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, 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 12,370,264 as of March 31, 2004, excluding 4,431,659 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
March 31, 2004 and December 31, 2003
Condensed Consolidated Statements of Operations for the Three 4
Months Ended March 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for 5
the Three Months Ended March 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 10
Condition and the Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 18
Item 4: Controls and Procedures 19
PART II: OTHER INFORMATION
Item 1: Legal Proceedings 19
Item 2: Changes in Securities and Use of Proceeds 19
Item 3: Defaults Upon Senior Securities 19
Item 4: Submission of Matters to a Vote of Security Holders 19
Item 5: Other Information 19
Item 6: Exhibits and Reports on Form 8-K 20
Signature 21
2
PART I: FINANCIAL INFORMATION
ITEM I: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2004 2003
--------------- --------------
ASSETS
Investments $ 164,415,504 $ 148,921,411
Cash and cash equivalents 15,240,647 24,348,693
Notes and other receivables, net 15,576,516 16,430,541
Reinsurance receivables 17,140,784 17,714,012
Real estate and water assets, net 113,840,088 112,270,280
Property and equipment, net 3,027,220 3,117,521
Net deferred income taxes 29,577
Other assets 7,880,841 7,246,695
Other assets - Discontinued Operations 321,983 818,537
--------------- -------------
Total assets $ 337,443,583 $ 330,897,267
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 58,696,094 $ 60,863,884
Reinsurance balance payable 671,031 671,031
Stock appreciation rights liability 7,470,303 5,969,762
Bank and other borrowings 17,533,638 15,376,640
Net deferred income taxes 2,476,472
Other liabilities 11,726,812 10,871,288
Other liabilities - Discontinued Operations 1,151,804 2,169,879
--------------- -------------
Total liabilities 99,726,154 95,922,484
--------------- -------------
Minority interest 4,091,323 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 51,064,894 56,082,903
Accumulated other comprehensive income 24,813,243 15,283,404
Treasury stock, at cost (common shares: 4,431,659 in 2004 and 4,428,389 in 2003) (78,358,055) (78,305,410)
--------------- -------------
Total shareholders' equity 233,626,106 229,160,402
--------------- -------------
Total liabilities and shareholders' equity $ 337,443,583 $ 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 March 31,
2004 2003
------------- ------------
Revenues:
Net investment income $ 1,077,754 $ 876,292
Net realized loss on investments (335,128) (547,784)
Sale of real estate and water assets 276,499 19,914
Rents, royalties and lease income 315,599 387,097
Service revenue 838,127
Other 223,959 747,385
------------ -----------
Total revenues 2,396,810 1,482,904
------------ -----------
Costs and Expenses:
Operating and other costs 9,202,009 3,541,187
Cost of real estate and water assets sold 111,676 9,269
Cost of service revenue 463,668
Loss and loss adjustment expenses 13,991
Depreciation and amortization 534,114 304,705
Interest 184,970 179,257
------------ -----------
Total costs and expenses 10,496,437 4,048,409
------------ -----------
Equity in loss of unconsolidated affiliates (340,396)
------------ -----------
Loss before income taxes and minority interest (8,099,627) (2,905,901)
Benefit for income taxes (1,589,221) (777,900)
------------ -----------
Loss before minority interest (6,510,406) (2,128,001)
Minority interest in loss of subsidiaries 1,441,071 114,601
------------ -----------
Loss from continuing operations (5,069,335) (2,013,400)
Income from discontinued operations, net of tax 51,326 2,388,848
Gain on disposal of discontinued
operations, net (See Note 5) 480,982
------------ -----------
Net income (loss) $ (5,018,009) $ 856,430
============ ===========
Net income (loss) per common share - basic and diluted:
Loss from continuing operations $ (0.41) $ (0.16)
Discontinued operations 0.23
------------ -----------
Net income (loss) per common share $ (0.41) $ 0.07
============ ===========
Weighted average shares outstanding 12,370,264 12,379,042
============ ===========
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,
2004 2003
----------------- ---------------
OPERATING ACTIVITIES:
Net cash used in operating activities $ (5,443,538) $ (5,982,512)
Net cash used in discontinued operations (521,521) (1,448,722)
------------ ------------
(5,965,059) (7,431,234)
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (11,797,384) (12,149,365)
