<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-11(c) or ss. 240.14a-12
PICO HOLDINGS, INC.
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock (including options and warrants to purchase Common
Stock).
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2) Aggregate number of securities to which transaction applies:
37,593,135 shares of Common Stock (including shares issuable upon
exercise of options and warrants to purchase Common Stock).
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$3.0938 (based upon the average of the high and low sales price of
the Common Stock on September 14, 1998).
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4) Proposed maximum aggregate value of transaction:
$116,305,640
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5) Total fee paid:
$23,261
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[ ] Fee paid with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
- - - -------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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1
<PAGE> 2
PLAN OF ARRANGEMENT
INVOLVING
PICO HOLDINGS, INC.
AND
GLOBAL EQUITY CORPORATION
ANNUAL MEETING
OF
SHAREHOLDERS
OF
PICO HOLDINGS, INC.
TO BE HELD ON NOVEMBER , 1998
- AND -
SPECIAL MEETING
OF
SHAREHOLDERS
OF
GLOBAL EQUITY CORPORATION
TO BE HELD ON NOVEMBER ?, 1998
NOTICES OF MEETINGS
AND
JOINT MANAGEMENT INFORMATION CIRCULAR
AND PROXY STATEMENT
OCTOBER ?, 1998
1
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PICO HOLDINGS, INC.
875 Prospect Street, Suite 301
La Jolla, CA 92037
October ?, 1998
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
of PICO Holdings, Inc., which will be held at the ?, ? on November ?, 1998 at ?.
At the meeting, PICO will ask for your approval of a transaction to
acquire the remaining shares of Global Equity Corporation ("GEC") that it does
not already own. PICO and related companies currently own approximately 51% of
the outstanding shares of GEC, and will acquire the remainder of GEC common
shares and warrants in exchange, respectively, for common stock and share
purchase warrants of PICO. We believe that this transaction creates significant
and compelling opportunities for our shareholders, as more fully described in
the attached Joint Management Information and Proxy Statement.
The combination of PICO and GEC will simplify the organizational
structures of the two companies, will reduce legal and accounting requirements,
and is intended to offer shareholders the benefits of a larger and more
diversified asset base. The simplification and increase in assets of the
combined company should also encourage increased analyst coverage and broader
investor interest, and therefore provide increased access to capital markets.
At the annual meeting, you will be asked to approve the combination of
GEC and PICO and the transactions contemplated thereby, as described in the
accompanying proxy materials. YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE IN FAVOR OF THESE MATTERS.
The transaction anticipates that the common shares of GEC will each be
exchanged for 0.4628 shares of PICO. GEC share purchase warrants will be
acquired on the same basis. The exchange ratio is based on the relative asset
values of PICO and GEC common shares, as negotiated with the special committee
of GEC's board constituted to negotiate the transaction and its independent
financial advisor. On closure of the transaction, GEC will become a wholly-owned
subsidiary of PICO.
The terms of the proposed acquisition transaction, which is to be
implemented under Ontario corporate law, are set forth in the combination
agreement attached as Annex "C" to the accompanying Joint Management Information
Circular and Proxy Statement. That agreement is subject to certain conditions,
some which have already been satisfied, the most significant of which is the
requirement that the arrangement be approved by the majority of "disinterested"
common shareholders of GEC (i.e. other than PICO and its affiliates).
Other matters to be considered at the annual meeting will include the
election of three directors, ratification of the appointment of auditors, a
one-for-five reverse common stock split and other more routine matters. We
believe the reduction in shares outstanding will be beneficial to shareholders,
as it will increase the share price of PICO to levels that will allow certain
types of institutional investors to include PICO in their equity portfolios. We
believe this too will enhance shareholder value.
WE URGE YOU TO CAREFULLY CONSIDER THE IMPORTANT MATTERS DESCRIBED IN
THE JOINT MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT. The document is
lengthy as a result of the use of the document to obtain the necessary approvals
of both the PICO and GEC shareholders and to satisfy legal requirements of both
the United States and Canada. A summary of some of the more important
information in the document begins on page ?, and is a useful place to begin
your review.
2
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WHETHER OR NOT YOU ARE PERSONALLY ABLE TO ATTEND THE ANNUAL MEETING,
PLEASE COMPLETE SIGN AND DATE THE ENCLOSED PROXY (ON ? PAPER) AND RETURN IT IN
THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE. This action will not limit your right
to vote in person if you wish to attend the meeting and vote personally.
Yours sincerely,
Ronald Langley, Chairman John R. Hart, President and CEO
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GLOBAL EQUITY CORPORATION
80 Richmond Street West, Suite 1805
Toronto, Ontario M5H 2A4
Dear Shareholder: October ? , 1998
You are cordially invited to attend the Special Meeting of Shareholders
of Global Equity Corporation ("GEC") to be held at ?, ? on November ?, 1998.
The purpose of the meeting is for you to consider and vote upon a
transaction by which PICO Holdings, Inc. ("PICO") will acquire the approximately
49% of the outstanding common shares of GEC which it does not already own. PICO
and related companies currently own approximately 51% of the outstanding GEC
common shares. It is proposed that PICO will acquire the GEC common shares that
it does not currently own on the basis of an exchange ratio of 0.4628 of a PICO
common share for each GEC common share. GEC common share purchase warrants will
be acquired in consideration for PICO common share purchase warrants on the same
basis.
We believe substantial benefits will accrue to GEC shareholders by
approving the transaction. The combination of PICO and GEC will result in a
larger, more simplified public structure that is managed with a distinct value
investment philosophy. To further simplify its capital structure, PICO is
proposing a one-for-five reverse stock split of the PICO common shares to be
effective immediately following consummation of the transaction. The resulting
unified public corporation should enable us to attract increased investment
analyst coverage and institutional investment interest, which in turn should
provide the combined company with increased access to capital markets. These are
among the benefits that we believe will enhance shareholder value.
The proposed transaction, including the exchange ratio, was reviewed
and negotiated on behalf of GEC by a special committee of independent GEC
directors. The exchange ratio is the simple average of the exchange ratios
calculated from the low and high values of the GEC common shares and PICO common
shares determined by First Marathon Securities Limited in its valuation and
fairness opinion dated as of June 30, 1998 (assuming an exchange rate of
Cdn.$1.46665 equal to U.S.$1.00, being the exchange rate in effect on such
date). The exchange ratio also implies an effective premium of approximately
22.5% over the closing price of the GEC common shares on The Toronto Stock
Exchange on June 18, 1998, the last trading day prior to the public announcement
of the exchange ratio.
First Marathon's valuation and fairness opinion is reproduced as Annex
"D" to the accompanying Joint Management Information Circular and Proxy
Statement. SHAREHOLDERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER FIRST
MARATHON'S VALUATION AND FAIRNESS OPINION IN ITS ENTIRETY.
The proposed transaction has been structured as a GEC plan of
arrangement. THE GEC BOARD, ON THE RECOMMENDATION OF ITS SPECIAL COMMITTEE OF
INDEPENDENT DIRECTORS, HAS UNANIMOUSLY DETERMINED THAT THE PROPOSED TRANSACTION
IS IN THE BEST INTERESTS OF GEC AND ITS MINORITY SHAREHOLDERS (OTHER THAN PICO)
AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOUR OF THE RESOLUTION
APPROVING THE ARRANGEMENT.
The accompanying Joint Management Information Circular and Proxy
Statement is being provided to holders of GEC common share purchase warrants
solely for the purposes of providing information on the proposed transaction and
the exchange of such warrants for warrants of PICO contemplated thereby, and to
explain the purpose of and procedure for using the accompanying Warrantholders
Letter of Transmittal (on ? paper) to facilitate such exchange.
We urge you to consider carefully the important matters described in
the accompanying Joint Management Information Circular and Proxy Statement. The
document is lengthy because of the use of the document to obtain the necessary
approvals of both the PICO and GEC shareholders and to satisfy the legal
requirements of both the United States and Canada. A summary of some of the more
important information in the document begins on page ?, and is a useful place to
begin your review.
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WHETHER OR NOT YOU ARE PERSONALLY ABLE TO ATTEND THE MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY (ON ? PAPER) AND RETURN IT IN THE
ENCLOSED ENVELOPE AS SOON AS POSSIBLE. This action will not limit your right to
vote in person if you wish to attend the meeting and vote personally.
Yours sincerely,
Ronald Langley, Chairman John R. Hart, President and CEO
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PICO HOLDINGS, INC.
875 Prospect Street, Suite 301
La Jolla, California 92037
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER ?, 1998
TO THE SHAREHOLDERS
OF PICO HOLDINGS, INC.:
The annual meeting of Shareholders of PICO HOLDINGS, Inc. ("PICO") will
be held at the ? at ?, on November ?, 1998 at ?, for the following purposes:
I To consider and vote upon a proposed transaction (the "Transaction")
whereby PICO is to acquire all of the outstanding shares (collectively, the "GEC
Common Shares") of Global Equity Corporation ("GEC") which it does not currently
own and all of the outstanding GEC Common Share purchase warrants (collectively,
the "GEC Warrants") pursuant to a Combination Agreement dated as of ?, 1998,
between PICO and GEC. As a result of the Transaction, each outstanding GEC
Common Share (other than GEC Common Shares owned by PICO or as to which
dissenter's rights have been duly exercised) will be converted into 0.4628 (the
"Exchange Ratio") of a share of PICO common stock and each outstanding GEC
Warrant (which entitles the holder to purchase one GEC Common Share for
Cdn.$3.25) will be converted into 0.4628 of a PICO warrant (each whole PICO
warrant entitling the holder to purchase on or before June 30, 1999 one share of
PICO common stock for U.S.$4.76, being the U.S. dollar equivalent on the date
upon which the exchange ratio was agreed of the Cdn.$3.25 exercise price of a
GEC warrant, divided by the Exchange Ratio);
II To elect three nominees to the Board of Directors of PICO;
III To ratify the appointment of Deloitte & Touche LLP as PICO's
independent auditors;
IV To approve a one-for-five reverse stock split of PICO Common Stock
(to be effected immediately following consummation of the Transaction); and
V To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
Shareholders of PICO have the right to dissent from the Transaction and
demand appraisal rights for their shares, provided that demands for payment are
duly filed with respect to 5% or more of the outstanding shares of PICO Common
Stock prior to the date of the annual meeting of Shareholders and such
Shareholders comply with the requirements of Chapter 13 of the California
General Corporation Law (the text of which is reproduced as Annex "H" to the
accompanying Joint Management Information Circular and Proxy Statement). See
"Dissenting Shareholders' Rights" in the accompanying Joint Management
Information Circular and Proxy Statement for a description of the rights of
dissenting Shareholders and a discussion of the procedures which must be
followed by Shareholders to obtain an appraisal of their shares.
The Board of Directors has fixed the close of business on ?, 1998 as
the record date for determining Shareholders entitled to notice of and to vote
at the meeting.
You are cordially invited to attend the meeting; however, whether or
not you attend the meeting, you are requested to mark, sign, date and return the
accompanying proxy (on ? paper) as soon as possible. THE GIVING OF A PROXY WILL
NOT AFFECT YOUR RIGHT TO REVOKE SUCH PROXY BY APPROPRIATE WRITTEN NOTICE OR BY
VOTING IN PERSON AT THE MEETING. PLEASE NOTE THAT IF YOUR SHARES ARE HELD OF
RECORD BY A BROKER, BANKER OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING,
YOU MUST BRING TO THE MEETING A LETTER FROM THE BROKER, BANKER OR OTHER NOMINEE
CONFIRMING YOUR BENEFICIAL OWNERSHIP OF THE SHARES AND YOU MUST OBTAIN FROM THE
RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
By Order of the Board of Directors
James F. Mosier
Secretary
October ?, 1998
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GLOBAL EQUITY CORPORATION
80 Richmond Street West, Suite 1805
Toronto, Ontario M5H 2A4
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER ?, 1998
TO THE SHAREHOLDERS
OF GLOBAL EQUITY CORPORATION:
TAKE NOTICE THAT a Special Meeting of Shareholders of Global Equity
Corporation ("GEC") will be held at ?, ?, on November ?, 1998 at ? for the
following purposes:
1. To consider, pursuant to an order (the "Interim Order") of the
Ontario Court of Justice (General Division) dated ?, 1998, and, if thought fit,
to pass, with or without variation, a resolution (the "Arrangement Resolution")
approving an arrangement under Section 182 of the Business Corporations Act
(Ontario) (the "OBCA") providing for the exchange of common shares ("GEC Common
Shares") of GEC for shares of common stock ("PICO Shares") of PICO Holdings,
Inc. ("PICO") and for the exchange of GEC warrants (each of which entitles the
holder to purchase one GEC Common Share for $3.25) for PICO warrants (each whole
PICO warrant entitling the holder to purchase on or before June 30, 1999 one
PICO Share for U.S.$4.76, being the U.S. dollar equivalent on the date upon
which the exchange ratio was agreed of the Cdn.$3.25 exercise price of a GEC
warrant, divided by the Exchange Ratio (as hereinafter defined)), each on the
basis of an exchange ratio (the "Exchange Ratio") of 0.4628 of the applicable
PICO security for each one corresponding GEC security, all in accordance with
the terms and subject to the conditions set forth in the Combination Agreement
and Plan of Arrangement; and
2. To transact such further and other business as may properly come
before the meeting or any adjournment or adjournments thereof.
The full text of the Arrangement Resolution and a copy of the
Combination Agreement are attached as Annexes "A" and "C", respectively, to the
accompanying Joint Management Information Circular and Proxy Statement (the
"Joint Proxy Statement"). A copy of the Plan of Arrangement is attached as
Exhibit 1 to the Combination Agreement.
REFERENCE IS MADE TO THE GLOSSARY OF TERMS IN THE ACCOMPANYING JOINT
PROXY STATEMENT FOR THE DEFINITION OF TERMS USED IN THIS NOTICE OF SPECIAL
MEETING NOT OTHERWISE DEFINED HEREIN.
Pursuant to the Interim Order, holders of GEC Common Shares who dissent
in respect of the Arrangement Resolution in accordance with section 185 of the
OBCA (the text of which is reproduced as Annex "G" to the accompanying Joint
Proxy Statement) are entitled to be paid the fair value of their shares as
provided in that section if the Arrangement is effected. The right to dissent is
described in detail under the heading "Dissenting Shareholders' Rights" in the
accompanying Joint Proxy Statement.
The Board of Directors has fixed the close of business on ?, 1998 as
the record date for determining shareholders entitled to notice of and to vote
at the meeting.
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You are cordially invited to attend the meeting; however, whether or
not you attend the meeting, you are requested to mark, sign, date and return the
accompanying proxy as soon as possible. The giving of a proxy will not affect
your right to revoke such proxy by appropriate written notice or by voting in
person at the meeting. Please note that if your shares are held of record by a
broker, banker or other nominee and you wish to vote at the meeting, you must
bring to the meeting a letter from the broker, banker or other nominee
confirming your beneficial ownership of the shares and you must obtain from the
record holder a proxy issued in your name.
By Order of the Board of Directors
Christine M. Veira
Assistant Secretary
October ?, 1998
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TABLE OF CONTENTS
AVAILABLE INFORMATION................................................. 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................... 3
GLOSSARY OF TERMS..................................................... 1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS............. 6
SUMMARY............................................................... 7
RISK FACTORS.......................................................... 16
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES........................ 23
EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS............................ 23
COMPARATIVE MARKET PRICE DATA......................................... 25
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA....................... 26
PICO............................................................... 26
GEC................................................................ 28
UNAUDITED PRO FORMA FINANCIAL INFORMATION............................. 31
COMPARATIVE AND UNAUDITED PRO FORMA PER SHARE FINANCIAL INFORMATION... 37
THE MEETINGS - GENERAL PROXY INFORMATION.............................. 39
PICO............................................................... 39
GEC................................................................ 40
THE TRANSACTION....................................................... 41
Background to the Transaction...................................... 41
Reasons for the Arrangement........................................ 44
Opinion of the Financial Advisor................................... 45
Board Recommendations.............................................. 47
Interests of Certain Persons in the Transaction.................... 47
Transaction Mechanics.............................................. 47
The Combination Agreement.......................................... 48
Court Approval of the Arrangement and Completion of the Arrangement.49
Accounting Treatment............................................... 50
Procedures for Exchange of Share Certificates by GEC Shareholders.. 50
Procedures for Exchange of Warrant Certificates by GEC
Warrantholders.................................................... 51
Stock Exchange Listings............................................ 51
Eligibility for Investment in Canada............................... 52
Regulatory Matters................................................. 52
Resale of PICO Shares Received in the Transaction.................. 53
Future Issuances of Authorized Shares.............................. 53
THE COMPANIES AFTER THE TRANSACTION................................... 54
The Combination - General.......................................... 54
Management and Operations.......................................... 54
Principal Holders of Securities.................................... 54
PICO Capital Stock................................................. 54
PICO Warrants...................................................... 56
TAX CONSIDERATIONS.................................................... 56
Canadian Federal Income Tax Considerations ........................ 56
Residents of Canada................................................ 57
Non-Residents of Canada............................................ 60
Summary of United States Federal Tax Considerations................ 61
COMPARISON OF SHAREHOLDER RIGHTS...................................... 65
DISSENTING SHAREHOLDERS' RIGHTS....................................... 69
GEC................................................................ 69
PICO............................................................... 71
ADDITIONAL MATTERS FOR CONSIDERATION BY PICO SHAREHOLDERS............ 73
Election of Directors of PICO...................................... 73
Appointment of Independent Auditors of PICO........................ 76
Reverse Stock Split................................................ 77
Other Business..................................................... 80
ADDITIONAL MATTERS FOR CONSIDERATION BY GEC SHAREHOLDERS.............. 81
ADDITIONAL INFORMATION REGARDING PICO................................. 81
Executive Compensation............................................. 81
Summary Compensation Table......................................... 82
Stock Price Performance............................................ 86
Security Ownership of Certain Beneficial Owners and Management..... 87
Certain Relationships and Related Transactions..................... 89
ADDITIONAL INFORMATION REGARDING GEC.................................. 89
Description of the Business of GEC................................. 89
Directors and Officers of GEC...................................... 94
Employees.......................................................... 96
Statement of Corporate Governance Practices........................ 96
Executive Compensation............................................. 96
Compensation of Directors......................................... 100
Indemnification of Directors and Officers......................... 100
Performance Graph................................................. 100
Interests of Insiders in Material Transactions.................... 101
APPROVAL OF JOINT PROXY STATEMENT BY
PICO HOLDINGS BOARD OF DIRECTORS.................................. 102
APPROVAL OF JOINT PROXY STATEMENT BY GEC BOARD OF DIRECTORS.......... 103
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ANNEX A - Form of the Arrangement Resolution
ANNEX B - Interim Order and Notice of Application for Final Order
ANNEX C - Combination Agreement including Plan of Arrangement
ANNEX D - First Marathon Securities Limited Valuation and Fairness Opinion
ANNEX E - PICO's Annual Report on Form 10K for 1997, as amended, and
Quarterly Report on Form 10Q for the quarter ended June 30,
1998
ANNEX F - GEC Financial Statements
ANNEX G - Provisions of Section 185 of the Business Corporations Act (Ontario)
ANNEX H - Provisions of Chapter 13 of the California General Corporation Law, as
amended
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PICO HOLDINGS, INC. GLOBAL EQUITY CORPORATION
875 Prospect Street, Suite 301 80 Richmond Street West, Suite 1805
La Jolla, California 92037 Toronto, Ontario, Canada M5H 2A4
JOINT MANAGEMENT INFORMATION CIRCULAR AND PROXY STATEMENT
This Joint Management Information Circular and Proxy Statement ("Joint Proxy
Statement") is being furnished to holders ("PICO Shareholders") of common stock,
par value U.S.$0.001 per share ("PICO Common Stock"), of PICO Holdings, Inc.
("PICO"), a California corporation, in connection with the solicitation of
proxies by the Board of Directors of PICO for use at the annual meeting of PICO
Shareholders to be held on November ?, 1998 and any adjournment or postponement
thereof (the "PICO Shareholders' Meeting").
This Joint Proxy Statement is also being furnished to holders ("GEC
Shareholders") of common shares ("GEC Common Shares") of Global Equity
Corporation ("GEC"), an Ontario corporation, in connection with the solicitation
of proxies by the management of GEC for use at a special meeting of GEC
Shareholders to be held on November ?, 1998 and any adjournment or postponement
thereof (the "GEC Shareholders' Meeting").
At the PICO Shareholders' Meeting and the GEC Shareholders' Meeting, holders
of shares of PICO Common Stock and GEC Common Shares, respectively, will be
asked to consider and vote upon (i) in the case of holders of PICO Common Stock,
a proposal to approve and adopt the transactions (the "Transaction")
contemplated by the Combination Agreement dated ?, 1998 by and between PICO and
GEC (the "Combination Agreement"), a proposal for the election of three nominees
to the PICO board of directors, a proposal for the ratification of the
appointment of Deloitte & Touche LLP as PICO's independent auditors, and a
proposal to effect a one-for-five reverse PICO Common Stock split immediately
following consummation of the Transaction, and (ii) in the case of holders of
GEC Common Shares, a special resolution to approve the arrangement (the
"Arrangement") contemplated by the Combination Agreement. Pursuant to the
Combination Agreement, each outstanding GEC Common Share (other than those
currently owned by PICO or as to which dissent rights have been duly exercised)
will be exchanged for 0.4628 (the "Exchange Ratio") of a share of PICO Common
Stock, and each GEC Common Share purchase warrant (which entitles the holder to
acquire one GEC Common Share for Cdn.$3.25) will be exchanged for 0.4628 of a
PICO Common Stock purchase warrant (each whole PICO warrant entitling the holder
to purchase on or before June 30, 1999 one share of PICO Common Stock for
$U.S.4.76, being the U.S. dollar equivalent on the date upon which the exchange
ratio was agreed of the Cdn.$3.25 exercise price of a Global Equity warrant,
divided by the Exchange Ratio). As a result, PICO will become the beneficial
owner of all of the outstanding GEC Common Shares and GEC Common Share purchase
warrants.
SEE "RISK FACTORS" BEGINNING ON PAGE ? FOR CERTAIN CONSIDERATIONS RELEVANT
TO APPROVAL OF THE PROPOSALS AND AN INVESTMENT IN THE PICO SECURITIES REFERRED
TO HEREIN.
This Joint Proxy Statement and the accompanying forms of proxy and letters
of transmittal are first being mailed to PICO Shareholders and GEC Shareholders
on or about October ?, 1998.
THE SECURITIES TO BE ISSUED IN THE TRANSACTION HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE
UNITED STATES SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS JOINT PROXY STATEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement is
October ?, 1998.
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Shareholders of PICO have the right to dissent from the Transactions and
demand appraisal rights for their shares, provided that demands for payment are
duly filed with respect to 5% or more of the outstanding shares of PICO Common
Stock prior to the date of the PICO Shareholders' Meeting and such Shareholders
comply with the requirements of Chapter 13 of the California General Corporation
Law. GEC Shareholders who oppose passage of the Arrangement Resolution are
entitled to dissent under section 185 of the Business Corporations Act
(Ontario). See "Dissenting Shareholders' Rights" in the Joint Proxy Statement
for a description of the rights of dissenting Shareholders and a discussion of
the procedures which must be followed by Shareholders to obtain an appraisal of
their shares.
All information in this Joint Proxy Statement relating to PICO has been
supplied by PICO and all information relating to GEC has been supplied by GEC.
The enforcement by GEC Shareholders of civil liabilities under Canadian
provincial securities laws may be affected adversely by the fact that PICO is
incorporated under the laws of California, that all of its officers and
directors are residents of the United States, and that all or a substantial
portion of the assets of PICO and of the said persons may be located outside
Canada.
AVAILABLE INFORMATION
PICO is subject to the informational requirements of the United States
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the SEC. Such reports, proxy statements and other information may be inspected
and copied at the SEC's Public Reference Section, Room 1024, 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549, where copies may be obtained at
prescribed rates, as well as at the following regional offices: Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048; and
Midwest Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. PICO Common Stock is traded on Nasdaq.
Reports and other information concerning PICO may also be inspected at the
offices of the National Association of Securities Dealers, Inc. - Market Listing
Section, 1735 K Street, N.W., Washington, D.C. 20006. Such reports and other
information may also be inspected without charge at a Web site maintained by the
SEC. The address of the site is http:\\www.sec.gov.
Material filed by GEC may be inspected at the offices of The Toronto Stock
Exchange, Exchange Tower, 2 First Canadian Place, Toronto, Ontario M5X IJ2 and
the Montreal Exchange, 800 Victoria Square, 4th Floor, Montreal, Quebec H4Z 1A9.
Such reports and other information may also be inspected without charge at a Web
site maintained by The Canadian Depository for Securities. The address of the
site is http:\\www.sedar.com.
No person is authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Joint Proxy Statement, and if given or made, such information or representation
should not be relied upon as having been authorized. This Joint Proxy Statement
does not constitute an offer to sell, or a solicitation of an offer to purchase,
the securities offered by this Joint Proxy Statement, or the solicitation of a
proxy, in any jurisdiction to or from any person to whom or from whom it is
unlawful to made such offer, solicitation of an offer or proxy solicitation in
such jurisdiction. Neither the delivery of this Joint Proxy Statement nor any
sale made hereunder shall, under any circumstance, create any implication that
there has been no change in the affairs of PICO or GEC since the date hereof or
that the information in this Joint Proxy Statement or in the documents
incorporated by reference herein is correct as of any time subsequent to the
dates thereof. If any material change occurs during the period in which this
Joint Proxy Statement is required to be delivered, this Joint Proxy Statement
will be amended and supplemented accordingly.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Joint Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith, as described below. A copy of any or all
of such documents (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference in such documents) will be provided
without charge to each person to whom a copy of this Joint Proxy Statement has
been delivered, upon the written or oral request of such person. With respect to
PICO's documents, requests should be directed to PICO, Corporate Secretary, 875
Prospect Street, Suite 301, La Jolla, California 92037 (telephone (619)
456-6022). With respect to GEC's documents, requests should be directed to
Global Equity Corporation, Corporate Secretary, 80 Richmond St. West, Suite
1805, Toronto, Ontario M5H 2A4 (telephone (416) 861-1592). In order to ensure
timely delivery of the documents, any request should be made by ?, 1998.
PICO
The following documents, which have been filed by PICO with the SEC pursuant
to the Exchange Act, are incorporated in this Joint Proxy Statement by reference
and shall be deemed to be a part hereof for purposes of the Exchange Act:
(a) The description of the PICO Common Stock contained in the Registration
Statement of PICO on Form 8-A filed pursuant to the Exchange Act,
effective as of March 21, 1991; and
(b) The description of certain rights attaching to the PICO Common Stock to
purchase Series A Junior Participating Preferred Stock contained in the
Registration Statement of PICO on Form 8-A filed pursuant to the
Exchange Act, effective as of July 18, 1991.
All documents filed by PICO pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Joint Proxy Statement and prior
to the PICO Shareholders' Meeting and any adjournment or postponement thereof,
shall be deemed to be incorporated by reference in this Joint Proxy Statement
and to be a part hereof for purposes of the Exchange Act from the date of the
filing of such documents.
GEC
The following documents, filed by GEC with the various securities
commissions or similar authorities in each of the provinces of Canada (the
"Canadian Securities Authorities"), are specifically incorporated by reference
in and form an integral part of this Joint Proxy Statement:
(a) Annual Information Form dated May 19, 1998 and filed with the Canadian
Securities Authorities on May 20, 1998;
(b) Annual Report for the fiscal year ended December 31, 1997, which was
filed with the Canadian Securities Authorities on April 2, 1998, which
includes Management's Discussion and Analysis and the comparative
Consolidated Financial Statements of GEC for the fiscal years ended
December 31, 1997 and December 31, 1996 and the Auditors' Report
thereon;
(c) Material Change Report filed with the Canadian Securities Authorities
on June 29, 1998 relating to the proposal by PICO to GEC with respect
to the Transaction; and
(d) Management Proxy Circular dated July 31, 1998 relating to the annual
meeting of GEC Shareholders to be held on September 11, 1998; and
(e) Unaudited financial statements of GEC for the six months ended June 30,
1998, which were filed with the Canadian Securities Authorities on
August 14, 1998.
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Any documents of the type referred to in the preceding paragraph and any
material change reports (excluding confidential reports) filed by GEC with the
Canadian Securities Authorities after the date of this Joint Proxy Statement and
prior to the earlier of the Effective Time and the termination of the
Combination Agreement shall be deemed to be incorporated by reference in this
Joint Proxy Statement.
Any statement contained in this Joint Proxy Statement, in a supplement to
this Joint Proxy Statement, or in a document incorporated or deemed to be
incorporated by reference herein, shall be deemed to be modified or superseded
for the purposes of this Joint Proxy Statement to the extent that a statement
contained herein, or in any subsequently filed supplement to this Joint Proxy
Statement or in any document that also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Joint Proxy Statement. The making of a modifying or
superseding statement shall not be deemed an admission for any purposes that the
modified or superseded statement, when made, constituted a misrepresentation, an
untrue statement of a material fact or an omission to state a material fact that
is required to be stated or that is necessary to make a statement not misleading
in light of the circumstances in which it was made.
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GLOSSARY OF TERMS
Unless the context otherwise requires, the following terms shall have
the following meanings when used in this Joint Proxy Statement.
"Affiliate": a corporation shall be deemed to be an Affiliate of
another corporation if one of them is the Subsidiary of the other or if both are
Subsidiaries of the same corporation or if each of them is directly or
indirectly Controlled by the same Person.
"APL" means American Physicians Life Insurance Company, a life and
health insurer governed by the laws of Ohio.
"Arrangement" means the proposed arrangement of GEC under section 182
of the OBCA pursuant to the Plan of Arrangement, and is synonymous with the term
the "Transaction".
"Arrangement Resolution" means the special resolution of GEC
shareholders concerning the Arrangement in the form set out in Annex "A" to this
Joint Proxy Statement.
"Canadian Dollar Equivalent" means on any given date the product
obtained by multiplying the relevant U.S. dollar amount by the noon spot
exchange rate on such date for U.S. dollars expressed in Canadian dollars as
reported by the Bank of Canada.
"Canadian GAAP" means generally accepted accounting principles in
Canada.
"Canadian Tax Act" means the Income Tax Act (Canada), as amended.
"CDN" means the Canadian Dealing Network Inc., a subsidiary of the TSE.
"CGCL" means the California General Corporation Law, as amended.
"CIC" means Citation Insurance Company, a property and casualty insurer
governed by the laws of California.
"Closing" means the closing of the transactions contemplated by the
Combination Agreement.
"Closing Date" means the date on which the Closing occurs.
"Combination Agreement" means the Combination Agreement by and between
PICO and GEC dated as of ?, 1998, a copy of which is attached as Annex "C" to
this Joint Proxy Statement.
"Controlled": a corporation shall be deemed to be "Controlled" by
another Person or two or more Persons if:
(i) securities entitled to vote in the election of directors
carrying more than 50% of the votes for the election of
directors are held, directly or indirectly, by or for the
benefit of the other Person or Persons; and
(ii) the votes carried by such securities are entitled, if
exercised, to elect a majority of the board of directors of
such corporation.
"Court" means the Ontario Court of Justice (General Division).
"Depositary" means Equity Transfer Services.
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<PAGE> 17
"Dissent Notice" means a written objection to the Arrangement sent by a
GEC Shareholder to GEC as described under "Dissenting Shareholders' Rights."
"Effective Date" means the date shown on the certificate of arrangement
issued under the OBCA giving effect to the Arrangement.
"Effective Time" means 12:01 a.m. (Toronto time) on the Effective Date.
"Exchange Act" means the United States Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder.
"Exchange Ratio" means 0.4628, being the ratio of the number of PICO
Shares for which each GEC Common Share will be exchanged and the ratio of the
number of PICO Warrants for which each GEC Warrant will be exchanged pursuant to
the Plan of Arrangement.
"Fairness Opinion" means the valuation and fairness opinion prepared
and rendered by First Marathon to the Special Committee, a copy of which is
attached as Annex "D" to this Joint Proxy Statement.
"Final Order" means the final order of the Court approving the
Arrangement.
"First Marathon" means First Marathon Securities Limited, independent
financial advisor to the Special Committee.
"FTC" means the United States Federal Trade Commission and all
successors thereto.
"GEC" means Global Equity Corporation, a corporation governed by the
laws of Ontario.
"GEC Articles" means the GEC articles of incorporation, as amended from
time to time.
"GEC Board" means the board of directors of GEC.
"GEC By-Laws" means GEC's By-Laws, as amended from time to time.
"GEC Common Shares" means the common shares in the capital of GEC.
"GEC Option Plan" means the GEC Employee and Director Stock Option
Plan, as amended from time to time.
"GEC Options" means all outstanding options to purchase GEC Common
Shares, including all outstanding options granted under the GEC Option Plan.
"GEC Public Shareholders" means GEC Shareholders, other than:
(a) GEC;
(b) PICO;
(c) any Related Party of PICO;
(d) any person acting jointly or in concert with any person
referred to in paragraph (a), (b) or (c) in respect of the
Arrangement; or
(e) any Affiliate of any of the foregoing.
"GEC Record Date" means ?, 1998.
"GEC Shareholders" means the holders of GEC Common Shares.
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<PAGE> 18
"GEC Shareholders' Meeting" means the special meeting of GEC
Shareholders to be held to consider the Arrangement.
"GEC Warrant Agent" means Montreal Trust Company of Canada in its
capacity as warrant agent under the GEC Warrant Indenture.
"GEC Warrantholders" means holders from time to time of GEC Warrants.
"GEC Warrant Indenture" means the warrant indenture dated October 21,
1993 between GEC and the GEC Warrant Agent, as supplemental from time to time.
"GEC Warrants" means the common share purchase warrants, each of which
entitles the holder to purchase one GEC Common Share for $3.25, issued pursuant
to and governed by the GEC Warrant Indenture, as supplemented from time to time.
"HSR Act" means the United States Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended and the rules and regulations promulgated
thereunder.
"Interim Order" means the interim order of the Court dated ?, 1998, a
copy of which is attached as Annex "B" to this Joint Proxy Statement.
"IRS" means the United States Internal Revenue Service.
"Joint Proxy Statement" means this joint management information
circular and proxy statement relating to the GEC Shareholders' Meeting and the
PICO Shareholders' Meeting.
"Justice Department" means the United States Department of Justice.
"Letter of Transmittal" means the letter delivered to holders of GEC
Common Shares, which when duly completed and returned with a certificate for GEC
Common Shares to the Depositary will enable such shareholder to exchange such
certificate for a certificate for PICO Shares.
"ME" means the Montreal Exchange.
"MPL" means medical professional liability insurance, a line of
casualty insurance.
"Nasdaq" means the Nasdaq National Market segment of the Nasdaq Stock
Market, an electronic securities market operated by The Nasdaq Stock Market,
Inc., a wholly-owned Subsidiary of the National Association of Securities
Dealers Inc.
"NLRC" means Nevada Land & Resource Company, LLC, a Subsidiary of GEC.
"OBCA" means the Business Corporations Act (Ontario), as amended.
"Person" means an individual, sole proprietorship, partnership,
unincorporated association, unincorporated syndicate, unincorporated
organization, trust, body corporate, or natural person in his or her capacity as
trustee, executor, administrator or other legal representative.
"Physicians" means Physicians Insurance Company of Ohio, a property and
casualty insurer governed by the laws of Ohio.
"PICO Affiliates" means PICO together with its Subsidiaries.
"PICO" means PICO Holdings, Inc., a corporation governed by the laws of
California.
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<PAGE> 19
"PICO Articles" means PICO's Articles of Incorporation, as amended from
time to time.
"PICO Board" means the board of directors of PICO.
"PICO By-Laws" means PICO's By-Laws, as amended from time to time.
"PICO Common Stock" means the class of common stock in the authorized
capital of PICO.
"PICO Option" means an option to purchase PICO Shares.
"PICO Record Date" means ?, 1998.
"PICO Shareholders" means holders of PICO Shares.
"PICO Shareholders' Meeting" means the annual meeting of PICO
Shareholders at which PICO Shareholders will consider, among other things, the
Combination Agreement and the transactions contemplated thereby.
"PICO Shares" means shares of PICO Common Stock.
"PICO Warrant" means a PICO Share purchase warrant to be issued by PICO
pursuant to the PICO Warrant Indenture in connection with the Arrangement, each
of which will entitle the holder thereof to purchase on or before June 30, 1999
one PICO Share for U.S.$4.76.
"PICO Warrant Indenture" means the warrant indenture to be entered into
by PICO and a warrant agent effective as of the Effective Time pursuant to which
the PICO Warrants will be issued.
"Plan of Arrangement" means the plan of arrangement proposed under
section 182 of the OBCA substantially in the form attached hereto as Exhibit 1
to the Combination Agreement attached hereto as Annex "C" to this Joint Proxy
Statement, as amended, modified or supplemented from time to time in accordance
with its terms.
"Policy 9.1" means Ontario Securities Commission Policy Statement No.
9.1 and Policy Q-27 of the Quebec Securities Commission.
"Related Party" has the meaning ascribed thereto in Policy 9.1.
"Reverse Split" means the one-for-five reverse PICO Common Stock split
described under the header "Additional Matters For Consideration by PICO
Shareholders - Reverse Stock Split."
"Rights Plan" means the shareholder rights plan of PICO, as amended.
"SEC" means the United States Securities and Exchange Commission.
"Securities Act" means the United States Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"Sequoia" means Sequoia Insurance Company, a property and casualty
insurance company governed by the laws of California.
"Special Committee" means the special committee of the GEC Board
comprised of David A. Williams (Chairman), Patrick C. MacCulloch and Peter N. T.
Widdrington.
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<PAGE> 20
"Subsidiary": a corporation shall be deemed to be a Subsidiary of
another corporation if:
(i) it is Controlled by:
(a) that other, or
(b) that other and one or more corporations, each of
which is Controlled by the other, or
(c) two or more corporations, each of which is Controlled
by that other; or
(ii) it is a Subsidiary of a corporation that is that other's
Subsidiary.
"Summit" means Summit Global Management, Inc., a registered investment
advisor with the SEC governed by the laws of Ohio.
"Supplemental Indenture" means the supplemental warrant indenture to be
entered into between GEC and the GEC Warrant Agent supplementing the GEC Warrant
Indenture.
"Transaction" means the transactions contemplated by the Combination
Agreement and by the Plan of Arrangement whereby, among other consequences, PICO
will become the sole holder, directly or indirectly, of all of the issued and
outstanding GEC Common Shares, and is synonymous with the term the
"Arrangement".
"TSE" means The Toronto Stock Exchange.
"U.S. Code" means the United States Internal Revenue Code of 1986, as
amended.
"U.S. Dollar Equivalent" means the product obtained by multiplying the
relevant Canadian dollar amount by the noon spot exchange rate on such date for
U.S. dollars expressed in U.S. dollars as reported by the Bank of Canada.
"U.S. GAAP" means generally accepted accounting principles in the
United States.
"Valuation" means the valuation of the GEC Common Shares and the PICO
Common Stock as of June 30, 1998, prepared and rendered to the Special Committee
by First Marathon and included within the Fairness Opinion.
"Vidler" means Vidler Water Company, Inc., a corporation governed by
the laws of Delaware and a Subsidiary of GEC.
"Warrantholders' Letter of Transmittal" means the letter delivered to
holders of GEC Warrants, which when duly completed and returned with a
certificate for GEC Warrants to the Depositary will enable the holder to
exchange such certificate for a certificate for PICO Warrants.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement includes "forward-looking statements" within
the meaning of various provisions of the Securities Act and the Exchange Act.
All statements, other than statements of historical facts, included in this
Joint Proxy Statement that address activities, events or developments that PICO
or GEC expects or anticipates will or may occur in the future, including such
things as future cost savings or capital expenditures (including the amount and
nature thereof), business strategy and measures to implement strategy,
competitive strengths, goals, expansion and growth of PICO's, GEC's and their
respective Subsidiaries' businesses and operations, plans, references to future
success and other such matters are forward-looking statements. When used in this
Joint Proxy Statement, the words "estimate", "project", "anticipate", "except",
"intend", "believe", and similar expressions are intended to identify
forward-looking statements.
These forward-looking statements are based on certain assumptions and
analyses made by PICO and GEC in light of their experience and their perception
of historical trends, current conditions and expected future developments as
well as other factors they believe are appropriate in the circumstances.
However, whether actual future results and developments will conform with their
expectations and predictions is subject to a number of risks and uncertainties,
including the significant considerations discussed in this Joint Proxy
Statement, and particularly the "Risk Factors" section beginning on page ?
hereof. Consequently, all of the forward-looking statements made in this Joint
Proxy Statement are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by PICO or GEC
will be realized or, even if substantially realized, that they will have the
expected consequences to or effects on PICO, GEC and their respective
Subsidiaries or their respective businesses or operations. Shareholders are
cautioned not to place undue reliance on forward-looking statements contained
herein when making their determination as to whether or not to vote in favour of
the Transaction or other matters described in this Joint Proxy Statement.
The cautionary statements contained or referred to in this section
should be considered in connection with any written or oral forward-looking
statements that may subsequently be issued by PICO or GEC or persons authorized
to act on their behalf. Neither PICO nor GEC undertakes any obligation to
release publicly any revisions to any forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Joint Proxy Statement; it is not, and is not intended to be, complete in
itself. Reference is made to, and this summary is qualified in its entirety by,
the more detailed information contained elsewhere in this Joint Proxy Statement
(including the Annexes hereto), which GEC Shareholders and PICO Shareholders are
encouraged to review. Unless otherwise indicated, capitalized terms used in this
Joint Proxy Statement are defined in the Glossary of Terms or elsewhere in this
Joint Proxy Statement.
