UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
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 12,366,440 as of March 31, 2005, excluding 3,228,300 shares of common
stock held by the registrant's subsidiaries.
PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NO.
--------
PART I: FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial
Condition and the Results of Operations 10
Item 3: Quantitative and Qualitative Disclosure About Market
Risk 19
Item 4: Controls and Procedures 19
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 20
Item 2: Unregistered Sales of Equity Securities and Use of
Proceeds 20
Item 3: Defaults Upon Senior Securities 20
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 5: Other Information 20
Item 6: Exhibits 21
Signature 22
2
PART I: FINANCIAL INFORMATION
ITEM I: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2005 2004
------------ ------------
ASSETS
Investments $195,840,491 $182,457,429
Cash and cash equivalents 15,264,197 17,407,138
Notes and other receivables, net 13,185,243 14,951,973
Reinsurance receivables 17,057,529 17,157,329
Real estate and water assets, net 110,489,662 110,700,456
Property and equipment, net 2,174,424 2,436,921
Other assets 8,077,422 9,512,807
Other assets - Discontinued Operations 57,692 6,970
------------ ------------
Total assets $362,146,660 $354,631,023
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 54,066,009 $ 55,994,375
Reinsurance balance payable 673,024 673,024
Stock appreciation rights liability 25,600,397 15,731,741
Bank and other borrowings 17,372,264 18,020,559
Net deferred income taxes 11,084,802 9,193,060
Other liabilities 10,427,700 11,989,257
Other liabilities - Discontinued Operations 967,271 759,372
------------ ------------
Total liabilities 120,191,467 112,361,388
------------ ------------
Minority interest 1,510,098 2,340,337
------------ ------------
Commitments and Contingencies (Note 4)
Common stock, $.001 par value; authorized
100,000,000 shares, 16,801,923 issued in 2005 and 2004 16,802 16,802
Additional paid-in capital 236,089,222 236,089,222
Retained earnings 38,560,871 45,524,219
Accumulated other comprehensive income 44,205,684 36,725,700
Treasury stock, at cost (common shares: 4,435,483 in 2005
and 4,435,444 in 2004) (78,427,484) (78,426,645)
------------ ------------
Total shareholders' equity 240,445,095 239,929,298
------------ ------------
Total liabilities and shareholders' equity $362,146,660 $354,631,023
============ ============
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2005 2004
------------ -----------
Revenues:
Net investment income $ 1,190,132 $ 1,077,754
Net realized gain (loss) on investments 3,479,951 (335,128)
Sale of real estate and water assets 2,154,080 276,499
Rents, royalties and lease income 294,184 315,599
Service revenue 889,054 838,127
Other 108,772 223,959
------------ -----------
Total revenues 8,116,173 2,396,810
------------ -----------
Costs and Expenses:
Operating and other costs 7,185,428 7,689,918
Stock appreciation rights expense 9,878,347 1,512,091
Cost of real estate and water assets sold 742,048 111,676
Cost of service revenue 283,243 463,668
Depreciation and amortization 565,461 534,114
Interest 235,234 184,970
------------ -----------
Total costs and expenses 18,889,761 10,496,437
------------ -----------
Loss before income taxes and minority interest (10,773,588) (8,099,627)
Benefit for income taxes (3,001,172) (1,589,221)
------------ -----------
Loss before minority interest (7,772,416) (6,510,406)
Minority interest in loss of subsidiaries 831,667 1,441,071
------------ -----------
Loss from continuing operations (6,940,749) (5,069,335)
Income (loss) from discontinued operations,
net of tax (22,599) 51,326
------------ -----------
Net loss $ (6,963,348) $(5,018,009)
============ ===========
Net loss per common share - basic and diluted:
Loss from continuing operations $ (0.56) $ (0.41)
Discontinued operations
------------ -----------
Net loss per common share $ (0.56) $ (0.41)
============ ===========
Weighted average shares outstanding 12,366,440 12,370,264
============ ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2005 2004
----------- ------------
OPERATING ACTIVITIES:
Net cash used in operating activities $(3,833,844) $ (5,443,538)
Net cash provided by (used in) discontinued operations 157,185 (521,521)
----------- ------------
(3,676,659) (5,965,059)
----------- ------------
INVESTING ACTIVITIES:
Purchases of investments (5,373,462) (11,797,384)
Proceeds from sale of investments 5,822,036 7,814,816
Proceeds from maturity of investments 605,000
Purchases of property and equipment (368,743) (265,368)
Purchases of minority interest in subsidiaries (1,312,686)
Capitalized software costs (338,980) (334,489)
----------- ------------
Net cash provided by (used in) investing activities 345,851 (5,895,111)
----------- ------------
FINANCING ACTIVITIES:
Repayments of debt (42,874) (13,074)
Proceeds from borrowings 35,000 2,394,636
Proceeds from exercise of stock options (HyperFeed) 1,428 20,661
Purchase of treasury stock for deferred compensation plans (839) (52,645)
----------- ------------
Net cash provided by (used in) financing activities (7,285) 2,349,578
----------- ------------
Effect of exchange rate changes on cash 1,195,152 402,546
----------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (2,142,941) (9,108,046)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,407,138 24,348,693
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $15,264,197 $ 15,240,647
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 155,884 $ 91,947
=========== ============
Cash paid for taxes: $ 1,132,311
===========
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, 2005.
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, 2004
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 values of such
assets and liabilities are appropriate as of March 31, 2005 and December
31, 2004, it is reasonably possible that actual results could differ from
the estimates upon which the carrying values were based.