Proceeds from sale of discontinued operations 25,202,442
Proceeds from sale of investments 7,814,816 2,687,388
Proceeds from maturity of investments 3,005,000
Purchases of property and equipment (265,368) (43,811)
Purchases of minority interest in subsidiaries (1,312,686)
Capitalized software costs (334,489)
------------ ------------
Net cash provided by (used in) investing activities (5,895,111) 18,701,654
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (13,074) (41,501)
Proceeds from borrowings 2,394,636
Proceeds from exercise of stock options (HyperFeed) 20,661
Purchase of treasury stock for deferred compensation plans (52,645) (2,446)
------------ ------------
Net cash provided by (used in) financing activities 2,349,578 (43,947)
------------ ------------
Effect of exchange rate changes on cash 402,546 (333,179)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,108,046) 10,893,294
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,348,693 22,079,082
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,240,647 $ 32,972,376
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest: $ 91,947 $ 156,805
============ ============
Cash paid for taxes: $ 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.
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 March 31, 2004 and December
31, 2003, it is reasonably possible that actual results could differ from
the estimates upon which the carrying values were based.
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, 2004, the Company has no common stock equivalents,
and consequently, diluted earnings per share is identical to basic
earnings per share. For the three months ended March 31, 2003, the common
stock equivalents were anti-dilutive and excluded from the calculation.
3. COMPREHENSIVE INCOME (LOSS)
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the Company includes
foreign currency translation and unrealized holding gains and losses on
available for sale securities.
The components of comprehensive income are as follows:
Three Months Ended March 31,
2004 2003
------------ --------------
Net income (loss) $(5,018,009) $ 856,430
Net change in unrealized appreciation
(depreciation) on available for sale investments 9,521,291 (2,355,173)
Net change in foreign currency translation 8,548 337,431
------------ ------------
Total comprehensive income (loss) $ 4,511,830 $ (1,161,312)
============ ============
Total comprehensive income for the three months ended March 31, 2004
is net of deferred income tax charges of $2.5 million. Total comprehensive
loss for the three months ended March 31, 2003 is net of a deferred income
tax benefit of $51,000.
6
The components of accumulated other comprehensive income are as
follows:
March 31, December 31,
2004 2003
------------------ --------------
Unrealized appreciation on
available for sale investments $ 30,400,321 $ 20,879,030
Foreign currency translation (5,587,078) (5,595,626)
------------ ------------
Accumulated other comprehensive income $ 24,813,243 $ 15,283,404
============ ============
Accumulated other comprehensive income is net of deferred income tax
liability of $10.3 million at March 31, 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, the Citation
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 the Citation 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 CNIC and 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 assume workers'
compensation claims and allocated claims expenses.
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").
Citation concluded that, because Fremont had been placed in
liquidation, 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.
Under the circumstances, it appears that Citation must litigate its
claim to the Citation deposit. To date, Citation has not filed a claim
seeking the benefit. In the event that Citation asserts, but fails to
prevail on such a claim, it is unlikely to receive any distribution from
Fremont or any credit for the Citation deposit. If, however, Citation
prevails on such a claim, it may obtain the benefit, directly or
indirectly, of the Citation deposit, as well as other relief.
The Company is presently unable to predict the outcome of this
dispute with a reasonable degree of certainty.
Global Equity S.A, the Company's wholly owned Swiss-domiciled
subsidiary has made a commitment to Accu Holding AG to participate with
other shareholders of Accu in raising capital which is expected to occur
in 2004. The maximum commitment for Global Equity is $1.9 million (2.3
million CHF).