<TABLE>
<CAPTION>
THE COMPANIES
<S> <C>
PICO ....................................... PICO is a holding company principally engaged, directly and indirectly
through Subsidiaries, in five industry segments: portfolio investing;
property and casualty insurance; surface, water, geothermal and mineral
rights; medical professional liability insurance; and other. PICO's
objective is to use its resources to increase shareholder value through
investments in businesses which it believes are undervalued and will
benefit from additional capital, restructuring of operations or management,
or improved competitiveness through operational efficiencies with PICO's
existing operations. PICO's principal executive offices are located at 875
Prospect Street, Suite 301, La Jolla, California 92037 (telephone: (619)
456-6022).
GEC ........................................ GEC is a strategic international investment and operating company with
value-based holdings worldwide. Subsidiaries of GEC include Nevada Land and
Resource Company, LLC and Vidler Water Company, Inc. GEC also has a
portfolio of investments in equity securities of United States, European
and Asian corporations. GEC's principal executive offices are located at 80
Richmond Street West, Suite 1805, Toronto, Ontario M5H 2A4 (telephone:
(416) 861-1592).
The Transaction ........................... The Combination Agreement between PICO and GEC provides for, among other
things, the exchange of all of the outstanding GEC Common Shares (other
than those currently owned by PICO or as to which dissent rights have been
duly exercised) for PICO Shares on the basis of 0.4628 of a PICO Share for
each GEC Common Share, and the exchange of all of the outstanding GEC
Warrants for PICO Warrants on the basis of 0.4628 of a PICO Warrant for
each GEC Warrant (subject in each case to rounding of fractional
interests). If approved by the PICO Shareholders at the PICO Shareholder's
meeting, a one-for-five reverse stock split of the outstanding shares of
PICO Common Stock will be effected immediately following conversion of the
Transaction, and the number of PICO Shares issuable under the Arrangement
to former GEC Shareholders (and the entitlements of holders of PICO
Warrants) will be correspondingly adjusted.
THE MEETINGS
Time, Date and Place ...................... The PICO Shareholders' Meeting will be held at ? at ? on November ?,
1998 at ?.
</TABLE>
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<TABLE>
<S> <C>
The GEC Shareholders' Meeting will be held at ?, ? on November ?, 1998
at ?.
See "The Meetings - General Proxy Information."
Record Dates, Shares Entitled
to Vote .................................. Holders of record of PICO Common Stock on ?, 1998 (the "PICO Record
Date") are entitled to notice of and to vote at the PICO Shareholders'
Meeting. At the close of business on the PICO Record Date, there were
outstanding 32,591,718 PICO Shares, of which 28,019,703 (i.e. excluding the
4,258,415 PICO Shares owned by GEC and the 313,600 PICO Shares owned by
CIC) will be entitled to vote on each matter to be acted upon.
Holders of record of GEC Common Shares on ?, 1998 (the "GEC Record Date")
are entitled to notice of and to vote at the GEC Shareholders' Meeting
except to the extent that a person has transferred GEC Common Shares after
that date and the new holder of such shares establishes proper ownership
and demands not later than ?, 1998 to be included in the list of GEC
Shareholders eligible to vote at the GEC Shareholders' Meeting. At the
close of business on ?, 1998, there were outstanding and entitled to vote
81,853,076 GEC Common Shares, including 41,883,445 held by PICO and its
Subsidiaries, each of which will be entitled to one vote on each matter to
be acted upon. The Arrangement Resolution must also be approved by a
majority of the votes cast by GEC Public Shareholders.
See "The Meetings - General Proxy Information."
Matters to be Considered at
Meetings ................................. At the PICO Shareholders' Meeting, the PICO Shareholders will consider
and vote upon: (i) the transactions contemplated by the Combination
Agreement; (ii) the election of three nominees to PICO's Board of
Directors; (iii) the ratification of the appointment of Deloitte & Touche
LLP as PICO's independent auditors; (iv) the approval of a one-for-five
reverse stock split of the outstanding shares of PICO Common Stock to be
effected immediately following consummation of the Transaction; and (v)
such further business as may properly come before the PICO Shareholders'
Meeting or any adjournment or postponement thereof. Whether or not PICO
Shareholders are personally able to attend the PICO Shareholders' Meeting,
they are urged to complete, sign and date the enclosed PICO proxy card and
return it in the enclosed envelope as soon as possible.
At the GEC Shareholders' Meeting, the GEC Shareholders will consider and
vote upon: (i) the Arrangement Resolution; and (ii) such further business
as may properly come before the GEC Shareholders' Meeting or any
adjournment or postponement thereof. GEC Shareholders who are unable to
attend the GEC Shareholders' Meeting are urged to complete, sign and date
the enclosed GEC proxy card and return it in the enclosed envelope as soon
as possible.
</TABLE>
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<TABLE>
<S> <C>
See "The Meetings - General Proxy Information" and "Additional Matters
For Consideration by PICO Shareholders."
Votes Required ............................. Approval of the Combination Agreement and the transactions contemplated
thereby and the approval of the one-for-five reverse stock split of the
outstanding shares of PICO Common Stock will require the affirmative
vote of the holders of a majority of the shares of PICO Common Stock
outstanding and eligible to vote on the PICO Record Date. The election
of the three directors of PICO will be by a plurality of the votes
cast. Ratification of the appointment of Deloitte & Touche LLP as
PICO's independent auditors will require the affirmative vote of the
holders of a majority of the votes cast.
The Arrangement Resolution must be approved by the affirmative vote of
not less than two-thirds of the votes cast in respect of that resolution
at the GEC Shareholders' Meeting. The Arrangement Resolution must also
be approved by a majority of the votes cast by GEC Public Shareholders.
Recommendations of Boards of
Directors ................................ THE PICO BOARD BELIEVES THAT THE TERMS OF THE TRANSACTION ARE FAIR TO
AND IN THE BEST INTERESTS OF PICO SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT PICO SHAREHOLDERS VOTE TO APPROVE THE TRANSACTIONS CONTEMPLATED BY THE
COMBINATION AGREEMENT. THE BOARD OF DIRECTORS OF PICO ALSO RECOMMENDS A
VOTE FOR EACH OF THE OTHER PROPOSALS TO BE VOTED ON AT THE PICO
SHAREHOLDERS' MEETING AND FOR EACH OF THE NOMINEES FOR THE PICO BOARD.
THE TERMS OF THE COMBINATION AGREEMENT WERE NEGOTIATED ON BEHALF OF GEC AND
THE GEC BOARD BY THE SPECIAL COMMITTEE. THE GEC BOARD ACCEPTED THE
RECOMMENDATION OF THE SPECIAL COMMITTEE AND BELIEVES THAT THE TERMS OF THE
TRANSACTION ARE FAIR TO AND IN THE BEST INTERESTS OF THE GEC PUBLIC
SHAREHOLDERS AND (WITH MESSRS. RONALD LANGLEY AND JOHN HART, WHO ARE ALSO
DIRECTORS AND OFFICERS OF PICO, ABSTAINING) UNANIMOUSLY RECOMMENDS THAT GEC
SHAREHOLDERS VOTE TO APPROVE THE ARRANGEMENT RESOLUTION.
See "The Transaction - Board Recommendations."
Dissenting Shareholders' Rights............. PICO Shareholders have the right to dissent from the Transaction and
demand appraisal rights for their PICO Shares, provided that demands for
payment are duly filed by holders of an aggregate of 5% or more of the
outstanding PICO Shares prior to the date of the PICO Shareholders' Meeting
and such holders comply with the requirements of Chapter 13 of the CGCL
(the text of which is set forth in Annex "H" to this Joint Proxy
Statement).
GEC Shareholders who oppose passage of the Arrangement Resolution are
entitled to dissent under section 185 of the OBCA (the text of which is set
forth in Annex "G" to this Joint Proxy Statement) in accordance with the
Interim Order.
It is a condition of the parties' obligations under the Combination
Agreement that rights of dissent shall not have been exercised in respect
of more than 2?% of the outstanding GEC Common
</TABLE>
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<TABLE>
<S> <C>
Shares held by GEC Public Shareholders nor in respect of more than 5% of
the outstanding PICO Shares unless same shall have been abandoned.
See "Dissenting Shareholders' Rights."
THE TRANSACTION
PICO's Reasons
for the Transaction ...................... In reaching its conclusion to enter into the Combination Agreement and
to recommend approval of the Transaction by PICO Shareholders, the PICO
Board considered information with respect to the business and affairs of
GEC and PICO and determined, among other things, that the Transaction:
- simplifies PICO's corporate structure and eliminates the
cross-ownership of investments between PICO and GEC;
- eliminates the public confusion, costs and duplication of efforts
inherent in maintaining two public entities with similar business
strategies, management and investment philosophies;
- results in a single publicly traded corporation with a distinct
value investment philosophy;
- results in a larger, more liquid publicly traded corporation (with
shareholders? equity increased by approximately U.S. $75 million to
approximately U.S. $186 million, based on unaudited pro forma financial
information as of June 30, 1998 included elsewhere in this Joint Proxy
Statement) which would bring the following potential benefits to all
Shareholders:
(i) increased analyst coverage;
(ii) increased ability to utilize PICO Shares as a currency for
further transactions and acquisitions;
(iii) increased ability for the combined company to access capital
markets; and
(iv) increased liquidity of PICO Shares though an increase in the
public float of approximately 18.5 million shares (an
additional approximately 3.7 million shares after giving effect
to the one-for-five reverse PICO Common Stock split).
- increases the book value per PICO Share by U.S.$0.30 to U.S.$4.01 per
share (U.S.$20.05 per share after giving effect to the one-for-five
reverse PICO Common Stock split), based on unaudited pro forma financial
information as of June 30, 1998 included elsewhere in this Joint Proxy
Statement.
See "The Transaction - Reasons for the Arrangement."
</TABLE>
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<TABLE>
<S> <C>
GEC's Reasons
for the Transaction ....................... In reaching its conclusions that the Arrangement is fair to and in the
best interests of GEC Shareholders and to recommend that GEC Shareholders
vote in favour of the Arrangement Resolution, the GEC Board considered
information with respect to the business and affairs of GEC and PICO, as
well as the following:
- the Exchange Ratio implies an effective premium of approximately
22.5% over the closing price of a GEC Common Share on the TSE at June
18, 1998 (the day prior to the public announcement of the Exchange
Ratio) and an effective premium of approximately 18.6% over the average
ratio of the GEC Common Shares to PICO Common Stock for the 20 trading
days prior to the June 19, 1998 public announcement of the Exchange
Ratio;
- the greater total market capitalization and liquidity of the
combined company relative to GEC which would bring the following
potential benefits to all shareholders:
(i) increased analyst coverage;
(ii) increased ability to utilize stock of the combined company as a
currency for future transactions and acquisitions;
(iii) increased ability for the combined company to access capital
markets; and
(iv) increased liquidity through ownership of PICO Shares (which
would be part of a significantly greater market capitalization
and broader public distribution relative to the GEC Common
Shares).
- the opinion received from First Marathon that the Arrangement is
fair, from a financial point of view, to GEC Public Shareholders;
- that GEC Public Shareholders will own approximately 40% of the
outstanding equity of the combined company (approximately 42% on a
fully diluted basis), excluding the PICO Shares owned by the PICO
Affiliates, based on the Exchange Ratio of 0.4628;
- the structure of the Arrangement; and
- the right of GEC Shareholders to dissent pursuant to section 185 of
the OBCA.
See "The Transaction - Reasons for the Arrangement."
Transaction Mechanics ...................... In accordance with the Combination Agreement, GEC will apply to the
Court for an order under the provisions of section 182 of the OBCA,
pursuant to which:
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(a) each GEC Common Share (other than those currently owned by PICO or
as to which rights of dissent have been duly exercised) will be
exchanged for 0.4628 of a PICO Share; and
(b) each GEC Warrant will be exchanged for 0.4628 of a PICO Warrant
(each whole PICO Warrant having an exercise price of U.S.$4.76,
being the U.S. dollar equivalent on the date upon which the Exchange
Ratio was agreed of the Cdn.$3.25 exercise price of a GEC Warrant,
divided by the Exchange Ratio).
The ratio of one GEC Common Share or GEC Warrant to 0.4628 of a PICO
Share or PICO Warrant, as the case may be, is referred to herein as the
"Exchange Ratio".
As a result of these transactions, PICO will become the beneficial
owner, directly and/or indirectly, of all of the outstanding GEC Common
Shares and GEC Warrants. Holders of GEC Common Shares and holders of
GEC Warrants will be able to obtain a certificate for the number of PICO
Shares or PICO Warrants (as the case may be) which they are entitled to
receive pursuant to the Arrangement by duly completing and returning a
Letter of Transmittal (or a Warrantholders' Letter of Transmittal, as
the case may be) in the form enclosed with this Joint Proxy Statement.
See "The Transaction - Transaction Mechanics" and "- Procedures for
Exchange of Share Certificates by GEC Shareholders" and " - Procedures
for Exchange of Warrant Certificates by GEC Warrantholders".
Opinion of Financial Advisor ............... First Marathon has rendered the Fairness Opinion to the Special
Committee which opines, inter alia, that the Arrangement is fair, from a
financial point of view, to the GEC Public Shareholders. THE FAIRNESS
OPINION IS ATTACHED TO THIS JOINT PROXY STATEMENT AS ANNEX "D" AND SHOULD
BE READ IN ITS ENTIRETY. The Fairness Opinion includes a valuation of the
GEC Common Shares and of the PICO Shares. As at June 30, 1998, First
Marathon determined the value of a GEC Common Share to be between Cdn.$3.35
and Cdn.$4.18, and the value of a share of PICO Common Stock to be between
U.S.$4.99 and U.S.$6.09. On June 18, 1998 (the day prior to the public
announcement of the Exchange Ratio), the closing price of a GEC Common
Share on the TSE was Cdn.$2.40 and the closing price for a share of PICO
Common Stock on the Nasdaq was U.S.$4.3125. Assuming an exchange rate of
Cdn.$1.4665 equal to U.S.$1.00 (the exchange rate in effect on June 30,
1998), the Exchange Ratio is equal to the simple average of the exchange
ratios calculated from the low and high values of GEC Shares and PICO
Shares.
See "The Transaction - Opinion of the Financial Advisor."
Exchange Procedures ........................ Accompanying this Joint Proxy Statement is a Letter of Transmittal (on ?
paper). The Letter of Transmittal, when duly completed and returned
together with a certificate for GEC Common Shares, will enable each GEC
Shareholder to obtain a certificate for that number of PICO Shares equal to
the number of GEC Common
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Shares previously held by such GEC Shareholder multiplied by the Exchange
Ratio (subject to adjustment for fractional shares). If the resolution
approving the one-for-five reverse PICO Common Stock split (the "Reverse
Split") is approved, GEC Shareholders will receive a certificate for such
number of PICO Shares as they otherwise would have been entitled to
pursuant to the Arrangement divided by five (i.e. adjusted to give effect
to the Reverse Split), together with the cheque for the cash which each
such holder is entitled as a result of the Reverse Split.
See "The Transaction - Procedures for Exchange of Share Certificates by
GEC Shareholders," and "Additional Matters for Consideration by PICO
Shareholders - Reverse Split."
This Joint Proxy Statement is also accompanied by a Warrantholders'
Letter of Transmittal (on ? paper) which, when duly completed and
returned together with a certificate for GEC Warrants, will entitle each
GEC Warrantholder to obtain a certificate for a number of PICO Warrants
equal to the number of GEC Warrants represented by a submitted
certificate multiplied by the Exchange Ratio (subject to adjustment for
fractional warrants). If the resolution approving the Reverse Split is
approved, each PICO Warrant, which when issued entitles the holder
thereof to purchase one pre-Reverse Split PICO Share for U.S.$4.76, will
be adjusted (without any action on the part of PICO or the holder) such
that, immediately following the Reverse Split, each whole PICO Warrant
will entitled the holder to purchase one post-Reverse Split PICO Share
for U.S.$23.80.
See "The Transaction - Procedures for Exchange of Warrant Certificates
by GEC Warrantholders," and "Additional Matters for Consideration by
PICO Shareholders - Reverse Split."
Effective Time of the Transaction .......... It is anticipated that the Transaction will become effective after the
requisite shareholder, court and regulatory approvals have been obtained
and all other conditions to the Transaction have been satisfied or
waived. It is currently anticipated that the Transaction will become
effective on or about November ?, 1998.
See "The Transaction - Transaction Mechanics."
Conditions to the Transaction .............. The obligations of GEC and PICO to consummate the Transaction are
subject to the satisfaction or waiver of certain conditions, including
obtaining approval of the PICO Shareholders and the GEC Shareholders,
[EXPIRATION OR TERMINATION OF WAITING PERIODS UNDER THE HSR ACT,] rights
of dissent not having been exercised in respect of more than 2 1/2% of
the outstanding GEC Common Shares held by GEC Public Shareholders nor more
than 5% of the outstanding PICO Shares unless same shall have been
abandoned, and the approval (without material condition or cost) of the
Plan of Arrangement by the Court.
See "The Transaction - The Combination Agreement."
Regulatory Requirements..................... The Combination Agreement is subject to the following regulatory
requirements:
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1. Court approval: The Arrangement requires approval by the Court.
Prior to the mailing of this Joint Proxy Statement, GEC obtained the
Interim Order providing for the calling and holding of the GEC
Shareholders' Meeting and other procedural matters, a copy of which
Interim Order, together with the Notice of Application for the Final
Order is attached to this Joint Proxy Statement as Annex "B".
Subject to the approval of the Arrangement by the GEC Shareholders
at the GEC Shareholders' Meeting, the hearing in respect of the
Final Order is scheduled to take place on ?, 1998 at ? (Toronto
time) in the Court at 361 University Avenue, Toronto, Ontario. At
the hearing of the motion with respect to the Final Order, the Court
will consider, among other things, the fairness and reasonableness
of the Arrangement.
[2. ANTITRUST: TRANSACTIONS SUCH AS THE TRANSACTION ARE SUBJECT TO
REVIEW BY THE JUSTICE DEPARTMENT OR THE FTC TO DETERMINE WHETHER OR
NOT THEY MAY LEAD TO REDUCED COMPETITION. UNDER THE PROVISIONS OF
THE HSR ACT, THE TRANSACTION MAY NOT BE CONSUMMATED UNTIL CERTAIN
INFORMATION HAS BEEN FURNISHED TO THE JUSTICE DEPARTMENT AND THE FTC
AND CERTAIN WAITING PERIOD REQUIREMENTS UNDER THE HSR ACT HAVE BEEN
SATISFIED. PICO, GEC AND CERTAIN COMPANIES IN WHICH PICO AND/OR GEC
HAVE AN INVESTMENT INTEND TO FILE PRE-TRANSACTION NOTIFICATION AND
REPORT FORMS PURSUANT TO THE HSR ACT WITH THE JUSTICE DEPARTMENT AND
THE FTC.]
See "The Transaction - Regulatory Matters."
Termination ................................ The Combination Agreement may be terminated at any time prior to the
Effective Time under certain circumstances, including by mutual written
consent of the parties or by either of the parties if the conditions to
the Arrangement have not been satisfied or waived on or before ?, 1998.
See "The Transaction - The Combination Agreement."
Interests of Certain Persons ............... Ronald Langley, the Chairman of the GEC Board, and John R. Hart,
President and Chief Executive Officer and a director of GEC, are also
directors and officers of PICO. Negotiation of the Transaction on
behalf of GEC and the GEC Board has been conducted by the Special
Committee, comprised of directors of GEC who are independent of PICO.
PICO has also agreed to maintain in effect for a period of at least six
years from the Effective Time all rights of indemnification existing at
the time of execution of the Combination Agreement in favour of the
independent directors and officers of GEC. PICO has agreed to grant
options ("PICO Options") to purchase PICO Shares to certain directors
and/or executive officers of GEC in consideration for such persons
agreeing to waive their entitlements to their GEC Options, subject in
each case only to the consummation of the Arrangement. Such PICO
Options are the economic equivalent of such GEC Options.
See "The Transaction - Interests of Certain Persons in the Transaction."
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Anticipated Accounting Treatment ........... The Transaction will be treated as a "purchase" for accounting and
financial reporting purposes, in accordance with U.S. GAAP.
Certain Income Tax Consequences to GEC
Shareholders ............................. The Transaction constitutes a tax-free reorganization under Section
368(1)(B) of the Code for United States federal income tax purposes.
For Canadian federal income tax purposes GEC Shareholders will generally
recognize a gain or loss upon the exchange of their GEC Common Shares
for PICO Shares. GEC SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS.
See "Tax Considerations."
Eligibility for Investment ................. The PICO Shares and PICO Warrants are eligible investments under certain
Canadian federal and provincial statutes.
See "The Transaction - Eligibility for Investment in Canada."
STOCK EXCHANGE LISTINGS
PICO Shares ................................ The PICO Shares are traded on the Nasdaq. PICO has filed an application
for listing of the PICO Shares whose issuance is contemplated by the
Combination Agreement (including PICO Shares issuable upon the exercise
of PICO Warrants). There is no current intention to list the PICO
Shares on any other stock exchange or quotation-based system in Canada
or the United States.
PICO Warrants............................... The PICO Warrants will not be listed on any stock exchange or
quotation-based system in Canada or the United States.
GEC Common Shares........................... On completion of the Transaction, the GEC Common Shares will be delisted
from the TSE and the ME.
GEC Warrants................................ Effective as of October 21, 1998, the initially scheduled expiry date of
the GEC Warrants, the GEC Warrants will cease to be quoted on the CDN.
There is no current intention to list (or relist) the GEC Warrants on
any stock exchange or quotation-based system in Canada or the United
States.
See "The Transaction - Stock Exchange Listings."
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RISK FACTORS
The following risk factors should be considered by PICO Shareholders
and GEC Shareholders in evaluating the Transaction, in the case of PICO
Shareholders, and the Arrangement Resolution in the case of GEC Shareholders.
The risk factors should be considered in conjunction with the other information
included in this Joint Proxy Statement. PICO SHAREHOLDERS AND GEC SHAREHOLDERS
ARE URGED TO READ THIS SECTION IN ITS ENTIRETY.
RISKS RELATED TO PICO
In addition to the risks and uncertainties discussed in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Annex "E" to this Joint Proxy Statement and in the section of
this Joint Proxy Statement entitled "Cautionary Statement Regarding
Forward-Looking Statements", the following risk factors should be considered by
holders of GEC Common Shares and PICO Shares in evaluating whether to approve
the Transaction and related matters described in this Joint Proxy Statement. In
evaluating PICO's and GEC's businesses, shareholders should carefully consider
the following factors in addition to the other information presented or
incorporated by reference in this Joint Proxy Statement.
Variability of Quarterly Operating Results
PICO's results of operations have been subject to significant
fluctuations, particularly on a quarterly basis, and PICO's future results of
operations could fluctuate significantly form quarter to quarter and from year
to year. Causes of such fluctuations may include the inclusion on consolidation
of PICO of operating earnings from newly acquired investment operations or the
exclusion on consolidation of operating earnings from investment operations that
have been disposed of, the acquisition of investment operations that, on
acquisition, exhibit low operating earnings but have a high degree of
expectation of capital gains due to PICO's ability to restructure operations or
management.
Risks Associated with Acquisitions and Investments
PICO invests in businesses which it believes are undervalued or will
benefit from additional capital, restructuring of operations or management or
improved competitiveness through operational efficiencies with existing PICO
operations. Due to PICO's limited experience in the operation of the businesses
of its Subsidiaries, which currently constitute a substantial portion of PICO's
operations, there can be no assurance as to the future operating results of PICO
or the recently acquired businesses of PICO.
PICO will continue to evaluate and make selective investments for the
purpose of enhancing and realizing additional value by means of shareholder
influence and control. This could involve the restructuring of the financing or
management of the entities in which PICO invests and initiating and facilitating
mergers and acquisitions. Any acquisition, depending on its size, could result
in the use of a significant portion of PICO's available cash or, if such
acquisition is made utilizing PICO's securities, could result in significant
dilution to PICO Shareholders, and could result in the incurrence of significant
acquisition related charges to earnings. Acquisitions by PICO may result in the
incurrence or the assumption of liabilities, including liabilities that are
unknown or not fully known at the time of acquisition, which could have a
material adverse effect on PICO and furthermore, there can be no assurance that
PICO will obtain the anticipated or desired benefits of such transactions. PICO
Shareholders will be relying on the experience and judgement of PICO's
management to locate, select and develop new acquisition and investment
opportunities. There can be no assurance that sufficient opportunities will be
found or that this business strategy will be successful. Failure to successfully
implement this strategy may negatively impact the business and financial
condition, results of operations and cash flows of PICO.
PICO faces significant risks associated with its recent acquisitions
(including the acquisition of NLRC). There can be no assurance that PICO will
realize the desired benefits of these transactions. In order to successfully
manage these companies, PICO must, among other things, continue to attract and
retain key
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management and other personnel. The diversion of the attention of
management from the day-to-day operations of PICO, or difficulties encountered
in the integration process, could have a material adverse effect on PICO's
business, financial condition, results of operations and cash flows.
Market values of equity securities are subject to changes in the stock
market, which may cause PICO Shareholders' equity to fluctuate from period to
period. At times, PICO may come to hold securities of companies for which no
market exists or which may be subject to restrictions on resale. As a result,
periodically, a portion of PICO's assets may not be readily marketable.
Change in Strategic Direction
In late 1994, Physicians began the process of changing its strategic
direction from the operation of an MPL insurance business to investing in
businesses which management believes are undervalued or will benefit from
additional capital, restructuring of operations or management or improved
competitiveness through operational efficiencies with existing operations.
Accordingly, in January 1995, Physicians reactivated its investment advisory
subsidiary, Summit; in August 1995 acquired Sequoia and entered new lines of
property and casualty insurance; in August 1995 sold its MPL insurance business;
in September 1995, Physicians purchased 38.2% of GEC; in November 1996,
Physicians acquired control of Citation Insurance Group ("CIG") pursuant to a
merger, and the holding company was renamed PICO Holdings, Inc. ("PICO"); in
April 1997, PICO acquired 25.23% ownership of NLRC which owns approximately
1,365,000 acres of deeded land in northern Nevada; in June 1997, PICO sold its
workers' compensation business; and in July and August 1997, PICO increased its
ownership in GEC to 51.17%. On May 8 and June 19, 1998, PICO and GEC jointly
announced their intentions to combine through a plan of arrangement. There can
be no assurance as to the future operating results of PICO or acquired
businesses of PICO.
PICO will continue to make selective investments for the purpose of
enhancing and realizing additional value by means of appropriate levels of
shareholder influence and control. This business strategy has been implemented
gradually during the past three to four years. For this reason and others,
including but not limited to the variability of the securities markets and the
uncertainties associated with trying to predict future results based upon past
performance, PICO's historical financial statements are not indicative of the
possible future results of this new business strategy.
Application of Physician's and PICO's new strategy since 1995 has
resulted in a greater concentration of equity investments held by PICO. Market
values of equity securities are subject to changes in the stock market, which
will cause PICO's shareholders' equity to fluctuate from period to period. At
times PICO may hold securities of companies for which no market exists or which
may be subject to restrictions on resale. As a result, periodically, a portion
of PICO's assets may not be readily marketable, which would restrict PICO's
ability to liquidate its interests in these entities. Such barriers to liquidity
could adversely impact the business, financial condition, results of operations
and cash flows of PICO.
PICO and GEC through NLRC and Vidler have committed a significant
portion of their assets to surface, water, geothermal and mineral rights. There
can be no assurance that the market value of these assets will increase over
time. In addition, there are a number of risks associated with the successful
development of PICO's and GEC's water rights business including, but not limited
to, water price volatility; environmental concerns; political opposition;
uncertainty of future demand/revenues; concentration of revenue sources in a
limited number of assets; and dependence on key personnel. There can be no
assurance that Vidler and NLRC will be successful in developing their surface,
water, geothermal and mineral rights assets.
Dependence on Key Personnel
PICO has several key executive officers, the loss of whom could have a
significant adverse effect on PICO. In particular, Ronald Langley, PICO's
Chairman, and John R. Hart, PICO's President and Chief Executive Officer, play
key roles in PICO's and GEC's investment decisions. Messrs. Langley and Hart
have entered into employment agreements with PICO and a wholly-owned Subsidiary
of GEC as of December 31, 1997, all for a period of four years. Messrs. Langley
and Hart are key to the implementation of PICO's new strategic focus,
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and the ability of PICO to implement its current strategy is dependent on its
ability to retain the services of Messrs. Langley and Hart.
Risks Regarding Physicians; Continuing MPL Liability
In August 1995, the MPL insurance business and related liability
insurance business of Physicians and its wholly-owned subsidiary, The
Professionals Insurance Company ("PRO") were sold. Physicians and PRO retained
all assets and liabilities related to insurance policies written prior to the
sale of the recurring book of business. Physicians and PRO will continue to
administer claims and loss adjustment expenses under MPL insurance policies
issued or renewed prior to July 16, 1995. Cash flow needed to fund the
day-to-day operations and the payment of claims and claims expenses will be
provided by investment income, lease income, and proceeds from the sale or
maturity of securities.
Under the terms of PICO's MPL policies, these policies have an extended
reporting period for claims. Under Ohio law the statute of limitations is one
year after the cause of action accrues. Also, under Ohio law there is a
four-year statutory time bar; however, this has been construed judicially to be
unconstitutional in situations where the plaintiff could not have reasonably
discovered the injury in that four-year period. Claims of minors must be brought
within one year of the date of majority. As a result, some claims may be
reported a number of years following the expiration of the MPL policy period.
Physicians and PRO have established reserves to cover losses and loss adjustment
expense on claims incurred under the MPL policies issued or renewed to date
including not only those claims reported to date, but also those incurred but
not yet reported. The amounts established and to be established by Physicians
and PRO for loss and loss adjusted expense ("LAE") reserves are estimates of
future costs based on various assumptions and, in accordance with Ohio law, have
been discounted (adjusted to reflect the time value of money). These estimates
are based on actual and industry experience and assumptions and projections as
to claims frequency, severity and inflationary trends and settlement payments.
In accordance with Ohio law, Physicians and PRO annually obtain a certification
from an independent actuary that their respective reserves for losses and LAE
are adequate. Physicians and PRO also obtain a concurring actuarial opinion.
Physicians' and PRO's reserves for losses and LAE for prior years
developed favourably in 1994, and these reserves were decreased by U.S.$12.7
million in 1994. Reserves also developed favourably in 1995; however, accretion
of reserve discount exceeded the amount of favourable development and
retroactive reinsurance, resulting in a U.S.$3.2 million increase in liabilities
for prior years' claims. As a result of continued favourable claims experience,
reserves for prior years' claims were further reduced in the first and fourth
quarters of 1996. However, based upon actuarial indications from data through
June 30, 1997, Physicians' MPL claims reserves were increased by U.S.$2 million
during the third quarter of 1997 due to somewhat deteriorated claims experience
during the first six months of 1997. At the same time, favourable development of
Physicians' and PRO's discontinued personal lines reserves (automobile,
homeowner, etc.) allowed reserve reductions of U.S.$750,000 during the third
quarter of 1997. Due to the inherent uncertainties in the reserving process
there is a risk that Physicians' and PRO's reserves for losses and LAE could
prove to be inadequate which could result in a decrease in earnings and
shareholders' equity. Adverse reserve development can reduce statutory
policyholders' surplus or otherwise limit the growth of such policyholders'
surplus and, correspondingly, shareholders' equity.
Loss Reserve Experience
The inherent uncertainties in estimating loss reserves are greater for
some insurance products than for others, and are dependent on the length of the
reporting tail associated with a given product, the diversity of historical
development patterns among various aggregations of claims, the amount of
historical information available during the estimation process, the degree of
impact that changing regulations and legal precedents may have on open claims,
and the consistency of reinsurance programs over time, among other things.
Because MPL and commercial casualty claims may not be fully paid for several
years or more, estimating reserves for such claims can be more uncertain than
estimating reserves in other lines of insurance. As a result, precise reserve
estimates cannot be made for several years following a current accident year for
which reserves are initially established.
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There can be no assurance that the insurance Subsidiaries in the group
have established reserves adequate to meet the ultimate cost of losses arising
from such claims. It has been necessary, and will over time continue to be
necessary, for the insurance companies to review and make appropriate adjustment
to reserves for estimated ultimate losses, LAE, future policy benefits, claims
payables, and annuity and other policyholder funds. To the extent reserves prove
to be inadequate, the insurance companies would have to adjust their reserves
and incur a charge to earnings, which could have a material adverse effect on
the financial results of PICO.
Reinsurance Risks
Prior to the June 30, 1997 sale of Citation National Insurance Company
("CNIC"), all of CNIC's existing insurance risks and claims liabilities, except
for those insuring workers' compensation, were transferred to CIC through
reinsurance treaties in order to effect the sale of CNIC and CIC's workers'
compensation business. As with other property and casualty ("P & C") insurers,
CIC's and Sequoia's operating results and financial condition can be adversely
affected by volatile and unpredictable natural and man-made disasters, such as
hurricanes, windstorms, earthquakes, fires, and explosions. CIC and Sequoia
generally seek to reduce their exposure to such events through individual risk
selection and the purchase of reinsurance. CIC's and Sequoia's estimates of
their exposures depend on their views of the possibility of a catastrophic event
in a given area and on the probable maximum loss to the insurance companies
should such an event occur. While CIC and Sequoia attempt to limit their
exposure to acceptable levels, it is possible that an actual catastrophic event
or multiple catastrophic events could significantly exceed the probable maximum
loss previously assumed, resulting in a material adverse effect on the financial
condition and results of operations of PICO.
The future financial results of the insurance Subsidiaries could be
adversely affected by disputes with their respective reinsurers with respect to
coverage and by the solvency of such reinsurers.
Risks Regarding Summit Global Management
Summit is registered as an investment adviser in California, Florida,
Kansas, Louisiana, Oregon, Virginia and Wisconsin, as well as with the SEC.
Summit must file periodic reports with the SEC and is subject to periodic
examination by the SEC. Summit is subject to Section 206 of the Investment
Advisers Act of 1940, which prohibits material misrepresentations and fraudulent
practices in connection with the rendering of investment advice, and to the
general prohibitions of Section 208 of such Act. If Summit were to violate the
Investment Advisers Act prohibitions, it would risk criminal prosecution, SEC
injunctive actions and the imposition of sanctions ranging from censure to
revocation of registration in an administrative hearing.
The investment adviser business is highly competitive. There are
several thousand investment advisers registered in the states in which Summit
does business, many of which are larger and have greater financial resources
than Summit. There can be no assurance that Summit will be able to compete
effectively in the markets that it serves.
Global Investment Volatility
As a result of global diversification, investment decisions already
made and which may be made in the future, particularly with regard to GEC,
PICO's revenues may be adversely affected by economic, political and
governmental conditions in countries where it maintains investments or
operations, such as volatile interest rates or inflation, the imposition of
exchange controls which could restrict PICO's ability to withdraw funds,
political instability and fluctuations in currency exchange rates. Such
investment volatility could have an adverse impact on PICO's business, financial
condition, results of operations and cash flows.
Fluctuations in P & C Reserves
During the past several years, the levels of the reserves for PICO's
insurance Subsidiaries have been very volatile. As a result of its claims
experience and the level of existing reserves with respect to its P & C
insurance business, CIC has had to significantly increase these reserves in a
number of the past several years.
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There can be no assurance that significant increases with respect to
the reserves for the P & C business will not be necessary in the future, that
the level of reserves for PICO's insurance Subsidiaries will not be volatile in
the future, or that any such increases or volatility will not have an adverse
effect on PICO's operating results and financial condition.
Competition
There are several hundred P & C insurers licensed in California, many
of which are larger and have greater financial resources than CIC, and Sequoia;
offer more diversified types of insurance coverage; have greater financial
resources and have greater distribution capabilities than the insurance
companies of the group. The presence of these competitors or competitive
developments in the future could adversely affect PICO's business and results of
operations.
A.M. Best Ratings
A.M. Best and Company ("Best") has assigned Sequoia a rating of B++
(Very Good) and APL has had a Best rating of B+ (Very Good) since 1983. In June
1997, a wholly-owned subsidiary of PICO entered into an agreement to sell APL,
which sale is pending regulatory approval. Upon announcement of the signing of
the agreement to sell APL, Best placed APL's rating under review with developing
implications. CIC was recently upgraded from a B- (Adequate) to a B+ (Very Good)
by Best. Physicians and PRO are currently rated, and have been for a number of
years, NR-3 (rating procedure inapplicable). Best's ratings reflect the
assessment of A.M. Best and Company of the insurer's financial condition, as
well as the expertise and experience of management. Therefore, Best ratings are
important to policyholders. Best ratings are subject to review and change over
time. Failure to maintain or improve their Best ratings could have a material
adverse effect on the ability of the insurance companies to underwrite new
insurance policies, as well as potentially reduce their ability to maintain or
increase market share. Management believes that many potential customers will
not insure with an insurer that carries a Best rating of less than B+, and that
customers who do so will demand lower rate structures. There can be no assurance
that any of the insurance companies' ratings will be maintained or increased,
and a downgrade would likely adversely affect PICO's business, financial
condition, results of operations and cash flows.
Cyclical Nature of the P&C Industry
The P & C insurance industry has been highly cyclical, and the industry
has been in a cyclical downturn over the last several years due primarily to
competitive pressures on pricing, which has resulted in lower profitability.
Pricing is a function of many factors, including the capacity of the P&C
industry as a whole to underwrite business, an individual company's
policyholders' surplus and returns on the investment portfolio. The level of
surplus in the industry varies with returns on invested capital and regulatory
barriers to withdrawal of surplus. Increases in surplus have generally been
accompanied by increased price competition among P & C insurers. The cyclical
trends in the industry and the industry's profitability can also be affected
significantly by volatile and unpredictable developments, including natural
disasters, fluctuations in interest rates, and other changes in the investment
environment which affect market prices of insurance companies' investments and
the income from those investments. Inflationary pressures affect the size of
losses and judicial decisions affect insurers' liabilities. These trends may
adversely affect PICO's business, financial condition, results of operations and
cash flows.
Insurance Company Capital and Surplus Testing
In the past few years, the National Association of Insurance
Commissioners has developed risk-based capital ("RBC") measurements for both
property and casualty and life and health insurers. The measures provide the
various state regulators with varying levels of authority based on the adequacy
of an insurer's RBC. The insurance companies' RBC results are reported annually
in their statutory Annual Statements to the insurance departments. Failure to
meet one or more RBC level may result in state regulators requiring the
insurance company to submit a business plan demonstrating attainment of the
required RBC level. This may entail the addition of capital, a restructuring of
assets and liabilities, or changes in operations. At or below certain lower RBC
levels, state regulators may supervise the operation of the insurance company
and/or
-20-
<PAGE> 36
require the liquidation of the insurance company. Failing to meet RBC levels
could adversely affect PICO's business, financial condition, results of
operations and cash flows.
Risks Associated with Failure to Manage Growth
PICO's growth internally and through its numerous acquisitions has
placed, and further expansion would continue to place, significant strain on its
limited personnel, management and other resources. PICO's ability to manage any
future growth may require it to attract, train, motivate and manage new
employees successfully, to integrate new employees effectively into its
operations and to continue to improve its operational, financial, management and
information systems and controls. The failure to manage any further growth
effectively could have a material adverse effect on PICO's business, financial
condition and results of operations.
Failure to Qualify for Exemption under Investment Company Act
PICO at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940.
However, if PICO were to fail to qualify for exemption from registration as an
investment company, its ability to use leverage would be substantially reduced,
and it would be subject to significant additional disclosure obligations and
restrictions on its operational activities.
Possible Price Volatility of PICO Common Stock
The trading price of PICO Common Stock has historically been, and is
expected to be, subject to fluctuations. The market price of the Common Stock
may be significantly impacted by quarterly variations in financial performance,
shortfalls in revenue or earnings from levels forecast by securities analysts,
changes in estimates by such analysts, product introductions by PICO or its
competitors, announcements of extraordinary events such as acquisitions or
litigation or general economic conditions. Statements or changes in opinions,
ratings, or earnings estimates made by brokerage firms or industry analysts
relating to the markets in which PICO does business or relating to PICO
specifically could result in an immediate and adverse effect on the market price
of the Common Stock. In addition, in recent years the stock market has
experienced extreme price and volume fluctuations. These fluctuations have had a
substantial effect on the market prices for many companies, often unrelated to
the operating performance of the specific companies. There can be no assurances
that the market price of the PICO Common Stock will not decline below the levels
prevailing on the Effective Date. Securities class action lawsuits are often
brought against companies following periods of volatility in the market price of
their securities. Any such litigation against PICO could result in substantial
costs and a diversion of resources and management attention.
Renewals
Insurance policy renewals have historically accounted for a significant
portion of PICO's net revenue; however, there can be no assurance that PICO will
be able to sustain historic renewal rates for its products in the future. Risks
related to PICO's recent change in business strategies could also cause
fluctuations in operating results and could make comparisons with historic
operating results and balances difficult or not meaningful.
Certain Anti-Takeover Features
The PICO Articles and by-laws contain certain provisions that could
deter or prevent certain takeover attempts. In addition, PICO has adopted the
Rights Plan which may also deter or prevent certain takeover attempts. See "The
Companies after the Transaction - PICO Capital Stock."
The foregoing factors, individually or in the aggregate, could
materially adversely affect PICO's operating results and could make comparison
of historic operating results and balances difficult or not meaningful.
-21-
<PAGE> 37
RISKS RELATED TO GEC
Nature of the Business
There are risks inherent in the nature of GEC's business as an
investment company. Investment in companies which management regards as
undervalued involves significant risk that even a combination of careful
evaluation, experience and knowledge may not eliminate. Potential investors must
rely on the ability of GEC's management and board of directors to identify and
take advantage of business opportunities, provide advisory services, facilitate
financings and make investments in appropriate businesses.
GEC ability to achieve an acceptable rate of return on any particular
investment is subject to a number of factors which are beyond its control,
including increased competition and loss of market share, quality of management,
cyclical or uneven financial results, technological obsolescence, foreign
currency risks and regulatory delays.