Stock-Based Compensation
The Company has a Stock Appreciation Rights Program (the "SAR
program"), which is a stock-based compensation program. The maximum number
of SARs issuable under the plan is approximately 2 million and at March 31,
2005, 80,000 remain that could be issued. Included in the accompanying
condensed consolidated 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 months ended March 31, 2005
and 2004 a charge of $9.9 million and $1.5 million, respectively, was
recorded. The accrued benefit payable under this program is $25.6 million
at March 31, 2005. During 2005, 1,500 SARs were exercised and the Company
paid $9,700 on exercise.
The Company applies the provisions of Statement of Financial
Accounting Standards ("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 months ended March 31:
Three Months Ended March 31,
----------------------------
2005 2004
----------- -----------
Reported net loss $(6,963,348) $(5,018,009)
Add: stock-based compensation recorded, net of income tax 6,519,709 997,980
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of income tax -- --
----------- -----------
Pro forma net loss $ (443,639) $(4,020,029)
=========== ===========
Reported net loss per share: basic and diluted $ (0.56) $ (0.41)
=========== ===========
Pro forma net loss per share: basic and diluted $ (0.04) $ (0.32)
=========== ===========
No stock-based compensation is reported in the table above since all
awards granted were previously vested and no additional grants have been
made.
Had there been stock-based awards to value, the Company would use the
Black-Scholes valuation model. This model requires the input of highly
subjective assumptions, including the expected stock price volatility and
estimated life of the stock-based compensation. Because the Company SARs
have characteristics significantly different from those of any like
instrument that is publicly traded, and because changes in the subjective
input assumptions can materially change the fair value estimate, management
believes the existing model does not necessarily provide a reliable single
measure of the fair value of its SARs.
The effects of applying SFAS No. 148 in this pro forma disclosure are
not indicative of future amounts.
Notes and Other Receivables
At March 31, 2005, notes receivable includes a $1.5 million receivable
arising from a sale of property in West Wendover, Nevada in 2003. The
property was sold for $12 million, and through March 31, 2005 the buyer had
made scheduled principal and interest payments of approximately $10.5
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 were not paid timely, and the receivable went past due. The
Company has allowed the buyer of the property additional time to pay the
balance by extending the due date until March 2006. The Company received
$1.4 million of the balance during 2005. 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 December 31, 2004 and March
31, 2005 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 December 2004, FASB issued Statement 123(Revised), Share-Based
Payment, which replaces FASB Statement No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees. Statement 123(Revised) is effective for public
entities that do not file as small business issuers--as of the beginning of
the first quarter of the first fiscal period that begins after June 15,
2005. The new Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. This Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. This Statement does not change the
accounting guidance for share-based payment transactions with parties other
than employees provided in Statement 123 as originally issued and EITF
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services." This Statement does not address the accounting for employee
share ownership plans, which are subject to AICPA Statement of Position
93-6, Employers' Accounting for Employee Stock Ownership Plans. This
Statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award--the requisite service period
(usually the vesting period). No compensation cost is recognized for equity
instruments for which employees do not render the requisite service.
Employee share purchase plans will not result in recognition of
compensation cost if certain conditions are met; those conditions are much
the same as the related conditions in Statement 123. PICO Holdings has a
cash based SAR plan which is
7
included in these provisions and described as a Share-based Liability plan.
PICO currently records compensation expense under the variable plan method
using the intrinsic value of the SARs. However, the new rules will require
PICO to re-measure its liability each reporting period using a fair value
approach until the awards are settled. Management is currently assessing
the impact adoption of this statement will have on the Company's
consolidated financial statements.
2. NET LOSS PER SHARE
Basic earnings per share is computed by dividing net earnings by the
weighted average shares outstanding during the period. For the three months
ended March 31, 2005 and March 31, 2004, the Company has no common stock
equivalents, and consequently, diluted earnings per share is identical to
basic earnings per share.
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 March 31,
----------------------------
2005 2004
----------- -----------
Net income (loss) $(6,963,348) $(5,018,009)
Net change in unrealized appreciation
(depreciation) on available for sale investments 7,663,942 9,521,291
Net change in foreign currency translation (183,958) 8,548
----------- -----------
Total comprehensive income $ 516,636 $ 4,511,830
=========== ===========
Total comprehensive income for the three months ended March 31, 2005
and 2004 is net of deferred income tax charges of $1.9 million and $2.5
million, respectively.
The components of accumulated other comprehensive income:
March 31, December 31,
2005 2004
----------- ------------
Unrealized appreciation on
available for sale investments $49,611,104 $41,947,162
Foreign currency translation (5,405,420) (5,221,462)
----------- -----------
Accumulated other comprehensive income $44,205,684 $36,725,700
=========== ===========
Accumulated other comprehensive income is net of deferred income tax
liabilities of $23.6 million and $18.2 million at March 31, 2005 and
December 31, 2004, respectively.
4. COMMITMENTS AND CONTINGENCIES
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"). On March 28, 2005, the terms of
the note were significantly modified to increase the maximum borrowing
under the note from $1.5 million to $4 million and to change the exercise
price of the conversion right to the lesser of 80% of the 5 day average at
March 28, 2005, or 80% of the 5 day average at the exercise date. The
Company can elect to convert all or any part of the principal and interest
outstanding into common stock of HyperFeed at any time. The Company has
eliminated the intercompany note and related interest expense.
(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 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.
8
5. DISCONTINUED OPERATIONS
During 2003, HyperFeed classified a segment of its business as
discontinued operations. These operations generated a loss of $23,000 for
the three months ended March 31, 2005 and $51,000 in income for the three
months ended March 31, 2004. At March 31, 2005 discontinued operations
reported assets of $58,000 and liabilities of $967,000.
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 2004 Annual Report on Form 10-K.