7
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 has recorded
an allowance 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 concerning both loans, and the
Company is awaiting judgment from the Australian court.
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 three months ended March 31, 2003 was $2.4 million, which
is reported as "Income from discontinued operations, net of tax." The
Company also recorded a $481,000 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 three months
ended March 31, 2003.
During 2003, HyperFeed, a consolidated subsidiary beginning in the
second quarter of 2003, classified a segment of its business as
discontinued operations as a result of a sale that closed in the fourth
quarter of 2003. These operations generated $51,000 in income for the
three months ended March 31, 2004 and at March 31, 2004 reported assets of
$322,000 and liabilities of $1.2 million.
6. 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, all of which were issued to the
prior option holders upon adoption of the SAR program 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 months ended March 31, 2004 a charge of $1.5
million was recorded. The accrued benefit payable under this program is
$7.5 million at March 31, 2004. No expense was recorded in the three
months ended March 31, 2003 as the SAR plan was adopted in the third
quarter of 2003.
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."
8
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 income per share would approximate the following pro forma
amounts for the three months ended March 31:
Three Months Ended March 31,
--------------------------------------
2004 2003
Reported net income (loss) $ (5,018,009) $ 856,430
Add: stock-based compensation recorded, net of income tax 997,980
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of income tax (40,730)
------------ ---------
Pro forma net income (loss) $ (4,020,029) $ 815,700
============ =========
Reported net income (loss) per share: basic and diluted $ (0.41) $ 0.07
============ =========
Pro forma net income (loss) per share: basic and diluted $ (0.32) $ 0.07
============ =========
The Black Scholes valuation model was used in estimating the fair
value of the Company's SARs that are fully vested and are
non-transferable. This model requires the input of highly subjective
assumptions including the expected stock price volatility and estimated
life of the SAR. 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.
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.
7. 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:
Total assets increased by $6.5 million from December 31, 2003,
primarily as a result of the increase in market value of investments.
Segment assets:
At March 31, 2004 At December 31, 2003
------------------------------------------
TOTAL ASSETS:
Vidler Water Company $ 88,100,461 $ 88,134,979
Nevada Land and Resource Company 46,167,855 46,267,828
Business Acquisitions and Financing 72,713,832 68,278,691
Insurance Operations in Run Off 123,659,756 118,351,511
HyperFeed Technologies, Inc. 6,801,679 9,864,258
------------- -------------
$ 337,443,583 $ 330,897,267
============= =============
9
Segment revenues and loss before taxes and minority interest for the
three months ended March 31, 2004 and 2003 were:
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
2004 2003
--------------- -------------
REVENUES:
Vidler Water Company $ 363,000 $ 583,000
Nevada Land & Resource Company 539,000 569,000
Business Acquisitions and Financing (222,000) (226,000)
Insurance Operations in Run Off 872,000 557,000
HyperFeed Technologies 845,000
------------ -----------
Total Revenues $ 2,397,000 $ 1,483,000
============ ===========
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $(1,386,000) $ (782,000)
Nevada Land & Resource Company (26,000) 47,000
Business Acquisitions and Financing (4,560,000) (2,176,000)
Insurance Operations in Run Off 526,000 5,000
HyperFeed Technologies (2,654,000)
----------- -----------
Loss Before Taxes and Minority Interest $(8,100,000) $(2,906,000)
=========== ===========
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 March 31, 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 companies where there
is significant unrecognized value in land and other tangible assets.
10
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 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 1.1 million acres of land in northern Nevada, and the
mineral rights and water rights related to the property;
- 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 and casualty 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 MONTHS ENDED MARCH 31, 2004 AND 2003
SHAREHOLDERS' EQUITY
At March 31, 2004, PICO had shareholders' equity of $233.6 million ($18.89
per share), compared to $229.2 million ($18.52 per share) at December 31, 2003,
and $219.9 million ($17.76 per share) at March 31, 2003. Book value per share
increased by $0.37, or 2%, during the first quarter of 2004.