There is no assurance that GEC's existing or future investments will
achieve acceptable rates of return or that GEC will realize the value of the
funds invested; accordingly, these investments may have to be written down or
sold at their then-prevailing market values.
Investments in both private and public companies may prove illiquid or
realizable only at a discount. Investments in private companies are not as
marketable as investments in public companies. Investments in public companies
are subject to prices determined in the public markets and, therefore, values
can vary dramatically. In particular, the ability of the public markets to
absorb a large block of shares offered for sale can affect GEC's ability to
dispose of an investment in a public company.
Foreign Investments and Operations
As a result of the global diversification of the investment portfolio,
GEC's revenues may be adversely affected by economic, political and governmental
conditions in countries where it maintains investments or operations, such as
volatile interest rates or inflation, the imposition of exchange controls which
could restrict GEC's ability to withdraw funds, political instability and the
currency risks discussed above.
Reliance on Key Personnel
The success of GEC depends to a large extent on its ability to retain
the services of its senior management, in particular Messrs. Langley and Hart
and, to a certain extent, upon the management of companies in which GEC has an
investment. The inability to retain the services of these persons could
potentially affect GEC's operations and profitability.
Water Rights Portfolio
The water rights described under the heading "Additional Information
Regarding GEC - Description of the Business of GEC - Business Strategy -
Surface, Water, Geothermal and Mineral Rights" and the transferability of these
rights to other uses and places of use are governed by the laws concerning water
rights in the states of Arizona, Colorado and Nevada. The volumes of water
actually derived from these rights may vary considerably based upon physical
availability and may be further limited by applicable legal restrictions. As a
result, the amounts of acre feet noted do not in every case represent a
reliable, firm annual yield of water, but in some cases describe the face amount
of the water right claims or management's best estimate of such entitlement.
Legal impediments exist to sale or transfer of some of these water rights which
may affect their commercial value.
Environmental Matters
GEC's operations in the United States are subject to federal, state,
municipal and local regulation under environmental laws and regulations
concerning, among other things, emissions to the air, discharges to waters, the
generation, handling, storage, transportation, treatment and disposal of waste,
hazardous
-22-
<PAGE> 38
substances and other materials and soil and ground water contamination. A risk
of environmental liability is inherent in the real estate ownership, operation
or control and other commercial activities of GEC with respect to current and
future operations.
In the agreements of purchase and sale with respect to the acquisitions
of land and water rights made in the western United States by GEC and its
subsidiaries, the vendors have provided representations and warranties and/or
indemnities in relation to certain environmental liabilities. These provisions
are subject to certain qualifications, thresholds and monetary limits. While
there can be no assurance that GEC and its subsidiaries will be able to recover
the amount of any environmental liability from the vendors pursuant to these
provisions, management of GEC believes that these provisions provide a
reasonable protection for GEC and its subsidiaries against environmental
liabilities.
REPORTING CURRENCIES AND ACCOUNTING PRINCIPLES
The financial statements and the unaudited pro forma financial
statements of, and the summaries of historical and unaudited pro forma financial
information concerning, PICO contained elsewhere in this Joint Proxy Statement
are reported in U.S. dollars and have been prepared in accordance with U.S.
GAAP.
The financial statements of, and the summaries of financial information
concerning, GEC contained in this Joint Proxy Statement are reported in Canadian
dollars and have been prepared in accordance with Canadian GAAP, which, as
applied to GEC, conforms in all material respects with U.S. GAAP except as
described in Note 14 of the Notes to GEC's Consolidated Financial Statements.
For a discussion of the conversion of GEC's historical financial statements from
Canadian GAAP to U.S. GAAP for the purposes of inclusion within the unaudited
pro forma financial information and PICO's historical consolidated financial
statements included elsewhere in this Joint Proxy Statement, see Note 14 of the
Notes to GEC's Consolidated Financial Statements set forth in Annex "F" to this
Joint Proxy Statement.
EXCHANGE RATE OF CANADIAN AND U.S. DOLLARS
In this Joint Proxy Statement, dollar amounts are expressed either in
U.S. dollars ("U.S.$") or Canadian dollars ("Cdn.$"). Where not indicated
otherwise, dollar amounts are expressed in Canadian dollars.
The following table sets forth, for each period indicated, the high and
low exchange rates for one Canadian dollar expressed in U.S. dollars, the
average of such exchange rates on the last day of each month during such period,
and the exchange rate at the end of such period, based upon the noon buying rate
in New York City for cable transfers in Canadian dollars, as certified for
customs purposes by the Federal Reserve Bank of New York (the "Noon Buying
Rate"):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
High ? 0.7491 0.7513 0.7530 0.7639 0.8065
Low ? 0.6949 0.7215 0.7148 0.7097 0.7418
Average ? 0.7225 0.7331 0.7348 0.7321 0.7752
Period End ? 0.6998 0.7299 0.7326 0.7133 0.7564
</TABLE>
On October ?, 1998, the exchange rate for one Canadian dollar expressed
in U.S. dollars based on the Noon Buying Rate was U.S.$?.
-23-
<PAGE> 39
The following table sets forth, for each period indicated, the high and
low exchange rates for one U.S. dollar expressed in Canadian dollars, the
average of such exchange rates on the last day of each month during such period,
and the exchange rate at the end of such period, based upon the noon spot rate
of the Bank of Canada (the "Noon Spot Rate"):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
High ? 1.4399 1.3865 1.4267 1.4090 1.3484
Low ? 1.3345 1.3287 1.3275 1.3085 1.2400
Average ? 1.3844 1.3636 1.3726 1.3659 1.2898
Period End ? 1.4305 1.3706 1.3640 1.4018 1.3217
</TABLE>
On October ?, 1998, the exchange rate for one U.S. dollar expressed in
Canadian dollars was Cdn.$?, based on the Noon Spot Rate.
-24-
<PAGE> 40
COMPARATIVE MARKET PRICE DATA
GEC Common Shares are traded under the symbol "GEC" on the TSE and the
ME, and shares of PICO Common Stock are traded under the symbol "PICO" on the
Nasdaq. The following table sets forth the high and low sales prices of GEC
Common Shares on the TSE and the ME and of shares of PICO Common Stock on the
Nasdaq for the periods indicated. The quotations are as reported in published
financial sources. TSE and the ME quotations are expressed in Cdn.$; the Nasdaq
quotations are expressed in U.S.$. During the periods presented below, neither
PICO nor GEC has declared or paid any dividends.
<TABLE>
<CAPTION>
GEC COMMON SHARES PICO SHARES
----------------- -----------
THE TORONTO STOCK EXCHANGE MONTREAL EXCHANGE NASDAQ
-------------------------- ----------------- ------
HIGH LOW VOLUME HIGH LOW VOLUME HIGH LOW VOLUME
---- --- ------ ---- --- ------ ---- --- ------
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
1st Quarter.... 4.00 3.05 7,150 4.25 3.00 1,468 4.75 3.50 959
2nd Quarter.... 3.80 2.90 4,358 4.00 2.90 590 4.63 3.88 768
3rd Quarter.... 3.55 2.75 2,024 3.55 2.65 341 4.44 3.38 563
4th Quarter.... 3.25 2.55 4,040 3.25 2.50 3,659 4.38 3.38 3,079
1997
1st Quarter.... 3.50 2.75 2,302 3.50 2.75 2,120 4.75 3.63 3,050
2nd Quarter.... 3.25 2.50 1,703 3.25 2.50 1,394 4.63 3.69 3,808
3rd Quarter.... 3.42 2.59 12,550 3.40 2.56 948 6.38 4.38 4,456
4th Quarter.... 3.65 3.00 6,200 3.60 3.00 2,136 6.44 5.88 3,254
1998
1st Quarter.... 3.84 2.83 2,569 3.80 2.90 311 7.06 5.69 2,444
2nd Quarter.... 2.90 2.40 2,947 2.95 2.00 411 6.00 4.00 4,149
3rd Quarter.... ? ? ? ? ? ? ? ? ?
4th Quarter ? ? ? ? ? ? ? ? ?
(through Oct.
__, 1998)
</TABLE>
On June 18, 1998, the last full trading day prior to the joint public
announcement by GEC and PICO of the acceptance by the Special Committee of the
Exchange Ratio, the last reported sale price on the TSE of a GEC Common Share
was Cdn.$2.40 and the last reported sale price of a PICO Share on the Nasdaq was
U.S.$4.3125 (equivalent to Cdn.$2.94 per GEC Common Share based on the 0.4628
Exchange Ratio and an exchange rate of Cdn.$1.4727 = U.S.$1.00). On October ?,
1998, the last reported sale price of a GEC Common Share on the TSE was Cdn.$?
and the last reported sale price of a PICO Share on the Nasdaq was U.S.$?
(equivalent to Cdn.$? per GEC Common Share based on the 0.4628 Exchange Ratio
and an exchange rate of Cdn.$? = U.S.$1.00). Because the market value of the
PICO Shares that holders of GEC Common Shares will receive in connection with
the Arrangement may increase or decrease, GEC Shareholders are encouraged to
obtain current quotations for the PICO Shares and GEC Common Shares.
-25-
<PAGE> 41
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables set forth selected historical financial data as of
and for the five fiscal years ended December 31, 1997, 1996, 1995, 1994 and 1993
and as of and for the six month periods ended June 30, 1998 and 1997 for PICO
and for GEC as of December 31, 1997, 1996 and 1995 and March 31, 1995 and 1994
and for the years ended December 31, 1997 and 1996 and for the nine months ended
December 31, 1995 and for the years ended March 31, 1995 and 1994 and as of and
for the six months ended June 30, 1998 and 1997. The selected historical
financial data for PICO for the five fiscal years ended December 31, 1997 has
been derived from PICO's consolidated financial statements, which statements
have been audited by Deloitte & Touche LLP, independent auditors, for the year
ended December 31, 1997, and by Coopers & Lybrand LLP, independent auditors, for
the years ended December 31, 1996, 1995, 1994 and 1993, whose reports on certain
of such financial statements are included herein. The selected historical
financial data for GEC for each of the years in the five-year period ended
December 31, 1997 has been derived from GEC's consolidated financial statements,
which statements have been audited by KPMG-independent auditors, whose report on
certain of such financial statements is included herein. The selected historical
financial data for PICO and GEC for the six-month periods ended June 30, 1998
and 1997 have been derived from unaudited condensed consolidated financial
statements of PICO and GEC, and include, in the opinion of management of PICO
and GEC respectively, all adjustments necessary to present fairly the results of
such periods. This selected historical financial data should be read in
conjunction with the historical consolidated financial statements and notes
thereto of PICO and GEC, which are included elsewhere in this Joint Proxy
Statement. See Annexes "E" and "F" to this Joint Proxy Statement.
GEC's financial statements are prepared in accordance with Canadian
GAAP which, as applied to GEC, does not differ materially from U.S. GAAP except
as described in Note 14 of the Notes to GEC's Consolidated Financial Statements.
PICO
The following selected consolidated financial data of PICO as of
December 31, 1997, 1996, 1995, 1994 and 1993 and for each of the years in the
five-year period ended December 31, 1997 has been derived from the audited
financial statements or other accounting records of PICO. The selected
consolidated financial data as of and for the six months ended June 30, 1998 and
for the six months ended June 30, 1997 has been derived from unaudited financial
statements of PICO. In the opinion of PICO management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of PICO consolidated financial position and results of operations
for such unaudited periods have been included. The information set forth below
is not necessarily indicative of the results of future operations and is
qualified in its entirety by, and should be read in conjunction with, PICO's
"Management's Discussion and Analysis of Financial Condition and Result of
Operations" in item 7 of the PICO Form 10-K filed March 31, 1998 as amended
April 30, 1998, and in Form 10-Q filed August 12, 1998, the statistical
information, and the related notes thereto included elsewhere in this Joint
Proxy Statement. See Annex "E" to this Joint Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -----------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- ----------- ------------ ------------
(U.S.$ in thousands, except per share data)
OPERATING RESULTS
Revenues
<S> <C> <C> <C> <C> <C> <C> <C>
Premium income earned........ $ 17,593 $ 28,478 $ 49,876 $ 38,761 $ 19,542 $ 20,026 $ 50,384
Net investment income........ 7,655 9,047 11,686 8,086 9,165 12,452 17,802
Other income................. 2,140 706 26,017 29,889 12,482 1,596 2,307
============ ============ ============ =========== =========== ============ ============
Total revenues $ 27,388 $ 38,231 $ 87,579 $ 76,736 $ 41,189 $ 34,074 $ 70,493
============ ============ ============ =========== =========== ============ ============
</TABLE>
-26-
<PAGE> 42
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -----------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before $ 3,722 $ 19,035 $ 21,019 $ 14,895 $ 16,348 $ (2,522)
discontinued operations and
cumulative effect of change
in accounting principle......
Income from discontinued $ 155 94 456 3,301 778 2,483 3,177
operations...................
Cumulative effect of change (4,110) (547)
in accounting principle......
============ ============ ============ =========== =========== ============ ============
Net income $ 155 $ 3,816 $ 19,491 $ 24,320 $ 15,673 $ 14,721 $ 108
============ ============ ============ =========== =========== ============ ============
PER PICO COMMON SHARE
RESULTS - BASIC
Income (loss) from $ 0.00 $ 0.12 $ 0.59 $ 0.75 $ 0.54 $ 0.60 $ (0.09)
continuing operations........
Income from discontinued 0.00 0.00 0.01 0.12 0.03 0.09 0.12
operations...................
Cumulative effect of change 0.00 0.00 0.00 0.00 0.00 (0.15) (0.02)
in accounting principle......
============ ============ ============ =========== =========== ============ ============
Net income................... $ 0.00 $ 0.12 $ 0.60 $ 0.87 $ 0.57 $ 0.54 $ 0.01
============ ============ ============ =========== =========== ============ ============
WEIGHTED AVERAGE PICO COMMON 32,592 32,515 32,552 28,005 27,436 27,436 27,436
SHARES OUTSTANDING...........
============ ============ ============ =========== =========== ============ ============
PER PICO COMMON SHARE
RESULTS- DILUTED:
Income (loss) from $ 0.00 $ 0.11 $ 0.57 $ 0.72 $ 0.54 $ 0.59 $ (0.09)
continuing operations........
Income from discontinued 0.00 0.00 0.01 0.12 0.03 0.09 0.12
operations...................
Cumulative effect of change 0.00 0.00 0.00 0.00 0.00 (0.15) (0.02)
in accounting principle......
============ ============ ============ =========== =========== ============ ============
Net income................... $ 0.00 $ 0.11 $ 0.58 $ 0.84 $ 0.57 $ 0.53 $ 0.01
============ ============ ============ =========== =========== ============ ============
WEIGHTED AVERAGE PICO COMMON 33,877 33,430 33,741 29,056 27,436 27,589 27,436
SHARES OUTSTANDING...........
============ ============ ============ =========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ ----------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------------- ------------- -------------- ------------- -------------
(U.S.$ in thousands, except per share data)
FINANCIAL CONDITION
<S> <C> <C> <C> <C> <C> <C>
Assets ............................... $408,154 $430,293 $490,425 $421,816 $297,163 $297,887
Unpaid losses and loss adjustment $175,037 $196,096 $252,024 $229,797 $180,691 $191,735
expenses, net of discount ............
Total liabilities and minority $296,558 $318,142 $380,222 $342,466 $261,419 $271,780
interest .............................
PICO shareholders' equity ............ $111,596 $112,151 $110,203 $79,350 $35,744 $26,107
Book value per PICO Share ............ $3.71 $3.73 $3.61 $3.04 $1.40 $1.17
</TABLE>
Notes:
(1) Prior year PICO Share values have been adjusted to reflect the November
20, 1996 reverse acquisition between Physicians and Citation Insurance
Group and prior year operating results have been adjusted to reflect
the treatment of APL as a discontinued operation.
(2) For the year ended December 31, 1994, Physicians recorded the
cumulative effect of a change in accounting principle related to the
discount rate associated with loss and loss adjustment expense. The
change was applied retroactively to 1993.
-27-
<PAGE> 43
(3) As of August 19, 1997, PICO consolidated the results of GEC into its
financial statements. Prior to this consolidation, GEC was accounted
for within PICO's Consolidated Financial Statements under the equity
method of accounting.
GEC
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements of GEC and the related
notes included elsewhere in this Joint Proxy Statement. See Annex "F" to this
Joint Proxy Statement. The selected consolidated financial data as of December
31, 1997, 1996 and 1995 and March 31, 1995 and 1994 and for the years ended
December 31, 1997 and 1996 and for the nine months ended December 31, 1995 and
for the years ended March 31, 1995 and 1994 are derived from the consolidated
financial statements of GEC audited by KPMG, independent auditors. The selected
consolidated financial data as of and for the six months ended June 30, 1998 and
for the six months ended June 30, 1997 are derived from financial statements of
GEC prepared by management of GEC in accordance with Canadian GAAP and, in the
opinion of management, include all adjustments, consisting of only normal
recurring adjustments, necessary for the fair presentation of the results of
operations for the periods presented. These historical results are not
necessarily indicative of the results to be expected in the future and results
for interim periods are not necessarily indicative of results for the entire
year.
The following selected consolidated financial data is presented in
Cdn.$ in accordance with Canadian GAAP. Significant differences between Canadian
GAAP and accounting principles generally accepted in the United States are
reconciled in Note 14 to the consolidated GEC financial statements included
elsewhere in this Joint Proxy Statement. A summary of foreign exchange rates to
convert the Canadian dollars to United States dollars is also provided for each
period. See "Exchange Rate of Canadian and U.S. Dollars".
During 1995, GEC changed its year-end from March 31 to December 31 to
be consistent with the reporting year-end of its parent.
There is a lack of comparability in results of operations and in
financial position for the years presented due to the acquisitions and
divestitures activities of GEC. A summary of these and the impact on the results
of operations is as follows:
Sale of Sri Lankan Subsidiaries: Results of operations for the nine
months ended December 31, 1995 and for the years ended March 31, 1995 and 1994
and for the years ended December 31, 1996 and 1997 include the results of
operations of the Sri Lankan Subsidiaries which were disposed of in November and
December of 1997. The results of operations for the Sri Lankan Subsidiaries have
been reclassified as discontinued operations for all periods presented.
Acquisition of Vidler Water Company Inc.: Results of operations for the
year ended December 31, 1997 and 1996 and the six months ended June 30, 1998 and
1997 include the results of operations for Vidler acquired in November 1995.
Acquisition of Nevada Land & Resource Company, LLC: Results of
operations for the year ended December 31, 1997 and for the six months ended
June 30, 1998 include the results of operations for NLRC acquired on April 23,
1997.
-28-
<PAGE> 44
GLOBAL EQUITY CORPORATION
SELECTED FINANCIAL INFORMATION
(Cdn.$ in thousands, except per share data)
<TABLE>
<CAPTION>
NINE
MONTHS
SIX MONTHS YEAR ENDED ENDED YEAR ENDED
ENDED JUNE 30, DECEMBER 31, DECEMBER 31, MARCH 31,
------------ ----------- ----------------------- ------------ ----------------------
1998 1997 1997 1996 1995 1995 1994
------------ ----------- ---------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues........................ $5,551 815 $5,546 $4,854 $3,798 $10,071 $14,659
===== ===== ===== ===== ====== ======
Income (loss) from continuing
operations...................... 929 (1,784) (14,871) 2,660 (5,374) 3,459 8,567
Income (loss) from discontinued 913 781 953 (4,470) 2,720 768
operations(1)................... ----------- --------- -------- --------- ---------- ---------- ----------
Net income (loss)............... $929 $(871) $(14,090) $3,613 $(9,844) $6,179 $9,335
============ =========== ========= ========== =========== ========== ==========
PER GEC COMMON
SHARE RESULTS:
Income (loss) from continuing
operations...................... $0.01 $(0.03) $(0.22) $0.04 $(0.09) $0.06 $0.19
Income (loss) from discontinued 0.00 0.01 0.01 0.02 (0.08) 0.05 0.02
operations(1)................... ========== ======== ======= ======== ========== ========== ==========
Net income (loss)............... $0.01 $(0.02) $(0.21) $0.06 $(0.17) $0.11 $0.21
=========== ========= ======== ========= ========== ========== ==========
WEIGHTED AVERAGE GEC COMMON SHARES
OUTSTANDING........................ 81,853 56,708 65,939 56,708 56,708 56,173 44,452
</TABLE>
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
DATA:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, MARCH 31,
----------- ----------------------- ------------ ----------------------
1998 1997 1996 1995 1995 1994
----------- ---------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets.......................... $205,643 $222,328 $168,400 $160,646 $177,136 $141,443
Liabilities..................... $6,583 $8,780 $15,779 $14,791 $16,907 $17,352
Long term debt, including $7,942 $23,388 $3,948
current portion.................
Minority interest............... $13,667 $16,504 $30,708 $30,593 $31,878 $747
Shareholders' equity............ $177,451 $173,656 $117,965 $115,262 $128,351 $123,344
Book value per GEC Common $2.17 $2.12 $2.08 $2.03 $2.25 $2.13
Share(2)........................
</TABLE>
-29-
<PAGE> 45
Notes:
(1) Discontinued operations reflect results of operations of Sri Lankan
Subsidiaries disposed of in 1997 as disclosed in Note 6 to the Notes to
GEC's Consolidated Financial Statements set forth in Annex F to this Joint
Proxy Statement.
(2) Book value per GEC Common Share is calculated based on shares outstanding at
the end of the period.
(3) For a reconciliation between Canadian GAAP and U.S. GAAP see Note 14 to
the Notes to GEC's Consolidated Financial Statements set forth in
Annex "F" to this Joint Proxy Statement.
-30-
<PAGE> 46
UNAUDITED PRO FORMA FINANCIAL INFORMATION
OF PICO AND GEC
The following unaudited pro forma balance sheet as of June 30, 1998 combines
the historical consolidated balance sheet of PICO with the purchase accounting
adjustments described in the accompanying notes as if the Transaction had been
effective June 30, 1998. At December 31, 1997 and June 30, 1998, PICO and its
Subsidiaries owned 51.17% of the outstanding GEC Common Shares. Accordingly,
GEC's 1997 and 1998 financial statements were consolidated with those of PICO
and its Subsidiaries as of and for the year ended December 31, 1997, and as of
and for the six months ended June 30, 1998. The unaudited pro forma statements
of operations present the combined income (loss) from continuing operations of
PICO and GEC for the year ended December 31, 1997 and the six months ended June
30, 1998, as if the Transaction had been effective on January 1, 1997, after
giving effect to the purchase accounting adjustments described in the
accompanying notes.
Pursuant to the Combination Agreement between PICO and GEC, all the
outstanding GEC Common Shares (other than those currently owned by PICO and
those as to which dissent rights have been duly exercised) will be exchanged for
PICO Shares on the basis of 0.4628 of a share of PICO Common Stock for each GEC
Common Share, and all of the outstanding GEC Warrants will be exchanged for PICO
Warrants on the basis of 0.4628 of a PICO Warrant for each GEC Warrant.
The unaudited pro forma financial statements and accompanying notes reflect
the application of the purchase method of accounting. Under this method of
accounting, the purchase price will be allocated to GEC's assets acquired and
liabilities assumed based on their estimated fair values at the time of
acquisition. The unaudited pro forma financial statements have been prepared
using the Exchange Ratio and a purchase price based upon a market price of
U.S.$4.42 per share for PICO Common Stock. The PICO Share market price
represents the average market price for one share of PICO Common Stock on the
Nasdaq for the six trading days commencing three days prior to the date of
announcement of the proposed Arrangement, in accordance with U.S. GAAP.
As described in the accompanying notes, preliminary estimates of the fair
values of assets and liabilities of GEC have been combined with the recorded
values of the assets and liabilities of PICO. Changes to the adjustments
included in the unaudited pro forma financial statements are expected to be made
as evaluations of assets and liabilities are completed and as additional
information becomes available. Accordingly, the final combined amounts will
differ from those set forth in the accompanying unaudited pro forma financial
statements. The unaudited pro forma financial statements are intended for
informational purposes only and are not necessarily indicative of the future
financial position or future results of operations of the combined company or of
the financial position or results of operations of the combined company that
would have actually occurred had the transaction been in effect as of the date
or for the periods presented. In preparing these unaudited pro forma financial
statements, no adjustments have been made to reflect the operating synergies
that may result from the transaction.
These unaudited pro forma financial statements should be read in conjunction
with the historical financial statements and notes thereto of PICO and GEC set
forth in Annexes "E" and "F" to this Joint Proxy Statement, in addition to all
other financial and statistical data contained elsewhere in this Joint Proxy
Statement.
-31-
<PAGE> 47
UNAUDITED PRO FORMA BALANCE SHEET
AS OF JUNE 30, 1998
(U.S.$ IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ASSETS PICO HOLDINGS,
INC. AND PRO FORMA
SUBSIDIARIES ADJUSTMENTS
CONSOLIDATED FOR THE
(AS REPORTED) TRANSACTION(1) PRO FORMA
---------------- --------------- --------------
<S> <C> <C>
Investments:
Available for sale:
Fixed maturities, at fair value.......... $ 35,838 $ 35,838
Equity securities, at fair value......... 75,860 $ (9,473) (h) 66,387
Short-term investments, at cost.................. 29,031 29,031
Real estate...................................... 2,099 2,099
---------------- --------------- --------------
Total Investments............................. 142,828 (9,473) 133,355
Cash and cash equivalents........................ 54,433 54,433
Premiums and other receivables, net.............. 8,897 8,897
Reinsurance receivables.......................... 70,960 70,960
Prepaid deposits and reinsurance premiums........ 11,083 11,083
Accrued investment income........................ 1,825 1,825
Surface, water, geothermal and mineral rights.... 75,573 29,390 (f)(i) 104,963
Property and equipment, net...................... 8,235 8,235
Deferred policy acquisition costs................ 5,300 5,300
Deferred income taxes............................ 7,977 7,977
Other assets..................................... 4,852 4,852
Net assets of discontinued operations............ 16,191 16,191
---------------- --------------- --------------
Total Assets.................................. $ 408,154 $ 19,917 $ 428,071
================ =============== ==============
LIABILITIES
Unpaid losses and loss adjustment expenses, net
of discount.................................. $175,037 $175,037
Unearned premiums................................ 29,697 29,697
Reinsurance balances payable..................... 9,133 9,133
Deferred gain on retroactive reinsurance......... 1,876 1,876
Accrued expenses and other liabilities........... 12,912 $800 (b) 13,712
Deferred income tax liability.................... 7,037 (g)(h) 7,037
Integration liability............................ 355 50 (e) 405
Excess of fair value of net assets acquired
over purchase price..................... 4,781 4,781
---------------- --------------- --------------
Total Liabilities............................. 233,791 7,887 241,678
---------------- --------------- --------------
Minority Interest................................ 62,767 (62,767) (d)
---------------- --------------- --------------
SHAREHOLDERS' EQUITY
Common stock (authorized 100,000; issued:
as reported 32,592, pro forma 66,644)(2) 33 34 (a) 67
Additional paid-in capital....................... 43,147 136,683 (a)(c) 179,830
Other comprehensive income:
Net unrealized depreciation on investments..... (2,394) 1,205 (h)(i) (1,189)
Cumulative foreign currency adjustment......... (3,234) (2,875) (i) (6,109)
Retained earnings................................ 83,873 83,873
Less treasury stock, at cost (as reported 2,493,
pro forma 20,126)(2)............................. (9,829) (60,250) (a)(h) (70,079)
---------------- --------------- --------------
Total PICO Shareholders' Equity............... 111,596 74,797 186,393
---------------- --------------- --------------
Total Liabilities and PICO
Shareholders' Equity............. $ 408,154 $ 19,917 $ 428,071
================ =============== ==============
Book value per PICO Share(3)..................... $ 3.71 $ 4.01
================ ==============
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
financial information.
-32-
<PAGE> 48
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(U.S.$ in thousands, except per share data)
<TABLE>
<CAPTION>
PICO HOLDINGS, PRO FORMA
INC. AND PRO FORMA
SUBSIDIARIES ADJUSTMENTS
CONSOLIDATED FOR THE
(AS REPORTED) TRANSACTION(1)
---------------- ---------------- --------------
REVENUES:
<S> <C> <C>
Premium income................................. $ 17,593 $17,593
Investment income, net......................... 5,181 5,181
Net realized gains on investments.............. 2,474 2,474
Other income................................... 1,653 1,653
---------------- --------------
Total revenues........................... 26,901 26,901
---------------- --------------
EXPENSES:
Loss and loss adjustment expenses.............. 13,661 13,661
Amortization of policy acquisition costs....... 5,559 5,559
Cost of land sales............................. 77 77
Insurance underwriting and other expenses...... 6,880 6,880
---------------- --------------
Total expenses........................... 26,177 26,177
---------------- --------------
Income from continuing operations before
income taxes and minority interest......... 724 724
Provision for income taxes..................... 930 930
---------------- --------------
Loss from continuing operations before minority
interest....................................... (206) (206)
Minority interest in loss of subsidiary........ $ 206 $ (206) (j)
---------------- ---------------- --------------
Income (loss) from continuing operations....... $ $ (206) $ (206)
================ ================ ==============
Per PICO Share:
Income from continuing operations (basic) $ 0.00 $0.00
Weighted average shares outstanding...... 32,592 46,518
Income from continuing operations (diluted) $ 0.00 $0.00
Weighted average shares outstanding...... 33,877 46,518
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
financial information
-33-
<PAGE> 49
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(U.S.$ in thousands, except per share data)
<TABLE>
<CAPTION>
PICO HOLDINGS, PRO FORMA
INC. AND PRO FORMA
SUBSIDIARIES ADJUSTMENTS
CONSOLIDATED FOR THE
(AS REPORTED) TRANSACTION(1)
----------------- ----------------- -------------
<S> <C> <C>
REVENUES:
Premium income................................. $ 49,876 $49,876
Investment income, net......................... 11,686 11,686
Net realized gains on investments.............. 21,393 21,393
Real estate sales.............................. 1,547 1,547
Other income................................... 3,078 3,078
----------------- -------------
Total revenues........................... 87,580 87,580
----------------- -------------
EXPENSES:
Loss and loss adjustment expenses.............. 34,330 34,330
Amortization of policy acquisition costs....... 10,069 10,069
Cost of land sales............................. 647 647
Insurance underwriting and other expenses...... 19,031 19,031
----------------- -------------
Total expenses........................... 64,077 64,077
----------------- -------------
Income from continuing operations before
income taxes and minority interest.......... 23,503 23,503
Provision for income taxes..................... 7,670 7,670
----------------- -------------
Income from continuing operations
before minority interest........... 15,833 15,833
Minority interest in loss of subsidiary........ $ 3,202 $ (3,202) (j)
----------------- ----------------- -------------
Income (loss) from continuing operations....... $ 19,035 $ (3,202) $15,833
================= ================= =============
Per PICO Share:
Income from continuing operations (basic) $ 0.59 $0.34
Weighted average shares outstanding...... 32,552 46,478
Income from continuing operations (diluted) $ 0.57 $0.33
Weighted average PICO Shares outstanding. 33,741 48,322
</TABLE>
The accompanying notes are an integral part of this unaudited pro forma
financial information
-34-
<PAGE> 50
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements may not be indicative
either of results that actually would have occurred if the transaction had taken
place on the dates indicated, or the results that may be achieved in the future.
In preparing these statements, no adjustments have been made to reflect the
operating synergies that may result from the Transaction.
(1) The Transaction will be accounted for under the purchase method of
accounting with PICO issuing new shares to acquire the remaining issued
and outstanding GEC Common Shares. The final allocation of the purchase
price to the assets acquired and the liabilities assumed will not be
determinable until after the date of the Transaction. Accordingly, the
amounts shown below may differ from the amounts ultimately determined.
The allocation of the purchase price is determined as follows based
upon an Exchange Ratio of 0.4628 of a PICO Share for each GEC Common
Share and an assumed consideration value of U.S.$4.42 per PICO Share
exchanged.
<TABLE>
<CAPTION>
(U.S.$ in thousands)
PURCHASE PRICE:
<S> <C>
Value of PICO Shares to be exchanged(a)............................................ $81,759
Acquisition costs(b)............................................................... 800
Value of GEC options(c)............................................................ 2,179
---------------------
$84,738
=====================
ALLOCATION OF PURCHASE PRICE:
Historic GEC shareholders' equity acquired(d)...................................... $62,767
Adjust assets and liabilities:
Integration liability(e)..................................................... (50)
Increase in book value of surface, water, geothermal and mineral rights(f)... 29,728
Deferred tax liability(g).......................................................... (7,707)
---------------------
$84,738
=====================
</TABLE>
Notes:
(a) Represents the value of 18,497,945 PICO Shares (39,969,631 GEC
Shares at an Exchange Ratio of 0.4628) issued to GEC
Shareholders other than PICO Subsidiaries at an assumed PICO
average market price per share of U.S.$4.42.
(b) Represents management's estimates of PICO's non-recurring
expenses and fees directly related to the Transaction,
including expenses and fees for legal counsel, investment
advisors, printing and distribution, and accountants.
(c) Represents an adjustment to reflect the fair value of stock
options. See discussion of options considered in purchase
accounting under "GEC Options". The value of such options was
determined using the Black-Scholes model.
(d) Represents GEC's historic minority interest associated with
39,969,631 GEC Common Shares issued and outstanding held by
GEC Shareholders other than PICO Subsidiaries.
(e) Represents management's estimate of integration costs related
to the Transaction.
(f) Represents the portion of the excess of the fair value of
surface, water, geothermal and mineral rights over book value
recognized as a result of the Transaction, to the extent of
the excess of the purchase price and costs to acquire GEC over
GEC's net asset value and costs to integrate. See
consideration of value of surface, water, geothermal and
mineral rights as described in the valuation and fairness
opinion attached as Annex "D" to this Joint Proxy Statement.
In addition, see Note 1 of Notes to PICO Consolidated
Financial Statements regarding the accounting policy for
surface, water, geothermal and mineral rights attached as
Annex "E" to this Joint Proxy Statement.
(g) Represents the deferred tax liability related to the increase
in book basis of surface, water, geothermal and mineral rights
resulting from the Transaction.
(h) Reflects accounting for PICO's increase in indirect holdings
of PICO Common Stock held by GEC from 51.17% to 100% as a
result of the Transaction. These additional 2,079,384 PICO
Shares held by GEC are accounted for as treasury stock.
(i) Represents consolidation entry recording 48.83% of GEC's
foreign currency translation adjustment and net unrealized
depreciation on investments resulting from PICO's increase in
GEC Common Share holdings from 51.17% to 100%.
(j) Represents elimination of minority interest in loss of GEC as
a result of the Transaction.
(2) After giving effect to the proposed one-for-five PICO Common Stock
reverse stock split, the 66,643,848 (32,591,718 PICO Shares prior to
the Transaction plus 34,052,130 PICO Shares issued in connection with
the Transaction) pro forma outstanding shares of PICO Common Stock will
become 13,328,770 PICO Shares outstanding, the pro forma treasury stock
of 20,126,200 (15,867,785 PICO Common Shares held by PICO Affiliates,
plus the 4,258,415 PICO Shares held by GEC). PICO Shares will become
4,025,240 PICO treasury shares and the pro forma book value per PICO
Share of $4.01 will become $20.05 per PICO Share.
-35-
<PAGE> 51
(3) Book value per share equals shareholders' equity (net of treasury
stock, at cost) at the end of the period divided by the number of
shares outstanding less treasury shares held at the end of the period.
-36-
<PAGE> 52
COMPARATIVE AND UNAUDITED PRO FORMA PER SHARE FINANCIAL INFORMATION
The following table sets forth comparative per share information for
PICO on a historical and unaudited pro forma basis and for GEC on a historical
and pro forma equivalent basis at the dates and for the periods indicated,
assuming the Exchange Ratio of 0.4628 and a purchase price based upon a market
value of PICO Common Stock of U.S.$4.42 per share, representing the average
market price of one PICO Share on the Nasdaq for the six trading days commencing
with three days prior to the announcement of the Transaction. See "Unaudited Pro
Forma Financial Information of PICO and GEC." The unaudited pro forma data is
not necessarily indicative of the actual amounts which would have resulted had
the Transaction actually been consummated at the beginning of the periods
presented. The data should be read in conjunction with the historical
consolidated financial statements and the related notes thereto of PICO and GEC
attached as Annexes "E" and "F" to this Joint Proxy Statement.
<TABLE>
<CAPTION>
FOLLOWING 1-FOR-5
FOLLOWING THE REVERSE PICO COMMON
HISTORICAL PER SHARE TRANSACTION STOCK SPLIT
--------------------------- ------------------------ --------------------------
GEC COMBINED GEC
COMBINED EQUIVALENT PRO FORMA EQUIVALENT
PRO FORMA PER PER PER
PICO(1) GEC(2) GEC(3) PER SHARE SHARE(4) SHARE (6) SHARE(6)
--------- -------- ------- ------------ ----------- ------------- -----------
U.S. $ Cdn.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations
per common share:
Basic:
Year ended December 31, 1997 $0.59 $(0.22) $(0.12) $0.34 $0.16 $1.70 $0.80
Six months ended June 30, $0.00 $0.01 $0.01 $0.00 $0.00 $0.00 $0.00
1998
Diluted:
Year ended December 31, 1997 $0.57 $(0.22) $(0.12) $0.33 $0.15 $1.65 $0.75
Six months ended June 30, $0.00 $0.01 $0.01 $0.00 $0.00 $0.00 $0.00
1998
Dividends per share(5)
Book value per share as of June 30, $3.71 $2.17 $1.58 $4.01 $1.86 $20.05 $9.30
1998
</TABLE>
Notes:
(1) PICO held approximately 51.17% of GEC Common Shares at December 31,
1997 and at June 30, 1998. Amounts shown reflect GEC consolidated with
the PICO Affiliates, as reported, in U.S. dollars and in U.S. GAAP.
(2) Amounts are as reported, in Cdn. dollars and in Cdn. GAAP.
(3) Amounts represent unaudited conversions of reported amounts to reflect
U.S. GAAP and are stated in U.S. dollars. The foreign exchange rate
used for income (loss) per share is the average rate for the period
presented and for book value per share is the period end rate as of the
date presented in accordance with the table on page ? under the heading
"Exchange Rate of Canadian and U.S. Dollars".
(4) Calculated by multiplying the corresponding unaudited pro forma per
share amounts in the previous column by the Exchange Ratio of 0.4628.
(5) Historically, no dividends have been paid by PICO or GEC.
-37-
<PAGE> 53
(6) Calculated by multiplying the corresponding unaudited pro forma per
share amounts in the corresponding columns under the heading "Following
the Transaction" by five.
-38-
<PAGE> 54
THE MEETINGS - GENERAL PROXY INFORMATION
PICO
This Joint Proxy Statement and the enclosed PICO proxy (on ? paper) are
being mailed to PICO Shareholders beginning on or about October ?, 1998. They
are furnished in connection with the solicitation of proxies by the PICO Board
for use at the PICO Shareholders' Meeting to be held at the time and place and
for the purposes set forth in the accompanying Notice of the PICO Shareholders'
Meeting. PICO has retained Corporate Investor Communications, Inc. on customary
terms and at a fee of approximately U.S.$5,500 plus out-of-pocket expenses to
assist in the solicitation of proxies. In addition to the solicitation of
proxies by mail, proxies may also be solicited by telephone, telegram or
personal interview by regular employees of PICO. PICO will pay all costs of
soliciting proxies. PICO will also reimburse brokers or other persons holding
stock in their names or in the names of their nominees for their reasonable
expenses in forwarding proxy material to beneficial owners, in accordance with
applicable SEC requirements.
All duly executed proxies received prior to the PICO Shareholders'
Meeting will be voted in accordance with the choices specified thereon. As to
any matter for which no choice has been specified in a duly executed proxy, the
shares represented thereby will be voted for the approval of the transactions
contemplated by the Combination Agreement, for the election as directors of the
nominees listed herein, for the ratification of Deloitte & Touche LLP as PICO's
independent auditors, for the one-for-five reverse PICO Common Stock split, and
in the discretion of the persons named in the proxy, in connection with any
other business that may properly come before the meeting. A PICO Shareholder
giving a proxy may revoke it at any time before it is voted at the meeting by
filing with the Secretary of PICO at 875 Prospect Street, Suite 301, La Jolla,
California 92037 an instrument revoking the proxy, by delivering a duly executed
proxy bearing a later date or by appearing at the PICO Shareholders' Meeting and
voting in person.
As of ?, 1998, the record date for determining PICO Shareholders
entitled to vote at the PICO Shareholders' Meeting (the "PICO Record Date"),
there were 32,591,718 shares of PICO Common Stock outstanding of which
28,019,703 (i.e. excluding the 4,258,415 PICO Shares owned by GEC and the
313,600 PICO Shares owned by CIC) are entitled to vote. Each holder of record of
shares of PICO Common Stock is entitled to one vote per share as to each matter
presented to a vote of PICO Shareholders; provided, however, that PICO
Shareholders may cumulate votes with respect to the election of directors. See
"Additional Matters for Consideration by PICO Shareholders - Election of
Directors of PICO". The quorum requirement for transaction of business at the
PICO Shareholders' Meeting is the presence in person or by proxy of a majority
of the outstanding shares of PICO Common Stock. Shares of PICO Common Stock
represented by proxies that reflect abstentions and shares of PICO Common Stock
referred to as "broker non-votes" (i.e., shares of PICO Common Stock held by
brokers or nominees as to which instructions have not been received from the
beneficial owners or persons entitled to vote that the broker or nominee does
not have discretionary power to vote on a particular matter) will be treated as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum.
On the PICO Record Date, directors and executive officers of PICO as a
group (10 persons) owned 2,491,986 shares of PICO Common Stock entitled to vote
at the PICO Meeting, or approximately 8.9% of the total issued and outstanding
shares eligible to vote. PICO has been advised that all of its directors and
executive officers intend to vote in favour of the Transaction.