Management analyzes segments using the following information:
Segment assets:
At March 31, At December 31,
2005 2004
------------ ---------------
TOTAL ASSETS:
Vidler Water Company $ 85,183,604 $ 83,533,742
Nevada Land and Resource Company 46,836,601 47,391,982
Business Acquisitions and Financing 89,522,291 87,905,906
Insurance Operations in Run Off 136,891,643 131,824,847
HyperFeed Technologies, Inc. 3,712,521 3,974,546
------------ ------------
$362,146,660 $354,631,023
============ ============
Segment revenues and income (loss) before taxes and minority interest
for the first quarter of 2005 and 2004 were:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------ -----------
REVENUES:
Vidler Water Company $ 407,000 $ 363,000
Nevada Land & Resource Company 2,367,000 539,000
Business Acquisitions and Financing 1,862,000 (222,000)
Insurance Operations in Run Off 2,591,000 872,000
HyperFeed Technologies 889,000 845,000
------------ -----------
Total Revenues $ 8,116,000 $ 2,397,000
============ ===========
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (1,518,000) $(1,386,000)
Nevada Land & Resource Company 1,239,000 (26,000)
Business Acquisitions and Financing (11,048,000) (4,560,000)
Insurance Operations in Run Off 2,253,000 526,000
HyperFeed Technologies (1,700,000) (2,654,000)
------------ -----------
Loss Before Taxes and Minority Interest $(10,774,000) $(8,100,000)
============ ===========
7. SUBSEQUENT EVENTS
HARQUAHALA VALLEY, ARIZONA
On April 5, 2005, the Company announced that Vidler had agreed to sell
approximately 42,000 acre-feet of water rights and the related 15,470 acres
of land in the Harquahala Valley for $95.2 million. A deposit of $1 million
was received on April 4, 2005, a further $4 million was received on May 4,
2005, and the balance is scheduled to be paid in cash at closing on June
30, 2005. At the time the sale closes, Vidler's cost of the assets is
expected to be approximately $37 million. If the sale closes as expected,
Vidler will own approximately 2,880 acre-feet of groundwater rights in
Arizona.
9
LINCOLN COUNTY WATER DISTRICT, NEVADA
On April 22, 2005, the Company announced that the Lincoln County Water
District and Vidler ("Lincoln/Vidler") entered into an agreement to sell
water to a developer. Lincoln/Vidler has agreed to sell the developer an
initial amount of 2,100 acre-feet of water for approximately $15.7 million,
which represents a price of $7,500 per acre-foot. The developer has agreed
to pay 20% of the purchase price by June 15, 2005, and the balance by
August 9, 2005.
The developer has up to 10 years to purchase an additional 7,240
acre-feet of water, as and when supplies are permitted from existing
applications. The initial price of $7,500 per acre-foot will increase at
10% each year. In addition, the developer will pay a commitment fee equal
to 10% of the outstanding balance of unpurchased water each year, beginning
August 9, 2006, which will be applied to the purchase of water. Under the
agreement between the Lincoln County Water District and Vidler Water
Company, the proceeds from the sale of water will be shared equally after
Vidler is reimbursed for the expenses incurred in developing water
resources in Lincoln County.
PRIVATE PLACEMENT OF COMMON STOCK
On May 6, 2005, the Company announced that it had entered into
definitive agreements to sell 905,000 shares of newly-issued common stock
to institutional investors at a price of $25 per share. After placement
costs, the net proceeds to the Company will be approximately $21.4 million.
The shares have not been registered under the Securities Act. The
Company will file a Form S-3 registration statement with the Securities and
Exchange Commission to register the resale of the newly-issued 905,000
common shares after the closing of the transaction.
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, INCLUDING, WITHOUT LIMITATION, STATEMENTS
ABOUT OUR EXPECTATIONS, BELIEFS, INTENTIONS, ANTICIPATED DEVELOPMENTS, AND OTHER
INFORMATION CONCERNING FUTURE MATTERS. 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.
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 THE ACTUAL RESULTS AND
OUTCOMES COULD DIFFER FROM THOSE DISCUSSED IN OR ANTICIPATED BY THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT 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 2004 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 2004 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.
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 businesses and
interests in businesses where there is significant unrecognized value in land
and other tangible assets.
10
We have acquired businesses and interests in businesses by the acquisition
of private companies, and the purchase of 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.
Our business is currently separated into five major operating segments:
- - Vidler Water Company, Inc. ("Vidler"), which develops and owns water rights
and water storage operations in the southwestern United States, primarily
in Nevada and Arizona;
- - Nevada Land & Resource Company, LLC ("Nevada Land"), which owns
approximately 1 million acres of land in northern Nevada, and the mineral
rights and water rights related to the land owned;
- - Insurance Operations in "Run Off," consisting of 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 historic property & casualty
insurance and workers' compensation loss reserves;
- - Business Acquisitions & Financing, which contains our other businesses,
interests in businesses, and parent company assets; 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 MONTHS ENDED MARCH 31, 2005 AND 2004
SHAREHOLDERS' EQUITY
At March 31, 2005, PICO had shareholders' equity of $240.4 million ($19.44
per share), compared to $239.9 million ($19.40 per share) at December 31, 2004,
and $233.6 million ($18.89 per share) at March 31, 2004. Book value per share
increased by $0.04, or 0.2%, during the first quarter of 2005.
The $516,000 increase in shareholders' equity during the first quarter of
2005 primarily resulted from a $7.7 million net increase in unrealized
appreciation in investments, which more than offset the quarter's net loss of $7
million.
COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," PICO reports comprehensive income as well as
net income from the Condensed Consolidated Statement of Operations.
Comprehensive income measures changes in shareholders' equity, and includes
unrealized items which are not recorded in the Consolidated Statement of
Operations, for example, foreign currency translation and the change in
investment gains and losses on available-for-sale securities.
For the first quarter of 2005, PICO recorded comprehensive income of
$517,000, principally represented by the $7.7 million net increase in unrealized
appreciation in investments, which was partially offset by a foreign currency
translation debit of $184,000 and the $7 million net loss.