The $4.4 million increase in shareholders' equity during the first quarter
of 2004 resulted from a $9.5 million net increase in unrealized appreciation in
investments, which more than offset the quarter's net loss of $5 million.
COMPREHENSIVE INCOME
In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," PICO reports comprehensive income in addition
to net income from the Condensed Consolidated Statement of Operations.
Comprehensive income 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.
For the first quarter of 2004, PICO recorded comprehensive income of $4.5
million, consisting of the $9.5 million net increase in unrealized appreciation
in investments and a foreign currency translation credit of $9,000 which is
partially offset by the $5 million net loss.
During the first quarter of 2003, PICO recorded a comprehensive loss of
$1.2 million, consisting of the $2.4 million net reduction in unrealized
appreciation in investments, partially offset by net income of $856,000, and a
foreign currency translation credit of $337,000.
NET INCOME
PICO reported a net loss of $5 million ($0.41 per share) for the first
quarter of 2004, 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.
PICO reported net income of $856,000 ($0.07 per share) for the first
quarter of 2003. A loss from continuing operations of $2 million ($0.16 per
share) was more than offset by $2.9 million of income related to Sequoia,
consisting of net income earned by Sequoia until its sale of $2.4 million
after-tax, and a $481,000 after-tax gain on the sale ($0.23 per share in total).
The $2 million loss from continuing operations consisted of a $2.9 million loss
before income taxes and minority interest, which was partially offset by an
income tax benefit of $778,000, and minority interest of $115,000.
11
Segment revenues and income (loss) before taxes and minority interest for
the first quarter of 2004 and 2003 were:
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2004 2003
-------------- -------------
REVENUES:
Vidler Water Company $ 363,000 $ 583,000
Nevada Land & Resource Company 539,000 569,000
Business Acquisitions and Financing (222,000) (226,000)
Insurance Operations in Run Off 872,000 557,000
HyperFeed Technologies 845,000
----------- -----------
Total Revenues $ 2,397,000 $ 1,483,000
=========== ===========
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST:
Vidler Water Company $(1,386,000) $ (782,000)
Nevada Land & Resource Company (26,000) 47,000
Business Acquisitions and Financing (4,560,000) (2,176,000)
Insurance Operations in Run Off 526,000 5,000
HyperFeed Technologies (2,654,000)
----------- -----------
Loss Before Taxes and Minority Interest $(8,100,000) $(2,906,000)
=========== ===========
The principal cause of the $914,000 year over year increase in revenues
was the consolidation of HyperFeed Technologies which added $845,000 to revenues
in the first quarter of 2004.
The $5.2 million year over year increase in the loss before taxes and
minority interest primarily resulted from:
- the consolidation of HyperFeed Technologies, which contributed a segment
loss of $2.7 million in the first quarter of 2004, compared to an equity
method loss of $340,000 in the first quarter of 2003 (which was recorded
in the Business Acquisitions & Financing segment);
- an expense of $1.5 million related to Stock Appreciation Rights ("SAR")
recorded in the Business Acquisitions and Financing segment, resulting
from a $0.77 per share increase in the PICO Holdings, Inc. stock price
during the first quarter of 2004. PICO did not record expenses related to
stock options and call options in the first quarter of 2003; and
- a $604,000 higher segment loss from Vidler Water Company, principally due
to a $384,000 increase in segment expenses.
VIDLER WATER COMPANY, INC.