Approval of the Combination Agreement and the transactions contemplated
thereby and the approval of the one-for-five reverse PICO Common Stock split
will each require the affirmative vote of the holders of a majority of the
shares of PICO Common Stock outstanding and eligible to vote on the PICO Record
Date. The election of directors will be by a plurality of the votes cast.
Ratification of the appointment of Deloitte & Touche LLP as PICO's independent
auditors will require the affirmative vote of the holders of a majority of the
votes cast.
-39-
<PAGE> 55
Broker non-votes and abstentions will have the same effect as a vote
cast against the proposal to approve the transactions contemplated by the
Combination Agreement and the approval of the one-for-five reverse stock split
of PICO Common Stock and will have no effect on the outcome of the election of
directors, the ratification of the appointment of Deloitte & Touche LLP as
PICO's independent.
The Board of Directors of PICO is not aware of any matters other than
those specifically stated in this Joint Proxy Statement which are to be
presented for action at the PICO Shareholders' Meeting. If any other matters are
properly presented at that meeting for action, including a question of
adjourning the meeting from time to time, the persons named in the proxies and
acting thereunder will have discretion to vote on those matters in accordance
with their best judgment. Any adjournment of the PICO Shareholders' Meeting will
require the affirmative vote of the holders of at least a majority of the shares
represented at such meeting (regardless of whether those PICO Shares constitute
a quorum).
GEC
THIS JOINT PROXY STATEMENT ACCOMPANIES THE NOTICE OF THE GEC
SHAREHOLDERS' MEETING TO BE HELD ON NOVEMBER ?, 1998, AND IS FURNISHED IN
CONNECTION WITH THE SOLICITATION BY MANAGEMENT OF GEC OF PROXIES FOR USE AT THE
GEC SHAREHOLDERS' MEETING. The solicitation will be primarily by mail but
proxies may also be solicited by regular employees of GEC. GEC has retained
Corporate Investor Communications, Inc. on customary terms and at a fee of
Cdn.$8,500 plus out-of-pocket expenses to assist in the solicitation of proxies.
GEC will provide proxy materials to brokers, custodians, nominees and
fiduciaries and request that such materials be promptly forwarded to the
beneficial owners of GEC Common Shares registered in the names of such brokers,
custodians, nominees and fiduciaries. The cost of such solicitation will be
borne by GEC.
At ?, 1998, the record date for determining GEC Shareholders entitled
to vote at the GEC Shareholders' Meeting (the "GEC Record Date") there were
81,853,076 outstanding GEC Common Shares entitled to be voted at the GEC
Shareholders' Meeting. Each GEC Shareholder is entitled to one vote on all
matters to come before the GEC Shareholders' Meeting for each GEC Common Share
registered in the holder's name in the list of holders of GEC Common Shares
prepared as of the GEC Record Date, unless a person has transferred such shares
after such date and the new holder of such shares establishes proper ownership
and makes a request not later than ?, 1998 to the Corporate Secretary of GEC to
be included in the list of holders of GEC Common Shares eligible to vote at the
GEC Shareholders' Meeting. HOLDERS OF GEC WARRANTS AND/OR GEC OPTIONS WILL NOT
BE ENTITLED TO VOTE AT THE GEC SHAREHOLDERS' MEETING.
The only person who, to the knowledge of the directors or officers of
GEC, beneficially owns or exercises control or direction over more than 10
percent of the outstanding GEC Common Shares, is PICO. As of ?, 1998, PICO
owned, directly or indirectly, 41,883,445 GEC Common Shares, representing
approximately 51.2% of the outstanding GEC Common Shares. PICO has agreed that
the GEC Common Shares which it owns, directly or indirectly, will be voted in
favour of the Arrangement Resolution.
On the GEC Record Date, directors and executive officers of GEC as a
group (9 persons) owned 1,023,600 GEC Common Shares, or approximately 1.22% of
the total outstanding GEC Common Shares. GEC has been advised that all of its
directors and executive officers intend to vote in favour of the Arrangement
Resolution.
The Arrangement Resolution must be approved by the affirmative vote of
not less than two-thirds of the votes cast in respect of that resolution at the
GEC Shareholders' Meeting, including a majority of the votes cast by GEC Public
Shareholders.
Appointment and Revocation of Proxies
The persons specified in the enclosed form of proxy (on ? paper) are
directors and senior officers of GEC. EACH GEC SHAREHOLDER HAS THE RIGHT TO
APPOINT A PERSON (WHO NEED NOT BE A GEC SHAREHOLDER) TO ATTEND AND ACT FOR HIM
OR ON HIS BEHALF AT THE GEC SHAREHOLDERS' MEETING OR ANY ADJOURNMENT OR
POSTPONEMENT THEREOF, OTHER THAN THE PERSONS SPECIFIED IN THE ENCLOSED FORM OF
PROXY. SUCH RIGHT MAY BE EXERCISED BY
-40-
<PAGE> 56
STRIKING OUT THE NAMES OF THE SPECIFIED PERSONS AND INSERTING THE NAME OF THE
GEC SHAREHOLDER'S NOMINEE IN THE SPACE PROVIDED OR BY COMPLETING ANOTHER
APPROPRIATE FORM OF PROXY AND, IN EITHER CASE, DELIVERING THE FORM OF PROXY TO
EQUITY TRANSFER SERVICES INC., STOCK TRANSFER DEPARTMENT, SUITE 420, 120
ADELAIDE ST. WEST, TORONTO, ONTARIO M5H 4C3, OR TO GEC AT ITS REGISTERED OFFICE,
LOCATED AT 80 RICHMOND ST. WEST, SUITE 1805, TORONTO, ONTARIO M5H 2A4, NOT LATER
THAN 5:00 P.M. (TORONTO TIME) ON ?, 1998 (OR, IF THE GEC SHAREHOLDERS' MEETING
IS ADJOURNED OR POSTPONED, NOT LATER THAN 48 HOURS, EXCLUDING SATURDAYS, SUNDAYS
AND HOLIDAYS, PRECEDING THE TIME OF SUCH ADJOURNED GEC SHAREHOLDERS' MEETING),
OR BY GIVING IT TO THE CHAIRMAN AT THE GEC SHAREHOLDERS' MEETING.
A GEC Shareholder giving a proxy pursuant to this solicitation may
revoke any such proxy by an instrument in writing executed by the GEC
Shareholder or by his attorney authorized in writing or, if the GEC Shareholder
is a corporation, under its corporate seal or by an officer or attorney thereof
duly authorized, and deposited either at the registered office of GEC at any
time up to and including the last business day preceding the day of the GEC
Shareholders' Meeting, or any adjournment or postponement thereof, or, as to any
matter on which a vote has not already been cast pursuant to the authority
conferred by the proxy, by depositing such instrument with the Chairman of the
GEC Shareholders' Meeting at the meeting or any adjournment thereof, all as more
particularly set out in the enclosed form of proxy. A GEC Shareholder may also
revoke the proxy in any other manner permitted by law.
Exercise of Discretion by Proxies
The GEC Common Shares represented by any proxy received by management
of GEC will be voted for or against, as appropriate, by the persons named in the
enclosed form of proxy in accordance with the direction of the GEC Shareholder
appointing them. IN THE ABSENCE OF ANY DIRECTION TO THE CONTRARY, IT IS INTENDED
THAT THE GEC COMMON SHARES REPRESENTED BY PROXIES RECEIVED BY MANAGEMENT WILL BE
VOTED FOR THE ARRANGEMENT RESOLUTION ON ANY BALLOT THEREFOR, AS MORE FULLY
DESCRIBED ELSEWHERE IN THIS JOINT PROXY STATEMENT.
The enclosed form of proxy confers discretionary authority upon the
persons named therein with respect to matters not specifically mentioned in this
Joint Proxy Statement, but which may properly come before the GEC Shareholders'
Meeting or any adjournment or adjournments thereof and with respect to
amendments to or variations of matters identified in the Notice of the GEC
Shareholders' Meeting accompanying this Joint Proxy Statement. As at the date
hereof, management of GEC knows of no such amendment, variation or other matters
to come before the GEC Shareholders' Meeting other than the matters referred to
in the said Notice of the GEC Shareholders' Meeting and routine matters
incidental to the conduct of the GEC Shareholders' Meeting. If any further or
other business is properly brought before the GEC Shareholders' Meeting, it is
intended that the person appointed as proxy vote on such other business in such
manner as he then considers to be proper.
THE TRANSACTION
BACKGROUND TO THE TRANSACTION
In 1993, Messrs. Langley and Hart structured a transaction which
resulted in the acquisition by Guinness Peat Group plc of an interest in
Physicians (a predecessor of PICO) and subsequently joined the board of
Physicians. In 1995, Physicians purchased approximately 38.2% of the GEC Common
Shares and Messrs. Langley and Hart joined the GEC Board. In November 1996,
Physicians merged with a subsidiary of Citation Insurance Group (following the
merger the resulting holding company adopted the name PICO Holdings, Inc.
("PICO")) and the Subsidiaries of Physicians were organized under PICO. In July
1997, the PICO Affiliates purchased an additional approximately 11.7% of the GEC
Common Shares. The PICO Affiliates currently own approximately 51.2% of the GEC
Common Shares.
On April 6, 1998, Messrs. Langley and Hart, on behalf of PICO,
approached the independent directors of GEC to discuss the possible acquisition
by PICO of all GEC Common Shares which it does not directly or indirectly own.
This proposal was premised on the fact that shareholders of the two companies
might benefit
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from a simplification of the corporate structure and from the creation of a
larger combined entity. Shortly thereafter, the GEC Board appointed the Special
Committee, comprised of David A. Williams (Chairman), Patrick C. MacCulloch and
Peter N.T. Widdrington, each of whom is independent of PICO, to negotiate and
consider the fairness of a possible transaction with PICO on behalf of GEC and
the GEC Board.
On April 14, 1998, the GEC Board established the Special Committee to
review the proposed Arrangement and to report thereon to the Board of Directors
of GEC. The mandate of the Special Committee was to (i) assess the terms of the
Arrangement; (ii) supervise the preparation of the Valuation and Fairness
Opinion; (iii) conduct, or supervise the conduct of, negotiations and
discussions with representatives of GEC and PICO with respect to the
Transaction; and (iv) consider and advise the GEC Board as to whether the
Transaction is in the best interests of GEC and the GEC Public Shareholders.
The Special Committee was authorized to consult the financial advisors,
lawyers, accountants and other professionals as it deemed appropriate in the
course of its activities.
The Special Committee is comprised of a majority of the members of the
GEC Board, consisting of Messrs. MacCulloch, Widdrington and Williams. Mr.
Williams was appointed by the Special Committee to serve as its Chair. Each of
the members of the Special Committee is independent of the management of GEC and
independent of management of PICO and its Subsidiaries. None of such members is
an employee, associate or affiliate of GEC or of PICO or any of its Subsidiaries
and none of such members will benefit from the Arrangement in a manner that is
different from the interests of GEC Public Shareholders generally. GEC has
agreed to remunerate each of the members of the Special Committee for their
participation as members of such committee.
The Special Committee met on ? occasions from April 14, 1998 to
September ?, 1998. At its first meeting, it retained Stikeman, Elliott as its
legal counsel and, thereafter, received, reviewed and considered advice from
counsel regarding its duties and responsibilities in the circumstances.
The Special Committee, together with its legal counsel, identified and
discussed the qualifications of a number of investment dealers who had been
invited to submit materials describing their qualifications to provide a formal
valuation of the GEC Common Shares and PICO Common Stock and a fairness opinion
concerning the fairness of any proposed transaction to the GEC Public
Shareholders. The Special Committee received written and oral presentations from
several such firms and considered their respective qualifications and degree of
independence.
The Special Committee engaged First Marathon to serve as financial
advisor to the Special Committee, to prepare a formal valuation under the
supervision of the Special Committee and to prepare a written opinion as to the
fairness from a financial point of view of the arrangement to GEC Public
Shareholders. The fee payable to First Marathon is not contingent on the result
of the Valuation or Fairness Opinion or the success of the Arrangement. The
Special Committee determined that First Marathon had considerable expertise and
experience in providing valuations and fairness opinions and in negotiating
transactions similar to the Transaction. As such, the Special Committee
determined that First Marathon was qualified to provide financial advisory
services to it and to prepare the Valuation and the Fairness Opinion. First
Marathon represented to the Special Committee that it was independent of GEC and
of PICO and its Subsidiaries.
The Special Committee unanimously concluded that the Arrangement is
fair to and in the best interests of GEC and the GEC Public Shareholders and
unanimously recommend that the Board of Directors of GEC recommend a vote for
approval of the Arrangement Resolution.
In reaching this conclusion and formulating its recommendation, the
Special Committee considered, among other things, the following factors:
(i) after reviewing the basis of the Valuation with First
Marathon, the Special Committee concluded that the methodology
and assumptions used by First Marathon were appropriate;
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(ii) the benefits of the Arrangement as set out in this Joint Proxy
Statement under "Reasons for the Arrangement";
(iii) the fact that GEC Public Shareholders will own approximately
40% of the equity of the combined company (and approximately
42% on a fully diluted basis), excluding the PICO Shares owned
by the PICO Affiliates, based on the Exchange Ratio;
(iv) the Fairness Opinion reflecting First Marathon's conclusion
that the Arrangement is fair, from a financial point of view,
to GEC Public Shareholders; and
(v) the right of GEC Shareholders to dissent pursuant to section
185 of the OBCA.
In considering the foregoing factors, the Special Committee did not
reach its conclusion concerning the Arrangement by individually assigning
relative or specific weights to anyone or a group of factors, and individual
members of the Special Committee may have assigned differing weights to
different factors.
On May 8, 1998, PICO and GEC jointly announced that they were
considering a proposal pursuant to which PICO would acquire the minority
shareholdings in GEC.
The Special Committee considered that it was responsible not only to
supervise the conduct of the negotiations with PICO but also to be actively
involved in those negotiations. As such, the Special Committee was involved in
the negotiation of the substantive terms of the Combination Agreement.
On June 4, 1998, representatives of First Marathon presented to the
Special Committee its preliminary assessment of the value of the outstanding GEC
Common Shares and PICO Common Stock, as well as a relative value analysis
(having regard for the extent of inter-company holdings). The representatives of
First Marathon discussed the valuation approaches used. The members of the
Special Committee and their advisors discussed the preliminary assessment, the
assumptions and analysis underlying that assessment and the particular factors
affecting value.
On June 18, 1998, PICO advised the Special Committee that it was
prepared to proceed with the proposed transaction at an exchange ratio (the
"Exchange Ratio") of 0.4628 of a PICO Share for each GEC Common Share, the
equivalent of $2.94 per GEC Common Share (being the Canadian Dollar Equivalent
of the product of the 0.4628 Exchange Ratio and U.S.$4.3125, the closing price
of a PICO Share on the Nasdaq on June 18, 1998). On June 19, 1998, GEC and PICO
jointly announced the proposed Transaction and that the Special Committee was
prepared to recommend acceptance thereof, subject to receiving the Fairness
Opinion.
From June 19, 1998 to August 30, 1998, management of PICO and its
respective advisers continued to explore and consider alternative transaction
structures. Ultimately it was concluded that a share exchange structure best met
the objectives of simplifying the group's corporate structure and maximizing the
benefits of the Transaction to the shareholders of the two companies.
On September 17, 1998, PICO and GEC agreed that it would be equitable
to extend the expiry date of the GEC Warrants to June 30, 1999 and to permit
them to participate in the Arrangement on a basis economically equivalent to GEC
Shareholders, in order to provide holders of those warrants with additional time
to consider the terms of the Transaction and in view of the fact that the May 8,
1998 announcement of the proposed Transaction (which was made approximately six
months prior to the initially scheduled expiry time of the GEC Warrants) had a
material impact on the market value of the GEC Common Shares. Prior to October
21, 1998 (the current expiry date of the GEC Warrants), GEC intends to enter
into the Supplemental Indenture with the GEC Warrant Agent to extend the expiry
date of the GEC Warrants to June 30, 1999 and to provide for the exchange
contemplated under the Transaction.
On September 17, 1998, following approval by the respective boards of
directors, the Combination Agreement was executed and the agreement and
transaction structure were publicly announced.
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REASONS FOR THE ARRANGEMENT
PICO's Reasons for the Arrangement
The Board of Directors of PICO has reviewed the proposed Transaction
and has concluded that the Transaction is fair to and in the best interests of
PICO and its Shareholders. In reaching its conclusion to enter into the
Combination Agreement and to recommend approval of the Transaction by PICO
Shareholders, the PICO Board considered and evaluated, among other things, the
following factors:
1. The consolidation of PICO and GEC would simplify PICO's
corporate structure, thereby eliminating the duplication,
confusion, potential for management conflict, need to
apportion investment opportunities and barrier to realization
of full shareholder value that arose by virtue of having two
separate public entities with similar business strategies,
management and investment interests. The Transaction would
result in a single publicly traded corporation with a distinct
value investment philosophy. In addition, the elimination of a
second public entity is intended to yield potential benefits
in terms of corporate efficiencies and cost savings.
2. The Transaction would result in a larger, more liquid,
publicly-traded entity (with Shareholders' equity increased by
approximately U.S.$75 million to approximately U.S.$186
million, based upon unaudited pro forma financial statements
as of June 30, 1998 included elsewhere in this Joint Proxy
Statement) which is intended to bring the following potential
benefits to all Shareholders:
(i) increased analyst coverage;
(ii) increased ability to utilize PICO Shares as a
currency for further transactions and acquisitions;
(iii) increased ability for the combined company to access
capital markets; and
(iv) increased liquidity of PICO Shares through an
increase in the public float (i.e. PICO Shares owned
otherwise than by the PICO Affiliates) of
approximately 18.5 million shares (an additional
approximately 3.7 million shares after giving effect
to the one-for-five reverse PICO Common Stock split).
3. Based upon unaudited pro forma financial information as of
June 30, 1998 included elsewhere in this Joint Proxy
Statement, the Transaction would increase the book value per
PICO Share by U.S.$0.30 to U.S.$4.01 per share (U.S.$20.05 per
share after giving effect to the one-for-five reverse PICO
Common Stock split).
In addition, the PICO Board considered: (i) the terms of the
Combination Agreement and the other agreements contemplated thereby, (ii) the
structure of the Transaction, (iii) the Fairness Opinion of First Marathon
(including the Valuation described below), (iv) the judicial and regulatory
approval requirements including approval by the Court, and (v) the fact that
PICO's Shareholders would, based on the Exchange Ratio of 0.4628, retain
approximately 60% of the equity of the combined company (and approximately 58%
outstanding PICO Shares of the equity of the combined company on a fully diluted
basis), excluding the PICO Shares owned by the PICO Affiliates.
The foregoing discussion of the information and factors considered and
given weight by the PICO Board is not intended to be exhaustive but is a summary
of material factors considered by the Board of Directors of PICO. In addition,
in reaching the determination to approve and recommend approval of the
Transaction, the PICO Board did not find it practical to and did not assign any
relative or specific weights to the foregoing factors which were considered, and
individual directors may have given differing weights to different factors. The
Board of Directors of PICO is, however, unanimous in its recommendation to the
holders of PICO Shares that the Combination Agreement and the transactions
contemplated thereby be approved.
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GEC's Reasons for the Arrangement
The GEC Board, on the recommendation of its Special Committee, has
determined that the terms of the Arrangement are fair to the GEC Public
Shareholders and has unanimously approved (with Messrs. Hart and Langley
abstaining) the Combination Agreement and the transactions contemplated thereby
including the Arrangement.
In reaching its determination, the Special Committee considered and
evaluated, among other things, (i) information concerning the results of
operations, performance, financial condition and prospects of PICO and GEC on a
company-by-company basis, and on a combined basis, (ii) the structure of the
proposed Transaction, (iii) that the Exchange Ratio represents an effective
premium of approximately 22.5% over the average closing price of a GEC Common
Share on the TSE and an effective premium of approximately 18.6% over the
average ratio of the GEC Common Shares to PICO Common Stock for the 20 trading
days prior to the June 19, 1998 public announcement of the Exchange Ratio, (iv)
that GEC Public Shareholders will own approximately 40% of the equity of the
combined company (and approximately 42% of the equity of the combined company on
a fully diluted basis), based on the Exchange Ratio of 0.4628, excluding the
PICO Shares owned by the PICO Affiliates; (v) the greater total market
capitalization and liquidity of the combined company relative to GEC, is
intended to bring the following potential benefits to all shareholders: (a)
increased analyst coverage; (b) increased ability to utilize stock of the
combined company as a currency for future transactions and acquisitions; (c)
increased ability to access capital markets; and (d) increased liquidity through
ownership of PICO Shares (which would be part of a significantly greater market
capitalization and broader public distribution relative to the GEC Common
Shares), (vi) the valuation ranges presented by First Marathon and the Fairness
Opinion reflecting First Marathon's conclusion that the Arrangement is fair,
from a financial point of view, to the GEC Public Shareholders, (vii) the
judicial and regulatory approval requirements, including approval by the Court,
and (viii) the right of GEC Shareholders to dissent pursuant to section 185 of
the OBCA.
Based on all of these matters, and such other matters as the members of
the GEC Board deemed relevant, the GEC Board unanimously approved the
Combination Agreement and the transactions contemplated thereby, including the
proposed Arrangement.
This discussion of the information and factors considered and given
weight by the Special Committee and the GEC Board is not intended to be
exhaustive but is a summary of material factors considered by the Special
Committee and the GEC Board. In addition, in reaching the determination to
approve and recommend the Combination Agreement and the related Arrangement,
neither the Special Committee nor the GEC Board assigned any relative or
specific weights to the foregoing factors which were considered, and individual
directors may have given differing weights to different factors. The Special
Committee and the GEC Board are, however, unanimous in their recommendation to
the GEC Public Shareholders that the Combination Agreement, the Arrangement and
the transactions contemplated thereby be approved.
OPINION OF THE FINANCIAL ADVISOR
The Special Committee retained First Marathon as its independent
financial advisor to consider the terms of the proposed Transaction, to provide
a formal valuation (as defined in Policy 9.1) of the GEC Common Shares and the
PICO Common Stock and to provide an opinion as to the fairness of the proposed
Transaction, from a financial point of view, to the GEC Public Shareholders. The
Special Committee initially contacted First Marathon regarding a potential
advisory assignment on April ?, 1998 and First Marathon was formally engaged by
the Special Committee through an agreement between GEC and First Marathon (the
"Engagement Agreement") dated June 4, 1998. The terms of the Engagement
Agreement provide that First Marathon is to be paid $375,000 for the Valuation
and Fairness Opinion. In addition, First Marathon is to be reimbursed for its
reasonable out-of-pocket expenses and is to be indemnified by GEC in certain
circumstances. First Marathon has consented to the inclusion of the Valuation
and Fairness Opinion in its entirety and a summary thereof in this Joint Proxy
Statement and to the filing thereof, as necessary, with the securities
commissions or similar regulatory authorities in each province of Canada and as
may be required in the U.S.
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First Marathon is a leading independent Canadian investment dealer
whose businesses include corporate finance, mergers and acquisitions, equity and
fixed income sales and trading and investment research. The Valuation and
Fairness Opinion represent the opinion of First Marathon and the form and
content thereof have been approved by a group of its directors, each of whom is
experienced in merger, acquisition, divestiture, valuation and fairness opinion
matters.
First Marathon is not an insider, associate or affiliate (as those
terms are defined in the Securities Act (Ontario)) of, nor has it provided any
financial advisory services to or participated in any financing on behalf of
Global or PICO during the 24 months preceding the date First Marathon was first
contacted with respect to the Valuation and Fairness Opinion. There are no
understandings or agreements between First Marathon and GEC or PICO with respect
to any future business dealings. The compensation of First Marathon under the
Engagement Agreement does not depend in whole or in part on the conclusion
reached in the Valuation or Fairness Opinion or the successful completion of the
Arrangement.
In preparing the Valuation and Fairness Opinion First Marathon made
several assumptions including that all of the conditions required to implement
the Arrangement would be satisfied and that the disclosure provided or
incorporated by reference in the Joint Proxy Statement with respect to GEC, PICO
and the Arrangement is complete and accurate in all material respects.
For purposes of the Valuation, First Marathon defined "fair market
value" as the highest price available in an open and unrestricted market between
informed, prudent parties, acting at arm's length and under no compulsion to
transact, expressed in terms of money or money's worth. First Marathon did not
make any downward adjustment to reflect the fact that the GEC Common Shares held
by shareholders other than PICO or the PICO Common Stock held by GEC may not
form part of a controlling interest.
First Marathon utilized a net asset valuation approach in arriving at
the value of GEC and PICO, as it considered this approach to most accurately
reflect full value of the shares of these companies. First Marathon concluded
that a valuation based on public market prices was inappropriate, given that
publicly traded holding companies usually trade at a discount to net asset
value. First Marathon also considered the liquidation values of GEC and PICO
respectively, but determined that the application of such methodology was not
appropriate in the circumstances, given that it is the reasonable intention of
management that the combined enterprise be run as an ongoing entity.
In arriving at its valuation conclusions, First Marathon determined the
range of value for each of the major assets of GEC and PICO. With respect to
GEC's 100% ownership of Vidler, First Marathon utilized an unlevered discounted
cash flow analysis. First Marathon also considered certain analyses that may
constitute a prior valuation of Vidler for purposes of applicable Canadian
securities policy prepared by an independent financial advisor in connection
with a proposed private placement by Vidler. These analyses are described in
First Marathon's Valuation and Fairness Opinion. With respect to GEC's 74.77%
membership interest and PICO's direct 25.23% membership interest in NLRC, First
Marathon examined a number of valuation benchmarks including the purchase price
for the asset in April 1997 and internal management valuation analyses. GEC's
European portfolio investments were valued separately by KPMG on a market value
basis and on whose report First Marathon relied. GEC's other portfolio
investments were valued by First Marathon using a market value approach, while
its strategic investments were valued based on recent trading activity,
historical financing transactions an analysis of the status of operating results
and market value multiples for comparable companies. PICO's property and
casualty insurance operations were valued based on stock market trading
multiples of comparable companies. The remaining assets and liabilities of GEC
and PICO were adjusted to reflect appropriate premiums and discounts from their
stated book value.
Based upon and subject to the foregoing, First Marathon is of the
opinion that, as of June 30, 1998, the fair market value of the GEC Common
Shares was in the range of $3.35 to $4.18 per share and the fair market value of
the PICO Shares was in the range of U.S. $4.99 to U.S. $6.09 per share.
In considering the fairness of the Arrangement, from a financial point
of view, to the GEC Public Shareholders, First Marathon principally considered
and relied upon a relative value analysis, having regard for the extent of
inter-company holdings and the shared interest in NLRC. It also considered
historical relative market prices of the GEC Shares and PICO Shares and the
exchange ratio range based on the valuation of net assets (which, based on a
Canadian/U.S. dollar exchange rate of $1.46665, would be 0.4577 to 0.4680).
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Based upon and subject to the foregoing, First Marathon is of the
opinion that, as of June 30, 1998, the Arrangement is fair, from a financial
point of view, to the GEC Public Shareholders.
THE FOREGOING IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE VALUATION AND FAIRNESS OPINION ATTACHED AS ANNEX "D" TO
THIS JOINT PROXY STATEMENT. SHAREHOLDERS ARE URGED TO READ THE VALUATION AND
FAIRNESS OPINION IN ITS ENTIRETY.
BOARD RECOMMENDATIONS
THE BOARD OF DIRECTORS OF PICO BELIEVES THAT THE TRANSACTION IS FAIR TO
AND IN THE BEST INTERESTS OF PICO AND THE PICO SHAREHOLDERS AND THEREFORE
UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE TRANSACTIONS CONTEMPLATED BY
THE COMBINATION AGREEMENT.
THE BOARD OF DIRECTORS OF GEC, ON THE RECOMMENDATION OF ITS SPECIAL
COMMITTEE, BELIEVES THAT THE ARRANGEMENT IS FAIR TO AND IN THE BEST INTERESTS OF
GEC AND THE GEC PUBLIC SHAREHOLDERS AND THEREFORE UNANIMOUSLY RECOMMENDS A VOTE
FOR APPROVAL OF THE ARRANGEMENT RESOLUTION.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
Indemnification of GEC Directors and Officers
The Combination Agreement provides that all rights to indemnification
for GEC directors and officers will survive the Arrangement and remain in full
force and effect for at least six years from the Effective Date. PICO has also
agreed to maintain insurance for GEC's directors and officers equivalent to
GEC's current directors' and officers' liability insurance for at least six
years after the Effective Date. Certain directors and executive officers of GEC
who hold options to purchase GEC Common Shares will receive economically
equivalent options to purchase PICO Shares in exchange for such options. See
"The Combination Agreement - GEC Options."
TRANSACTION MECHANICS
The following description is qualified in its entirety by reference to
the full text of the Combination Agreement (including the Plan of Arrangement
set forth as Exhibit I thereto) which is attached as Annex "C" to this Joint
Proxy Statement and is incorporated herein by reference.
The Arrangement
Pursuant to the terms of the Plan of Arrangement, at the Effective
Date: (i) each outstanding GEC Common Share (other than GEC Common Shares held
by PICO or as to which dissent rights have been duly exercised) will be
exchanged for 0.4628 of a PICO Share; and (ii) each outstanding GEC Warrant will
be exchanged for 0.4628 of a PICO Warrant.
No fractional PICO Shares or PICO Warrants will be delivered in
exchange for GEC Common Shares or GEC Warrants pursuant to the Arrangement. All
PICO Shares and PICO Warrants to be issued under the Plan of Arrangement shall
be rounded to the next lowest whole number if the first decimal place is less
than five and rounded to the next highest whole number if the first decimal
place is five or greater, without compensation therefor to the holders of such
shares or warrants.
See "Procedures for Exchange of Share Certificates by GEC Shareholders"
and "Procedures for Exchange of Warrant Certificates by GEC Warrantholders" for
procedures to be followed in order to obtain certificates representing the PICO
Shares and PICO Warrants, respectively, issuable in the Arrangement.
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PICO Warrants
The PICO Warrants will be governed by the PICO Warrant Indenture, which
is to be dated and effective as of the Effective Time. The PICO Warrants will
expire at 5:00 p.m. (Toronto time) on June 30, 1999, and will have an exercise
price equal to U.S.$4.76 (being the U.S. Dollar Equivalent on the date upon
which the Exchange Ratio was agreed of the Cdn.$3.25 exercise price of the GEC
Warrants divided by the Exchange Ratio).
GEC Options
On ? , 1998, the PICO Board, on the recommendation of its Compensation
Committee, agreed to grant options ("PICO Options") to purchase PICO Shares to
Messrs. Hart, Langley and Webb and Ms. Ferguson, each a director and/or
executive officer of GEC, in consideration for such persons agreeing to waive
their entitlement under their outstanding options ("GEC Options") to purchase
GEC Common Shares previously granted pursuant to the GEC Option Plan, subject in
each case only to consummation of the Arrangement. Such PICO Options are the
economic equivalent of such GEC Options; the parties having agreed that (i) the
exercise price of the PICO Options would be the U.S. Dollar Equivalent of the
exercise price of the GEC Options on the date upon which the Exchange Ratio was
agreed, divided by the Exchange Ratio; (ii) the number of PICO Shares underlying
the PICO Options would be equal to 0.4628 of the number of GEC Shares underlying
such GEC Options; and (iii) the PICO Options would expire on the same date as
the corresponding GEC Options would have expired. After giving effect to the
Transaction, there will remain one option exercisable for 1,327,600 GEC Common
Shares (i.e. Common Shares in the capital of GEC, then a private corporation)
until January 30, 2001 at an exercise price of Cdn.$3.325 per share.
THE COMBINATION AGREEMENT
Representations, Warranties and Covenants
The Combination Agreement contains certain customary representations
and warranties from PICO relating to, among other things, organization,
qualification, capital structure, operations, material contracts, financial
condition, title to assets, litigation, compliance with necessary regulatory or
governmental authorities and other matters, including its authority to enter
into the Combination Agreement and to consummate the Transaction. The
Combination Agreement also contains certain representations of GEC, including
representations as to organization, qualification, capital structure and other
matters, including its authority to enter into the Combination Agreement and to
consummate the Transaction. Pursuant to the Combination Agreement, each party
has covenanted, among other things, that until the Effective Date, it will:
maintain its business; use its best efforts to satisfy the conditions precedent
to the Transaction; effect the matters contemplated by the Combination
Agreement, including the preparation and mailing of this Joint Proxy Statement;
and cooperate with the other party in connection with the performance by the
other of its obligations under the agreement. In addition, PICO has covenanted
to: maintain all rights of indemnification for directors and officers of GEC for
at least six years from the Effective Date, and to assume all of GEC's
obligations in respect of such indemnification rights; to register the shares of
PICO Common Stock to be issued under the transactions contemplated by the
Arrangement and to list those shares on the Nasdaq; and to vote in favour of the
Arrangement at the GEC Shareholders' Meeting.
The Combination Agreement also provides that until the Effective Date,
GEC shall not, directly or directly, solicit, initiate or encourage proposals or
offers from, or negotiations with, any person, or provide information to any
person relating to any other potential transaction with respect to, or assist or
participate in or facilitate any effort or attempt with respect to, the
disposition of all or a material portion of its business or assets or its
outstanding securities or any merger, business combination or similar
transaction involving GEC or the GEC Common Shares, provided that
notwithstanding the foregoing, the GEC Board shall not be constrained in
responding as required by law to any submission or proposal regarding any
acquisition or disposition of assets or to amalgamate, merge or effect an
arrangement or otherwise fulfil their fiduciary duties to GEC and its
shareholders in relation to such transaction, if to do so would, in the opinion
of the GEC Board (having consulted qualified outside counsel) be a proper
exercise of such directors' fiduciary duties.
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Conditions to Closing
The Combination Agreement provides that the respective obligations of
each party to complete the Transaction are subject to a number of conditions,
including the following: (i) the Arrangement shall have been approved and
adopted by the required votes of holders of GEC Common Shares; (ii) the
transactions contemplated by the Combination Agreement shall have been approved
by the holders of PICO Common Stock; (iii) all orders, including the Final
Order, and orders from relevant Canadian securities regulatory authorities that
are legally required for the consummation of the transactions contemplated by
the Combination Agreement, shall have occurred, have been filed or been obtained
without material conditions or costs; (iv) all regulatory permits and
authorizations shall have been obtained, and regulatory authorities shall have
taken all action required to consummate the Arrangement and the Transaction; (v)
no order, decree or ruling or statute, rule, regulation or order shall have been
threatened, enacted, entered or enforced by any governmental agency that
prohibits or renders illegal the consummation of the Arrangement; (vi) there
shall have been no preliminary injunction, permanent injunction, restraining
order, cease trading order or other order preventing the consummation of the
Arrangement issued by any Canadian or U.S. federal, provincial or state court
remaining in effect, nor shall any proceeding that is reasonably likely to
succeed seeking any of the foregoing be pending or threatened; (vii) the
representations and warranties of the parties shall be true and accurate as of
the Effective Date as though made at and as of such date, except to the extent
that failure of such representations and warranties to be true and accurate has
not and would not be reasonably likely to have a material adverse effect on PICO
or GEC, as the case may be; (viii) the parties shall have performed in all
material respects all agreements and covenants to be performed by them under the
Combination Agreement; (ix) there shall not have been any event or change, or
events or changes, that has or have an effect on either of the parties that is
materially adverse to such parties' condition (financial or otherwise),
properties, assets, liabilities, businesses, operations, results of operations
or prospects; and (x) the Fairness Opinion shall not have been withdrawn or
amended in a way that adversely alters the conclusions therein. In addition, it
is a condition of the parties' obligations that GEC Shareholders shall not have
exercised the right of dissent provided for in the Plan of Arrangement in
respect of more than 2?% of the outstanding GEC Common Shares (in the aggregate)
held by GEC Public Shareholders unless the same shall have been abandoned and
that PICO Shareholders shall not have exercised the right of dissent provided in
Chapter 13 of the CGCL in respect of more than 5% of the outstanding PICO Shares
(in the aggregate) unless the same shall have been abandoned.
Termination
The Combination Agreement may be terminated by mutual agreement of the
parties at any time prior to the Effective Date. Also, either party may
terminate the Combination Agreement prior to the effective date if all
conditions for closing the Arrangement have not been satisfied or waived by ?
(other than as a result of a breach of the Combination Agreement by the
terminating party), or if: (i) there has been a breach of any representation,
warranty, covenant or agreement contained in the Combination Agreement on the
part of the other party that has or is likely to have a material adverse effect
on the breaching party and such breach has not been cured within 15 business
days after notice thereof; (ii) any required approval of the shareholders of GEC
or the Shareholders of PICO shall not have been obtained; or (iii) any permanent
injunction or other order of a court has been issued and become final and
non-appealable which would prohibit or otherwise restrain consummation of the
Arrangement.
COURT APPROVAL OF THE ARRANGEMENT AND COMPLETION OF THE ARRANGEMENT
An arrangement of a corporation under the OBCA requires approval by
both the Court and the shareholders of the subject corporation. Prior to the
mailing of this Joint Proxy Statement, GEC obtained the Interim Order providing
for the calling and holding of the GEC Shareholders' Meeting and other
procedural matters. A copy of the Interim Order is attached in Annex "B" to this
Joint Proxy Statement. The Notice of Application for the Final Order also
appears in Annex "B" to this Joint Proxy Statement.
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Subject to the approval of the Arrangement by the GEC Shareholders at
the GEC Shareholders' Meeting, the hearing in respect of the Final Order is
scheduled to take place on ?, 1998 at ? (Toronto time) in the Court at 361
University Avenue, Toronto, Ontario. All GEC Shareholders who wish to
participate or be represented or to present evidence or arguments at that
hearing must serve and file a notice of appearance as set out in the Notice of
Application for the Final Order and satisfy any other requirements. At the
hearing of the application in respect of the Final Order, the Court will
consider, among other things, the fairness and reasonableness of the
Arrangement. The Court may approve the Arrangement as proposed or as amended in
any manner the Court may direct, subject to compliance with such terms and
conditions, if any, as the Court deems fit.
Assuming the Final Order is granted and the other conditions to the
Combination Agreement are satisfied or waived, it is anticipated that the
following will occur substantially in the following order:
(a) GEC will file Articles of Arrangement with the Director under
the OBCA to give effect to the Arrangement (including the
exchange of each GEC Common Share, other than those then held
by PICO or as to which dissent rights have been duly
exercised, for 0.4628 of a PICO Share and the exchange of each
GEC Warrant for 0.4628 of a PICO Warrant); and
(b) any other documents necessary to consummate the transactions
contemplated under the Combination Agreement (including, with
limitation, the PICO Warrant Indenture) will be executed and
delivered.
Subject to the foregoing, it is presently anticipated that the
Effective Date will occur on or about November ?, 1998.
ACCOUNTING TREATMENT
The Transaction will be treated as a "purchase" for accounting and
financial reporting purposes, in accordance with U.S. GAAP.
PROCEDURES FOR EXCHANGE OF SHARE CERTIFICATES BY GEC SHAREHOLDERS
Accompanying this Joint Proxy Statement is a Letter of Transmittal (on
? paper). The Letter of Transmittal, when duly completed and returned together
with a certificate for GEC Common Shares, will enable each GEC Shareholder to
obtain a certificate for that number of PICO Shares equal to the number of GEC
Common Shares previously held by such shareholder multiplied by the Exchange
Ratio (subject to adjustment for fractional shares, as discussed below). If the
resolution approving the Reverse Split is approved. GEC Shareholders will
receive a certificate for such number of PICO Shares as they otherwise would
have been entitled to pursuant to the Arrangement divided by five (i.e. adjusted
to give effect to the Reverse Split), together with a cheque for the cash which
each such holder is entitled as a result of the Reverse Split. See "Transaction
Mechanics," and "Additional Matters for Consideration by PICO Shareholders -
Reverse Split."
No fractional PICO Shares will be delivered in exchange for GEC Common
Shares pursuant to the Arrangement. All PICO Shares to be issued under the Plan
of Arrangement shall be rounded to the next lowest whole number if the first
decimal place is less than five and rounded to the next highest whole number if
the first decimal place is five or greater, without compensation therefor to the
holders of such shares.
Any use of the mails to transmit a certificate for GEC Common Shares
and a related Letter of Transmittal is at the risk of the holder. If these
documents are mailed, it is recommended that registered mail, with return
receipt requested, properly insured, be used.
Certificates representing the appropriate number of PICO Shares
issuable to a former holder of GEC Common Shares who has complied with the
procedures set out above will, after the Effective Date and as soon as
practicable after the date of receipt of a certificate for GEC Common Shares and
a related Letter of Transmittal, be (a) forwarded to the holder at the address
specified in the Letter of Transmittal by first class
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mail or (b) made available at the offices of the Depositary (Equity Transfer
Services Inc., Suite 4200, 120 Adelaide Street West, Toronto, Ontario M5H 4C3)
for pick up by the holder, if requested by the holder in the Letter of
Transmittal.
Where a certificate for GEC Common Shares has been destroyed, lost or
mislaid, the registered holder of that certificate should immediately contact
Equity Transfer Services, Suite 4200, 120 Adelaide Street West, Toronto, Ontario
M5H 4C3, Attention: Stock Transfer Department, telephone: (416) 361-0152,
telecopier: (416) 361-0470, regarding the issuance of a replacement certificate
upon the holder satisfying such requirements as may be imposed by GEC in
connection with issuance of the replacement certificate.