During the first quarter of 2004, PICO recorded comprehensive income of
$4.5 million, consisting of a $9.5 million net increase in unrealized
appreciation in investments and a foreign currency translation credit of $9,000,
which were partially offset by the $5 million net loss.
NET INCOME (LOSS)
PICO reported a net loss of $7 million ($0.56 per share) for the first
quarter of 2005, consisting of a $6.9 million ($0.56 per share) loss from
continuing operations and a loss from discontinued operations of $23,000
after-tax ($0.00 per share). The $6.9 million net loss from continuing
operations consisted of a $10.8 million loss before income taxes and minority
interest, partially offset by an income tax benefit of $3 million and minority
interest of $832,000.
For the first quarter of 2004, PICO reported a net loss of $5 million
($0.41 per share), consisting of a $5.1 million ($0.41 per share) loss from
continuing operations, partially offset by income from discontinued operations
of $51,000 after-tax ($0.00 per share). The $5.1 million net loss from
continuing operations consisted of an $8.1 million loss before income taxes and
minority interest, partially offset by an income tax benefit of $1.6 million and
minority interest of $1.4 million.
11
Segment revenues and income (loss) before taxes and minority interest for
the first quarter of 2005 and 2004 were:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------ -----------
REVENUES:
Vidler Water Company $ 407,000 $ 363,000
Nevada Land & Resource Company 2,367,000 539,000
Business Acquisitions and Financing 1,862,000 (222,000)
Insurance Operations in Run Off 2,591,000 872,000
HyperFeed Technologies 889,000 845,000
------------ -----------
Total Revenues $ 8,116,000 $ 2,397,000
============ ===========
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $ (1,518,000) $(1,386,000)
Nevada Land & Resource Company 1,239,000 (26,000)
Business Acquisitions and Financing (11,048,000) (4,560,000)
Insurance Operations in Run Off 2,253,000 526,000
HyperFeed Technologies (1,700,000) (2,654,000)
------------ -----------
Loss Before Taxes and Minority Interest $(10,774,000) $(8,100,000)
============ ===========
The principal causes of the $5.7 million year over year increase in
revenues were:
- - $1.7 million higher land sales at Nevada Land;
- - $1.7 million higher realized gains on the sale of investments in the
Insurance Operations in Run Off segment; and
- - $2.1 million higher revenues in the Business Acquisitions and Financing
segment, primarily due to a $2 million increase in net realized gains on
the sale of investments.
The $2.7 million year over year increase in the loss before taxes and
minority interest primarily resulted from:
- - a $6.5 million higher loss from Business Acquisitions and Financing
segment, as an $8.4 million increase in the expense related to Stock
Appreciation Rights ("SAR") and a $206,000 increase in other expenses,
offset a $2.1 million increase in revenues. During the first quarter of
2005, the PICO stock price increased by $5.14 per share resulting in SAR
expense of $9.9 million, compared to a $1.5 million expense resulting from
a $0.77 per share increase in the PICO stock price during the first quarter
of 2004. This was partially offset by
- - $1.3 million higher segment income from Nevada Land, primarily due to a
$1.2 million increase in gross margin on land sales year over year;
- - $1.7 million higher segment income from Insurance Operations in Run Off,
principally due to a $1.7 million increase in realized gains; and
- - a $954,000 lower loss from HyperFeed.
VIDLER WATER COMPANY, INC.
Three Months Ended March 31,
----------------------------
2005 2004
----------- -----------
REVENUES:
Sale of Land and Water Rights $ 152,000
Lease of Water 19,000 $ 21,000
Lease of Agricultural Land 129,000 121,000
Interest 53,000 160,000
Other 54,000 61,000
----------- -----------
Segment Total Revenues $ 407,000 $ 363,000
=========== ===========
EXPENSES:
Cost of Land and Water Rights Sold $ (72,000)
Depreciation and Amortization (316,000) $ (276,000)
Interest (129,000) (93,000)
Project Expenses (944,000) (911,000)
Overhead Expenses (464,000) (469,000)
----------- -----------
Segment Total Expenses $(1,925,000) $(1,749,000)
----------- -----------
LOSS BEFORE TAX $(1,518,000) $(1,386,000)
=========== ===========
In the first quarter of 2005, Vidler's revenues were $407,000. The largest
revenue items were $152,000 from the sale of water rights in Colorado, and
$129,000 from the lease of agricultural land. After operating expenses of $1.9
million, Vidler generated a loss before taxes of $1.5 million for the first
quarter of 2005.
12
In the first quarter of 2004, Vidler's revenues totaled $363,000. The
largest revenue items were $160,000 of interest earned on collateralized notes
receivable related to the assets at Big Springs Ranch and West Wendover sold in
2003, and $121,000 from the lease of agricultural land. After operating expenses
of $1.7 million, Vidler generated a loss before taxes of $1.4 million for the
first quarter of 2004.
Revenues increased $44,000 year over year, primarily due to the $152,000 in
water rights sales in 2005 compared to no sales in the prior year. This was
partially offset by a $107,000 reduction in interest earned, principally due to
lower outstanding balances on the Big Springs Ranch and West Wendover notes as
the principal was progressively repaid.
Operating expenses increased by $176,000 year over year. This was
principally due to the recognition of the $72,000 cost of water rights sold in
Colorado, and year over year increases of $40,000 in Depreciation and
Amortization, $36,000 in Interest, and $33,000 in Project Expenses.
Project Expenses were $944,000 in the first quarter of 2005 and $911,000 in
the first quarter of 2004. Project Expenses consist of costs related to the
development of existing water resources, such as maintenance and professional
fees. Project expenses are recorded as expenses as incurred, and could fluctuate
from period to period depending on activity regarding Vidler's various water
resource projects. It should be noted that costs related to the development of
water resources which meet the criteria to be recorded as assets in our
financial statements are capitalized to the cost of the asset, and amortized
against matching revenues once revenues are generated.