Three Months Ended March 31,
----------------------------------------------
2004 2003
----------- -----------
REVENUES:
Option Premiums Earned $ 346,000
Lease of Water $ 21,000 1,000
Lease of Agricultural Land 121,000 176,000
Interest 160,000 1,000
Other 61,000 59,000
----------- -----------
Segment Total Revenues $ 363,000 $ 583,000
============ ===========
EXPENSES:
Depreciation and Amortization $ (276,000) $ (238,000)
Interest (93,000) (117,000)
Project Expenses (911,000) (638,000)
Overhead Expenses (469,000) (372,000)
----------- -----------
Segment Total Expenses $(1,749,000) $(1,365,000)
----------- -----------
LOSS BEFORE TAX $(1,386,000) $ (782,000)
=========== ===========
In the first quarter of 2004, Vidler's revenues totaled $363,000. The
largest revenue item was $160,000 of interest earned on collateralized notes
receivable related to the assets at Big Springs Ranch and West Wendover sold in
December 2003, which are scheduled to be repaid during 2004. After operating
expenses of $1.7 million, Vidler generated a loss before taxes of $1.4 million
for the first quarter of 2004.
In the first quarter of 2003, Vidler's revenues totaled $583,000; the
largest component being $346,000 in option premiums earned when options over
land and water granted to two electricity-generating companies expired without
being exercised. After operating expenses of $1.4 million, Vidler generated a
loss before taxes of $782,000 for the first quarter of 2003.
12
To increase transparency to the reader, the line "Operations, Maintenance,
and Other Expenses" reported in previous years is now broken into two
components, Project Expenses and Overhead Expenses.
Project Expenses were $911,000 in the first quarter of 2004 and $638,000
in the first quarter of 2003. 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 (e.g., the cost of
drilling successful wells, which has typically been the major cost in converting
a water rights application to a water right that can be used for commercial
purposes).
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 $469,000 in the first quarter of 2004 and
$372,000 in the first quarter of 2003.
Revenues decreased $220,000 year over year, primarily due to the $346,000
in option premiums earned in 2003 which did not recur in 2004, partially offset
by a $159,000 year over year increase in interest revenue. Operating expenses
increased by $384,000 year over year, principally due to a $273,000 increase in
Project Expenses and a $97,000 increase in Overhead Expenses.
NEVADA LAND & RESOURCE COMPANY, LLC
THREE MONTHS ENDED MARCH 31,
----------------------------------------------
2004 2003
----------- ----------
REVENUES:
Sale of Land $ 276,000 $ 20,000
Option Premiums Earned 137,000
Lease and Royalty 174,000 210,000
Interest and Other 89,000 202,000
---------- ----------
Segment Total Revenues $ 539,000 $ 569,000
========== ==========
EXPENSES:
Cost of Land Sales $ (112,000) $ (9,000)
Operating Expenses (453,000) (513,000)
---------- ----------
Segment Total Expenses $ (565,000) $ (522,000)
---------- ----------
INCOME (LOSS) BEFORE TAX $ (26,000) $ 47,000
========== ==========
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 2003, 2002 and 2001, land sales in the first
quarter were minimal and the lowest of the four quarters in that year.
In 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 59.4%. 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.
In the first quarter of 2003, segment total revenues were $569,000. Nevada
Land sold approximately 121 acres of land for $20,000. The average sales price
was $165 per acre and our average basis in the land sold was $77 per acre. The
gross margin on land sales was $11,000, which represents a gross margin
percentage of 55%. Lease and royalty revenues were $210,000, option premiums of
$137,000 were earned, and interest and other revenues contributed $202,000.
After operating expenses of $513,000, Nevada Land recorded income of $47,000.
13
The segment result decreased $73,000 year over year due to a combination
of factors. The 2003 segment result included a $137,000 option premium earned,
which did not recur in 2004. The 2004 segment result benefited from a $153,000
higher gross margin from land sales and a $60,000 reduction in operating
expenses year over year. These positive factors were partially offset by a
$149,000 reduction in all other revenue items year over year, principally
resulting from decreased interest revenue due to Nevada Land holding a lower
level of interest-bearing temporary investments after surplus funds were
distributed to other group companies during 2003.