PROCEDURES FOR EXCHANGE OF WARRANT CERTIFICATES BY GEC WARRANTHOLDERS
Accompanying this Joint Proxy Statement is a Warrantholder's Letter of
Transmittal (on ? paper). The Warrantholder's Letter of Transmittal, when duly
completed and returned together with a certificate for GEC Warrants, will enable
each GEC Warrantholder to obtain a certificate for that number of PICO Warrants
equal to the number of GEC Warrants previously held by such warrantholder. If
the resolution approving the Reverse Split is approved, each PICO Warrant, which
when issued entitles the holder thereof to purchase one pre-Reverse Split PICO
Share for U.S.$4.76, will be adjusted (without any action on the part of PICO or
the holder) such that, immediately following the Reverse Split, each whole PICO
Warrant will entitle the holder to purchase one post-Reverse Split PICO Share
for U.S.$23.80. See "Transaction Mechanics," and "Additional Matters for
Consideration by PICO Shareholders - Reverse Split."
No fractional PICO Warrants will be delivered in exchange for GEC
Warrants pursuant to the Arrangement. All PICO Warrants to be issued under the
Plan of Arrangement shall be rounded to the next lowest whole number if the
first decimal place is less than five and rounded to the next highest whole
number if the first decimal place is five or greater, without compensation
therefor to the holders of such Warrants.
Any use of the mail to transmit a certificate for GEC Warrants and a
related Warrantholder's Letter of Transmittal is at the risk of the holder. If
these documents are mailed, it is recommended that registered mail, with return
receipt requested, properly insured, be used.
Certificates representing the appropriate number of PICO Warrants
issuable to a former holder of GEC Warrants who has complied with the procedures
set out above will, after the Effective Date and as soon as practicable after
the date of receipt of a certificate for GEC Warrants and a related
Warrantholder's Letter of Transmittal, be (a) forwarded to the holder at the
address specified in the Warrantholder's Letter of Transmittal by first class
mail or (b) made available at the offices of the Depositary (Equity Transfer
Services Inc., Suite 4200, 120 Adelaide Street West, Toronto, Ontario M5H 4C3)
for pick up by the holder, if requested by the holder in the Warrantholder's
Letter of Transmittal.
Where a certificate for GEC Warrants has been destroyed, lost or
mislaid, the registered holder of that certificate should immediately contact
the GEC Warrant Agent (Montreal Trust Company of Canada, 151 Front Street West,
8th Floor, Toronto, Ontario M5J 2N1, Attention: Manager, Client Services
(Telecopier: (416) 981-9800)) regarding the issuance of a replacement
certificate upon the holder satisfying the relevant conditions set forth in the
GEC Warrant Indenture.
STOCK EXCHANGE LISTINGS
PICO Common Stock
The PICO Common Stock is listed on the Nasdaq. PICO has filed an
application for listing of the PICO Shares issuable in connection with the
Arrangement (including those underlying the PICO Warrants to be issued under the
Arrangement) on the Nasdaq. There is no current intention to list the PICO
Common Stock on any other stock exchange or quotation-based system in Canada or
the United States.
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PICO Warrants
There is no current intention to list the PICO Warrants on any stock
exchange or quotation-based system in Canada or the United States.
GEC Common Shares
On completion of the Transaction, the GEC Common Shares will be
delisted from the TSE and the ME.
GEC Warrants
EFFECTIVE OCTOBER 21, 1998, THE GEC WARRANTS WILL CEASE TO BE QUOTED ON
THE CDN. The GEC Warrants will not be relisted on any stock exchange or
quotation-based system in Canada or the United States.
ELIGIBILITY FOR INVESTMENT IN CANADA
In the opinion of Goodman Phillips & Vineberg, Toronto, and Stikeman,
Elliott, Toronto, if the Arrangement were to become effective on the date
hereof, the PICO Shares and the PICO Warrants would not be precluded as
investments under or by the following statutes (and, where applicable, the
regulations thereunder):
<TABLE>
<S> <C>
Insurance Companies Act (Canada) Loan and Trust Corporations Act (Ontario)
Pension Benefits Standards Act, 1985 (Canada) Supplemental Pensions Act (Quebec)
Trust and Loan Companies Act (Canada) An Act respecting insurance (Quebec)
Pension Benefits Act (Ontario)
</TABLE>
subject to compliance with the prudent investment standards and general
investment provisions and restrictions of the statutes referred to above (and,
where applicable, the regulations thereunder) and, in certain cases, subject to
the satisfaction of additional requirements relating to investment or lending
policies or goals and, in certain cases, the filing of such policies or goals.
PICO Shares and PICO Warrants will be qualified investments under the
Canadian Tax Act for trusts governed by registered retirement savings plans,
registered retirement income funds and deferred profit sharing plans, provided
the PICO Shares remain quoted on the Nasdaq (or are listed on another prescribed
stock exchange).
The PICO Shares and the PICO Warrants each constitute foreign property
under the Canadian Tax Act for certain tax-exempt persons, including trusts
governed by registered pension plans, registered retirement savings plans,
registered retirement income funds and deferred profit sharing plans. Persons
subject to Part XI of the Canadian Tax Act are urged to consult their tax
advisors.
REGULATORY MATTERS
[HART-SCOTT-RODINO ACT
TRANSACTIONS SUCH AS THE TRANSACTION ARE SUBJECT TO REVIEW BY THE
JUSTICE DEPARTMENT OR THE FTC TO DETERMINE WHETHER THEY POSE POTENTIAL THREATS
TO COMPETITIVE CONDITIONS AND WHETHER OR NOT THEY COMPLY WITH APPLICABLE
ANTITRUST LAWS. UNDER THE PROVISIONS OF THE HSR ACT, THE TRANSACTION MAY NOT BE
CONSUMMATED UNTIL CERTAIN INFORMATION HAS BEEN FURNISHED TO THE JUSTICE
DEPARTMENT AND THE FTC AND CERTAIN WAITING PERIOD REQUIREMENTS UNDER THE HSR ACT
HAVE BEEN SATISFIED. PICO, GEC AND CERTAIN COMPANIES IN WHICH PICO AND/OR GEC
HAS AN INVESTMENT INTEND TO FILE PRE-TRANSACTION NOTIFICATION AND REPORT FORMS
PURSUANT TO THE HSR ACT WITH THE JUSTICE DEPARTMENT AND THE FTC.]
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RESALE OF PICO SHARES RECEIVED IN THE TRANSACTION
United States
The issuance of PICO Shares and the PICO Warrants pursuant to the
Arrangement will not be registered under the Securities Act based upon an
exemption from such registration provided, in part, by the review and approval
of the Transaction by the Court. This exemption does not apply to the issuance
of shares of PICO upon exercise either of the PICO Warrants or any PICO Options
issued in substitution for GEC Options. PICO Shares issued in exchange for GEC
Shares may be traded without restriction as long as the holder was not an
Affiliate of GEC before the Transaction or is not an Affiliate of PICO either
before or after the Transaction. Persons who were Affiliates of GEC before the
Transaction and who are not Affiliates of PICO after the transaction may resell
their PICO Shares pursuant to the manner of sale and volume limitations set
forth under Rule 145; these restrictions will terminate two years following the
Transaction. Persons who are Affiliates of GEC and remain Affiliates of PICO
after the Transaction may only sell their PICO Shares received in exchange for
the GEC Shares in compliance with the provisions of Rule 145.
Canada
The issuance to GEC Shareholders and GEC Warrantholders of PICO Shares
and PICO Warrants, respectively, under the Arrangement will be exempt from the
prospectus and registration requirements of provincial securities legislation.
PICO and GEC have applied for discretionary relief from certain Canadian
securities regulatory authorities to permit the resale of those PICO Shares (and
the PICO Shares issued on the exercise of PICO Warrants) through the facilities
of the Nasdaq and to permit the resale of the PICO Warrants.
FUTURE ISSUANCES OF AUTHORIZED SHARES
Following the Transaction, additional shares of PICO Common Stock and
PICO Preferred Stock could be issued, without approval of holders of shares of
PICO Common Stock, at such time or times, to such persons and for such
consideration as PICO may determine, except as may otherwise be required by
applicable laws, regulations or stock exchange requirements. Nasdaq, on which
the PICO Common Stock now trades, currently requires Shareholder approval of the
issuance of shares in certain instances, including private placements of
securities at less than their market value or merger or acquisition transactions
where the issuance could increase the number of outstanding shares by twenty
percent (20%) or more. The CGCL also requires shareholder approval of such
merger or acquisition transactions.
The PICO Articles authorize the Board of Directors of PICO to issue
shares of PICO Preferred Stock in one or more series and to fix and state the
designations, powers, preferences, qualifications, limitations, restrictions and
relative rights of the shares of each such series. The PICO Board of Directors
may determine, without any vote or action by Shareholders, among other things,
the payment dates and rates of dividends, if any, whether dividends are to be
cumulative or non-cumulative, whether the series is subject to redemption and,
if so, the manner of redemption and the redemption price, the preference of any
series over any other series of PICO Preferred Stock or PICO Common Stock on
liquidation or dissolution of PICO, any sinking fund or other retirement
provisions for the series and any conversion or exchange rights or other
privilege of the holders to acquire shares of any other series of PICO Preferred
Stock or of PICO Common Stock. The PICO Board of Directors may also determine
the number of shares in each series, the stated value for which the series may
be issued and the voting rights of each series. The shares of each series of
PICO Preferred Stock may rank prior to the PICO Common Stock in respect of
dividends and rights in liquidation.
Other than pursuant to the Arrangement (including the shares issuable
upon the exercise of PICO Warrants and options issued thereunder) and pursuant
to the existing PICO stock option plan, PICO has no current understanding or
agreement with respect to the issuance for any purpose of any additional PICO
Shares and PICO Preferred Stock. Although the PICO Board has no present
intention of doing so, additional shares of PICO Common Stock or shares of PICO
Preferred Stock could be issued in one or more transactions (within limitations
imposed by applicable law) that would make a takeover of PICO more difficult
and, therefore, less likely, even though such a takeover might be economically
beneficial to PICO and holders of PICO Common
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Stock. The PICO Board and management of PICO have no knowledge of any person or
entity that intends to seek a controlling interest in, or to make a takeover
proposal with respect to, PICO.
THE COMPANIES AFTER THE TRANSACTION
THE COMBINATION - GENERAL
Upon completion of the Transaction, PICO will continue to be a
corporation governed by the CGCL, and its principal executive office will
continue to be located at 875 Prospect Street, Suite 301, La Jolla, California,
U.S.A. 92037 (telephone number (619) 456-6022). After the Effective Time, PICO
will own all of the voting securities of GEC, which will continue to be a
corporation governed by the OBCA.
MANAGEMENT AND OPERATIONS
Information concerning the directors and officers of PICO is set forth
below under "Additional Information Concerning PICO". Management does not
foresee any fundamental changes to the operation of the businesses of the
companies following successful completion of the Transaction.
PRINCIPAL HOLDERS OF SECURITIES
To the knowledge of PICO and GEC and their respective directors and
officers, there are no persons who, had the Transaction occurred on ?, 1998,
would (following completion of the Transaction) beneficially own, directly or
indirectly, or exercise control or direction over, in excess of 10 percent of
the outstanding shares of PICO Common Stock.
PICO CAPITAL STOCK
The PICO Articles currently authorize 100,000,000 shares (U.S.$0.001
per value per share) of PICO Common Stock and 2,000,000 shares (U.S.$0.01 par
value per share) of PICO Preferred Stock. At ?, 1998, there were 32,591,718
shares of PICO Common Stock outstanding and no shares of PICO Preferred Stock
outstanding.
PICO Common Stock
The holders of PICO Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote of shareholders and,
upon giving the notice required by law, may cumulate their votes in the election
of directors. Subject to the preferences applicable to any shares of preferred
stock outstanding at the time, holders of PICO Common Stock are entitled to
receive ratably such dividends as may be declared by the PICO Board out of funds
legally available therefor and, in the event of the liquidation or dissolution
of PICO, are entitled to share ratably in all assets remaining after payment of
liabilities and preferred stock preferences, if any. Holders of PICO Common
Stock have no preemptive rights and have no rights to convert their PICO Common
Stock into any other securities. See "Comparison of Shareholder Rights" for a
description of other rights related to the PICO Common Stock.
PICO Preferred Stock
Of the 2,000,000 shares of preferred stock authorized by PICO Articles,
1,000,000 have been designated as Series A Junior Participating Cumulative
Preferred Stock (the "Series A Preferred Stock"). The Series A Preferred Stock
was designated pursuant to the adoption of the Rights Plan adopted by a
predecessor to PICO in July, 1991. See "Shareholder Rights Plan." The PICO Board
is authorized, without further action by the shareholders, to issue, from time
to time, additional series of preferred stock, in one or more series, to fix and
alter the dividend rights, dividend rate, conversion rights, voting rights, the
rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preferences of any wholly unissued series
of preferred stock, to fix the number of shares constituting such series and to
increase
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or decrease the number of shares of any such series (but not below the number of
shares then outstanding). The PICO Board, without further shareholder approval,
can thus issue preferred stock with voting and conversion rights, which would
adversely affect the voting power and other rights of the holders of PICO Common
Stock. In addition, the PICO Board can issue and sell shares of preferred stock
to designated persons the impact of which could make it more difficult for a
holder of a substantial block of PICO Common Stock to remove incumbent directors
or otherwise gain control of PICO. See "Comparison of Shareholder Rights."
As of the date of this Joint Proxy Statement, there are no shares of
Series A Preferred Stock or any other shares of preferred stock of PICO
outstanding. PICO has no current plans to issue any preferred stock, except as
provided in the Rights Plan described below.
Shareholder Rights Plan
On July 11, 1991, a predecessor of PICO adopted the Rights Plan, set
forth in a Rights Agreement (the "Rights Agreement") pursuant to which the PICO
Board declared a dividend of one preferred stock purchase right (a "Right") for
each share of PICO Common Stock to holders of record as of July 22, 1991. All
PICO Common Stock issued thereafter (including the PICO Shares issuable under
the Arrangement) includes a Right. Pursuant to the Rights Plan, in the event (i)
of a public announcement that any person has become a beneficial owner of 10% or
more of the outstanding PICO Common Stock (such person, a "10% Shareholder" and
the date of such announcement, the "Acquisition Trigger Date") or (ii) a tender
offer or exchange offer is commenced, the consummation of which would cause any
person to become a 10% Shareholder, each Right (other than a Right held by such
10% shareholder) will be exercisable, on and after the close of business on the
tenth business day following such event (the "Distribution Date"), to purchase
PICO Common Stock having a market value equal to two times the then current
exercise price (presently $35) (the "Exercise Price"). The Rights Plan further
provides that if, on or after the occurrence of such event, PICO is merged into
any other corporation or 50% or more of PICO's assets or earning power are sold,
each Right (other than a Right held by the 10% Shareholder) will be exercisable
to purchase common shares of the acquiring corporation having a market value
equal to two times the Exercise Price. The Exercise Price is subject to
adjustment from time to time in order to prevent dilution. The Rights will
expire on July 22, 2001, unless earlier redeemed or exchanged. Prior to
expiration, the Rights may be redeemed by PICO, in whole, but not in part, under
certain circumstances at a price of $.01 per Right.
At any time after the Acquisition Trigger Date and prior to the first
date thereafter upon which a 10% Shareholder becomes the beneficial owner of 50%
or more of the PICO Common Stock, PICO may exchange all, but not less than all,
of the then outstanding Rights for PICO Common Stock, at an exchange ratio of
one PICO Share per Right. Until a Right is exercised, the holder thereof has no
rights as a shareholder of PICO solely by virtue of the ownership of such Right.
Upon the close of business on a Distribution Date, the Rights will be
traded independently of the PICO Common Stock, and each Right, except those held
by the 10% Shareholder (which will be void), will entitle the holder thereof to
acquire, upon payment of the Exercise Price, a fraction of a share of Series A
Preferred Stock of PICO, which fraction of a share is designated to have a value
approximately equal to the value of one share of PICO Common Stock.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to the person or group that attempts to acquire PICO unless
the offer is conditional on a substantial number of Rights being acquired. The
Rights, however, should not affect any prospective offeror willing to make an
offer at an equitable price and that is otherwise in the best interest of PICO
and its shareholders, as determined by the PICO Board. The Rights should not
interfere with any merger or other business combination approved by the PICO
Board, since a majority of the independent directors may cause PICO to redeem
the rights at a price of $.01 per Rights within a specified period after a
person acquires sufficient shares to cause the Rights to become exercisable.
Each share of PICO Common Stock to be issued pursuant to the Transaction
(including shares to be issued on the exercise of PICO Warrants) includes a
Right. The Rights Plan has been amended so that it will not be triggered by the
Transaction.
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Other Anti-Takeover Items
In November 1992, a predecessor of PICO adopted a Severance Plan for
Certain Executive Officers, Senior Management and Key Employees of PICO and its
Subsidiaries (the "Severance Plan"). This plan provided for severance payments
to key executives in the event of a change of control and subsequent termination
or constructive termination of the employment of the executive. On November 1,
1992, Messrs. Sharpe, Burchfield, and Mosier entered into Key Employee Severance
Agreements with PICO (the "Severance Agreement") each of which provides that in
the event of his termination of employment under certain circumstances during
the 24-month period (the "Effective Period") following a "change of control" of
PICO, such employee will be entitled to certain severance benefits. If the
employee terminates his employment with PICO during the Effective Period for
"good reason" or if PICO terminates such employee's employment during such
period for any reason other than for serious cause, PICO will be obligated to
continue the employee's compensation at the base rate then in effect for the
longer of (a) the period remaining between the termination date of the
employee's employment and the second anniversary of the change of control, and
(b) a period of six months. A "change of control" is defined to include, among
other events, the acquisition by any person of shares possessing in the
aggregate more than 50% of the voting power of PICO or the sale of all or
substantially all of the assets of PICO. The Transaction will not result in a
"change of control" for these purposes. The Severance Plan may have
anti-takeover effects and may delay, defer or prevent a takeover attempt.
PICO WARRANTS
The PICO Warrants will be governed by the PICO Warrant Indenture. The
PICO Warrants will expire at 5:00 p.m. (local time at the place of exercise) on
June 30, 1999. Each whole PICO Warrant will entitle the holder to purchase one
PICO Share (subject to adjustment as described below) at any time on or prior to
the expiry of the said warrants for U.S.$4.76 (being the U.S. Dollar Equivalent
on the date of the Combination Agreement of Cdn.$3.25 exercise price for the GEC
Warrants, divided by the Exchange Ratio). The PICO Warrant Indenture will
contain standard anti-dilution adjustment provisions equivalent to those
contained in the GEC Warrant Indenture.
TAX CONSIDERATIONS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Goodman Phillips & Vineberg, Toronto, Canadian
counsel for PICO, and Stikeman, Elliott, Canadian counsel to the Special
Committee, the following is a summary of the principal Canadian federal income
tax considerations under the Canadian Tax Act generally applicable to GEC
Shareholders and GEC Warrantholders who, for purposes of the Canadian Tax Act,
hold their GEC Common Shares and GEC Warrants and will hold their PICO Shares
and PICO Warrants as capital property and deal at arm's length with GEC and
PICO. This summary does not apply to a holder with respect to which PICO is or
will be a "foreign affiliate" within the meaning of the Canadian Tax Act.
The GEC Common Shares and GEC Warrants will generally be considered to
be capital property to a holder unless they are held in the course of carrying
on a business or as "mark-to-market property" as defined for the purposes of the
Canadian Tax Act or were acquired in a transaction or transactions considered to
be an adventure in the nature of trade. Holders who are resident in Canada and
whose GEC Common Shares or GEC Warrants might not otherwise qualify as capital
property may be entitled to obtain such qualification by making the irrevocable
election provided by subsection 39(4) of the Canadian Tax Act. Holders who are
financial institutions (as defined in the Canadian Tax Act) should consult their
own tax advisors with respect to the application of the "mark-to-market" rules.
This summary is based on the current provisions of the Canadian Tax
Act, the regulations thereunder and counsel's understanding of the
administrative practices published by Revenue Canada, all in effect as of the
date of this Joint Proxy Statement. This summary also takes into account all
specific proposals to amend
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the Canadian Tax Act and regulations announced prior to the date hereof. This
summary does not take into account or anticipate any other changes in law,
whether by judicial, governmental or legislative action or decision, nor does it
take into account provincial, territorial or foreign income tax legislation or
considerations, which may differ from the Canadian federal income tax
considerations described herein.
THIS SUMMARY IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE,
LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR GEC SHAREHOLDER OR GEC
WARRANTHOLDER. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX
CONSEQUENCES OF THE ARRANGEMENT IN THEIR PARTICULAR CIRCUMSTANCES.
In computing a holder's liability for tax under the Canadian Tax Act,
all amounts must be expressed in Canadian dollars, generally determined at the
time such amounts are received or arise.
RESIDENTS OF CANADA
The following portion of the summary is applicable to GEC Shareholders
and GEC Warrantholders who, for purposes of the Canadian Tax Act, are resident
or deemed to be resident in Canada.
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<PAGE> 73
Exchange of GEC Common Shares for PICO Shares
On an exchange of GEC Common Shares for PICO Shares, a holder of GEC
Common Shares will be considered to have disposed of the GEC Common Shares for
proceeds of disposition equal to the aggregate fair market value of the PICO
Shares and any rights under the Rights Plan received on the exchange. A GEC
Shareholder will, in general, realize a capital gain (or a capital loss) equal
to the amount by which the aggregate proceeds of disposition received on the
exchange, net of any reasonable costs of disposition, exceed (or are exceeded
by) the aggregate adjusted cost base of the GEC Common Shares to the GEC
Shareholder. See "Taxation of Capital Gain or Capital Loss" below.
Taxation of Capital Gain or Capital Loss
Three-quarters of any capital gain (the "taxable capital gain")
realized on a disposition of GEC Common Shares will be included in the
shareholder's income in the year of disposition. Three-quarters of any capital
loss so realized (the "allowable capital loss") may generally be deducted by the
holder against taxable capital gains realized in the year of disposition. Any
excess of allowable capital losses over taxable capital gains of the shareholder
realized in the year of disposition may generally be carried back up to three
taxation years or forward indefinitely and deducted against net taxable capital
gains in those other years.
Capital gains realized by an individual or trust, other than certain
specified trusts, may give rise to alternative minimum tax under the Canadian
Tax Act. A shareholder that is a Canadian-controlled private corporation (as
defined in the Canadian Tax Act) throughout a taxation year may be liable to pay
an additional 6?% refundable tax on certain investment income, including taxable
capital gains.
If the holder of a GEC Common Share is a corporation, the amount of any
capital loss arising from a disposition of a GEC Common Share may be reduced by
the amount of dividends received or deemed to have been received by it on such
share, to the extent and under circumstances prescribed by the Canadian Tax Act.
Similar rules may apply where a corporation is a member of a partnership or a
beneficiary of a trust that owns GEC Common Shares or where a trust or
partnership, of which a corporation is a beneficiary or a member, is a member of
a partnership or a beneficiary of a trust that owns GEC Common Shares.
Exchange of GEC Warrants for PICO Warrants
On the exchange of GEC Warrants for PICO Warrants, a holder of GEC
Warrants will be considered to have disposed of the GEC Warrants for proceeds of
disposition equal to the aggregate fair market value of the PICO Warrants
received on the exchange. A GEC Warrantholder will, in general, realize a
capital gain (or capital loss) equal to the amount by which the aggregate
proceeds of disposition received on the exchange, net of any reasonable costs of
disposition, exceed (or are exceeded by) the aggregate adjusted cost base of the
GEC Warrants to the GEC Warrantholder. See "Taxation of Capital Gain or Capital
Loss" above.
Acquisition and Disposition of PICO Shares
The cost of the PICO Shares received on the exchange of GEC Common
Shares will be equal to the fair market value of such PICO Shares at the time of
the exchange. The adjusted cost base of a holder's PICO Shares will be
determined by averaging the cost of the PICO Shares received on the exchange
with the adjusted cost base of any other PICO Shares held by the holder as
capital property at that time.
A disposition or deemed disposition of PICO Shares by a holder will
generally result in a capital gain (or capital loss) equal to the amount by
which the proceeds of disposition, net of any reasonable costs of disposition,
exceed (or are exceeded by) the adjusted cost base to the holder of such PICO
Shares. See "Taxation of Capital Gain or Capital Loss" above.
Dividends - PICO Shares
Dividends on the PICO Shares will be included in a holder's income for
the purposes of the Canadian Tax Act. Such dividends received by an individual
will not be subject to the gross up and dividend tax credit
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rules in the Canadian Tax Act. A corporation will not be entitled to deduct the
dividends in computing its taxable income. A corporation that is a
"Canadian-controlled private corporation" (as defined in the Canadian Tax Act)
throughout a taxation year may be liable to pay an additional 6?% refundable tax
on such dividends. Subject to the detailed rules of the Canadian Tax Act, a
holder may be entitled to claim either a foreign tax credit or deduction in
respect of United States withholding taxes on dividends paid by PICO on the PICO
Shares.
Acquisition and Disposition of PICO Warrants
The adjusted cost base of the PICO Warrants received on the exchange of
GEC Warrants will be equal to the fair market value of the PICO Warrants at the
time of the exchange.
A disposition or deemed disposition of PICO Warrants by a holder will
generally result in a capital gain (or capital loss) equal to the amount by
which the proceeds of disposition, net of any reasonable costs of disposition,
exceed (or are exceeded by) the adjusted cost base to the holder of such PICO
Warrants. The exercise of a PICO Warrant will be deemed not to be a disposition
and the cost of the PICO Shares received on such exercise will include the
adjusted cost base of the PICO Warrant. On the expiry of a PICO Warrant, a
holder will generally realize a capital loss equal to the adjusted cost base to
the holder of the PICO Warrant.
Reverse Split
It is Revenue Canada's administrative position, as set out in
Interpretation Bulletin IT-65, that where shares of a class of stock of a
corporation are replaced on a reverse stock split by a lesser number of shares
of the same class of stock of the same corporation in the same proportion for
all shareholders, where there is no change in the total capital represented by
the shares, no concurrent change in the capital structure of the corporation and
no change in the rights and interests of the shareholders, no acquisition or
disposition is considered to have occurred. Rather, the cost of the post-split
shares issued on the consolidation will be equal to the aggregate adjusted cost
base of the pre-split shares. In a published technical interpretation, Revenue
Canada has extended this administrative position, such that on a stock split
where shareholders receive cash in lieu of a fraction of a share (i) no
acquisition or disposition of shares is deemed to occur and (ii) the cost of the
post-split shares issued on the stock split is equal to the aggregate adjusted
cost base of the pre-split shares less the amount of the cash received. Counsel
knows no reason why this administrative position will not be extended to share
consolidations, such that (i) a holder of PICO Shares whose PICO Shares are
consolidated on the Reverse Split and who receives cash in lieu of fractional
PICO Shares on the Reverse Split should not be considered to have disposed of
its PICO Shares and acquired new PICO Shares and (ii) the cost to the holder of
the new PICO Shares will be equal to the aggregate adjusted cost base of the
PICO Shares replaced on the Reverse Split, less the amount of the cash received.
Even if Revenue Canada's administrative position is not extended to share
consolidations, holders of PICO Shares who held no PICO Shares prior to the
Arrangement will not realize any adverse tax consequences as a result of the
Reverse Split. Holders of PICO Shares who held PICO Shares immediately prior to
the Arrangement are urged to consult their own tax advisors.
Foreign Property Information Reporting
PICO Shares and PICO Warrants will constitute "specified foreign
property" (as defined in the Canadian Tax Act). A holder of PICO Shares or PICO
Warrants who is a "reporting entity" (as defined in the Canadian Tax Act) will
be required to file an information return disclosing information respecting the
holder's specified foreign property. A reporting entity is defined, in general
terms, to be a taxpayer resident in Canada who holds specified foreign property
having a total cost amount exceeding $100,000. The Ministers of Finance and
National Revenue have announced that this requirement to report has been delayed
until April, 1999. Each holder should consult its own tax advisor for advice
respecting this reporting requirement.
Dissenting Shareholders
A GEC Shareholder who exercises the right of dissent (see "Dissenting
Shareholders' Rights - GEC") and becomes entitled to receive a cash payment from
GEC equal to the fair value of his or her GEC Common
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Shares will be deemed to have received a dividend equal to the amount by which
the payment (other than an amount in respect of interest awarded by a court)
exceeds the paid-up capital of the dissenting GEC Shareholders' Common Shares
and will realize a capital gain (or capital loss) to the extent that the paid-up
capital of such shares, net of any reasonable costs of disposition, exceeds (or
is exceeded by) the adjusted cost base of such shares. See "Taxation of Capital
Gain or Capital Loss" above.
In the case of a dissenting GEC Shareholder who is an individual, any
such dividend will be included in computing the individual's income and will be
subject to the gross-up and dividend tax credit rules normally applicable to
dividends received from taxable Canadian corporations. In the case of a
corporate holder, in certain circumstances the amount of any such dividend may
be treated as proceeds of disposition and not as a dividend. Where the amount is
treated as a dividend, it will be included in computing the corporation's income
and will generally be deductible in computing the corporation's taxable income.
Private corporations and certain other corporations controlled for the benefit
of an individual or a related group of individuals will be liable to pay a 33?%
refundable tax under Part IV of the Canadian Tax Act in respect of such
dividends.
Interest awarded to a dissenting GEC Shareholder by a court will be
included in such shareholders income for purposes of the Canadian Tax Act.
NON-RESIDENTS OF CANADA
The following portion of the summary is applicable to GEC Shareholders
and GEC Warrantholders (i) who, for purposes of the Canadian Tax Act, have not
been and will not be resident or deemed to be resident in Canada at any time
while they have held GEC Common Shares or GEC Warrants or will hold PICO Shares
or PICO Warrants, (ii) who do not use or hold, and are not deemed to use or
hold, any GEC Common Shares or GEC Warrants or, when acquired, PICO Shares or
PICO Warrants, in the course of carrying on a business in Canada, and (iii) to
whom the GEC Common Shares and GEC Warrants are not otherwise "taxable Canadian
property" (as defined in the Canadian Tax Act). This summary assumes that the
PICO Shares and PICO Warrants will not become taxable Canadian property on the
basis that not more than 50% of the fair market value of a PICO Share will ever
be derived directly or indirectly from real property situated in Canada,
Canadian resource properties and/or timber resource properties. This summary
does not apply to non-resident insurers, who are urged to consult their own tax
advisors.
Generally, GEC Common Shares and GEC Warrants will not be taxable
Canadian property to a holder provided that the GEC Common Shares are listed on
a prescribed stock exchange (which currently includes the TSE, the ME and the
Nasdaq National Market System), and the holder, alone or together with persons
with whom such holder does not deal at arm's length, has not owned (or had under
option) 25% or more of the issued shares of any class or series of the capital
stock of GEC at any time within the five year period immediately preceding the
date of disposition.
A holder will not be subject to tax under the Canadian Tax Act on the
exchange of GEC Common Shares for PICO Shares, the exchange of GEC Warrants for
PICO Warrants, the Reverse Split or on the sale or other disposition of a PICO
Share or a PICO Warrant.
A GEC Shareholders who exercises the right of dissent (see "Dissenting
Shareholders' Rights - GEC") and becomes entitled to receive a cash payment from
GEC equal to the fair value of his or her GEC Common Shares will be deemed to
have received a dividend equal to the amount by which the payment (other than an
amount in respect of interest awarded by a court) exceeds the paid-up capital of
the dissenting GEC Shareholders' Common Shares and will realize a capital gain
(or capital loss) to the extent that the paid-up capital of such shares, net of
any reasonable costs of disposition, exceeds (or is exceeded by) the adjusted
cost base of such shares. A deemed dividend realized by, and any interest
awarded to, a dissenting GEC Shareholder will be subject to Canadian withholding
tax at the rate of 25%, subject to any reduction thereof by virtue of the terms
of an applicable income tax convention to which Canada is a party. Any capital
gain realized by the dissenting GEC Shareholder will not be subject to tax under
the Canadian Tax Act.
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SUMMARY OF UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary of the principal United States federal income tax
considerations generally applicable to a United States Holder (as defined below)
arising from and relating to the Arrangement, including the receipt and
ownership of PICO Common Stock insofar as it relates to matters of United States
federal income tax law and conclusions with respect thereto.
As used herein, a "United States Holder" includes a GEC Shareholder
who is a citizen or individual resident of the United States, a corporation or
partnership created or organized in or under the laws of the United States, or
of any political subdivision thereof, or an estate or trust the income of which
is includible in its gross income for United States federal income tax purposes
without regard to its source, or GEC Shareholders otherwise subject to U.S. tax
on a net income basis in respect of their shares, but excludes persons subject
to special provisions of United States federal income tax law, such as
tax-exempt organizations, financial institutions, insurance companies,
broker-dealers, qualified retirement plans, Real Estate Investment Trust and
Regulated Investment Companies, persons having a "functional currency" other
than the United States dollar, GEC Shareholders who hold GEC Common Shares as
part of a straddle, wash sale, hedging or conversion transaction (other than by
virtue of their participation in the Arrangement) and GEC Shareholders who
acquired their GEC Common Stock through the exercise of employee stock options
or otherwise as compensation for services. This summary is limited to United
States Holders who hold GEC Common Shares as capital assets and who own,
actually, beneficially or constructively (as defined under Section 958 of the
U.S. Code), less than 5% of the GEC Common Shares, and PICO and its
Subsidiaries.
This summary is based on the U.S. Code, Treasury Regulation promulgated
and proposed thereunder, judicial decisions and published administrative rulings
and pronouncements of the Internal Revenue Service ("IRS"), as in effect as of
the date of this Joint Proxy Statement. Changes in or additions to such rules,
or new interpretations thereof, may have retroactive effect and therefore could
significantly affect the consequences described below. No income tax ruling has
been (or will be) sought or obtained from the United States Internal Revenue
Services (the "IRS") as to the anticipated tax consequences of the Arrangement.
This summary does not address aspects of United States taxation other
than United States federal income taxation under the U.S. Code, nor does it
address all aspects of United States federal income taxation that may be
applicable to a particular United States Holder in light of the United States
Holder's particular circumstances. In addition, this summary does not address
the United States state or local tax consequences or the foreign tax
consequences of the Arrangement or the receipt and ownership of the shares of
PICO Common Stock.
THIS SUMMARY IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE,
LEGAL, BUSINESS OR TAX ADVICE TO ANY PARTICULAR GEC SHAREHOLDER. UNITED STATES
HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE UNITED
STATES FEDERAL, STATE AND LOCAL TAX CONSEQUENCES AND THE FOREIGN TAX
CONSEQUENCES OF THE ARRANGEMENT, INCLUDING THE RECEIPT AND OWNERSHIP OF SHARES
OF PICO COMMON STOCK.
Tax Opinion
At the time of closing, GEC will have received an opinion from
__________ addressing the principal United States federal income tax
consequences of the Arrangement, a copy of which is attached as Annex C to this
Joint Management and Information Circular and Proxy Statement. The following
represents management's summary of the principal United States federal income
tax considerations to a United States Holder (as defined below) arising from and
relating to the Arrangement, including the receipt and ownership of PICO Common
Stock insofar as reflected in the opinion. The conclusions reached in that
opinion will be based upon specific factual representations from PICO to _____,
including, but not limited to, PICO's assertion that during July and August of
1997 when PICO and its affiliates purchased additional shares of GEC, they had
no intention to acquire any additional shares of GEC at any time in the future.
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Treatment of United States Holders Upon the Exchange of GEC Common Shares for
PICO Common Stock
The Arrangement should be treated as a "reorganization" within the
meaning of Section 368(a) of the U.S. Code, and the following federal tax
consequences should result.
No gain or loss should be recognized by United States Holders upon
their receipt of shares of PICO Common Stock received in exchange for GEC Common
Shares.
The tax basis of the shares of PICO Common Stock received by United
States Holders should be the same as the tax basis of GEC Common Shares
surrendered pursuant to the Arrangement.
The holding period of the shares of PICO Common Stock received by
United States Holders should include the United States Holders holding period of
GEC Common Shares exchanged therefore, provided the GEC Common Shares were held
as a capital asset by the United States Holder.
The exchange of GEC Common Shares for shares of PICO Common Stock
should not, under proposed United States Treasury Regulations and legislative
history, result in the imposition of Investment Company ("PFIC") tax to
exchanging United States Holders if GEC is characterized as a PFIC. (See,
Investment Company Considerations, discussed below.)
The anticipated United States federal income tax consequences of the
Arrangement discussed above are based on certain factual representations and
assumptions, which, if untrue or incorrect could affect the federal income tax
consequences described above.
To the extent that the Arrangement is not treated as a reorganization
within the meaning of Section 368 (a) of the U.S. Code, a United States Holder
should recognize a gain (or loss) equal to the difference between such United
States Holder's adjusted tax basis in the GEC Common Shares exchanged and the
aggregate fair market value of the consideration received therefor. Such gain
may be subject to PFIC tax in addition to United States federal income tax if
GEC is characterized as a PFIC at any time during its existence.
Requirement of Notice Filing
Any United States Holder that receives shares of PICO Common Stock in
exchange for GEC Common Shares generally will be required to file a notice with
the IRS on or before the last date for filing a United States federal income tax
return for the United States Holder's taxable year in which the Arrangement
occurs. The notice must contain certain information specifically enumerated in
Section 1.367(b)-1(c) of United States Treasury regulations, and United States
Holders are advised to consult their tax advisors for assistance in preparing
such notice.
If a United States Holder required to give notice as described above
fails to give such Notice, and if the United States Holder further fails to
establish reasonable cause for the failure, then the Commissioner of the IRS
(the "Commissioner") will be required to determine, based on all the facts and
circumstances, whether the exchange of GEC Common Shares for PICO Common Stock
is eligible for nonrecognition of gain treatment. In making this determination,
the Commissioner may conclude (i) that the conversion is eligible for
nonrecognition of gain treatment, despite such noncompliance, (ii) provided that
the conversion is eligible for nonrecognition of gain treatment, provided that
certain other conditions imposed by the United States Treasury regulations are
satisfied, or (iii) that the conversion is not eligible for nonrecognition of
gain treatment; and that any gain recognized will be taken into account for
purpose of increasing the tax basis of the PICO Common Stock received pursuant
to the Combination Agreement and the Arrangement. Nevertheless, the failure of
any one United States Holders to satisfy the foregoing notice requirements
should not prevent other United States Holders that do satisfy such requirements
from receiving nonrecognition treatment with respect to the exchange of their
GEC Common Shares into PICO Common Stock pursuant to the Arrangement.
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Disposition of PICO Common Stock
A United States Holder that disposes of its shares of PICO Common Stock
will (subject to the discussion below) recognize gain or loss on such exchange.
Such gain or loss will be equal to the difference between the fair market value
of the proceeds of the disposition and the United States Holder's tax basis in
the shares of PICO Common Stock surrendered. The gain or loss will generally be
from the disposition of a capital asset, and will generally be long-term capital
gain or loss if the PICO Common Stock has been held for more than one year at
the time of the sale. A United States Holder should have a tax basis in the
shares of PICO Common Stock equal to the fair market value of the GEC Common
Shares exchanged therefore under the Arrangement. For United States federal
income tax purposes, gain realized on the sale of shares of PICO Common Stock
generally will be treated as United States source gain.
Dissenters
A United States Holder who exercises such holder's right to dissent
from the Arrangement should recognize gain or loss on the exchange of such
holder's GEC Common Shares for cash in an amount equal to the difference between
the amount of cash received (other than amounts, if any, which are or are deemed
to be interest for United States federal income tax purposes, wherein such
amounts will be taxed as ordinary income) and such holder's tax basis in the GEC
Common Shares. See "Dissenting Shareholders' Rights". Any gain realized by a
United States Holder may be subject to United States tax under Section 1291 of
the U.S. Code ("PFIC tax") in addition to United States federal income tax if
GEC is characterized as a PFIC under Section 1297 of the U.S. Code.
If GEC is not characterized as a PFIC during the dissenting United
States Holder's holding period, then any gain or loss realized on the exercise
of dissent rights should be treated as a capital gain or loss if the shares were
held as a capital asset at the Effective Time.
If GEC is a PFIC for any year during the United States Holder's
holding period for its GEC Common Shares, and the United States Holder has not
made a Qualified Electing Fund ("QEF") election for all taxable years included
in the United States Holder's holding period in which GEC was a PFIC, then such
United States Holder may be required to treat gain realized upon the exercise of
dissenting rights as an "excess distribution" subject to PFIC tax.
If GEC is treated as a PFIC, United States Holders that exercise
dissent rights should consult their tax advisors concerning the merits and
mechanics of making the appropriate elections to avoid the imposition of PFIC
tax on gain realized upon exercise of such dissent rights.
Passive Foreign Investment Company Considerations
A corporation that is incorporated outside of the United States (a
"foreign corporation") generally will be classified as a "PFIC" as defined by
Section 1297 of the U.S. Code for any taxable year after 1986 during which
either (i) 75 percent of its gross income is passive income (as defined by
Section 1297 of the U.S. Code) or (ii) 50% or more of its assets produce or are
held for the production of passive income for the purpose of applying the
foregoing test to GEC, the assets and gross income of GEC's significant
subsidiaries will be attributed to GEC and the determination as to PFIC status
based on attributed assets and income must be applied for any taxable year
including the year in which the Arrangement is consummated. GEC believes that it
may be classified as a PFIC. No opinion will be rendered regarding GEC's status
as a PFIC at any time before or after the Effective date.
If GEC is classified as a PFIC under the test described above, PFIC tax
may impose on distributions made by GEC that are treated as "excess
distributions" and certain gains realized upon the disposition of GEC
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Common Shares unless the United States Holder has made a Qualified Electing Fund
("QEF") Election with respect to all taxable years included in the United States
holding period in which GEC is characterized as a PFIC. If PFIC tax is imposed
on a United States Holder, a distribution treated as an "excess distribution"
and certain gain realized on the disposition of GEC stock that is treated as
PFIC stock is allocated ratably over the United States Holder's entire holding
period for its GEC Common Shares and is subject to United States tax at the
highest rate applicable to individuals or corporations, as the case may be, in
effect for the year to which the gain is allocated and in which GEC is a PFIC.
