. The vote for Mr. Campbell was 8,905,259 in favor, none
against, and 327,599 withheld.
ITEM 5: OTHER INFORMATION
None
23
ITEM 6: EXHIBITS
Exhibit
Number Description
- ------- -----------
+3.1 Amended and Restated Articles of Incorporation of PICO.
++3.2 Amended and Restated By-laws of PICO.
31.1. Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.
31.2. Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.
32.1. Section 1350 certification of Chief Executive Officer.
32.2. Section 1350 certification of Chief Financial Officer.
- ---------------------------------
+ Incorporated by reference to exhibit of same number filed with Form 8-K
dated December 4, 1996.
++ Filed as Appendix to the prospectus in Part I of Registration Statement on
Form S-4 (File No. 333-06671).
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PICO HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PICO HOLDINGS, INC.
Dated: November 8, 2004 By: /s/ Maxim C. W. Webb
---------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
25