BUSINESS ACQUISITIONS AND FINANCING
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2004 2003
------------- --------------
REVENUES (CHARGES):
Realized Losses:
On Sale or Impairment of Holdings $ (396,000) $ (596,000)
SFAS No. 133 Change in Warrants (171,000) (21,000)
Investment Income 188,000 223,000
Other 157,000 168,000
----------- ------------
Segment Total Charges $ (222,000) $ (226,000)
=========== ============
SEGMENT TOTAL EXPENSES $(4,338,000) $ (1,610,000)
----------- ------------
LOSS BEFORE INVESTEE INCOME $(4,560,000) $ (1,836,000)
Equity in Loss of Unconsolidated Affiliates $ (340,000)
----------- ------------
LOSS BEFORE TAX $(4,560,000) $ (2,176,000)
=========== ============
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 $29.4 million (before taxes) at March 31,
2004.
In 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 include a $637,000 charge for other-than-temporary
impairment of our holdings in SIHL and Phoenix Capital to reflect a decline in
the market value of these securities, 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 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." 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.
For the first quarter of 2003, Business Acquisitions and Financing segment
revenues were negative $226,000, primarily due to realized losses of $617,000.
The realized losses include a $596,000 charge for other-than-temporary
impairment of our holdings in SIHL and Accu Holding. Investment income was
$223,000 and other revenues were $168,000. After segment expenses of $1.6
million, and our $340,000 equity share of HyperFeed's net loss and other events
affecting equity, the segment reported a loss before taxes of $2.2 million for
the first quarter of 2003.
The $2.7 million year over year increase in expenses recorded in this
segment primarily resulted from:
- an expense of $1.5 million recorded in the first quarter of 2004 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 now 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 $1.5
million SAR expense resulted from the $0.77 per share increase in the PICO
stock price during the first quarter of 2004; and
- a $923,000 increase in a non-cash expense related to foreign currency,
from a benefit of $472,000 in 2003 to a $451,000 expense in 2004. 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 -- such as the first quarter of 2003 -- 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
14
operations. During accounting periods when the Swiss Franc depreciates
relative to the US dollar -- such as the first quarter of 2004 -- opposite
entries are made and an expense is recorded in PICO's statement of
operations. Accordingly, we were required to record a $472,000 benefit in
PICO's statement of operations in the first quarter of 2003, and a
$451,000 expense in the first quarter of 2004, even though there was no
net impact on shareholders' equity.
INSURANCE OPERATIONS IN RUN OFF
THREE MONTHS ENDED MARCH 31,
------------------------------------------
2004 2003
----------- -----------
REVENUES:
Investment Income $ 640,000 $ 491,000
Realized Investment Gains 232,000 65,000
Other 1,000
----------- -----------
Segment Total Revenues $ 872,000 $ 557,000
=========== ===========
EXPENSES:
Operating and Underwriting Expenses (346,000) (552,000)
----------- -----------
Segment Total Expenses $ (346,000) $ (552,000)
INCOME (LOSS) BEFORE TAXES:
Physicians Insurance Company of Ohio $ 224,000 $ (247,000)
Citation Insurance Company 302,000 252,000
----------- -----------
Segment Income Before Tax $ 526,000 $ 5,000
=========== ===========
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 an insurance company in "run off' come
from investment income. Investment income 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 $872,000 in the first quarter of 2004, compared to $557,000 in the
first quarter of 2003. Investment income was $640,000 in the first quarter of
2004, compared to $491,000 in the first quarter of 2003, an increase of $149,000
year over year, primarily resulting from an increase in the quantity of
fixed-income securities in Physicians' portfolio following receipt of the
proceeds from selling Sequoia Insurance Company. See "Discontinued Operations."
Realized investment gains were $232,000 in the first quarter of 2004, compared
to $65,000 in the first quarter of 2003, an increase of $167,000 year over year.