In addition, an interest charge is imposed which accrues on tax allocated to
each such year in the holding period. The same results would apply to U.S.
Holders if any foreign corporation held by GEC is classified as a PFIC for any
year during the U.S. Holders' holding period.
The foregoing summary of the application of the PFIC rules to United
States Holders of GEC Common Shares is only a summary of certain material
aspects of those rules. Because the United States federal income tax
consequences to such United States Holders under the PFIC provisions are
significant and complex, such United States Holders are urged to discuss those
consequences with their tax advisors.
Shareholders Not Resident in or Not Citizens of the United States
The following summary is applicable to a non-United States Holder. As
used herein, a non-United States Holder is a GEC Shareholder who, for United
States federal income tax purposes, is a non-resident alien individual, a
foreign corporation, a foreign partnership or a foreign estate or trust, but
excludes persons subject to special provisions of United States federal income
tax law, such as tax-exempt organizations, financial institutions, insurance
companies, broker-dealers, GEC Shareholders who hold GEC Common Shares as part
of a straddle, wash sale, hedging or conversion transaction (other than by
virtue of their participation in the Arrangement and GEC Shareholders who
acquired their GEC Common Shares through the exercise of employee stock options
or otherwise as compensation for services. A non-United States Holder seeking
benefits under an applicable tax treaty or an exemption from United States
withholding tax for "effectively connected" income, as described below, may be
required to comply with additional certification and other requirements in order
to establish the holder's entitlement to such benefits or exemption. This
summary is limited to non-United States Holders who hold GEC Common Shares as
capital assets and who will hold shares of PICO Common Shares as capital assets.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a non-resident alien) by virtue of being present
in the United States for at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three year period ending in the current
calendar year (counting for such purposes of all of the days present in the
current year, one-third of the days present in the immediately preceding year,
and one-sixth of the days present in the second preceding year). Resident aliens
are subject to tax as if they were U.S. citizens.
This discussion does not consider specific facts and circumstances that
may be relevant to a particular non-United States Holder's tax position,
including whether such non-United States Holder is a United States expatriate.
A non-United States Holder generally will not be subject to United
Sates federal income tax on gain (if any) recognized on the receipt of the
shares of PICO Common Stock, or on the sale or exchange of shares of PICO Common
Stock, unless (i) such gain is effectively connected with a trade or business of
the non-United States Holder in the United States, or, if a tax treaty applies,
is attributable to a permanent establishment maintained by the non-United States
Holder in the United States, or (ii) the non-United States Holder is an
individual who holds the GEC Common Shares or the shares of PICO Common Stock,
as the case may be, as capital assets and is present in the United States for
183 days or more in the taxable year of disposition, and certain other
conditions are satisfied.
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COMPARISON OF SHAREHOLDER RIGHTS
In the event that the Transaction is consummated, holders of GEC Common
Shares will, at the Effective Time, have their GEC Common Shares exchanged for
PICO Shares. PICO is a corporation organized under the CGCL. GEC is a
corporation organized under the OBCA. While the rights and privileges of
shareholders of an Ontario corporation are, in many instances, comparable to
those of shareholders of a California corporation, there are certain
differences. These differences arise from differences between Ontario and
California law, between the OBCA and CGCL and between the GEC Articles and GEC
By-Laws and the PICO Articles and PICO By-Laws. For a description of the
respective rights of the holders of GEC Common Shares and PICO Common Stock,
see, respectively, "Information Concerning GEC - Share Capital Structure" and
"The Companies After the Transaction - PICO Capital Stock."
Vote Required for Extraordinary Transactions
Under the OBCA, certain extraordinary corporate actions, such as
certain amalgamations, continuances, and sales, leases or exchanges of all or
substantially all the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions such as
liquidations, dissolutions and (if ordered by a court) arrangements, are
required to be approved by special resolution. A special resolution is a
resolution passed at a meeting by not less than two-thirds of the votes cast by
the shareholders entitled to vote on the resolution. In certain cases, a special
resolution to approve an extraordinary corporate action is also required to be
approved separately by the holders of a class or series of shares.
In those situations where shareholder approval is required, the CGCL
generally requires the affirmative vote of a majority of the outstanding shares
of the constituent corporations in a merger. Under the CGCL, in the event
shareholder approval is required, the holders of each class of shares
outstanding must approve the transaction (notwithstanding that the shares of a
class or series may not be entitled to vote on any other matters), except that
any outstanding preferred shares of the surviving or acquiring corporation or
parent party are not required to vote unless the rights, preferences, privileges
or restrictions granted to or imposed upon such class is changed. Unless (i) an
amendment is made to the articles of incorporation which would otherwise require
shareholder approval, or (ii) the shares of any class of a corporation which is
party to the transaction would receive shares of the surviving or acquiring
corporation or parent party having different rights, preferences, privileges or
restrictions than those surrendered, the CGCL does not require a shareholder
vote in the case of transaction where the shareholders of corporation own
immediately after the transaction equity securities of the surviving or
acquiring corporation or a parent party possessing more than five-sixths (5/6)
of the voting power of the surviving or acquiring corporation or parent party.
Amendment to Governing Documents
Under the OBCA, any amendment to the articles generally requires
approval by special resolution, which is a resolution passed by a majority of
not less than two-thirds of the votes cast by shareholders entitled to vote on
the resolution. The OBCA provides that unless the articles or by-laws otherwise
provide, the directors may, by resolution, make, amend or repeal any by-laws
that regulate the business or affairs of a corporation. Where the directors
make, amend or repeal a by-law, they are required under the OBCA to submit the
by-law, amendment or repeal to the shareholders at the next meeting of
shareholders, and the shareholders may confirm, reject or amend the by-law,
amendment or repeal by an ordinary resolution, which is a resolution passed by a
majority of the votes cast by shareholders entitled to vote on the resolution.
Under the CGCL, unless the articles of incorporation otherwise provide,
amendments of the articles of incorporation require the approval of the holders
of a majority of the outstanding shares entitled to vote thereon, and if such
amendments would increase or decrease the number of authorized shares of any
class or series or would adversely affect the shares of such class or series, a
majority of the outstanding stock of such class or series would also have to
approve the amendment.
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Dissenting Shareholders' Rights
The OBCA provides that shareholders of an Ontario corporation entitled
to vote on certain matters are entitled to exercise dissent rights and to be
paid the fair value of their shares in connection therewith. The OBCA does not
distinguish for this purpose between listed and unlisted shares. Such matters
include (a) any amalgamation with another corporation (other than with certain
affiliated corporations); (b) an amendment to the corporation's articles to add,
change or remove any provisions restricting the issue, transfer or ownership of
shares; (c) an amendment to the corporation's articles to add, change or remove
any restriction upon the business or businesses that the corporation may carry
on or upon the powers that the corporation may exercise; (d) a continuance under
the laws of another jurisdiction; (e) a sale, lease or exchange of all or
substantially all the property of the corporation other than in the ordinary
course of business; (f) a court order permitting a shareholder to dissent in
connection with an application to the court for an order approving an
arrangement proposed by the corporation; and (g) certain amendments to the
articles of a corporation which require a separate class or series vote,
provided that a shareholder is not entitled to dissent if an amendment to the
articles is effected by a court order approving a reorganization or by a court
order made in connection with an action for an oppression remedy.
The CGCL provides that shareholders have the right, in some
circumstances, to dissent from certain corporate reorganization and instead to
demand payment of the fair value of their shares. The CGCL generally does not
provide for dissenters' rights if no vote of the shareholders of the surviving
corporation is required. Further, dissenters' rights are not available under the
CGCL for shares listed on a securities exchange or included in the Nasdaq,
unless holders of more than 5% of the outstanding shares vote against the
transaction and demand payment for their shares.
Oppression Remedy
The OBCA provides an oppression remedy that enables the court to make
any order, both interim and final, to rectify the matters complained of where it
is satisfied upon application by a complainant (as defined below) that: (i) any
act or omission of the corporation or an affiliate effects or threatens to
effect a result; (ii) the business or affairs of the corporation or an affiliate
are, have been or are threatened to be carried on or conducted in a manner; or
(iii) the powers of the directors of the corporation or an affiliate are, have
been or are threatened to be exercised in a manner, that is oppressive or
unfairly prejudicial to or that unfairly disregards the interest of any security
holder, creditor, director or officer of the corporation. A complainant
includes: (a) a present or former registered holder or beneficial owner of
securities of a corporation or any of its affiliates; (b) a present or former
officer or director of the corporation or any of its affiliates; and (c) any
other person who in the discretion of the court is a proper person to make such
application.
Because of the breadth of the conduct which can be complained of and
the scope of the court's remedial powers, the oppression remedy is very flexible
and is sometimes relied upon to safeguard the interests of shareholders and
other complainants with a substantial interest in the corporation. Under the
OBCA, it is not necessary to prove that the directors of a corporation acted in
bad faith in order to seek an oppression remedy. Furthermore, the court may
order the corporation to pay the interim expenses of a complainant seeking an
oppression remedy, but the complainant may be held accountable for such interim
costs on final disposition of the complaint (as in the case of a derivative
action).
The CGCL does not provide for a similar remedy.
Derivative Action
Under the OBCA, a complainant may apply to the court for leave to bring
an action in the name of and on behalf of a corporation or any subsidiary, or to
intervene in an existing action to which any such body corporate is a party, for
the purpose of prosecuting, defending or discontinuing the action on behalf of
the body corporate. Under the OBCA, no action may be brought and no intervention
in an action may be made unless the complainant has given 14 days' notice to the
directors of the corporation or its Subsidiary of the complainant's intention to
apply to the court and the court is satisfied that (a) the directors of the
corporation or its subsidiary will not bring, diligently prosecute or defend or
discontinue the action; (b) the complainant is acting in good faith; and (c) it
appears to be in the interests of the corporation or its subsidiary that the
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action be brought, prosecuted, defended or discontinued. Where a complainant
makes an application without having given the required notice, the OBCA permits
the court to make an interim order pending the complainant giving the required
notice, provided that the complainant can establish that at the time of seeking
the interim order it was not expedient to give the required notice.
Under the OBCA, the court in a derivative action may make any order it
thinks fit. Additionally, under the OBCA, a court may order a corporation or its
subsidiary to pay the complainant's interim costs, including reasonable legal
fees and disbursements. Although the complainant may be held accountable for the
interim costs on final disposition of the complaint, it is not required to give
security for costs in a derivative action.
Derivative actions may be brought in California by a shareholder on
behalf of, and for the benefit of, the corporation. Under the CGCL, a
shareholder must allege in the complaint that he or she was a shareholder of the
corporation at the time of the transaction of which he or she complains, or that
his or her shares thereafter devolved on him or her by operation of law. The
complaint must also allege the efforts, if any, made by the shareholder to
obtain the action he or she desires from the board or the reasons for his or her
failure to obtain the action or for not making the effort.
Shareholder Consent in Lieu of Meeting and Shareholders' Rights to
Call Meetings
Under the OBCA, shareholder action without a meeting may only be taken
by written resolution signed by all shareholders who would be entitled to vote
thereon at a meeting. Special meetings of shareholders may be called by the
Board of Directors or, in certain circumstances, requisitioned by a holder of at
least 5% of the outstanding shares or a court.
Unless restricted in a company's articles of incorporation, under the
CGCL any action to be taken by shareholders without a meeting may be taken by
the written consent of all shareholders entitled to vote on such action and
having not less than the minimum number of votes to approve such action at a
meeting. Special meetings of PICO Shareholders may be called only by a majority
of the Board of Directors, the Chairman of the Board, the President or the
holders of 10% or more of the PICO Shares.
Director Qualifications
Under the OBCA, an offering corporation, such as GEC, must have not
fewer than three directors and a majority of the directors generally must be
resident Canadians. The OBCA also requires that at least one-third of the
directors of such a corporation must not be officers or employees of the
corporation or any of. its affiliates. The CGCL does not have comparable
qualification requirements.
Fiduciary Duties of Directors
Directors of corporations governed by the OBCA have fiduciary
obligations to the corporation. Under the OBCA, the duty of loyalty requires
directors of an Ontario corporation to act honestly and in good faith with a
view to the best interests of the corporation, and the duty of care requires
that the directors exercise the care, diligence and skill that a reasonably
prudent person would exercise in comparable circumstances.
Directors of corporations incorporated under the CGCL have fiduciary
obligations to the corporation and its shareholders. Pursuant to these fiduciary
obligations, the directors must perform their duties in good faith, in the
manner each director believes to be in the best interests of the corporation and
its shareholders and with such care, including reasonable inquiry, as an
ordinarily prudent person in a like position would use under similar
circumstances.
Indemnification of Officers and Directors
Under the OBCA, a corporation may indemnify a director or officer, a
former director or officer or a person who acts or acted at the corporation's
request as a director or officer of a body corporate of which the corporation is
or was a shareholder or creditor, and his or her heirs and legal representatives
(an
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"Indemnifiable Person"), against all costs, charges and expenses, including
an amount paid to settle an action or satisfy a judgment, reasonably incurred by
him or her in respect of any civil, criminal or administrative action or
proceeding to which he or she is made a party by reason of being or having been
a director or officer of such corporation or such body corporate, if: (a) he or
she acted honestly and in good faith with a view to the best interests of such
corporation; and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she had reasonable
grounds for believing that his or her conduct was lawful. An Indemnifiable
Person is entitled to such indemnity from the corporation if he or she was
substantially successful on the merits in his or her defense of the action or
proceeding and fulfilled the conditions set out in (a) and (b), above. A
corporation may, with the approval of a court, also indemnify an Indemnifiable
Person in respect of an action by or on behalf of the corporation or body
corporate to procure a judgment in its favour, to which such person is made a
party by reason of being or having been a director or an officer of the
corporation or body corporate, if he or she fulfills the conditions set out in
(a) and (b), above. The GEC By-Laws provide for indemnification of directors and
officers to the fullest extent authorized by the OBCA.
The PICO By-Laws permit indemnification of directors, officers and
other agents in excess of that provided by the CGCL but subject to the
limitations of the CGCL. Pursuant to the CGCL, PICO generally has the power to
indemnify its present and former directors, officers, employees and agents
against expenses, judgments, fines and amounts paid in settlements incurred by
them in connection with any suit to which they are, or are threatened to be
made, a party by reason of their serving in such positions so long as they acted
in good faith and in a manner they reasonably believed to be in the best
interest of PICO, and with respect to any criminal action, they had no
reasonable cause to believe their conduct was unlawful. With respect to suits by
or in the right of a corporation, however, indemnification is not available if
such person is finally adjudged to be liable to PICO or for amounts paid (or
costs incurred) in settlement, unless and only to the extent the court
determines that indemnification is appropriate.
Director Liability
The OBCA does not permit the limitation of a director's liability for
breach of fiduciary liability through the charter of a corporation.
The PICO Articles eliminate liabilities of a director for monetary
damages to the fullest extent permitted by law. The PICO Articles do not
eliminate the liability of a director for actions or omissions involving
intentional misconduct, believed to be contrary to the best interest of the
corporation or its shareholders or that involve the absence of good faith, or
improper personal benefit, showing a reckless disregard for the director's duty,
constituting an unexcused pattern of inattention, self-dealing or for making an
unlawful distribution to shareholders.
Anti-Takeover Provisions and Interested Shareholder Transactions
The CGCL limits tender offers, reorganizations and asset sales with
"interested parties" (defined as a party that (a) directly or indirectly
controls the corporation that is subject to the tender offer or proposal, (b) is
directly or indirectly controlled by an officer or director of the subject
corporation, or (c) an entity in which a material financial interest is held by
any director or executive officer of the subject corporation) by requiring the
delivery or an affirmative written opinion as to the fairness of the
consideration to the shareholders of the target corporation. The opinion must be
provided by a person who is not affiliated with the offeror and who, for
compensation, engages in the business of advising others as to the value of
properties, businesses or securities. This requirement for an opinion on the
fairness of the consideration does not apply if the target corporation does not
have shares held of record by 100 or more persons. The CGCL also requires
notification of shareholders in the event that an interested party has made a
proposal for tender offer, reorganization or sale of assets and a later proposal
by another party is made to the corporation or its shareholders.
The ability of the Board of Directors of PICO to determine the
preferences, relative rights, qualifications and restrictions of the Preferred
Stock and to issue Preferred Stock without Shareholder approval could have
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an anti-takeover effect. The Board of Directors of PICO has adopted a preferred
stock purchase rights plan which has an anti-takeover effect. See "The Companies
After the Transaction - PICO Capital Stock."
The OBCA does not contain a comparable provision with respect to
business combinations. However, policies of certain Canadian securities
regulatory authorities, including Policy 9.1, contain requirements in connection
with related party transactions. A related party transaction means, generally,
any transaction by which an issuer, directly or indirectly, acquires or
transfers an asset or acquires or issues treasury securities or assumes or
transfers a liability from or to, as the case may be, a related party by any
means in any one or any combination of transactions. "Related Party" is defined
in Policy 9.1 and includes directors, senior officers and holders of at least
10% of the voting securities of the issuer.
Policy 9.1 requires more detailed disclosure in the proxy material sent
to security holders in connection with a related party transaction, and, subject
to certain exceptions, the preparation of a formal valuation of the subject
matter of the related party transaction and any non-cash consideration offered
therefor and the inclusion of a summary of the valuation in the proxy material.
Policy 9.1 also requires, subject to certain exceptions, that the minority
shareholders of the issuer separately approve the transaction, by either a
simple majority or two-thirds of the votes cast, depending on the circumstances.
DISSENTING SHAREHOLDERS' RIGHTS
GEC
Section 185 of the OBCA (the full text of which is reproduced as Annex
"G" to this Joint Proxy Statement) provides shareholders with the right to
dissent from certain resolutions of corporation which effect extraordinary
corporate transactions or fundamental corporate changes. The Interim Order and
the Final Order provide GEC Shareholders with the right to dissent from the
Arrangement Resolution pursuant to section 185 of the OBCA and the Plan of
Arrangement.
Any GEC Shareholder who dissents from the Arrangement Resolution in
compliance with section 185 of the OBCA and the Plan of Arrangement will be
entitled, in the event the Arrangement become effective, to be paid by GEC the
fair value of the GEC Common Shares held by such dissenting GEC Shareholder
determined as of the close of business on the day before the Arrangement
Resolution is adopted.
A GEC Shareholder who wishes to dissent must send to GEC, no later than
the termination of the GEC Shareholders' Meeting (or any adjournment thereof),
written objection to the Arrangement Resolution (a "Dissent Notice"). The filing
of a Dissent Notice does not deprive a GEC Shareholder of the right to vote;
however, the OBCA provides, in effect, that a GEC Shareholder who has submitted
a Dissent Notice and who votes in favour of the Arrangement Resolution will no
longer be considered a dissenting GEC Shareholder. The OBCA does not provide,
and GEC will not assume, that a vote against the Arrangement Resolution or an
abstention constitutes a Dissent Notice but a GEC Shareholder need not vote his
or her GEC Common Shares against the Arrangement Resolution in order to dissent.
Similarly, the revocation of a proxy conferring authority on the proxy holder to
vote in favour of the Arrangement Resolution does not constitute a Dissent
Notice; however, any proxy granted by a GEC Shareholder who intends to dissent,
other than a proxy that instructs the proxy holder to vote against the
Arrangement Resolution, should be validly revoked (see "The Meetings - General
Proxy Information - GEC") in order to prevent the proxy holder from voting such
GEC Common Shares in favour of the Arrangement Resolution and thereby causing
the GEC Shareholder to forfeit his or her right to dissent. Under the OBCA,
there is no right of partial dissent and, accordingly, a dissenting GEC
Shareholder may only dissent with respect to all GEC Common Shares held by him
or her on behalf of any one beneficial owner and which are registered in the
name of the dissenting GEC Shareholder.
GEC is required, within 10 days after the GEC Shareholders adopt the
Arrangement Resolution, to notify each GEC Shareholder who has filed a Dissent
Notice that the Arrangement Resolution has been adopted, but such notice is not
required to be sent to any GEC Shareholder who voted for the Arrangement
Resolution or who has withdrawn his or her Dissent Notice.
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A dissenting GEC Shareholder who has not withdrawn his or her Dissent
Notice must then, within 20 days after receipt of notice that the Arrangement
Resolution has been adopted or, if the dissenting GEC Shareholder does not
receive such notice, within 20 days after be or she learns that the Arrangement
Resolution has been adopted, send to GEC a written notice (a "Payment Demand")
containing his or her name and address, the number of GEC Common Shares in
respect of which he or she dissents, and a demand for payment of the fair value
of such GEC Common Shares. Within 30 days after sending a Payment Demand, the
dissenting GEC Shareholder must send to the GEC transfer agent the certificates
representing the GEC Common Shares in respect of which he or she dissents. A
dissenting GEC Shareholder who fails to send certificates representing the GEC
Common Shares in respect of which he or she dissents forfeits his or her right
to make a claim under section 185 of the OBCA. The GEC transfer agent will
endorse on share certificates received from a dissenting GEC Shareholder a
notice that the holder is a dissenting GEC Shareholder and will forthwith return
the share certificates to the dissenting GEC Shareholder.
At the Effective Time, a dissenting GEC Shareholder ceases to have any
rights as a GEC Shareholder notwithstanding the provisions of section 185 of the
OBCA, and holders who duly exercise such rights of dissent and who:
(a) are ultimately entitled to be paid fair value for their GEC
Common Shares shall (i) be deemed to have transferred their
GEC Common Shares to GEC for cancellation at the Effective
Time and (ii) not be entitled to any other payment or
consideration including any payment that would be payable
under the Arrangement had such holders not exercised their
right of dissent; or
(b) are ultimately not entitled, for any reason, to be paid fair
value for their GEC Common Shares shall be deemed to have
participated in the Arrangement on the same basis as any
non-dissenting holder of GEC Common Shares, including
receiving PICO Shares.
GEC is required, not later than seven days after the later of the
effective date of the Arrangement or the date on which GEC received the Payment
Demand of a dissenting GEC Shareholder, to send to each dissenting GEC
Shareholder who has sent a Payment Demand a written offer to pay ("Offer to
Pay") for his or her GEC Common Shares in an amount considered by the GEC Board
to be the fair value thereof, accompanied by a statement showing the manner in
which the fair value was determined. Every Offer to Pay must be on the same
terms. GEC must pay for the GEC Common Shares of a dissenting GEC Shareholder
within 10 days after an offer made as aforesaid has been accepted by a
dissenting GEC Shareholder, but any such offer lapses if GEC does not receive an
acceptance thereof within 30 days after the Offer to Pay has been made.
If GEC fails to make an Offer to Pay for a dissenting GEC Shareholder's
GEC Common Shares, or if a dissenting GEC Shareholder fails to accept an offer
which has been made, GEC may, within 50 days after the effective date of the
Arrangement or within such further period as a court may allow, apply to a court
to fix a fair value for the GEC Common Shares of dissenting GEC Shareholders. If
GEC fails to apply to a court, a dissenting GEC Shareholder may apply to a court
for the same purpose within a further period of 20 days or within such further
period as a court may allow. A dissenting GEC Shareholder is not required to
give security for costs in such an application.
Upon an application to a court, all dissenting GEC Shareholders whose
GEC Common Shares have not been purchased by GEC will be joined as parties and
bound by the decision of the court, and GEC will be required to notify each
affected dissenting GEC Shareholder of the date, place and consequences of the
application and of his or her right to appear and be heard in person or by
counsel. Upon any such application to a court, the court may determine whether
any person is a dissenting GEC Shareholder who should be joined as a party, and
the court will then fix a fair value for the GEC Common Shares of all dissenting
GEC Shareholders. The final order of a court will be rendered against GEC in
favour of each dissenting GEC Shareholder and for the amount of the fair value
of his or her GEC Common Shares as fixed by the court. The court may, in its
discretion, allow a reasonable rate of interest on the amount payable to each
dissenting GEC Shareholder from the effective date of the Arrangement until the
date of payment.
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The above is only a summary of the dissenting shareholder provisions of
the OBCA (reproduced in Annex "G" to this Joint Proxy Statement), which are
technical and complex. ANY GEC SHAREHOLDER WISHING TO AVAIL HIMSELF OR HERSELF
OF HIS OR HER RIGHTS UNDER THOSE PROVISIONS SHOULD SEEK HIS OR HER OWN LEGAL
ADVICE AS FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS OF THE OBCA MAY
PREJUDICE HIS OR HER RIGHT OF DISSENT. For a general summary of certain income
tax implications to a dissenting GEC Shareholder, see "Tax Considerations to GEC
Shareholders - Canadian Federal Tax Considerations to GEC Shareholders -
Dissenting Shareholders" and "Tax Considerations to GEC Shareholders - United
States Federal Tax Considerations to GEC Shareholders - Dissenting
Shareholders."
It is a condition of PICO's obligations under the Combination Agreement
that rights of dissent shall not have been exercised in respect of more than 2?%
of the outstanding GEC Common Shares held by GEC Public Shareholders unless same
shall have been abandoned.
PICO
Under the CGCL, if demands for payment are duly filed with respect to
5% or more of the outstanding shares of PICO Common Stock, shareholders of
record of PICO, will have the right, by fully complying with all of the
applicable provisions of the CGCL, to dissent with respect to the Transaction
and to receive from PICO, as applicable, payment in cash of the "fair market
value" of any or all of their shares. However, shareholders of record of PICO
whose shares are subject to any restriction on transfer imposed by PICO or by
any law or regulation will have the right, under the CGCL, to dissent with
respect to the Transaction and to receive such cash payment for their shares of
PICO Common Stock from PICO, regardless of whether demands for payment are duly
filed with respect to 5% or more of the outstanding shares of PICO Common Stock.
Cash dividends declared and paid, if any, on dissenting shares after
the date of approval of the principal terms of the Transaction are deducted from
the amount paid for the dissenting shares. If the parties are unable to agree on
fair market value, the determination of fair market value is subject to
litigation, including appellate review, with respect to PICO Common Stock, in
the Superior Court for the County of San Diego, California.
Dissenters' rights cannot be validly exercised by persons other than
shareholders of record regardless of the beneficial ownership of the shares.
Persons who are beneficial owners of shares held of record by another person,
such as a broker, a bank or a nominee, should instruct the record holder to
follow the procedure outlined below if they wish to dissent from the Transaction
with respect to any or all of their shares.
In order to perfect their dissenters' rights, PICO shareholders of
record must (i) make written demand for the purchase of their dissenting shares
upon PICO or its transfer agent on or before the date of the PICO Meeting, (ii)
vote their dissenting shares against the Transaction, and (iii) within 30 days
after the mailing to shareholders by PICO of notice of approval of the
Transaction, submit the certificates representing their dissenting shares to
PICO or its transfer agent, for the notation thereon that they represent
dissenting shares.
FAILURE TO FOLLOW ANY OF THESE PROCEDURES MAY RESULT IN THE LOSS OF
STATUTORY DISSENTERS' RIGHTS.
Demand for Purchase
Dissenting PICO Shareholders must submit to PICO at its principal
executive offices, 875 Prospect Street, Suite 301, La Jolla, California 92037,
Attention: James F. Mosier, Secretary, a written demand that PICO purchase for
cash some or all of their shares.
The notice must state the number of shares held of record by such
shareholders which they demand to be purchased and the amount which they claim
to be the "fair market value" of those shares. That statement of fair market
value will constitute an offer by the dissenting shareholder to sell such shares
at that price. Such demand shall not be effective unless it is received by not
later than the date of the PICO Shareholders' Meeting. See "Notice of Approval"
below. Dissenting PICO Shareholders may not withdraw
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their demand for payment without the consent of the PICO Board. The rights of
dissenting shareholders to demand payment terminate if the Transaction is
abandoned (although dissenting shareholders are entitled upon demand to
reimbursement of expenses incurred in a good faith assertion of their
dissenters' rights), or if the shares are transferred prior to submission for
endorsement as dissenting shares.
Vote Against the Transaction
Any PICO Shareholders desiring to exercise dissenters' rights must vote
against the Transaction. PICO Shareholders may vote part of the shares which
they are entitled to vote in favour of the Transaction or abstain from voting a
part of such shares without jeopardizing their dissenters' rights as to other
shares; however, if record shareholders vote part of the shares they are
entitled to vote in favour of the Transaction and fail to specify the number of
shares they are so voting, it is conclusively presumed under the CGCL that their
approving vote is with respect to all shares which they are entitled to vote.
Voting against the Transaction will not of itself, absent compliance with all of
the provisions summarized herein, satisfy the requirements of the CGCL for
exercise and perfection of dissenters' rights for PICO Shareholders.
Notice of Approval
If PICO Shareholders have a right to require PICO to purchase their
shares for cash under the dissenters' rights provision of the CGCL, PICO will
mail to each such shareholder a notice of approval of the Transaction within 10
days after the date of shareholder approval, stating the price determined by it
to represent the "fair market value" of the dissenting shares. The statement of
price will constitute an offer to purchase any dissenting shares at that price.
Submission of Stock Certificates
Within 30 days after the mailing of the notice of approval of the
Transaction, dissenting shareholders must submit to PICO or its transfer agent
certificates representing the dissenting shares demanded to be purchased, such
certificates to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed. The notice of approval of the Transaction
would specify the date by which the submission of certificates for endorsement
had to be made and a submission made after that date would not be effective for
any purpose.
Purchase of Dissenting Shares
If a dissenting shareholder and PICO agree that any of the shares are
dissenting shares and agree upon the price of the shares, PICO, upon surrender
of certificates, will make payment of that amount (plus interest thereon at the
legal rate on judgments from the date of such agreement) within 30 days after
such agreement. Any agreement between dissenting shareholders and PICO fixing
the "fair market value" of any dissenting shares must be filed with the
Secretary of PICO.
If PICO denies that the shares are dissenting shares, or PICO and a
dissenting shareholder fail to agree upon the "fair market value" of the shares,
the dissenting shareholder may, within six months after the date on which notice
of approval of the Transaction was mailed to the shareholder, but not
thereafter, file a complaint or intervene in a pending action, if any) in the
Superior Court for San Diego County, State of California, requesting that the
Superior Court determine whether the shares are dissenting shares and if so, the
"fair market value" per share of the dissenting shares. The cost of the action
will be assessed or apportioned as the Superior Court considers equitable, but
if the "fair market value" is determined to exceed the price offered to the
shareholder by PICO, then PICO will be required to pay such costs (including, in
the discretion of the Superior Court, attorneys fees, fees of expert witnesses
and interest at the legal rate on judgments, if such "fair market value" is
determined to exceed 12.5% of the price offered by PICO). A dissenting
shareholder must bring this action within six months after the date on which
notice of approval of the Transaction was mailed to the shareholder whether or
not PICO responds within such time to the shareholder's written demand that PICO
purchase for cash shares voted against the Transaction.
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It is a condition of PICO's obligations under the Combination Agreement
that rights of dissent shall not have been exercised in respect of more than 5%
of the outstanding PICO Shares unless same shall have been abandoned.
ADDITIONAL MATTERS FOR CONSIDERATION BY PICO SHAREHOLDERS
ELECTION OF DIRECTORS OF PICO
The PICO Board is divided into three classes, with the terms of office
of each class ending in successive years. Three directors of PICO are to be
elected for terms ending at the annual meeting of PICO Shareholders in the year
2001 or until their respective successors have been duly elected and qualified.
Unless otherwise instructed, the proxy holders named on the enclosed
form of proxy intend to distribute the votes represented by proxies in such
proportions as they deem desirable to elect a maximum of the three nominees
named below or their substitutes. Although it is not contemplated that any
nominee will decline or be unable to serve, if either occurs prior to the PICO
Shareholders' Meeting, a substitute nominee will be selected by the PICO Board.
See "Additional Information Regarding PICO - Security Ownership of Certain
Beneficial Owners and Management" for the number of shares of PICO Common Stock
beneficially owned by these nominees.
In voting for the election of directors, PICO Shareholders have
cumulative voting rights. Accordingly, each PICO Shareholder may cumulate such
voting power as such PICO Shareholder possesses and give one candidate a number
of votes equal to the number of directors to be elected multiplied by the number
of PICO Shares held by the PICO Shareholder, or distribute such PICO
Shareholder's votes on the same principle among two or more candidates, as such
PICO Shareholder sees fit. However, no PICO Shareholder is entitled to cumulate
votes (in other words, cast for any candidate a number of votes greater than the
number of PICO Shares held by such PICO Shareholder) unless at least one PICO
Shareholder has given notice, at the PICO Shareholders' Meeting prior to the
voting, of the PICO Shareholder's intention to cumulate votes. If any PICO
Shareholder has given such notice, all PICO Shareholders may cumulate their
votes for candidates in nomination.
As a result of the resignations of two directors there currently exists
two vacancies on the PICO Board. The term of one of these directors would have
expired at the PICO Shareholders' Meeting of PICO Shareholders in 2000, and the
term of the other director who resigned would have expired at the PICO
Shareholders' Meeting of PICO Shareholders in 1998. The PICO Board has nominated
an individual for election at the PICO Shareholders to fill the vacancy in the
class of directors with a term expiring at the PICO Shareholders' Meeting.
However, the PICO Board has not nominated anyone to fill the vacancy in the
class of directors whose term expires in 2000. A majority of the directors may
nevertheless elect to fill this vacancy at any time in the future without
shareholder approval. Notwithstanding this vacancy, proxies may not be voted for
a greater number of persons than the number of nominees named.
The nominees for election as directors receiving the highest number of
votes, up to the number of directors to be elected, shall be elected. THE PICO
BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE NOMINEES STANDING FOR ELECTION
TO THE PICO BOARD LISTED BELOW.
The following table sets forth information regarding the nominees for
election as directors and the other directors whose terms of office will
continue after the PICO Shareholders' Meeting, including their ages, a brief
description of their business experience, certain directorships held by each of
them and the year in which each became a director of PICO.
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<TABLE>
<CAPTION>
DIRECTOR NAME BUSINESS EXPERIENCE AGE SINCE
- - - ------------------------------------- ---------------------------------------------------- ------- -------------
<S> <C> <C> <C>
NOMINEES STANDING FOR ELECTION FOR
TERMS ENDING IN 2001:
Robert R. Broadbent Retail consultant since 1989; Chairman of Higbee 76 1996
Company from 1984 to 1989; President, CEO,
Director and Vice Chairman of the Higbee Company
from 1979 to 1984; President and Chief Executive
Officer of Liberty House - Mainland from 1976 to
1978; Chairman and CEO of Gimbel?s from 1973 to
1976; Director of Physicians from 1993 to 1995.
Carlos C. Campbell President of C.C. Campbell & Company, Reston, 61 N/A
Virginia, since 1985; Director of Resource
America, Inc., Fidelity Leasing, Inc., Fidelity
Mortgage Funding, Inc., and Passport Health
David A. Williams CEO of Beutel Goodman & Co. Ltd. from 1991 to 56 N/A
1995; President, Roxborough Holdings Limited,
Toronto, Ontario since 1995; Director of Global
Equity Corporation, Enhanced Marketing Services,
Equisure Financial Network, FRI Corporation,
Krystal Bond Corporation, Octagon Industries Ltd.,
Phoenix Duff and Phelps Corp., Pinetree Capital
Corporation, MicroPulse Inc., Radiant Energy
Corporation, and Signature Brands Ltd.
</TABLE>
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<PAGE> 90
<TABLE>
<CAPTION>
DIRECTOR NAME BUSINESS EXPERIENCE AGE SINCE
- - - ------------------------------------- ---------------------------------------------------- ------- -------------
<S> <C> <C> <C>
DIRECTORS WITH TERMS ENDING 2000:
S. Walter Foulkrod, III, Esq. Attorney; owner of S. Walter Foulkrod, III & 56 1996
Associates, Attorneys at Law, Harrisburg PA, since
1994; President and Chairman of Foulkrod, Reynolds
& Havas, PC, from 1984 to 1994; Director
of Physicians since 1988.
Richard D. Ruppert, MD Physician; President of Medical College of Ohio 67 1996
from 1978 to 1993; President of American Society
of Internal Medicine from 1992 to 1993; Director
of Physicians since 1988.
DIRECTORS WITH TERMS ENDING 1999:
John R. Hart President of Quaker Holdings Limited, an 38 1996
investment company, since 1991; Principal with
Detwiler, Ryan & Company, Inc., an investment
banking firm, from 1982 to 1991; Director of
Physicians since 1993; President and CEO of
Physicians since 1995; President and CEO and
Director of Global Equity Corporation since 1995;
Director of PC Quote, Inc.
Ronald Langley Director of Physicians since 1993; Chairman of 54 1996
Physicians since 1995; Chairman and Director of
Global Equity Corporation since 1995; Chairman of
Summit Global Management, Inc. since 1994;
Director of PC Quote, Inc. and MC Shipping, Inc.
John D. Weil President, Clayton Management Company, a strategic 57 1996
investment company; Director of Todd Shipyards
Corporation; Cliffs Drilling Company, CleveTrust
Realty Investors, Oglebay Norton Company, Southern
Investors Service Company, Inc., Allied Health
Products, Inc., and Baldwin & Lyons, Inc.
</TABLE>
Committees of the Board of Directors of PICO
The PICO Board has an Executive Committee, an Audit Committee, a
Compensation Committee, and a Nominating Committee.
During 1997, the Executive Committee consisted of Messrs. Langley
(Chairman), Hart, and Weil. The Executive Committee may exercise substantially
all the powers vested in the PICO Board except for certain actions as prescribed
by California law. The Executive Committee did not meet during 1997.
During 1997, the Audit Committee consisted of Dr. Burak (Chairman), Mr.
Foulkrod, and Dr. Ruppert, none of whom has been or is an officer or employee of
PICO. In 1997, the Committee met seven times. The functions of the Audit
Committee include reviewing the accounting principles and practices employed by
PICO and its Subsidiaries; meeting with PICO's auditors to review their reports
on their audits of PICO's financial statements, their comments on the internal
accounting controls of PICO and the action taken by management
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<PAGE> 91
with regard to such comments; and recommending annually to the PICO Board the
appointment of PICO's independent auditors. The Audit Committee has the
authority, in its discretion, to order interim and unscheduled audits and to
perform such other duties as may be assigned to it from time to time by the PICO
Board.
During 1997, the Compensation Committee consisted of Mr. Weil
(Chairman), Mr. Foulkrod, and Dr. Ruppert, none of whom has been or is an
officer or employee of PICO. In 1997, the Committee met four times. The
functions of the Compensation Committee include reviewing and approving the
overall executive compensation packages and recommending to the PICO Board
modifications of the compensation package for the Chief Executive Officer. The
Compensation Committee's goals are to attract and retain key executives critical
to the long-term success of PICO, to reward executives for the long-term success
of PICO and the enhancement of PICO Shareholder value, and to integrate
executive compensation with both annual and long-term financial results of PICO.
During 1997, the Nominating Committee consisted of Mr. Langley
(Chairman), Mr. Hart, and Dr. Ruppert. In 1997, the Nominating Committee met
once. The Committee will consider nominees recommended by PICO Shareholders;
such recommendations must be submitted in writing to the Nominating Committee.
Directors' Attendance
In 1997, there were three meetings of the Board of Directors of PICO.
All of the directors attended 75% or more of the aggregate of their respective
PICO Board and Committee meetings.
Directors' Compensation
In 1997, the base fee for serving as a director of PICO was U.S.$10,000
annually. The fee for each Committee meeting attended in person was U.S.$1,000,
while the fee for each telephonic Committee meeting was up to U.S.$500 in the
discretion of the Committee's Chairman. There was an overall limitation of
U.S.$3,000 per day for Committee fees.
Officers and employees are not eligible to receive PICO Board or
Committee fees.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires PICO's executive officers,
directors and persons who beneficially own more than 10% of PICO's Shares to
file initial reports of ownership and reports of changes in ownership with the
SEC. Such persons are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms filed by such persons.
Based on a review of the copies of these reports received by PICO and
written representations from certain reporting persons that they have complied
with the relevant filing requirements, PICO believes that all filing
requirements have been complied with on a timely basis for the fiscal year ended
December 31, 1997.
APPOINTMENT OF INDEPENDENT AUDITORS OF PICO
The PICO Board is seeking Shareholder ratification of its selection of
Deloitte & Touche LLP to serve as PICO's auditors for the fiscal year ending
December 31, 1998. Deloitte & Touche LLP has previously served as the auditors
of PICO since July 1997. It is anticipated that representatives of Deloitte &
Touche LLP will attend the PICO Shareholders' Meeting, will have the opportunity
to make any statements they may desire, and will be available to respond to
appropriate questions from PICO Shareholders. Approval of this proposal requires
the affirmative vote of the holders of a majority of the PICO Shares represented
and voting at the PICO Shareholders' Meeting. THE PICO BOARD RECOMMENDS A VOTE
"FOR" THIS PROPOSAL.
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<PAGE> 92
REVERSE STOCK SPLIT
The PICO Board believes that the best interests of PICO and its
shareholders will be served by effecting a one-for-five reverse stock split (the
"Reverse Split") of the issued and outstanding PICO Shares. THE PICO BOARD HAS
UNANIMOUSLY APPROVED AND RECOMMENDS A VOTE "FOR" THIS PROPOSAL.
If the Reverse Split is approved, it will be effected by amending
Section A of Article III of the PICO Articles to add the following sentence:
"Upon amendment of the Amended and Restated Articles of Incorporation, every
five shares of Common Stock issued and outstanding shall be converted into one
share of Common Stock." If the PICO Shareholders approve this proposal, the
Reverse Split shall become effective immediately after the consummation of the
Transaction with GEC (the "Reverse Split Effective Date"). As a result, the PICO
Shares issuable to the GEC Shareholders will be affected by the Reverse Split in
the same fashion as all other outstanding shares of PICO Common Stock. That is,
if the resolution approving the Reverse Split is approved, GEC Shareholders will
receive a certificate for such number of PICO Shares as they otherwise would
have been entitled to pursuant to the Arrangement divided by five (i.e. adjusted
to give effect to the Reverse Split), together with a cheque for the cash which
such holder is entitled as a result of the Reverse Split.