Overhead Expenses were $464,000 in the first quarter of 2005 and $469,000
in the first quarter of 2004. 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.
SUBSEQUENT EVENTS:
HARQUAHALA VALLEY, ARIZONA
On April 5, 2005, we announced that Vidler has agreed to sell approximately
42,000 acre-feet of water rights and the related 15,470 acres of land in the
Harquahala Valley for $95.2 million. A deposit of $1 million was received on
April 4, 2005, a further $4 million was received on May 4, 2005, and the balance
is scheduled to be paid in cash on June 30, 2005.
The sale agreement covers the vast majority of Vidler's water rights in the
Harquahala Valley. At the time the sale closes, we currently estimate that
Vidler's cost for the assets being sold will be approximately $37 million.
LINCOLN COUNTY WATER DISTRICT, NEVADA
On April 22, 2005, we announced that the Lincoln County Water District and
Vidler ("Lincoln/Vidler") have entered into an agreement to sell water to a
developer. The developer is one of the purchasers of approximately 13,300 acres
of land that was recently auctioned by the Bureau of Land Management in Lincoln
County. It is anticipated that the mixed-use development planned to be built
will include approximately 50,000 residential units.
Lincoln/Vidler has agreed to sell the developer an initial amount of 2,100
acre-feet of water for approximately $15.7 million, which represents a price of
$7,500 per acre-foot. The developer has agreed to pay 20% of the purchase price
by June 15, 2005, and the balance by August 9, 2005.
The developer has up to 10 years to purchase an additional 7,240 acre-feet
of water, as and when supplies are permitted from existing applications. The
initial price of $7,500 per acre-foot will increase at 10% each year. In
addition, the developer will pay a commitment fee equal to 10% of the
outstanding balance of unpurchased water each year, beginning August 9, 2006,
which will be applied to the purchase of water.
Under the agreement between the Lincoln County Water District and Vidler
Water Company, the proceeds from the sale of water will be shared equally after
Vidler is reimbursed for the expenses incurred in developing water resources in
Lincoln County.
13
NEVADA LAND & RESOURCE COMPANY, LLC
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
----------- ---------
REVENUES:
Sale of Land $ 2,003,000 $ 276,000
Lease and Royalty 145,000 174,000
Interest and Other 219,000 89,000
----------- ---------
Segment Total Revenues $ 2,367,000 $ 539,000
=========== =========
EXPENSES:
Cost of Land Sales $ (669,000) $(112,000)
Operating Expenses (459,000) (453,000)
----------- ---------
Segment Total Expenses $(1,128,000) $(565,000)
----------- ---------
INCOME (LOSS) BEFORE TAX $ 1,239,000 $ (26,000)
=========== =========
Nevada Land recognizes revenue from land sales, and the resulting gross
profit or loss, when the sales transactions close. On closing, the entire sales
price is recorded as revenue, and a gross margin is recognized depending on the
cost basis attributed to the land which was sold. Since the date of closing
determines the accounting period in which the sales revenue and gross margin are
recorded:
- - Nevada Land's reported revenues and income fluctuate from quarter to
quarter depending on the dates when specific transactions close; and
- - land sales revenues for any individual quarter are not indicative of likely
full-year revenues.
In the first quarter of 2005, segment total revenues were $2.4 million.
Nevada Land sold approximately 21,826 acres of land for $2 million. The average
sales price was $92 per acre, and our average basis in the land sold was $31 per
acre. The gross margin on land sales was $1.3 million, which represents a gross
margin percentage of 66.6%. Lease and royalty revenues were $145,000, and
interest and other revenues contributed $219,000. After operating expenses of
$459,000, Nevada Land recorded income of $1.2 million.
For the first quarter of 2004, segment total revenues were $539,000. Nevada
Land sold approximately 3,724 acres of land for $276,000. The average sales
price was $74 per acre, and our average basis in the land sold was $30 per acre.
The gross margin on land sales was $164,000, which represents a gross margin
percentage of 59.6%. Lease and royalty revenues were $174,000, and interest and
other revenues contributed $89,000. After operating expenses of $453,000, Nevada
Land recorded a loss of $26,000.
The segment result improved by $1.3 million year over year, principally due
to a $1.2 million higher gross margin from land sales year over year. Interest
and other revenues increased by $130,000, primarily as a result of a $124,000
increase in interest income from land sales receivables, from $81,000 in the
first quarter of 2004 to $205,000 in the first quarter of 2005.
BUSINESS ACQUISITIONS AND FINANCING
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------ -----------
REVENUES (CHARGES):
Realized Gains (Losses):
On Sale or Impairment of Holdings $ 1,554,000 $ (396,000)
SFAS No. 133 Change in HyperFeed
instruments (171,000)
Investment Income 260,000 188,000
Other 48,000 157,000
------------ -----------
Segment Total Charges $ 1,862,000 $ (222,000)
============ ===========
EXPENSES:
SAR $ (9,878,000) $(1,512,000)
Other (3,032,000) (2,826,000)
------------ -----------
Segment Total Expenses $(12,910,000) $(4,338,000)
============ ===========
------------ -----------
LOSS BEFORE TAX $(11,048,000) $(4,560,000)
============ ===========
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 $47.9 million (before taxes) at March 31,
2005.
14
In the first quarter of 2005, Business Acquisitions and Financing segment
revenues were $1.9 million. Net realized gains were $1.6 million, including
gains of $903,000 from sale of shares in Raetia Energie AG, $508,000 from the
sale of Keweenaw Land Association, Limited, and $294,000 on the sale of two
unrelated foreign stocks. The realized gains were partially offset by a $151,000
charge for other-than-temporary impairment of our holding in another foreign
stock to reflect the cumulative decline in the market value of the security
since its purchase in 2003 through March 31, 2005. Investment income was
$260,000, and other revenues were $48,000.