Operating and underwriting expenses were $346,000 in the first quarter of
2004, compared to $552,000 in the first quarter of 2003. Consequently, segment
income increased from $5,000 in the first quarter of 2003 to $526,000 in the
first quarter of 2004.
PHYSICIANS INSURANCE COMPANY OF OHIO
During the first quarter of 2004, Physicians generated total revenues of
$507,000, including realized gains of $205,000. Operating and underwriting
expenses were $283,000, resulting in income before taxes of $224,000. During the
first quarter of 2003, total revenues were $169,000, operating and underwriting
expenses were $416,000, and Physicians reported a loss before taxes of $247,000.
At March 31, 2004, Physicians' loss and loss adjustment reserves were
$18.6 million, net of reinsurance, compared to $19.6 million at December 31,
2003. Reserves decreased by $1 million 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, 2004 DECEMBER 31, 2003
-------------------------------------------
Direct Reserves $22.6 million $23.6 million
Ceded Reserves (4.0) (4.0)
-------------------------------------------
Net Medical Professional Liability Insurance Reserves $18.6 million $19.6 million
===========================================
CITATION INSURANCE COMPANY
For the first quarter of 2004, Citation generated revenues of $365,000.
After operating and underwriting expenses of $63,000, Citation reported income
before taxes of $302,000. In the first quarter of 2003, Citation generated
revenues of $388,000, operating and underwriting expenses were $136,000, and
Citation reported income before taxes of $252,000.
15
At March 31, 2004, Citation's property and casualty insurance claims
reserves were $23 million, net of reinsurance, consisting of $12.5 million in
net property and casualty insurance reserves and $10.5 million in workers'
compensation reserves. At December 31, 2003, Citation's property and casualty
insurance claims reserves were $23.8 million, net of reinsurance, consisting of
$13.3 million in net property and casualty insurance reserves and $10.5 million
in workers' compensation reserves.
The decrease was primarily due to the payment of approximately $1.3
million in direct losses (i.e., claims) and loss adjustment expenses, partially
offset by the recovery of approximately $373,000 from reinsurance companies.
There were no unusual trends in claims during the quarter.
Citation Insurance Company -- Loss and Loss Adjustment Expense Reserves
MARCH 31, 2004 DECEMBER 31, 2003
---------------------------------------------
PROPERTY & CASUALTY INSURANCE
Direct Reserves $ 14.0 million $ 14.8 million
Ceded Reserves (1.5) (1.5)
---------------------------------------------
Net Property & Casualty Insurance Reserves $ 12.5 million $ 13.3 million
=============================================
WORKERS' COMPENSATION INSURANCE
Direct Reserves $ 22.1 million $ 22.4 million
Ceded Reserves (11.6) (11.9)
---------------------------------------------
Net Workers' Compensation Insurance Reserves $ 10.5 million $ 10.5 million
=============================================
TOTAL RESERVES $ 23.0 million $ 23.8 million
=============================================
HYPERFEED TECHNOLOGIES
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
2004 2003
------------ ---------------
REVENUES:
Service $ 838,000
Investment Income 7,000
Other
----------- --------------
Segment Total Revenues $ 845,000
=========== ==============
EXPENSES:
Cost of service $ (464,000)
Depreciation and amortization (214,000)
Other (2,821,000)
----------- --------------
Segment Total Expenses $(3,499,000)
----------- --------------
Segment Loss Before Taxes and Minority Interest $(2,654,000)
=========== ==============
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. For more information, please refer to
HyperFeed's 10-Q for the first quarter of 2004, which should be filed with the
SEC on or before May 10, 2004, the contents of which are not incorporated into
this 10-Q.
See the "Business Acquisitions and Financing" segment analysis for the
impact of HyperFeed in the first quarter of 2003.