The proposed Reverse Split will not affect any shareholder's
proportionate equity interest in PICO or the rights, preferences, privileges or
priorities of any shareholder, other than an adjustment which may occur due to
the payment of cash for fractional shares. Likewise, the proposed Reverse Split
will not affect the total shareholders' equity of PICO except to change the
numbers of the issued and outstanding shares of capital stock. However, because
the number of shares of capital stock that PICO is authorized to issue will not
be decreased in proportion to the decrease in the number of issued shares, the
number of shares which are authorized but unissued, and the percentage of
ownership of PICO represented by such shares if they are issued in the future in
the discretion of the Board of Directors, effectively will be increased.
The following table illustrates the principal effects on PICO's capital
stock of the Reverse Split (based upon the Exchange Ratio and assuming the
Transaction is also approved):
<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES OF
PICO CAPITAL STOCK PICO CAPITAL STOCK
PRIOR TO REVERSE SPLIT AFTER REVERSE SPLIT
------------------------------ -------------------------
<S> <C> <C>
COMMON
- - - ------
Authorized............................... 100,000,000 100,000,000
Issued and outstanding (including
outstanding PICO Shares held by PICO
Affiliates)(1)........................... 66,643,848 13,328,770
Available for future issuance............ 33,356,152 86,671,230
PREFERRED
- - - ---------
Authorized............................... 2,000,000 2,000,000
Issued and Outstanding................... 0 0
Available for future issuance............ 2,000,000 2,000,000
</TABLE>
(1) Includes PICO Shares issuable upon conversion of GEC Shares. Excludes
(i) 4,997,103 PICO Shares issuable upon exercise of outstanding options
including those issuable in the Transaction (999,420 PICO Shares after
the Reverse Split) and (ii) 1,115,933 PICO Shares issuable upon
exercise
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<PAGE> 93
of outstanding PICO warrants issuable in the Transaction
(223,187 PICO Shares after the Reverse Split), each as of
June 30, 1998.
Exchange Of Shares; No Fractional Shares
Pursuant to the Reverse Split, every five issued and outstanding PICO
Shares would be converted and reclassified into one post-split PICO Share, and
any fractional interests resulting from such reclassification would be paid in
cash. For example, a holder of 100 shares prior to the Reverse Split Effective
Date would be the holder of 20 shares at the Reverse Split Effective Date; a
holder of 101 shares prior to the Reverse Split Effective Date would be the
holder of 20 shares at the Reverse Split Effective Date and would receive a cash
payment for the fair market value of the one-fifth share otherwise issuable.
Shareholders will be notified after the Reverse Split Effective Date that the
Reverse Split has been effected. PICO's transfer agent, Harris Trust and Savings
Bank will act as the exchange agent (the "Exchange Agent") for shareholders in
implementing the exchange of their certificates and payments for fractional
shares.
As soon as practicable after the Reverse Split Effective Date,
shareholders will be notified and provided the opportunity (but shall not be
obligated) to surrender their certificates to the Exchange Agent in exchange for
certificates representing post-split PICO Shares. Except for the PICO Shares
issuable in exchange for the GEC Shares, shareholders will not receive
certificates for post-split PICO Shares unless and until the certificates
representing their pre-split PICO Shares are surrendered and they provide such
evidence of ownership of such PICO Shares as the Exchange Agent may require.
Certificates for the PICO Shares issuable upon conversion of the GEC Shares will
be adjusted for the Reverse Split and will be issued after surrender of the GEC
Shares pursuant to the Letter of Transmittal. Shareholders should not forward
their certificates to the Exchange Agent until they have received notice from
PICO that the Reverse Split has become effective. Beginning on the Reverse Split
Effective Date, each certificate representing pre-split PICO Shares will be
deemed for all purposes to evidence ownership of the appropriate number of
post-split PICO Shares. No service charge will be payable by shareholders in
connection with the exchange of certificates.
Shareholders have no right under California law to dissent from the
Reverse Split or from the payment of cash for fractional interests resulting
from the Reverse Split.
Purposes Of The Reverse Split And Effective Increase In Authorized
Shares
The primary objectives of the Reverse Split are to increase the per
share market value of the PICO Shares.
The PICO Board believes that the current price of the PICO Shares may
reduce the effective marketability of the PICO Shares because of the reluctance
of certain brokerage firms to recommend the purchase of lower-priced stocks to
their clients. Certain institutional investors have internal policies preventing
the purchase of lower-priced stocks and many brokerage houses do not permit
lower-priced stocks to be used as collateral for margin accounts. Further, a
number of brokerage houses have policies and practices that tend to discourage
individual brokers within those firms from dealing in lower-priced stocks. Some
of those policies and practices pertain to the payment of brokers' commissions
and to time-consuming procedures that function to make the handling of
lower-priced stocks unattractive to brokers from an economic standpoint. In
addition, the structure of certain trading commissions tends to have an adverse
impact upon holders of lower-priced stocks because the brokerage commission on a
sale of lower-priced stocks frequently represents a higher percentage of the
sales price than the commission on a relatively higher-priced stock.
The PICO Board believes that the low per share market price of the PICO
Shares impairs the marketability of the PICO Shares to institutional investors
and members of the investing public and creates a negative impression with
respect to PICO. Many investors and market makers look upon lower priced stocks
as unduly speculative in nature and, as a matter of policy, avoid investment and
trading in such stocks. The foregoing factors adversely affect both the pricing
and the liquidity of the PICO Shares. Thus, the potential increase in trading
price resulting from the Reverse Split is expected to be attractive to the
financial community and the investing public and in the best interests of the
PICO Shareholders.
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<PAGE> 94
The PICO Shares are currently listed on the Nasdaq, which has a minimum
bid requirement of U.S.$5.00 per share and certain criteria for continued
qualification for such listing. The Company anticipates that the Reverse Split
will have the effect of increasing the minimum bid price of the PICO Shares to a
level that would permit them to satisfy the applicable minimum bid price
criteria for continued listing. Further, the PICO Board has been advised that
certain securities firms limit the extension of margin credit for, and otherwise
discourage their registered representatives from recommending, the purchase of
corporate securities that have a market value of less than U.S.$5.00 per share.
Under the margin regulations of the Federal Reserve Board, brokers, financial
institutions and certain other lenders may extend credit for the purchase of
margin stock in an amount not to exceed 50% of the market value of such shares.
For purposes of these regulations, the market value of the PICO Shares is the
closing price as reported by the Nasdaq on the day preceding the extension of
credit. To increase the per share market value, satisfy the Nasdaq continued
listing criteria and increase the likelihood of marginability of the PICO
Shares, the PICO Board has determined that the Reverse Split would be in the
best interests of PICO and its shareholders.
The PICO Board believes that the decrease in the number of PICO Shares
outstanding as a consequence of the Reverse Split, and the resulting anticipated
increased price level, will stimulate additional interest in the PICO Shares and
possibly promote greater liquidity for the PICO Shareholders. There can be no
assurance, however, that there will be any greater liquidity, and it is possible
that the liquidity could even be adversely affected by the reduced number of
PICO Shares which would be outstanding after the Reverse Split is effected.
If the Reverse Split becomes effective, PICO expects the quoted market
price of the PICO Shares to increase as a result of decreasing the number of
shares outstanding,without altering the aggregate economic interest in PICO
represented by such shares. The PICO Board believes that the increased price
would be a more appropriate trading price for a company that is traded on the
Nasdaq or a stock exchange. In addition, the increase in the market price may
serve to mitigate the present reluctance, policies and practices on the part of
brokerage firms referred to above and diminish the adverse impact of trading
commissions on the potential market for the PICO Shares. There can be no
assurance, however, that the Reverse Split will achieve these desired results,
that any such increase would be in proportion to the one-for-five Reverse Split
ratio or that the per share price level of the PICO Shares immediately after the
proposed Reverse Split can be maintained for any period of time.
The Reverse Split may result in some shareholders owning "odd lots" of
less than 100 shares. The costs, including brokerage commissions, of
transactions in odd lots are generally higher than the costs in transactions in
"round lots" of even multiples of 100.
As a result of the effective increase in the number of shares of PICO
Shares which are authorized but unissued, and in the percentage of ownership of
PICO represented by such shares if they are issued in the future in the
discretion of the PICO Board, PICO will have additional PICO Shares authorized
and available for issuance as the need arises for possible future financing
transactions, mergers or acquisitions, stock dividends or splits, issuances
under any stock option plans that may be adopted in the future,and other general
corporate purposes. The PICO Board believes that the effective increase in the
number and percentage of authorized but unissued shares will provide PICO
additional flexibility to issue additional PICO Shares to meet PICO's future
financing needs. In order to avoid the delay and expense involved in obtaining
shareholder approval, the PICO Board believes it to be in the best interests of
PICO and its shareholders to have PICO Shares authorized and available for
issuance without further action by the shareholders. Shareholders have no
preemptive rights with respect to the additional authorized PICO Shares. Such
PICO Shares may be issued on such terms, at such times and on such conditions as
the PICO Board may determine in its discretion.
Although the Reverse Split and the effective increase in the number and
percentage of authorized but unissued shares of PICO Common Stock are not
intended to be anti-takeover devices, the effective increase in the authorized
capital together with a subsequent issuance of equity securities could impede a
potential takeover for various reasons including, but not limited to, diluting
the stock ownership of persons attempting to gain control of PICO and issuing
securities to individuals or entities favourable to management.Moreover, the
availability of such additional PICO Shares in and of itself might have the
effect of discouraging an attempt to acquire control of PICO other than through
negotiations with the PICO Board. PICO has no plans to adopt
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<PAGE> 95
any additional measures, other than the Reverse Split, which may be deemed to be
anti-takeover devices. The PICO Board is not aware of any present efforts by any
person to accumulate PICO's capital stock or to obtain control of PICO through
tender offer, merger or other business combination, proxy contest or otherwise.
The PICO Board has not formulated any program, nor entered into any agreement or
understanding, and has no current intention, to issue any unissued and
unreserved shares of PICO Common Stock for the purpose of impeding or preventing
any proposed takeover.
Effect of Reverse Split on PICO Warrants
Under the terms of the PICO Warrant Indenture, each whole PICO Warrant,
which when issued entitles the holder thereof to purchase one pre-Reverse Split
PICO Share for U.S.$4.76, will be adjusted (without any action on the part of
PICO or the holder) such that, immediately following the Reverse Split, each
whole PICO Warrant will entitle the holder to purchase one post-Reverse Split
PICO Share for U.S.$23.80.
Certain U.S. Income Tax Consequences
In the opinion of Gray Cary Ware & Freidenrich LLP, United States
counsel to PICO, the following is a summary of the U.S. income tax consequences
of the Reverse Split is set forth below. The discussion is based on the current
federal income tax law. The discussion is not intended to be, nor should it be
relied on as, a comprehensive analysis of the tax issues arising from or
relating to the Reverse Split. Income tax consequences to PICO shareholders may
vary from the U.S. tax consequences described generally below. SHAREHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE EFFECT OF THE CONTEMPLATED
REVERSE SPLIT UNDER APPLICABLE FEDERAL, STATE AND LOCAL INCOME TAX LAWS.
The Reverse Split constitutes a "recapitalization" to PICO and its
shareholders to the extent that issued PICO Shares are exchanged for a reduced
number of PICO Shares. Therefore, neither PICO nor its shareholders will
recognize any gain or loss for federal income tax purposes as a result thereof,
except to the extent of any cash issued as payment for fractional shares.
The PICO Shares to be issued to each shareholder will have an aggregate
basis,for computing gain or loss, equal to the aggregate basis of the shares of
such stock held by such shareholder immediately prior to the Reverse Split
Effective Date. A shareholder's holding period for the PICO Shares to be issued
will include the holding period for the PICO Shares held thereby immediately
prior to the Reverse Split Effective Date provided that such shares were held as
capital assets on the Reverse Split Effective Date.
Vote Required For Reverse Split
The affirmative vote of holders of a majority of the outstanding PICO
Shares eligible to vote is required for approval of the Reverse Split. THE PICO
BOARD RECOMMENDS A VOTE "FOR" APPROVAL OF THE REVERSE SPLIT.
OTHER BUSINESS
Management of PICO does not intend to bring any business before the
PICO Shareholders' Meeting other than the matters referred to in the
accompanying notice. If, however, any other matters properly come before the
meeting, it is intended that the persons named in the accompanying proxy will
vote pursuant to the proxy in accordance with their best judgment on such
matters to the extent permitted by applicable law and regulations. The
discretionary authority includes matters which the PICO Board does not know are
to be presented at the PICO Shareholders' Meeting by others and any proposal of
PICO Shareholders omitted from the proxy material pursuant to Rule 14a-8 of the
SEC.
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<PAGE> 96
ADDITIONAL MATTERS FOR CONSIDERATION BY GEC SHAREHOLDERS
Management of GEC does not intend to bring any business before the GEC
Shareholders' Meeting other than the matters referred to in the accompanying
notice. If, however, any other matters properly come before the meeting, it is
intended that the persons named in the accompanying proxy will vote pursuant to
the proxy in accordance with their best judgment on such matters to the extent
permitted by applicable law and regulations. The discretionary authority
includes matters which the GEC Board does not know are to be presented at the
GEC Shareholders' Meeting by others.
ADDITIONAL INFORMATION REGARDING PICO
(ALL AMOUNTS IN U.S. DOLLARS, UNLESS OTHERWISE INDICATED)
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
for fiscal year 1997 of the (i) Chief Executive Officer of PICO (ii) the
executive officers of PICO as of December 31, 1997 (Messrs. Langley, Hart,
Sharpe, Burchfield and Mosier are sometimes hereinafter referred to as "Named
Officers"). Amounts under the caption "Bonus" are amounts earned for performance
during the year including amounts paid after the end of the year.
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<PAGE> 97
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- - - ----------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM
COMPENSATION AWARDS
- - - ----------------------------------------------------------------------------------------------------------------------
SECURITIES
UNDERLYING
OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (SHARES) COMPENSATION
- - - ----------------------------------------------------------------------------------------------------------------------
CHIEF EXECUTIVE OFFICER:
<S> <C> <C> <C> <C> <C>
John R. Hart(1)(2)
President and Chief 1997 $800,000 -0- -0- -0-
Executive Officer 1996 $300,000(3) $450,000 876,733(4) -0-
1995 $197,000 -0- -0- -0-
- - - ----------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS(2):
Ronald Langley(5)
Chairman of the 1997 $800,000 -0- -0- -0-
Board of Directors 1996 $300,000(3) $450,000 876,733(4) -0-
1995 $197,000 -0- -0- -0-
- - - ----------------------------------------------------------------------------------------------------------------------
Richard H. Sharpe(6) 1997 $165,317 $18,340 -0- $ 18,743(7)
Chief Operating Officer 1996 $139,264 $28,000 300,594(4) $ 14,362(7)
1995 $139,376 -0- -0- $7,590(7)
- - - ----------------------------------------------------------------------------------------------------------------------
Gary W. Burchfield(8) 1997 $135,000 $13,500 -0- $15,618(7)
Chief Financial Officer 1996 $102,170 $35,000 210,416(4) $10,506(7)
and Treasurer 1995 $92,084 -0- -0- $9,338(7)
- - - ----------------------------------------------------------------------------------------------------------------------
James F. Mosier(9) 1997 $113,017 $12,570 -0- $12,796(7)
General Counsel and Secretary 1996 $82,835 $27,000 210,416(4) $8,497(7)
1995 $80,952 -0- -0- $8,807(7)
- - - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Mr. Hart became President and CEO of Physicians on July 15, 1995. Prior
to that time he was not an officer of Physicians. He became President
and CEO of PICO on November 20, 1996.
(2) Includes compensation received from Physicians prior to November 20,
1996 as well as compensation received from PICO.
(3) Mr. Langley and Mr. Hart were each compensated $533,328 by PICO for
consulting services in 1997 in the areas of investment banking,
investment portfolio analysis, and analysis of operations. In addition,
Mr. Langley and Mr. Hart entered into consulting agreements with a
Subsidiary of GEC for annual compensation of $266,672 each for
consulting services in the areas of investment banking, investment
portfolio analysis, and analysis of operations. On December 31, 1997,
Mr. Langley and Mr. Hart each signed employment agreements with PICO
and a Subsidiary of GEC on terms substantially similar to the
consulting agreements.
(4) Options issued by Physicians prior to the November 1996 Merger under
the Physicians Insurance Company of Ohio 1995 Non-Qualified Stock
Option Plan and assumed by PICO upon the merger of Physicians and CIG.
All options are fully vested.
(5) Mr. Langley became Chairman of the board of directors of Physicians on
July 15, 1995. Prior to that time he was not an officer of Physicians.
He became Chairman of the Board of Directors of PICO on November 20,
1996.
(6) Mr. Sharpe became Chief Operating Officer of Physicians on June 3,
1994. He became Chief Operating Officer of PICO on November 20, 1996.
(7) Represents amounts contributed by PICO to the PICO Holdings,
Inc. Employees 401(k) Retirement Plan and Trust.
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<PAGE> 98
(8) Mr. Burchfield became Chief Financial Officer and Treasurer of
Physicians on November 3, 1995. He became Chief Financial Officer and
Treasurer of PICO on November 20, 1996.
(9) Mr. Mosier has been Secretary of Physicians Insurance Company of Ohio
since 1982 and General Counsel since 1984. He became General Counsel
and Secretary of PICO on November 20, 1996.
Option Grants In Last Fiscal Year
No grants of options to purchase PICO's Common Stock were made during
the year ended December 31, 1997 to any of the persons named in the Summary
Compensation Table.
Option Exercises and Fiscal 1997 Year-End Value
The following table provides information concerning options held as of
December 31, 1997 by the persons named in the Summary Compensation Table. No
options were exercised in 1997 by such individuals.
Aggregate Option Exercises in Last Fiscal Year And Fiscal Year-End
Option Values
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY-OPTIONS
AT DECEMBER 31, 1997 AT DECEMBER 31, 1997(1)
--------------------------------------------- -------------------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - - ----------------------- ----------------------- -------------------- ----------------------- ------------------
<S> <C> <C> <C> <C>
John R. Hart 876,733 -0- $3,285,556 -0-
Ronald Langley 876,733 -0- $3,285,556 -0-
Richard H. Sharpe 300,594 -0- $1,126,476 -0-
Gary W. Burchfield 210,416 -0- $ 788,533 -0-
James F. Mosier 210,416 -0- $ 788,533 -0-
</TABLE>
Note:
(1) Based on the closing price of PICO Common Stock on December 31, 1997 on
the Nasdaq National Market of $6.4375 per share.
Employment and Change in Control Arrangements
Mr. Langley and Mr. Hart each entered into employment agreements
effective December 31, 1997 with PICO and a wholly-owned subsidiary of GEC, each
for a term of four years (the employment agreements with the subsidiary of GEC
are described below under "Additional Information Regarding GEC-Executive
Compensation-Remuneration Contracts"). Total compensation to each of Mr. Langley
and Mr. Hart under these employment agreements is $800,000 each on an annual
basis. These employment agreements include a change in control clause providing
that if there is a change of control before December 31, 1999, PICO shall
immediately pay each employee a total lump sum of $2.4 million and an amount
equal to three times the highest annual bonus paid to the employee in the last
three years. The change of control provision in the employment agreements of Mr.
Langley and Mr. Hart will not be triggered if the Transaction is consummated.
Compensation Committee Interlocks and Insider Participation
Messrs. Weil and Foulkrod, and Dr. Ruppert, serve as members of the
Compensation Committee of PICO (the "Compensation Committee"). Mr. Langley and
Mr. Hart have been directors and executive officers of GEC since September 5,
1995.
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<PAGE> 99
Report of the Compensation Committee
This report of the Compensation Committee and the Stock Price
Performance Graph set forth below, shall not be deemed incorporated by reference
by any general statement incorporating by reference this proxy statement into
any filing under the Securities Act or under the Exchange Act except to the
extent that PICO specifically incorporates this information by reference, and
shall not otherwise be deemed filed under the Securities Act or the Exchange
Act.
Committee Members
The three-member Compensation Committee of the PICO Board is a standing
committee composed entirely of outside directors. Mr. Weil is the chairman and
Mr. Foulkrod and Dr. Ruppert are the other members.
Committee Functions
The Compensation Committee is responsible for assuring that all of the
executive compensation programs of PICO are developed, implemented, and
administered in a way that supports PICO's fundamental philosophy that a
significant proportion of executive compensation should be effectively linked to
company performance.
The Compensation Committee meets on a regularly scheduled basis. It
reviews and approves the overall executive compensation program which includes
both base pay and incentive compensation. It considers and approves individual
executive officer compensation packages based on recommendations of PICO's Chief
Executive Officer. It recommends, for the approval of the full PICO Board, any
modification to the compensation package of PICO's Chief Executive Officer.
Executive Compensation Philosophy
The Board of Directors of Physicians retained an independent
compensation expert, William M. Mercer, Incorporated ("Mercer"). In 1996, Mercer
conducted an analysis of marketplace executive compensation levels. The scope of
Mercer's study covered PICO's Chairman and President and Chief Executive
Officer. The objectives of Mercer's study were as follows:
- - - - Analyze the scope, responsibilities and skill requirements of the jobs
performed by Messrs. Langley and Hart and compare and contrast to
comparable benchmark executive positions found in the marketplace.
- - - - Develop an appropriate methodology for selecting comparable benchmark
jobs, industry categories and a peer group of companies comparable to
PICO in terms of business focus, industry classification and size; and
competing for senior executives with the skills, expertise and talent
demonstrated by PICO's top two executives.
- - - - For the appropriate benchmark jobs, industry category and peer company
group, collect information on marketplace compensation levels and
practices from compensation surveys and peer company proxy statements.
The companies included in the peer company group are not necessarily
those included in the Nasdaq Insurance Stock Index. Determine the most
relevant marketplace compensation levels and to compare actual PICO
compensation levels.
- - - - Develop alternate approaches for structuring the total compensation
package for PICO's top two executives, in terms of compensation
elements to be used, the mix of total pay and how short and long term
incentive compensation might be structured to accurately reflect
performance.
Mercer's study recommended to the Compensation Committee a compensation
strategy with the following objectives:
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- - - - To provide a total compensation package that:
- is competitive with market rates for executives with similar
skill, talent and job requirements.
- is closely linked to PICO's strategy and the role of covered
executives in building shareholder value through growing the
book value and, ultimately, the market value of PICO.
- - - - To retain critical executive talent by:
- providing a reasonable and competitive level of current income
(cash flow).
- providing for loss of future incentive opportunity if an
executive terminates employment before unrealized investment
gains are realized.
- - - - To link executive rewards to shareholder interests by:
- tying incentive awards to growth in book value which
ultimately translates into increased market price per share
(as investments are liquidated for gains, and PICO grows
earnings).
- granting additional stock options in the future once current
options are exercised or expire.
The Compensation Committee believes that to accomplish these goals, the
executive compensation program should be based on three distinct components:
base pay, annual incentives, and long-term incentives. PICO obtains industry and
peer group surveys, and consults with independent experts, to evaluate PICO's
executive compensation programs in comparison with those offered by its
comparable competitors.
The Compensation Committee has considered amendments to the U.S. Code
denying deductions for annual compensation to certain executives in excess of $1
million, subject to certain exceptions. PICO's compensation structure has been
such that it does not believe that it is likely that the $1 million cap will
affect PICO in the near future. The Internal Revenue Service has issued proposed
regulations which, among other things, provide for a transition period of three
years for plans previously approved by PICO Shareholders. PICO is studying the
proposed regulations, but has not yet determined what steps may be required or
desirable with respect to its existing plans.
Executive Compensation Program
The features of the executive compensation program as recommended by
Mercer and approved by the Compensation Committee are:
BASE COMPENSATION. A fixed rate, to be reviewed annually. Future
adjustments will take into account movement in executive compensation levels,
changes in job responsibilities, and the size of PICO and GEC. Two-thirds of
base compensation is to be paid by PICO and one-third by GEC.
INCENTIVE AWARDS. Based on growth of book value per share in a fiscal
year. Awards are earned when a pre-determined threshold is surpassed. If book
value per share of PICO or GEC exceeds this threshold the incentive award is
equal to 5% of the increase in book value per share multiplied by the number of
shares outstanding at the beginning of the fiscal year. The threshold for 1997
was 16%.
In addition the Board of Directors of Physicians granted options under
the Physicians Insurance Company of Ohio 1995 Non-Qualified Stock Option Plan.
The options granted under this option plan were designed to reinforce the
relationship between PICO's future performance and the executive's potential
future financial rewards. These options were assumed by PICO on November 20,
1996.
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Goals of Compensation Committee
The Compensation Committee attempts to align executive compensation
with the value achieved by the executives for PICO Shareholders. PICO's
compensation program for executives emphasizes a combination of base salary,
discretionary bonuses, and stock options designed to attract, retain, and
motivate executives who will maximize shareholder value. The Compensation
Committee considers individual and company performance, as well as compensation
paid by comparable companies.
Executives also participate in other employee benefit programs,
including health insurance, group life insurance, and PICO's 401(k) Plan.
Discussion of 1997 Compensation for the Chief Executive Officer
As discussed above, in 1997 the Chief Executive Officer received fixed
consulting fees from Physicians and a Subsidiary of GEC. No bonus was paid with
respect to PICO's performance in 1997 and no new options were granted in 1997.
The Compensation Committee recommended to the PICO Board, and the PICO Board
accepted the recommendation, that it was appropriate for the chief executive
officer and the chairman to be compensated as employees, rather than as
consultants. Accordingly, effective December 31, 1997, the chief executive
officer and chairman entered into employment agreements with PICO and a
wholly-owned Subsidiary of GEC each for a term of four years. The terms of these
employment agreements are substantially similar to the terms of the consulting
agreements.
August 20, 1998
Compensation Committee
John D. Weil, Chairman
S. Walter Foulkrod, III, Esq.
Richard D. Ruppert, MD
STOCK PRICE PERFORMANCE
For a comparison of the cumulative total return of PICO, the Nasdaq
Insurance Stock Index and the Nasdaq Stock Market (U.S. Companies) for the
period January 1, 1993 through December 31, 1997, see page 9 of the PICO form
10K/A for the year ended December 31, 1997, included in Annex E to this Joint
Proxy Statement.
The table below compares the stock prices of PICO and Physicians and
the Nasdaq Insurance Stocks Index, and the Nasdaq Stock Market Index (U.S.
Companies) as of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996 1997
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PICO Holdings $ 4.13 $ 6.44
Physicians $ 0.92 $ 0.65 $ 1.05 $ 6.34
NASDAQ 676.95 776.82 751.96 1,052.41 1,291.03 1,570.352
NASDAQ Insurance Stocks 803.91 920.59 925.87 1,292.64 1,465.43 1,797.95
Index
</TABLE>
On November 20, 1996, Physicians merged with a wholly-owned subsidiary of
Citation Insurance Group which was renamed PICO Holdings, Inc. The data from
November 20, 1996 represents the historical performance of
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PICO Shares. Accordingly, it does not represent the historical stock performance
of Citation Insurance Group. The graph represents the historical stock
performance of the companies managed by the current PICO management since the
change in strategic directory of Physicians in June, 1993.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of October ?, 1998, with
respect to the beneficial ownership of PICO's Shares entitled to vote by each
person known by PICO to be the beneficial owner of more that 5% of PICO Shares,
and by each director and director nominee, each Named Officer and all executive
officers, and directors as a group. Except as otherwise indicated, each person
has sole investment and voting power, subject to community property laws. As of
October ?, 1998, there were 32,591,718 PICO Shares issued and outstanding of
which 4,572,015 are held by Subsidiaries of PICO, and may therefore not be voted
under California law.
<TABLE>
<CAPTION>
NUMBER OF SHARES AND PERCENTAGE OWNERSHIP OF
NATURE OF BENEFICIAL VOTING SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1)
- - - ---------------------------------------------------------- --------------------------- -------------------------
<S> <C> <C>
GEC(2)(3) 4,258,415 Nil
80 Richmond Street West, #1805
Toronto, Ontario
Canada M5H 2A4
John R. Hart (4) 1,908,847 6.81%
La Jolla, California
Ronald Langley (4) 1,911,520 6.82%
La Jolla, California
Robert R. Broadbent 20,039 (5)
Cleveland, Ohio
Dr. Marshall J. Burak -0- (5)
San Jose, California
Carlos C. Campbell -0- (5)
Reston, Virginia
David A. Williams -0- (5)
Toronto, Ontario
S. Walter Foulkrod, III, Esq. 12,524 (5)
Harrisburg, Pennsylvania
Richard D. Ruppert, MD(6) 34,868 (5)
Toledo, Ohio
John D. Weil (7) 2,389,916 8.52%
St. Louis, Missouri
Richard H. Sharpe (8) 325,529 1.1%
La Jolla, California
Gary W. Burchfield (9) 225,064 (5)
La Jolla, California
James F. Mosier(9) 231,408 (5)
La Jolla, California
</TABLE>
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<TABLE>
<CAPTION>
NUMBER OF SHARES AND PERCENTAGE OWNERSHIP OF
NATURE OF BENEFICIAL VOTING SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1)
- - - ---------------------------------------------------------- --------------------------- -------------------------
<S> <C> <C>
Executive Officers and Directors as a Group 7,059,715 25.20%
(10 persons)(10)
</TABLE>
Notes:
(1) Sole voting and investment power unless otherwise indicated.
(2) GEC has an option to purchase U.S.$825,000 of newly issued PICO Shares.
The purchase price would be the average of the closing bid prices for
PICO Shares on the Nasdaq for the 20 trading days immediately preceding
the date when GEC gives notice of purchase. This option will expire if
GEC's ownership of PICO Shares becomes less than 7.5%. PICO has a first
right to purchase any stock, which GEC desires to sell. Approximately
51.2% of GEC's outstanding shares are owned by Subsidiaries of PICO and
accordingly, pursuant to California law, GEC cannot vote any of its
shares of PICO's stock. The numbers in the above table do not include
shares issuable pursuant to the options described in this footnote.
(3) PICO and its Subsidiaries own approximately 51.2% of the issued and
outstanding GEC Common Shares. Since September 5, 1995, Mr. Langley has
been Chairman and a Director of GEC. Mr. Hart has been President and
CEO and a Director of GEC since September 5, 1995.
(4) Mr. Langley and Mr. Hart each hold currently exercisable options to
purchase up to 876,733 PICO Shares under the Physicians Insurance
Company of Ohio 1995 Non-Qualified Stock Option Plan. These options
were assumed by PICO on November 20, 1996. In addition Mr. Langley and
Mr. Hart each hold currently exercisable options to purchase up to
1,032,114 PICO Shares presently owned by PICO. PICO acquired these PICO
Shares from Guinness Peat Group plc in August, 1998 and agreed to
assume Guinness Peat Group plc's obligations to Mr. Langley and Mr.
Hart in connection with these PICO Shares.
(5) Less than one percent.
(6) Dr. Ruppert shares voting and investment power with his wife.
(7) Of these PICO Shares 2,284,709 PICO Shares are owned by a partnership
which Mr. Weil controls, and Mr. Weil has voting control of 105,207
PICO Shares which are held by family members.
(8) Includes currently exercisable options to purchase up to 300,594 PICO
Shares under the Physicians Insurance Company of Ohio 1995
Non-Qualified Stock Option Plan.
(9) Includes currently exercisable options to purchase up to 210,416 PICO
Shares under the Physicians Insurance Company of Ohio 1995
Non-Qualified Stock Option Plan.
(10) Includes currently exercisable options.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Langley and Mr. Hart entered into employment agreements with PICO
and a wholly-owned Subsidiary of GEC, effective December 31, 1997 each for a
term of four years. See "Employment and Change in Control Arrangements". Mr.
Langley and Mr. Hart are entitled to receive 50% of the first $1 million of
profits attributable to PICO's ownership interest in Summit Global Management,
Inc.; to date no profits have been generated by Summit or been paid to either
Mr. Langley or Mr. Hart.
ADDITIONAL INFORMATION REGARDING GEC
(ALL AMOUNTS IN CDN. DOLLARS, UNLESS OTHERWISE INDICATED)
DESCRIPTION OF THE BUSINESS OF GEC
Incorporation
The corporation which is now GEC was formed under the laws of the
Province of Ontario on April 1, 1989 by the amalgamation of Loewen, Ondaatje,
McCutcheon Inc. and 743645 Ontario Inc. The articles of such corporation were:
amended by articles of amendment dated October 21, 1991 which changed the
corporation's authorized capital; restated by restated articles of incorporation
dated November 28, 1991; amended by articles of amendment dated September 30,
1992 which changed the corporation's name from Loewen, Ondaatje, McCutcheon Inc.
to The Ondaatje Corporation; and amended by articles of amendment dated June 27,
1996 which changed the corporation's name to Global Equity Corporation.
Business of GEC
GEC operates primarily, both directly and indirectly through its
various Subsidiaries, as an international investment and operating company. The
emphasis of GEC's investment strategy is to increase shareholder value through
the long-term appreciation of its assets. The current business strategy of GEC
has been in place since September 1995 when PICO acquired effective control by
purchasing The Southeast Asia Plantation Corporation Limited's ("SEAP")
approximately 38.2% common shareholding in GEC.
Under the terms of a merger agreement dated November 20, 1996 between
Physicians and Citation Insurance Group, the holding company was renamed PICO
Holdings, Inc. ("PICO"), which holds all of the interests of Physicians and
Citation Insurance Group. Accordingly, the approximately 38.2% holding of GEC
Common Shares became beneficially owned by PICO.
Through acquisitions and participation in a public offering of GEC
Common Shares in July and August 1997, Physicians and its parent company, PICO,
increased their ownership in GEC to an aggregate of approximately 51.17%.
GEC's investment portfolio comprises holdings in public equities,
strategic investments and convertible instruments in North American, Asian and
European corporations, as well as a wide portfolio of surface, water, geothermal
and mineral rights in the western United States, and oil and gas lease interests
in North America.
Subsidiaries
Set forth below are the names and respective jurisdictions of
incorporation of certain direct and indirect Subsidiaries of GEC, all of which
are wholly-owned except for Nevada Land & Resource Company, LLC ("NLRC") in
which GEC has a 74.77% membership interest as at December 31, 1997 (the other
25.23% membership interest in NLRC is held by PICO). The following list
includes, but is not limited to, all Subsidiaries the total assets of which
constituted more than 10% of the consolidated assets of GEC as at December 31,
1997 or the total revenues of which constituted more than 10% of the continuing
consolidated operating revenues of GEC during fiscal 1997.
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<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
- - - ---------- -------------
<S> <C>
Direct
Forbes & Walker Securities Limited (formerly,
The Ondaatje Securities Corporation, and prior thereto
Loewen, Ondaatje, McCutcheon & Company Limited) Ontario
Forbes & Walker (USA) Inc. Delaware
Indirect
Forbes & Walker International Limited Barbados
Global Equity SA (formerly Loewen, Ondaatje, McCutcheon & Co. SA) Geneva
Vidler Water Company, Inc. Delaware
Nevada Land & Resource Company, LLC Delaware
</TABLE>
Forbes & Walker Securities Limited ("F&WSL") was, until March 31, 1997,
a broker and a member of the TSE and is an investment holding company for a
number of GEC's investments. Forbes & Walker (USA) Inc. ("F&W(USA)") is the U.S.
operating arm of GEC.
Forbes & Walker International Limited is a holding company for GEC's
residual Sri Lankan assets arising on the disposal of GEC's Sri Lankan
Subsidiaries. Global Equity SA is a holding company for the group's European
equities. Vidler Water Company, Inc. (referred to in this Joint Proxy Statement
as "Vidler"), a private water asset company, was acquired by GEC on November
1995 and holds directly and indirectly surface and water right assets. A 74.77%
membership interest in NLRC was acquired by GEC on April 23, 1997. NLRC?s
principal asset is 1.365 million acres of deeded land in Northern Nevada with
appurtenant water, geothermal and mineral rights.
Historical Development (1992 - 1997)
Historically, GEC and its predecessor corporations (which within this
section entitled "Historical Developments (1992 - 1997)" are referred to as the
"Corporation") engaged primarily in the stock brokerage and investment banking
businesses. The major events that have influenced the general business of GEC
during the past five years are discussed below.
i. Take-over Bid by SEAP
On June 8, 1992, SEAP, a private corporation, made a successful
take-over bid to acquire all of the outstanding GEC Common Shares.
On April 16, 1993, GEC completed a rights offering and a private
placement to SEAP pursuant to which the Corporation received total net proceeds
of approximately $39.6 million and $21.6 million, respectively. Pursuant to the
rights offering, two rights were issued in respect of each common share of the
Corporation held as of March 26, 1993. Each right conferred the right to
purchase one GEC Common Share at a subscription price of $1.50 per share.
In connection with the 1992 change in control of GEC, a restructuring
plan was formulated by GEC's management and board of directors at that time
which changed the focus of GEC's activities towards international investment
banking, asset management and corporate finance. This plan redirected GEC?s
activities into the emerging markets of Southeast Asia. In addition, a number of
other changes occurred including: the sale of 100% of a western Canadian-based
brokerage operation; the settlement of a significant lease; the establishment of
an institutional brokerage business by certain employees of F&WSL, a Subsidiary
of GEC, with the assistance of GEC; the acquisition of Forbes & Walker Limited
(a private Sri Lankan corporation); a private placement of common shares
resulting in net proceeds to GEC of approximately $44.8 million; and the
establishment of Forbes Ceylon Limited (a public Sri Lankan Corporation) to
transact business in Sri Lanka and carry out an investment strategy in the
Southeast Asian region (each of these changes is discussed in greater detail
below).
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ii. Disposition of L.O.M. Western Securities Ltd.
In November 1989, F&W (USA) acquired Canarim Investment Corporation
Ltd., which thereupon was renamed L.O.M. Western Securities Ltd. ("LOM
Western"). At the time, LOM Western was a Vancouver based brokerage firm with
four branches in British Columbia and an institutional equity division in
Toronto. The institutional equity division was subsequently integrated into the
institutional operations of F&WSL.
The integration did not provide acceptable financial results.
Consequently, the GEC Board and senior management of LOM Western agreed that LOM
Western be sold to its senior management.
Effective April 1, 1992, GEC completed the sale of the issued and
outstanding shares of LOM Western to Lomcap Investments Ltd. for a purchase
price of $11.5 million. The purchase price was fully satisfied by October 1,
1994.
iii. Settlement of Lease
On November 2, 1992, GEC settled in full its lease obligation for its
premises in Scotia Plaza, Toronto. The financial impact of settling this
liability was included in the financial results for fiscal 1993.
iv. Loewen, Ondaatje, McCutcheon Limited
Subsequent to the 1992 change in control, certain of the executives of
GEC's brokerage business established and invested in a separate entity to carry
on a new brokerage business. This entity was established through the acquisition
by GEC of all the outstanding common shares and subordinated indebtedness of
Arachnae Securities Limited, subsequently renamed Loewen, Ondaatje, McCutcheon
Limited ("LOM Limited"), a dormant company with a seat on the TSE, for nominal
consideration. Regulatory approval was obtained from the TSE for certain key
employees, through 997359 Ontario Inc. ("997359"), to acquire LOM Limited from
GEC effective December 30, 1992.
GEC also assisted in the establishment of LOM Limited as an independent
brokerage by providing an indirect guarantee of a $1.25 million subordinated
line of credit, which guarantee was replaced as of October 1, 1993 with a loan
from GEC in the amount of $6.3 million at 10% per annum. In addition, a
wholly-owned Subsidiary of GEC agreed to provide various financial services to
997359 and its brokerage Subsidiaries, including LOM Limited, in return for a
fee based on the revenues of 997359 and such Subsidiaries. In December 1995, the
loan of $6.3 million was repaid in full and the financial services agreement was
terminated.
v. Forbes & Walker
On October 19, 1993, GEC paid approximately $8.4 million, through the
issuance of GEC Common Shares and GEC Warrants, for 100% of Forbes & Walker, a
privately owned group of companies with its principal office in Colombo, Sri
Lanka. Forbes & Walker then consisted of 22 companies employing approximately
550 people and was one of Sri Lanka's leading brokers in tea and other
commodities including rubber and coconut. Forbes & Walker was also involved in
stock brokerage, agricultural services, food processing, exports and other
operations at the time of its acquisition. In December 1997, GEC concluded the
disposition of Forbes & Walker to Vanik Incorporation Limited ("Vanik"), a
public Sri Lankan corporation whose stock is listed on the Colombo Stock
Exchange, (this disposition is discussed in greater detail below).
vi. Private Placement
In December 1993, GEC raised net proceeds of approximately $44.8
million through a private placement of special warrants, which special warrants
were exercisable at a price of $3.20 per special warrant. All of the special
warrants have been exercised, resulting in the issuance of 15 million GEC Common
Shares.
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vii. Forbes Ceylon
Forbes Ceylon was incorporated under the laws of Sri Lanka on May 4,
1994. On September 30, 1994, Forbes Ceylon completed a $66 million (Sri Lanka
Rupee 2.4 billion) financing, including an initial public offering. The common
shares of Forbes Ceylon were listed on the Colombo Stock Exchange.
Forbes Ceylon used a portion of the proceeds of its initial public
offering to purchase, at a total cost of approximately $22.5 million, a number
of operating businesses, real estate assets and portfolio investments from
Forbes & Walker. In November, 1997, GEC concluded the disposition of its 51%
interest in Forbes Ceylon to Vanik (this disposition is discussed in greater
detail below).
viii. Purchase of Shares by Physicians Insurance Company of Ohio
In September 1995, PICO purchased the approximately 38.2% GEC Common
Shares held by SEAP and a new board of directors of GEC was appointed. The new
management's initial focus was on restructuring and cost-cutting efforts to
reduce overhead costs. More importantly, a new investment strategy and direction
was implemented and GEC now operates as an international investment company.