The expenses recorded in this segment primarily consist of holding company
costs which are not allocated to our other segments, mostly notably this quarter
expenses related to the PICO Holdings, Inc. Stock Appreciation Rights ("SAR")
Program, as explained in following paragraphs. After segment expenses of $12.9
million, including SAR expense of $9.9 million, the segment reported a loss
before taxes of $11 million for the first quarter of 2005.
For the first quarter of 2004, Business Acquisitions and Financing segment
revenues were negative $222,000, primarily due to realized losses of $567,000.
The realized losses included a $637,000 charge for other-than-temporary
impairment of our holdings in SIHL and Phoenix Capital, Inc. to reflect a
decline in the market value of these securities during the first quarter of
2004, partially offset by $241,000 in net realized gains on the sale of other
securities. In addition, a $171,000 decline in the estimated fair value of
warrants we owned to buy shares in HyperFeed was recorded as a loss in
accordance with SFAS No. 133. Investment income was $188,000 and other revenues
were $157,000. After segment expenses of $4.3 million, the segment reported a
loss before taxes of $4.6 million for the first quarter of 2004.
In 2004, PICO provided a $1.5 million secured convertible promissory note
to our 51%-owned subsidiary, HyperFeed Technologies, Inc. In March 2005, the
amount of the note was increased to $4 million. The principal outstanding on the
note was zero at December 31, 2004, $1.1 million at March 31, 2005, and $1.7
million at April 30, 2005. The note matures in March 2006, interest is payable
on the outstanding balance at the prime rate plus 2.75%, and PICO has the right
to convert all or part of the amount due into HyperFeed common stock. The
conversion price is the lower of either $1.62, or 80% of the 5-day moving
average price of HyperFeed common stock on the conversion date. In the attached
consolidated financial statements, the principal and interest owing from
HyperFeed to PICO are eliminated on consolidation.
The $8.6 million year over year increase in expenses recorded in this
segment primarily resulted from:
- - an $8.4 million year over year increase in the expense related to the PICO
Holdings, Inc. Stock Appreciation Rights ("SAR") Program. From the third
quarter of 2003, 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 is being recorded through
the consolidated 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. Substantially, all of the 2005 $9.9 million SAR
expense resulted from the $5.14 per share increase in the PICO stock price
during the first quarter of 2005, compared to a $1.5 million SAR expense
resulting from a $0.77 per share increase in the PICO stock price during
the first quarter of 2004. Expenses in this segment include SAR expense and
other holding company costs (for example, rent for our head office), which
are not allocated to other segments; and
- - a $772,000 increase in a non-cash expense related to foreign currency, from
$451,000 in 2004 to $1.2 million in 2005. 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 depreciates relative to the US dollar--such as
the first quarter of 2005 and 2004--under GAAP, we are required to record
an expense through the statement of operations to reflect the fact that
Global Equity SA owes PICO fewer US dollars. In Global Equity SA's
financial statements, an equivalent amount is reflected in the foreign
currency translation component of shareholders' equity (since it owes PICO
fewer US dollars); however, this does not go through the statement of
operations. Accordingly, we were required to record a $1.2 million expense
in PICO's statement of operations in the first quarter of 2005, and a
$451,000 expense in the first quarter of 2004, even though there was no net
impact on shareholders' equity before related tax effects.
15
INSURANCE OPERATIONS IN RUN OFF
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
---------- ---------
REVENUES:
Investment Income $ 665,000 $ 640,000
Realized Investment Gains 1,926,000 232,000
---------- ---------
Segment Total Revenues $2,591,000 $ 872,000
========== =========
EXPENSES:
Operating and Underwriting Expenses (338,000) (346,000)
---------- ---------
Segment Total Expenses $ (338,000) $(346,000)
========== =========
INCOME BEFORE TAXES:
Physicians Insurance Company of Ohio $2,166,000 $ 224,000
Citation Insurance Company 87,000 302,000
---------- ---------
Segment Income Before Tax $2,253,000 $ 526,000
========== =========
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.
Typically, most of the revenues of a "run off" insurance company come from
investment income, which is expected to decline over time as fixed-income
securities mature or are sold to provide the funds to pay claims and expenses.
The Insurance Operations in Run Off segment generated total revenues of $2.6
million in the first quarter of 2005, compared to $872,000 in the first quarter
of 2004. Investment income was $665,000 in the first quarter of 2005, compared
to $640,000 in the first quarter of 2004. Realized investment gains were $1.9
million in the first quarter of 2005, compared to $232,000 in the first quarter
of 2004. The 2005 realized gains included $1.3 million from the sale of
Physicians' remaining holding in Keweenaw Land Association, Limited, and
$354,000 on the sale of Williams & Kettle Limited, a New Zealand rural service
company, which was taken over in March 2005.
Operating and underwriting expenses were $338,000 in the first quarter of
2005, compared to $346,000 in the first quarter of 2004. Consequently, segment
income increased from $526,000 in the first quarter of 2004 to $2.3 million in
the first quarter of 2005.
On February 7, 2005, we reported on Schedule 13G that Physicians and
Citation own a total of 310,000 common shares of Consolidated-Tomoka Land Co.
(Amex: CTO), representing approximately 5.5% of CTO. Consolidated-Tomoka owns
approximately 12,000 acres of land in and around Daytona Beach, Florida, and a
portfolio of income properties in the southeastern United States. The investment
was purchased between September 2002 and February 2004 at a cash cost of $6.5
million, or approximately $20.90 per CTO share. At March 31, 2005, the market
value and carrying value of the investment was $17.6 million (before taxes).