DISCONTINUED OPERATIONS
On March 31, 2003, we closed on the sale of Sequoia Insurance Company,
which is now recorded as a discontinued operation in our financial statements
for 2003 and previous years. During the first quarter of 2003, Sequoia
contributed income of $2.4 million after-tax, which is recorded in the "Income
from discontinued operations" line in the Condensed Consolidated Statement of
Operations, and PICO recorded an after-tax gain on the sale of Sequoia of
$481,000, which is recorded in the "Gain on disposal of discontinued operations,
net" line.
16
The gross sale proceeds were approximately $43.1 million, consisting of
approximately $25.2 million in cash and a dividend of $17.9 million. The
dividend included the common stocks previously held in Sequoia's investment
portfolio with a value of $16.4 million, and debt securities. The common stocks
received in the dividend primarily consisted of a number of holdings in
small-capitalization value stocks, which we believed were still undervalued
based on the private market value of the underlying assets, earnings, and cash
flow. These common stocks are being held in the investment portfolio of
Physicians, which was Sequoia's direct parent company.
During 2003, HyperFeed completed the sale of 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
income of $51,000 after-tax in the first quarter of 2004.
LIQUIDITY AND CAPITAL RESOURCES -- THREE MONTHS ENDED MARCH 31, 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 $15.2 million in cash and cash equivalents
at March 31, 2004, compared to $24.3 million at December 31, 2003, and $33
million at March 31, 2003.
In addition to the $15.2 million in consolidated cash and cash equivalents
as defined by GAAP, at March 31, 2004, the parent company held fixed-income
securities, mostly investment-grade corporate bonds maturing in 2004 and 2005,
with a market value of $8.1 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 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 March 31, 2004, HyperFeed held
approximately $1.2 million in cash and cash equivalents.
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 prices of
individual securities are depressed.
17
As shown in the Condensed Consolidated Statements of Cash Flow, cash and
cash equivalents decreased by $9.1 million in the first quarter of 2004,
compared to a $10.9 million net increase in the first quarter of 2003.
During the first quarter of 2004, cash of $6 million was used in Operating
Activities, including $521,000 of cash used in discontinued operations of
HyperFeed. Operating cash flows include the collection of $1.6 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 $7.7
million is scheduled to be repaid during the remainder of 2004.
In the first quarter of 2003, cash of $7.4 million was used, including
$1.4 million of cash used in Sequoia's operating activities. 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 $5.9 million of cash in the first quarter of
2004, compared to $18.7 million of cash generated in the first quarter of 2003.
In 2004, the sale and maturity of fixed-income securities exceeded new
purchases, providing a $2.9 million net cash inflow. The principal investing
cash outflows in 2004 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. The cash inflow in 2003 primarily 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 principally resulted from the net investment of $3
million in fixed-income securities and the net investment of $3.7 million in
stocks.
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. In the first quarter of 2003,
Financing Activities used cash of $44,000.
At March 31, 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 March 31, 2004, 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 the fair value 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 approximate fair
value. At March 31, 2004, PICO had $50 million of fixed maturity securities and
mortgage participation interests, $114.4 million of marketable equity securities
that were subject to market risk, of which $59.4 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 decline 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 $22.9 million that would impact the unrealized appreciation in
shareholders' equity, net of the related tax effect. The hypothetical 20%
decrease in the local currency of PICO's foreign denominated investments
produced a loss of $9.4 million that would impact the foreign currency
translation in shareholders' equity.
18
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: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
19
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) 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.
21. Subsidiaries of PICO. See Note 1 of Notes To Consolidated Financial Statements, "Nature
of Operations and Significant Accounting Policies" in Registrant's Annual Report on Form
10-K for 2003, filed with the SEC on March 10, 2004.
31.1. Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2. Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1. Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2. Certification of Chief Financial Officer pursuant to 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 27, 2003, and filed
with the SEC on April 30, 2003.
(b) REPORTS ON FORM 8-K
None.
20
PICO HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PICO HOLDINGS, INC.
Dated: May 6, 2004 By: /s/ Maxim C. W. Webb
--------------------------------------------
Maxim C. W. Webb
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
21