PHYSICIANS INSURANCE COMPANY OF OHIO
During the first quarter of 2005, Physicians generated total revenues of
$2.4 million, including realized gains of $1.9 million. Operating and
underwriting expenses were $191,000, resulting in income before taxes of $2.2
million. During the first quarter of 2004, total revenues were $507,000,
including realized gains of $205,000. Operating and underwriting expenses were
$283,000, and Physicians reported income before taxes of $224,000.
At March 31, 2005, Physicians' loss and loss adjustment reserves were $15.5
million, net of reinsurance, compared to $16.4 million at December 31, 2004.
Reserves decreased by $943,000 during the quarter due to the payment of 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
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
Direct Reserves $18.6 million $19.6 million
Ceded Reserves (3.1) (3.2)
-------------- ---------------
Net Medical Professional Liability
Insurance Reserves $15.5 million $16.4 million
============== ===============
CITATION INSURANCE COMPANY
For the first quarter of 2005, Citation generated revenues of $234,000.
After operating and underwriting expenses of $147,000, Citation reported income
before taxes of $87,000. In the first quarter of 2004, Citation generated
revenues of $365,000, including realized gains of $26,000. Operating and
underwriting expenses were $63,000, and Citation reported income before taxes of
$302,000.
16
At March 31, 2005, Citation's claims reserves were $21.6 million, net of
reinsurance, consisting of $9.8 million in net property and casualty insurance
reserves and $11.8 million in net workers' compensation reserves. At December
31, 2004, Citation's claims reserves were $22.3 million, net of reinsurance,
consisting of $10.2 million in net property and casualty insurance reserves and
$12.1 million in net workers' compensation reserves. There were no unusual
trends in claims during the quarter.
During the first quarter of 2005, Citation's net property and casualty
insurance reserves declined by $458,000 due to the payment of $513,000 in direct
losses (i.e., claims) and loss adjustment expenses, partially offset by the
recovery of approximately $55,000 from reinsurance companies.
During the first quarter of 2005, Citation's net workers' compensation
reserves declined by $233,000 due to the payment of $434,000 in direct losses
and loss adjustment expenses, partially offset by the recovery of approximately
$201,000 from reinsurance companies.
CITATION INSURANCE COMPANY -- LOSS AND LOSS
ADJUSTMENT EXPENSE RESERVES
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
PROPERTY & CASUALTY INSURANCE
Direct Reserves $11.1 million $11.6 million
Ceded Reserves (1.3) (1.4)
-------------- ---------------
Net Property & Casualty Insurance Reserves $ 9.8 million $10.2 million
============== ===============
WORKERS' COMPENSATION INSURANCE
Direct Reserves $24.3 million $24.8 million
Ceded Reserves (12.5) (12.7)
-------------- ---------------
Net Workers' Compensation Insurance Reserves $11.8 million $12.1 million
============== ===============
-------------- ---------------
TOTAL RESERVES $21.6 million $22.3 million
============== ===============
HYPERFEED TECHNOLOGIES
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
----------- -----------
REVENUES:
Service $ 889,000 $ 838,000
Investment Income 7,000
----------- -----------
Segment Total Revenues $ 889,000 $ 845,000
=========== ===========
EXPENSES:
Cost of service $ (283,000) $ (464,000)
Depreciation and amortization (213,000) (214,000)
Other (2,093,000) (2,821,000)
----------- -----------
Segment Total Expenses $(2,589,000) $(3,499,000)
----------- -----------
Segment Loss Before Taxes and Minority Interest $(1,700,000) $(2,654,000)
=========== ===========
During the first quarter of 2005, HyperFeed generated $889,000 in revenues.
Service revenues were $889,000 and the costs of service were $283,000, resulting
in gross margin of $606,000. After the deduction of $2.3 million in other
operating expenses, HyperFeed generated a segment loss before taxes and minority
interest of $1.7 million. For more information, please refer to HyperFeed's 10-Q
for the first quarter of 2005, which should be filed with the SEC on or before
May 10, 2005, the contents of which are not incorporated into this 10-Q.
During the first quarter of 2004, HyperFeed generated $845,000 in revenues.
Service revenues were $838,000 and the costs of service were $464,000, resulting
in gross margin of $374,000. After the deduction of $3 million in other
operating expenses, HyperFeed generated a segment loss before taxes and minority
interest of $2.7 million.
DISCONTINUED OPERATIONS
During 2003, HyperFeed sold two businesses, which are now recorded as
discontinued operations: 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. The discontinued operations of HyperFeed generated an after-tax
loss of $23,000 in the first quarter of 2005, compared to income of $51,000
after-tax in the first quarter of 2004.
17
LIQUIDITY AND CAPITAL RESOURCES -- THREE MONTHS ENDED MARCH 31, 2005 AND 2004
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 $15.3 million in cash and cash equivalents
at March 31, 2005, compared to $17.4 million at December 31, 2004, and $15.2
million at March 31, 2004.
In addition to cash and cash equivalents, at March 31, 2005, the
consolidated group held fixed-income securities with a market value of $40.5
million, and equities with a market value of $155.9 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 and the
proceeds from selling land, water rights, and net recharge credits overtake
maintenance capital expenditure, financing costs, and operating expenses;
- - Nevada Land is actively selling land which has reached its highest and best
use. 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 cash flow;
- - Investment income more than covers the operating expenses of the "run off"
insurance companies, Physicians and Citation. The funds to pay claims are
coming from the maturity of fixed-income securities, the realization of
fixed-income investments and stocks held in their investment portfolios,
and recoveries from reinsurance companies; and
- - HyperFeed manages its own cash and cash equivalents balances and
borrowings. At March 31, 2005, HyperFeed held approximately $33,000 in cash
and cash equivalents, and external borrowings of $1.6 million. PICO has
extended a $4 million secured convertible promissory note to HyperFeed, on
which $1.1 million was drawn at March 31, 2005. See "Business Acquisitions
and Financing" segment in Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" above.
The Departments of Insurance in Ohio and California prescribe minimum
levels of capital and surplus for insurance companies, set guidelines for
insurance company investments, and restrict the amount of profits which can be
distributed as dividends. Typically, our 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.
As shown in the Condensed Consolidated Statements of Cash Flow, cash and
cash equivalents decreased by $2.1 million in the first quarter of 2005,
compared to a $9.1 million net decrease in the first quarter of 2004.
During the first quarter of 2005, cash of $3.7 million was used in
Operating Activities. Included in operating cash flows is the collection of
approximately $1.4 million of principal on collateralized notes receivable
related to Vidler's sale of assets at Big Springs Ranch and West Wendover in
2003. The remaining principal of approximately $1.6 million is scheduled to be
repaid in 2006.
In the first quarter of 2004, cash of $6 million was used, including
$521,000 of cash used in discontinued operations of HyperFeed.
The principal uses of cash in 2005 and 2004 include operating expenses at
Vidler, the payment of claims by Citation and Physicians, and group overhead.
18
Investing Activities provided $346,000 of cash in the first quarter of
2005, compared to $5.9 million of cash used in the first quarter of 2004. The
2005 investing cash flows principally represented cash inflows of $5.8 million
from the sale of stocks and $611,000 from the sale or maturity of fixed-income
securities, which were partially offset by the purchase of $3.1 million of
stocks and $2.3 million of bonds. In 2004, the sale and maturity of fixed-income
securities exceeded new purchases, providing a $2.9 million net cash inflow, and
the principal investing cash outflows were the net investment of $6.9 million in
stocks, and $1.3 million to purchase the minority shareholdings in Vidler Water
Company and SISCOM Inc.
Financing Activities used $7,000 in the first quarter of 2005, primarily
due to a net reduction in borrowings. Financing Activities generated $2.3
million in the first quarter of 2004, principally due to a $2.4 million increase
in Swiss franc borrowings to fund additional purchases of stocks in Switzerland.
At March 31, 2005, 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 March 31, 2005, no stock had been repurchased under this
authorization.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PICO's balance sheets include a significant amount of assets and
liabilities whose fair value are subject to market risk. Market risk is the risk
of loss arising from adverse changes in market interest rates or prices. PICO
currently has interest rate risk as it relates to its fixed maturity securities
and mortgage participation interests, equity price risk as it relates to its
marketable equity securities, and foreign currency risk as it relates to
investments denominated in foreign currencies. Generally, PICO's borrowings are
short to medium term in nature and therefore approximate fair value. At March
31, 2005, PICO had $40.5 million of fixed maturity securities and mortgage
participation interests, $155.3 million of marketable equity securities that
were subject to market risk, of which $87.8 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 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 million for a 100 basis point increase in interest rates on its
fixed securities and mortgage participation interests. The hypothetical 20%
decrease in fair value of PICO's marketable equity securities produced a loss in
fair value of $31.1 million that would impact the unrealized appreciation in
shareholders' equity, before the related tax effect. The hypothetical 20%
decrease in the local currency of PICO's foreign denominated investments
produced a loss of $15 million that would impact the foreign currency
translation in shareholders' equity.
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. There were no material changes in controls and procedures for
the three months ended March 31, 2005.
19
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
- -------------------------------------------------------------------------
(a) Total number of
Period shares purchased (b) Average Price Paid per Share
- ---------------- ------------------- --------------------------------
1/1/05 - 1/31/05
2/1/05 - 2/28/05 39 $21.51
3/1/05 - 3/31/05
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.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
On February 25, 2005, PICO filed a Form 8-K disclosing the annual incentive
plans for PICO's Chairman and President & Chief Executive Officer and four
additional executive officers of PICO, and for two additional officers of PICO's
subsidiaries.
On March 16, 2005, PICO filed a Form 8-K disclosing changes to its
compensation for Directors.
20
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.
+++ 10.1 PICO Holdings, Inc. 2003 Stock Appreciation Rights Program.
++++ 10.2 Employment Agreement of Ronald Langley.
++++ 10.3 Employment Agreement of John R. Hart.
++++ 10.4 Bonus Plan of Dorothy A. Timian-Palmer.
++++ 10.5 Bonus Plan of Stephen D. Hartman.
+++++ 10.6 Director's Compensation.
++++++ 10.7 Contract to sell land and groundwater in Arizona.
+++++++ 21. Subsidiaries of PICO.
31.1. Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2. Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1. Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
32.2. Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
- ----------
+ Incorporated by reference to exhibit of same number filed with Form 8-K
dated December 4, 1996.
++ Filed as Appendix to the prospectus in Part I of Registration Statement on
Form S-4 (File No. 333-06671).
+++ Incorporated by reference to Proxy Statement for Annual Meeting of
Shareholders to be Held on July 17, 2003, dated May 23, 2003, and filed
with the SEC on April 30, 2003.
++++ Incorporated by reference to exhibit of same number to the Company's
current report on Form 8-K filed February 25, 2005.
+++++ Incorporated by reference to the Company's current report on Form 8-K
filed March 16, 2005.
++++++ Incorporated by reference to the Company's current report on Form 8-K
filed April 7, 2005.
+++++++ Incorporated by reference to the Company's Annual Report on Form 10-K
for 2004, filed with the SEC on March 14, 2005. See Note 1 of Notes To
Consolidated Financial Statements, "Nature of Operations and Significant
Accounting Policies".
21
PICO HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PICO HOLDINGS, INC.
Dated: May 9, 2005 By: /s/ Maxim C. W. Webb
--------------------------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
22