Since September 1995, GEC has pursued a number of investment opportunities.
On July 30, 1997, Subsidiaries of PICO purchased further GEC Common
Shares from MacKenzie Financial Corporation, increasing PICO's beneficial
ownership in GEC to approximately 49.9% of the outstanding GEC Common Shares. On
August 19, 1997, PICO and its Subsidiaries purchased further GEC Common Shares
in connection with a public offering of GEC Common Shares by GEC (see "Public
Offering" below). These purchases increased PICO beneficial ownership in GEC to
approximately 51.17% of the outstanding GEC Common Shares.
ix. Acquisition of Vidler Water Company, Inc.
In November 1995, F&W(USA) acquired 100% of the shares of Vidler in
exchange for approximately $7.5 million in cash. At the time, Vidler owned
certain property assets with appurtenant water rights in Colorado. Vidler has
made further acquisitions in water rights through the purchase of three other
properties with appurtenant water rights in Colorado, Nevada and Arizona.
x. Acquisition of Nevada Land & Resource Company, LLC
On April 23, 1997, GEC paid $50.2 million for a 74.77% membership
interest in NLRC. The other 25.23% membership interest in NLRC was purchased by
PICO. NLRC's principal asset consists of approximately 1.365 million acres of
land and appurtenant water, geothermal and mineral rights, located in northern
Nevada.
xi. Public Offering
On August 19, 1997, GEC closed a new issue of 25,145,054 GEC Common
Shares at a subscription price of $2.59 per share. Net proceeds of $63 million
were raised after deducting issue costs of $2.1 million. Physicians and PICO
acquired an aggregate of 13,586,143 additional GEC Common Shares in connection
with the offering, increasing PICO's beneficial interest in GEC to approximately
51.17%.
xii. Disposition of Forbes & Walker and Forbes Ceylon
As a result of the acquisition by PICO of approximately 38.2% of the
outstanding GEC Common Shares held by SEAP, in September, 1995, GEC implemented
a new investment strategy and focus. Accordingly, in November and December,
1997, GEC disposed of its interests in Forbes Ceylon and Forbes & Walker,
respectively, to Vanik. At the date of the disposals, GEC carried these
investments at approximately $28.0 million including earnings of $1.0 million
generated in fiscal 1997 prior to the dates of disposals. As a result of the
disposals, GEC received gross cash proceeds of $22.5 million, before cash taxes
of $1.8 million, plus 15% debentures in Vanik with a face value of $6.7 million
and equity in Vanik with a carrying value of $3.6 million.
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xiii. Issuance of Common Shares by Phoenix Capital Inc.
On May 1, 1998, Phoenix Capital Inc. ("Phoenix") issued 2,950,000
common shares pursuant to the exercise of special warrants previously issued in
November 1997 by way of private placement. This issuance of common shares
reduced GEC's ownership of the outstanding common shares of Phoenix from
approximately 50.52% to 0.17%. On May 6, 1998, Phoenix issued an additional
2,050,000 common shares which further reduced GEC's ownership to 0.09%.
Business Strategy
i. International Value Investing
Under the current business plan, GEC engages, both directly and through
its various Subsidiaries, in international value investing. Management's purpose
is to increase shareholder value through the long-term appreciation of its
assets. Performance is measured over the long-term through growth in
shareholders' equity from appreciation of assets as well as operating income and
realized profits.
ii. Investment in Public Equities, Strategic Investments and
Convertible Instruments
Shareholder value is created by GEC using asset pricing inefficiencies
to GEC's advantage. Investment targets are comprised of companies whose value
for various reasons is not recognized in the market - whether they are
under-researched, misunderstood, unique, in industries that are currently
out-of-favour or require management input or financial assistance. Much of the
anticipated appreciation already exists at the time of investment given that
often an acquisition is made at a discount to current asset values. GEC adds
value in a number of ways, including: 1) the method of structuring the
transaction; 2) special insights from the independent research or experience of
GEC's management; 3) constructive representation of GEC on boards of directors;
4) elimination of weak holders of common stock positions; 5) otherwise
unforeseen natural evolution of events; and 6) general recognition by the market
of what GEC has recognized.
All of the investments made by GEC since the change in investment
strategy following the acquisition of control of GEC by PICO reflect one or more
of the above potential sources for increase in, and recognition of, value. GEC
has a value based investment portfolio in public equities, strategic investments
and convertible instruments in North American, Asian and European corporations.
iii. Surface, Water, Geothermal and Mineral Rights
GEC's aggregate portfolio of surface, water, geothermal and mineral
rights amounts to approximately 49% of GEC's total assets at June 30, 1998. The
portfolio of surface, water, geothermal and mineral rights is held by Vidler and
NLRC. GEC has a 74.77% membership interest in NLRC; the remaining 25.23%
membership interest of NLRC is held by PICO.
NLRC's principal asset consists of approximately 1.365 million acres of
land with appurtenant water, geothermal and mineral rights in northern Nevada.
It is understood that NLRC is the largest private land owner in the state.
NLRC's business plan contemplates developing the different components
of the asset in order to realize the aggregate inherent value. The development
will include: land exchanges with government agencies, private landholders and
promoters; development of residential and commercial land in and around fast
growing towns in northern Nevada; land parcel sales; conversion of grazing land
to agricultural production; development of existing water rights and development
or sale of geothermal interests.
Vidler owns surface and water rights in Colorado, Arizona and Nevada.
Vidler is an operator in the water marketing and transfer business.
Vidler's business strategy is to identify privately owned water supplies in fast
growing regions in the southwestern United States, where water is, or will
shortly be, scarce, and then facilitate the transfer from current ownership to
Vidler, to municipalities, water
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districts, developers and others. Vidler adds value through the ability to
aggregate supplies from disparate owners and locations and re-direct the water
to its highest and best use. In addition, Vidler's business plan calls for the
development and operation of water recharge (storage) facilities directed to
municipalities and water districts in the southwest United States. Water storage
provides ultimate end users with flexibility as surplus supplies can be stored
inexpensively and can be sold and delivered to meet peak demands.
iv. Oil and Gas Lease Interests
GEC, through a wholly owned subsidiary (Global Oil & Gas Corporation),
is a general partner for an Oklahoma partnership called TPC Exploration ("TPC").
TPC was formed for the purpose of acquiring leasehold interests in oil and gas
producing and non-producing properties that are suited to precision horizontal
drilling.
Precision horizontal drilling represents a relatively recent
technological advance in the oil and gas industry. It is possible under
horizontal drilling to experience a greater increase in flow rates, reserves and
overall return on investment compared to a vertical well in the same zone.
TPC's business strategy with respect to its prospect of 120,000 acres
of oil and gas leases in North Dakota, is to market the prospect to oil and gas
exploration companies and to retain an overriding royalty on any income that may
be generated from producing wells.
v. Forbes & Walker and Forbes Ceylon
The acquisition of Forbes & Walker and the formation of Forbes Ceylon
were part of the GEC's previous management's investment strategy to have a
Southeast Asian base for GEC for its investment banking, asset management and
corporate finance services. The operations of Forbes & Walker and Forbes Ceylon
included tea and commodity broking, stockbroking and treasury and investment in
Sri Lanka. As noted above, following the acquisition of control of GEC by PICO,
management determined that these operations were peripheral to the GEC's new
investment strategy. Accordingly, GEC concluded the disposition of Forbes Ceylon
and Forbes & Walker to Vanik in November and December, 1997, respectively.
DIRECTORS AND OFFICERS OF GEC
The directors of GEC are elected at each annual meeting of shareholders
and hold office until the next annual meeting of shareholders or until their
successors are elected or appointed. The names and municipalities of residence
of the directors and officers of GEC, their respective principal occupations
within the preceding five years, and the periods during which they have served
as directors of GEC, if applicable, are set forth below.
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<TABLE>
<CAPTION>
NAME AND POSITION WITH GEC PRINCIPAL OCCUPATION IN PRECEDING 5 YEARS
MUNICIPALITY OF RESIDENCE
<S> <C> <C>
SHEILA C. FERGUSON Financial Controller of GEC Since 1993 employed by the GEC group of
La Jolla, California since June 1997 companies (being Director, Treasury and
Finance, of Forbes Ceylon Limited from
1993 to 1996)
JOHN R. HART President, Chief Executive President, Chief Executive Officer, and
La Jolla, California Officer and Director of GEC Director of PICO since 1996 and of
since September 1995 Physicians since 1995; President of
Quaker Holdings Limited from 1991 to 1995
RONALD LANGLEY Chairman and Director of GEC Chairman and Director of PICO since 1996
La Jolla, California since 1995 and of Physicians since 1995;
self-employed investor 1992 to 1995
PATRICK C. MacCULLOCH Director of GEC since June President of Peak Business Consultants
Toronto, Ontario 1997 (management consulting) since 1989
JAMES F. MOSIER Secretary of GEC since Corporate Secretary and General Counsel
La Jolla, California October 1995 of PICO since 1996 and of Physicians
since 1984
CHRISTINE M. VEIRA Assistant Corporate Assistant Corporate Secretary, GEC, since
Toronto, Ontario Secretary of GEC since 1995; Operations Manager, ITC
October 1995 International Tradename Clearance Inc.
from 1990 to 1993
MAXIM C.W. WEBB Vice President, Investments, Since 1993 employed by GEC group of
La Jolla, California of GEC since November 1997 companies (being Vice-President,
Investments, Forbes Ceylon Limited from
1994 to 1996)
PETER N.T. WIDDRINGTON Director of GEC since Director, President and Chief Executive
London, Ontario October 1997 Officer of Cuddy International
Corporation (producer, poultry) since
1996; Director and Chairman of Laidlaw
Inc. (management holding) since 1990;
Chairman of Talisman Energy Inc. since
1996; Director and Chairman of The
Toronto Blue Jays Baseball Club
(professional baseball club) from 1991 to
1995
DAVID A. WILLIAMS(1) Director of GEC since August President of Roxborough Holdings Limited
Toronto, Ontario 1997 (investments) since 1995; Chief Executive
Officer of Beutel Goodman & Co. Ltd.
(investment counsel) from 1991 to 1995
</TABLE>
(1) Mr. Williams was elected to the board to replace Mr. Paul Brent who
resigned as a director of GEC in August 1997.
The directors and officers of GEC as a group beneficially own, directly
or indirectly, or exercise control or direction over, approximately 1.22% of the
GEC Common Shares.
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<PAGE> 111
GEC does not have an executive committee. GEC has an audit committee,
the members of which are Patrick MacCulloch, Peter Widdrington, and David
Williams.
EMPLOYEES
The number of employees decreased by approximately 411 to 16 during
the most recent year due to the disposition of GEC's Sri Lankan Subsidiaries.
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
In accordance with its statutory mandate, the GEC Board has overall
responsibility for the stewardship of GEC, including those matters set out in
the guidelines (the "Guidelines") proposed by The Report of The Toronto Stock
Exchange Committee on Corporate Governance in Canada released in December 1994.
The division of responsibilities between the GEC Board and the management of
GEC, including the Chief Executive Officer, is a function of the materiality of
the matter under consideration. All determinations with respect to material
matters are referred to the full GEC Board. The determination of the slate of
nominee directors is ultimately the responsibility of the full GEC Board.
Two of GEC's five directors, Ronald Langley and John Hart, are also
officers of GEC and certain of its Subsidiaries and are therefore "related"
directors for the purposes of the Guidelines. Mr. Langley and Mr. Hart are also
the Chairman and the President and Chief Executive Officer, respectively, of
PICO (which together with its wholly-owned Subsidiaries holds 51.17% of the
common shares of GEC). In accordance with the Guidelines, the majority of
directors are "unrelated" to GEC (and are also "unrelated" to GEC's principal
shareholder). Similarly, while there is no formal administrative structure
whereby the GEC Board functions independently from management, non-management
directors may meet as required to discuss issues without the presence of
management.
Having regard to its relatively small size, the GEC Board has not
appointed any committees other than the audit committee (which is required) and
the Special Committee. The audit committee has oversight responsibility for
management reporting and internal control, and has direct communication with
management and GEC's external auditors to discuss and review specific issues as
appropriate. The audit committee is composed of three directors none of whom are
officers of GEC.
In situations where GEC may be engaged in negotiations with a related
party, it is the policy of the GEC Board to appoint an independent committee of
the directors. For example, the Special Committee was created in connection with
the Transaction, which committee was authorized to and has retained financial
and legal advisors to advise it in connection with the Transaction.
The GEC Board has not adopted any explicit process in an attempt to
measure its performance, nor has the GEC Board instituted a formal orientation
and education program for new directors. New directors are encouraged to meet
with the directors and officers of GEC to educate themselves as to the nature of
the business, any issues concerning GEC, corporate strategy, and the general
responsibilities of directors.
The GEC Board is committed to effective communication with its
shareholders. It is the policy of GEC to deal with shareholder concerns on a
personal basis, as such concerns are brought to the attention of GEC, and to
make senior management available for such purposes. Material shareholder
concerns are brought to the attention of the GEC Board for its consideration and
disposition.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all annual and long-term compensation
for services in all capacities to GEC and its Subsidiaries for the fiscal years
ended December 31, 1997, 1996, and 1995 in respect of the Chief Executive
Officer and the most highly compensated executive officers of GEC and its
Subsidiaries (other than the Chief Executive Officer), whose total salary and
bonus during the period January 1, 1997 to December 31, 1997 exceeded $100,000
(the "Named Executives"). All amounts are in Canadian dollars.
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<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- - - ----------------------------------------------------------------------------------------------------------------------------
RESTRICTED
SECURITIES SHARES OR
OTHER ANNUAL UNDER OPTIONS RESTRICTED LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION GRANTED SHARE UNITS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($) ($) ($)
- - - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Hart, 1997 -- -- $369,147(1) --(2) -- -- $457(3)
Chief Executive 1996 -- -- $205,440 -- -- -- $15,954(3)
Officer & President, 1995(4) -- -- $64,726(5) 2,500,000(6) -- -- --
GEC
- - - ----------------------------------------------------------------------------------------------------------------------------
Sheila Ferguson, 1997 $131,071 -- -- -- -- -- --
Financial Controller, 1996 $91,175 -- -- -- -- -- --
GEC 1995(4) $60,000 $25,000 -- 40,000(6) -- -- --
- - - ----------------------------------------------------------------------------------------------------------------------------
James Hamilton, 1997 -- -- $125,000(7) --(2) -- -- $457(3)
President & 1996 -- -- $125,000(7) -- -- -- $15,954(3)
Secretary, Phoenix 1995(4) -- -- $39,469(5) -- -- -- --
Capital Inc.
- - - ----------------------------------------------------------------------------------------------------------------------------
Ronald Langley, 1997 -- -- $369,147(1) --(2) -- -- $457(3)
Chairman, GEC 1996 -- -- $205,440 -- -- -- $15,954(3)
1995(4) -- -- $64,726(5) 2,500,000(6) -- -- --
- - - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Based on an annual consulting fee of U.S.$266,672. See "Remuneration
Contracts".
(2) In October 1997, Phoenix Capital Inc. ("Phoenix"), which as of December
31, 1997 was a Subsidiary of GEC, entered into a service compensation
agreement with Messrs. Langley and Hart whereby each were granted one
pre-emptive warrant (a "Pre-Emptive Warrant") of Phoenix in payment for
past services rendered to Phoenix. Phoenix also entered into a database
compensation agreement with Resource Equity Ltd. ("Resource Equity"), a
company in which Mr. Hamilton owns 63% of the voting shares, whereby
Resource Equity was also granted one Pre-Emptive Warrant in
consideration for the use of its database. Each Pre-Emptive Warrant
gives the holder the right to acquire that number of securities equal
to 6.67% of any offering of securities (including special warrants)
issued by Phoenix where the consideration is comprised solely of a cash
subscription price payable by the subscribers thereto. Such right is
exercisable on or before October 23, 2002, at a price equal to the cash
subscription price paid by investors pursuant to such offering. On
November 25, 1997, Phoenix issued, by way of private placement,
2,950,000 special warrants (the "Phoenix Special Warrants") which were
convertible into common shares of Phoenix ("Phoenix Common Shares") on
a 1:1 ratio. The Phoenix Special Warrants were converted into Phoenix
Common Shares on May 1, 1998. As of the date of this Joint Proxy
Statement, neither Mr. Langley, Mr. Hart nor Resource Equity had
exercised their respective rights as holders of a Pre-Emptive Warrant
in relation to this offering of Phoenix Special Warrants.
(3) Pursuant to Phoenix's offer to purchase units of Imperial Square
Edmonton III (West) and Imperial Square Edmonton III (East), the common
shareholders of Phoenix (including, inter alia, Mr. Langley, Mr. Hart
and Resource Equity, a company in which Mr. Hamilton owns 63% of the
voting shares) were entitled to receive certain debentures in
consideration for providing services, initial financing and working
capital to Phoenix in connection with such offer. In 1996, 6,318 Series
A $1.00 debentures and 9,636 Series B $1.00 debentures were issued or
reserved for issuance to each of Mr. Langley, Mr. Hart and Resource
Equity. In 1997, 29 Series A $1.00 debentures and 428 Series B $1.00
debentures were issued to each of Mr. Langley, Mr. Hart and Resource
Equity.
(4) Nine month period due to a change in GEC's year end.
(5) Consulting fees commenced in September 1995 with the appointments of
Messrs. Langley and Hart as officers of GEC. Consulting fees were
payable to Resource Equity for services provided by Mr. Hamilton
commencing in September 1995.
(6) Options to purchase common shares of GEC.
(7) Based on an annual consulting fee of $125,000 payable to Resource
Equity, a company in which Mr. Hamilton owns 63% of the voting shares.
See "Remuneration Contracts".
Option Grants
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<PAGE> 113
No options were granted to the Named Executives during the fiscal year
ended December 31, 1997 pursuant to GEC?s Employee and Director Incentive Stock
Option Plan (1993) (as amended) (the "Stock Option Plan").
The following table provides information as to the number and the value
of options held by the Named Executives at December 31, 1997. No options were
exercised by the Named Executives in the period January 1, 1997 to December 31,
1997.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
AND FINANCIAL YEAR-END OPTION VALUES
- - - ---------------------------------------------------------------------------------------------------------------------------
NAME SECURITIES AGGREGATE VALUE UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED
ACQUIRED ON REALIZED DECEMBER 31, 1997 IN-THE-MONEY OPTIONS AT
EXERCISE ($) (#) DECEMBER 31, 1997
(#) ($)
---------------------------------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John Hart -- -- 2,500,000 -- $2,547,508 --
- - - ---------------------------------------------------------------------------------------------------------------------------
Sheila Ferguson -- -- 40,000 -- $42,000 --
- - - ---------------------------------------------------------------------------------------------------------------------------
James Hamilton -- -- -- -- -- --
- - - ---------------------------------------------------------------------------------------------------------------------------
Ronald Langley -- -- 2,500,000 -- $2,547,508 --
- - - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Remuneration Contracts
In accordance with separate consulting agreements (the "Consulting
Agreements") dated January 1, 1997 between Messrs. Langley and Hart and
F&W(USA), a Subsidiary of GEC, Mr. Langley and Mr. Hart were each paid
U.S.$266,672 for advisory services provided during the fiscal year ended
December 31, 1997. The terms of the Consulting Agreements were approved by the
GEC Board.
Effective December 31, 1997, the Consulting Agreements were terminated
and replaced by separate employment agreements (the "Employment Agreements")
between Messrs. Langley and Hart and F&W(USA), the terms of which were approved
by the GEC Board.
Under the terms of the Employment Agreements, remuneration for each of
Mr. Langley and Mr. Hart consists of a salary of U.S.$266,672 per annum and a
possible incentive award which is based on the amount by which GEC's book value
per share during the fiscal year exceeds a threshold rate of return. The
threshold above which incentives are earned (the "Return Threshold") is 80% of
the S&P 500 annualized total return for the five previous years. If the increase
in GEC's book value per share during the relevant fiscal period exceeds the
Return Threshold, Messrs. Langley and Hart will each receive an award (an
"Incentive Award") equal to 5% of such excess multiplied by the number of shares
outstanding at the beginning of the fiscal year. In the event that an Incentive
Award is paid, such amount will be added to the exercise price of the options
granted to each of Messrs. Langley and Hart under the Stock Option Plan.
In the event of a Change of Control (as defined in the Employment
Agreements) of F&W(USA) occurs prior to December 31, 1999, the Employment
Agreements provide that Messrs. Langley and Hart will each receive a lump sum of
U.S.$800,016 plus an amount equal to three times the highest Incentive Award
paid to such executive in the last three years, less applicable tax
withholdings. Whether or not the Transaction would constitute a "Change of
Control" for purposes of the Employment Agreements, Messrs. Langley and Hart
have agreed to waive the benefits of such provisions in relation to the
Transaction.
If the services of Mr. Langley or Mr. Hart are terminated prior to
December 31, 1998 for any reason other than cause or the death or disability of
such executive, the terminated executive will receive a lump sum of
U.S.$800,016, less applicable tax withholdings. If termination occurs on or
after December 31, 1998 and prior to December 31, 2001, such executive will
receive a lump sum of U.S.$800,016, less applicable tax withholdings, and less
any amount of salary earned from December 31, 1998 to the date of termination.
In addition to this termination payment, such executive will also receive his
pro rata share of any Incentive
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<PAGE> 114
Award that would have been payable in the year in which the termination occurred
and any amount payable to such executive in connection with a Change of Control
of F&W(USA) (as outlined above).
Messrs. Langley and Hart are also parties to Employment Agreements
with PICO. See "Additional Information Regarding PICO -- Executive Compensation
Employment and Change in Control Arrangements."
The Employment Agreements further provide that in the event of the
death or permanent and total disability of Mr. Langley or Mr. Hart occurring
prior to December 31, 1998, such executive (or persons designated by him) will
receive a lump sum of U.S.$800,016, less applicable withholding taxes. If such
an event occurs on or after December 31, 1998 and prior to December 31, 2001,
such executive (or persons designated by him) will receive a lump sum of
U.S.$800,016, less applicable tax withholdings, and less any amount of salary
earned from December 31, 1998 to the date of death or disability. In addition to
this death/disability payment, such executive (or persons designated by him)
will also receive his pro rata share of any Incentive Award that would have been
payable in the year in which the death or disability occurred and any amount
payable to such executive in connection with a Change of Control of F&W(USA) (as
outlined above).
From January 1, 1997 to November 30, 1997, GEC paid to Resource Equity
Ltd. (a company in which James Hamilton holds 63% of the voting shares)
$10,416.66 monthly, plus disbursements, for the consulting services provided by
Mr. Hamilton to GEC. Commencing December 1, 1997, this fee was paid by Phoenix.
Report on Executive Compensation by the GEC Board
All compensation matters during the fiscal year ended December 31, 1997
were dealt with by the full GEC Board. Executive compensation is comprised of
two elements: 1) salary or consulting fees, as the case may be; and 2) long-term
incentive programs such as the Stock Option Plan. It is the preference of the
GEC Board to have a meaningful portion of the executives' compensation,
including that of the President and Chief Executive Officer, based on
performance rather than a significant fixed annual compensation.
Unless determined pursuant to their employment/consulting agreement,
the base annual compensation of each executive officer of GEC is evaluated
annually. In evaluating appropriate pay levels and increases for its executives,
the GEC Board considers achievement of GEC's strategic goals, level of
responsibility, individual performance, internal equity and external pay
practices.
GEC's long-term incentive compensation program includes the granting of
stock options, which offer the executive the right to purchase GEC Common Shares
at their fair market value on the date of the grant; however, no options were
granted to the Named Executives during fiscal 1997.
John R. Hart is the President and Chief Executive Officer of GEC.
During 1997, Mr. Hart's compensation was governed by a consulting agreement
dated January 1, 1997 with F&W(USA), a Subsidiary of GEC, the terms of which
were approved by the GEC Board. This consulting agreement provided for a payment
of U.S.$266,672 for advisory services provided during the fiscal year ended
December 31, 1997. Effective December 31, 1997, Mr. Hart's consulting agreement
was terminated and replaced with an employment agreement with F&W(USA), the
terms of which are discussed under "Remuneration Contracts" below.
Pursuant to a service compensation agreement with Phoenix Capital Ltd.
("Phoenix"), which as of December 31, 1997 was a Subsidiary of GEC, Mr. Hart was
also granted one pre-emptive warrant (a "Pre-Emptive Warrant") of Phoenix in
October of 1997 for past services rendered to Phoenix. This Pre-Emptive Warrant
entitles Mr. Hart to acquire that number of securities equal to 6.67% of any
offering of securities (including special warrants) issued by Phoenix where the
consideration is comprised solely of a cash subscription price payable by the
subscribers thereto. Such right is exercisable on or before October 23, 2002, at
a price equal to the cash subscription price paid by investors pursuant to such
offering.
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<PAGE> 115
On November 25, 1997, Phoenix issued, by way of private placement,
2,950,000 special warrants (the "Phoenix Special Warrants") which were
convertible into common shares of Phoenix ("Phoenix Common Shares") on a 1:1
ratio. The Phoenix Special Warrants were converted into Phoenix Common Shares on
May 1, 1998. As of the date of this Joint Proxy Statement, Mr. Hart had not
exercised his right as a holder of a Pre-Emptive Warrant in relation to this
offering of Phoenix Special Warrants.
Report submitted by:
John R. Hart
Ronald Langley
Patrick C. MacCulloch
Peter N.T. Widdrington
David A. Williams
COMPENSATION OF DIRECTORS
During the fiscal year ended December 31, 1997, all directors who were
not also officers of GEC received an annual fee of $5,000, plus $1,000 for each
directors' meeting they attended in person and $250 for each directors' meeting
attended by telephone. GEC reimbursed the directors for expenses incurred in
attending meetings of the GEC Board. During the fiscal year ended December 31,
1997, the directors of GEC were paid an aggregate of $14,626.71 for their
services on the GEC Board. See also "Remuneration Contracts" above.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
GEC has purchased and maintains a policy for insurance for the benefit
of the directors and officers of GEC as permitted by subsection 136(4) of the
OBCA. The policy insures directors and officers or, in circumstances where GEC's
indemnification of directors and officers is available, GEC against certain
liabilities incurred by the directors and officers in their capacity as
directors and officers of GEC, except in certain limited circumstances including
where such liability relates to the failure by a director or officer to act
honestly and in good faith with a view to the best interests of GEC.
An aggregate annual premium of $93,000 has been be paid by GEC for the
insurance for the period April 12, 1997 to August 31, 1998 and no part of this
premium was or will be paid by the directors or officers of GEC. The aggregate
insurance coverage under the policy is limited to $25,000,000 and a deductible
is not payable by any director or officer making a claim under the policy. A
deductible of $100,000 per incident is payable by GEC with respect to any claim
for which GEC's indemnification is available.
PERFORMANCE GRAPH
The GEC Common Shares trade on the TSE and the ME under the symbol
"GEC". As indicated in the graph below, during the period from March 31, 1993 to
December 31, 1997, a $100 investment in GEC Common Shares grew to approximately
$175.00. During the same period, a $100 investment in the Total Return Index of
the TSE grew to approximately $207 and a $100 investment in the TSE 300
Composite Index grew to approximately $186.
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<PAGE> 116
[INSERT GRAPH]
<TABLE>
<CAPTION>
MAR. 31/93 MAR. 31/94 MAR. 31/95 DEC. 31/95 DEC. 31/96 DEC. 31/97
------------- ------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
GEC $100 $158 $103 $175 $163 $175
TOTAL RETURN $100 $123 $126 $140 $180 $207
INDEX
TSE 300 $100 $120 $120 $131 $165 $186
</TABLE>
INTERESTS OF INSIDERS IN MATERIAL TRANSACTIONS
On April 23, 1997, GEC completed acquisition of a 74.77% membership
interest in NLRC (owner of approximately 1,365,000 acres of deeded land in
northern Nevada) and PICO completed acquisition of the remaining interest. GEC
financed this acquisition by the issuance of a convertible secured debenture
(the "Convertible Debenture") in the principal amount of U.S.$34.5 million to
PICO, of which U.S.$27.6 million was assigned to a wholly-owned Subsidiary of
PICO, and by the issuance of a note (the "Note") payable to PICO in the amount
of U.S.$5 million. At the closing of the public offering (the "GEC Public
Offering") of 24,160,054 GEC Common Shares at Cdn.$2.59 per share in August
1997, PICO and its Subsidiaries subscribed for 13,586,143 GEC Common Shares.
Both the Convertible Debenture and the Note have been repaid in full.
On July 30, 1997, PICO and its wholly-owned Subsidiaries purchased
6,616,218 GEC Common Shares from MacKenzie Financial Corporation at a price of
Cdn.$2.38 per share. This, together with the 13,586,143 GEC Common Shares
acquired pursuant to the GEC Public Offering, brings their total GEC Common
Share holding to 41,883,445 shares, or approximately 51.17% of the outstanding
GEC Common Shares.
In October 1997, the Corporation issued a promissory note, bearing
interest at 7% per annum, to each of PICO and Physicians Investment Company in
the amounts of U.S.$8.3 million and U.S.$8 million, respectively. As of July 31,
1998, both of these promissory notes have been repaid in full.
As at January 1, 1997, GEC held 89,096,888 common share purchase
warrants (the "Conex Purchase Warrants") of Conex Continental Inc. ("Conex").
The Conex Purchase Warrants are exercisable until August 2, 1999 at a price of
$0.0566 per common share of Conex. During fiscal 1997, 22,195,043 Conex Purchase
Warrants were exercised. GEC now holds 38% of Conex's voting shares. Until
August 1997, Mr. Paul Brent served as a director of GEC and as director, Chief
Financial Officer, and Corporate Secretary of Conex.
See also "Report on Executive Compensation by the GEC Board" above.
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<PAGE> 117
APPROVAL OF JOINT PROXY STATEMENT BY
PICO HOLDINGS BOARD OF DIRECTORS
The contents of this Joint Proxy Statement and the sending thereof to
the PICO Shareholders has been approved by the PICO Board of Directors.
By Order of the PICO Board of Directors
John R. Hart
President and Chief Executive Officer
October ?, 1998
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<PAGE> 118
APPROVAL OF JOINT PROXY STATEMENT BY
GEC BOARD OF DIRECTORS
The contents of this Joint Proxy Statement and the sending thereof to the GEC
Shareholders has been approved by the GEC Board of Directors.
By Order of the GEC Board of Directors
John R. Hart
President and Chief Executive Officer
October ?, 1998
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<PAGE> 119
ANNEX "A"
<PAGE> 120
ANNEX "A"
ARRANGEMENT RESOLUTION
ARRANGEMENT UNDER SECTION 182 OF THE
BUSINESS CORPORATIONS ACT (ONTARIO)
BE IT RESOLVED THAT:
1. The arrangement (the "Arrangement") pursuant to section 182 of the Business
Corporations Act (Ontario) involving the Company ("GEC"), the shareholders of
the Company and PICO Holdings, Inc. ("PICO"), all as set forth in the plan of
arrangement (the "Plan of Arrangement") attached as Schedule I to the
combination agreement (the "Combination Agreement") dated ?, 1998 between the
Company and PICO and which is attached as Annex "C" to the joint management
information circular and proxy statement of the Company and PICO dated ?, 1998
(the "Circular") accompanying the Notice of this Meeting of the holders of
common shares of the Company be, and it is hereby authorized, approved and
adopted.
2. The Combination Agreement, the actions of the directors of the Company in
approving the Arrangement and the actions of the officers of the Company in
executing and delivering the Combination Agreement be, and they are hereby
confirmed, ratified, authorized and approved.
3. Notwithstanding that this resolution has been passed (and the Arrangement
adopted) by the shareholders of the Company or that the Arrangement has been
approved by the Ontario Court (General Division) (the "Court"), the directors of
the Company be, and they are hereby authorized and empowered (i) to amend the
Combination Agreement or the Plan of Arrangement to the extent permitted by the
Combination Agreement, and (ii) not to proceed with the Arrangement at any time
prior to the acceptance for filing of the final order (the "Final Order") of the
Court made in connection with the approval of the Arrangement giving effect to
the Arrangement without the further approval of the shareholders of the Company
but only if the Combination Agreement is terminated in accordance with its
terms.
4. Any one director or one officer of the Company be, and is hereby authorized,
empowered and instructed, acting for, in the name of and on behalf of the
Company, to execute, under the seal of the Company or otherwise, and to deliver
such documents as are necessary or desirable, and to deliver the Articles of
Arrangement contemplating the Arrangement or such other documents as are
necessary or desirable to the Director appointed under section 278 of the
Business Corporations Act (Ontario) in accordance with the Combination Agreement
for filing.
5. Any one director or one officer of the Company be, and is hereby authorized,
empowered and instructed, acting for, in the name of and on behalf of the
Company, to execute or cause to be executed, under the seal of the Company or
otherwise, and
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<PAGE> 121
to deliver or to cause to be delivered, all such documents, agreements and
instruments and to do or to cause to be done all such other acts and things as
such one director or one officer of the Company shall determine to be necessary
or desirable in order to carry out the intent of the foregoing paragraphs of
this resolution and the matters authorized thereby, such determination to be
conclusively evidenced by the execution and delivery of such document, agreement
or instrument or the doing of such act or thing.
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<PAGE> 122
ANNEX B
<PAGE> 123
Court File No. ?
ONTARIO COURT OF JUSTICE
(GENERAL DIVISION)
COMMERCIAL LIST
THE HONOURABLE ) ?, DAY, THE ? DAY
)
JUSTICE ) OF ? , 1998
GLOBAL EQUITY CORPORATION
APPLICANT
IN THE MATTER OF AN APPLICATION UNDER SECTION 182, BUSINESS
CORPORATIONS ACT, R.S.O. 1990, B.16, AS AMENDED, AND RULES 14.05(2) AND
14.05(3)(F) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED PLAN OF ARRANGEMENT INVOLVING GLOBAL
EQUITY CORPORATION AND PICO HOLDINGS, INC.
ORDER
THIS MOTION made by the Applicant, Global Equity Corporation, for an
interim order for advice and direction, pursuant to section 182(5) of the
Business Corporations Act, R.S.O. 1990, B.16, as amended, was heard this day at
393 University Avenue, Toronto, Ontario.
ON READING the Notice of Application, Notice of Motion and the
Affidavit of ? , sworn ? , 1998, and the exhibits attached thereto, and on
hearing the submissions of counsel for the Applicant and of counsel to the
Special Committee of the Applicant,
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DEFINITIONS
1. THIS COURT ORDERS THAT, as used in this Order, all definitions are to be as
in the Notices of Meetings and Joint Management Information Circular and Proxy
Statement, attached as Exhibit ? to the ? Affidavit, with the following
additions:
"NOTICE" means the Notice of the GEC Shareholders' Meeting included
with the Joint Proxy Statement.
THE GEC SHAREHOLDERS' MEETING
2. THIS COURT ORDERS THAT GEC be permitted to call, hold and conduct the GEC
Shareholders' Meeting, in accordance with the Notice, the OBCA and the articles
and by-laws of GEC, subject to the provisions of this Order, and to submit the
Arrangement to the GEC Shareholders' Meeting and to seek approval thereof from
the GEC Shareholders and the GEC Public Shareholders, in the manner set forth
herein.
AMENDMENTS
3. THIS COURT ORDERS THAT GEC is authorized to make such amendments, revisions
and/or supplements to the Arrangement as it may determine, and the Arrangement,
as so amended, revised and supplemented shall be the Arrangement to be submitted
to the GEC Shareholders' Meeting and to be the subject of the Arrangement
Resolution.
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NOTICE OF GEC SHAREHOLDERS' MEETING
4. THIS COURT ORDERS THAT GEC shall give notice of the GEC Shareholders'
Meeting, substantially in the form of the Notice, subject to GEC's ability to
insert dates and other relevant information in the final form of Notice. The
Notice shall be given by one of the methods set out in paragraph 6 of this
Order, not later than 21 days prior to the date established for the GEC
Shareholders' Meeting in the Notice. Accidental failure of or omission by GEC to
give notice to any one or more GEC Shareholders, or any failure or omission to
give such notice as a result of events beyond the reasonable control of GEC,
shall not constitute a breach of this Order or a defect in the calling of the
GEC Shareholders' Meeting, but if any such failure or omission is brought to the
attention of GEC, GEC shall use its best efforts to rectify it by the method and
in the time most reasonably practicable in the circumstances.
THE JOINT PROXY STATEMENT
5. THIS COURT ORDERS THAT Minorca is hereby authorized and directed to send to
the GEC Shareholders the Joint Proxy Statement, subject to such amendments,
revisions or supplements as GEC may determine. The Joint Proxy Statement shall
include the within Notice of Application and this Order as annexes thereto. The
Joint Proxy Statement shall be distributed by one of the methods set out in
paragraph 6 of this Order, not later than 21 days prior to the date established
for the GEC Shareholders' Meeting in the Notice.
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METHOD OF DISSEMINATION
6. THIS COURT ORDERS THAT the Notice, the Joint Proxy Statement and any other
communications or documents determined by GEC to be necessary or appropriate
shall be disseminated, sent and given to:
(i) all registered holders of GEC Common Shares and to the directors
of GEC, by GEC mailing same by pre-paid ordinary mail to such
persons at their addresses as they appear on the books of GEC as
of the GEC Record Date;
(ii) all non-registered holders of GEC Common Shares, by GEC complying
with its obligations under National Policy Statement No. 41 of the
Canadian Securities Administrators; and
(iii) the auditors of GEC, namely, ? , by GEC mailing same by pre-paid
ordinary mail to them at ?.
DEEMED RECEIPT
7. THIS COURT ORDERS THAT the Notice, the Joint Proxy Statement, the within
Notice of Application and this Order shall be deemed to have been received by
the GEC Shareholders on the fifth day after mailing. No other form of service
need be made or notice given or other material served in respect of these
proceedings.
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VOTING
8. THIS COURT ORDERS THAT in order for the Arrangement to be implemented, the
Arrangement Resolution must be passed, with or without variation, at the GEC
Shareholders' Meeting by:
(i) a two-thirds majority of the votes cast in respect of the
Arrangement Resolution in person or by proxy by GEC
Shareholders; and
(ii) a simple majority of the votes cast in respect of the
Arrangement Resolution in person or by proxy by GEC Public
Shareholders.
Such votes shall be sufficient to authorize and direct GEC to do all such acts
and things as may be necessary or desirable to give effect to the Arrangement on
a basis consistent with what is provided for in the Joint Proxy Statement and no
further shareholder approval shall be required, subject only to this Court's
final approval of the Arrangement.
9. THIS COURT ORDERS THAT the only persons entitled to vote in person or by
proxy on the Arrangement Resolution shall be the GEC Shareholders and the GEC
Public Shareholders as at the close of business on the Record Date, subject to
the provisions of the OBCA with respect to persons who become registered holders
of GEC common shares after the Record Date.
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DISSENT RIGHTS
10. THIS COURT ORDERS THAT each GEC Shareholder shall be entitled to exercise
rights of dissent with respect to the Arrangement Resolution in accordance and
compliance with section 185 of the OBCA and that any such GEC Shareholder who
exercises such right of dissent and who:
(x) is ultimately entitled to be paid fair value for his, her or its
GEC Common Shares, shall be deemed to have transferred his, her or
its GEC Common Shares to GEC for cancellation on the date on which
the Arrangement becomes effective under the OBCA, but shall not be
entitled to any other payment or consideration including any
payment that would be payable under the Arrangement had such
holder not exercised such right of dissent; or
(xi) is for any reason ultimately not entitled to be paid fair value
for his, her or its GEC Common Shares, shall be deemed to have
participated in the Arrangement on the same basis and at the same
time as any non-dissenting GEC Shareholder and shall be entitled
to receive any shares or receive payment on the same basis as any
non-dissenting holder under the Arrangement.
HEARING OF APPLICATION FOR FINAL ORDER
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11. THIS COURT ORDERS THAT upon the passing of the Arrangement Resolution
pursuant to the provisions of paragraph 8 hereof, the Applicant shall be
permitted to apply to this Court for final approval of the Arrangement pursuant
to the within Notice of Application.
12. THIS COURT ORDERS THAT the only persons entitled to appear and be heard at
the hearing of the within Application shall be:
(xii) the Applicant; and
(xiii) persons who have filed a Notice of Appearance herein in accordance
with the Notice of Application and the Rules of Civil Procedure.
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Court File No. ?
ONTARIO COURT OF JUSTICE
(GENERAL DIVISION)
COMMERCIAL LIST
GLOBAL EQUITY CORPORATION
Applicant
IN THE MATTER OF AN APPLICATION UNDER SECTION 182, BUSINESS
CORPORATIONS ACT, R.S.O. 1990, B.16, AS AMENDED, AND RULES 14.05(2) AND
14.05(3)(f) OF THE RULES OF CIVIL PROCEDURE
AND IN THE MATTER OF A PROPOSED PLAN OF ARRANGEMENT INVOLVING GLOBAL
EQUITY CORPORATION AND PICO HOLDINGS, INC.
NOTICE OF APPLICATION
TO THE RESPONDENTS
A LEGAL PROCEEDING HAS BEEN COMMENCED by the applicant. The claim made
by the applicant appears on the following pages.
THIS APPLICATION will come on for hearing on, ?, October ? 1998, at ?
a.m., before a Judge presiding over the Commercial List at 393 University
Avenue, Toronto, Ontario.
IF YOU WISH TO OPPOSE THIS APPLICATION, you or an Ontario lawyer acting
for you must forthwith prepare a notice of appearance in Form 38C prescribed by
the Rules of Civil Procedure, serve it on the applicant's lawyer or, where the
applicant does not have a lawyer, serve it on the applicant, and file it, with
proof of service, in this court office, and you or your lawyer must appear at
the hearing.
IF YOU WISH TO PRESENT AFFIDAVIT OR OTHER DOCUMENTARY EVIDENCE TO THE
COURT OR TO EXAMINE OR CROSS-EXAMINE WITNESSES ON THE APPLICATION, you or your
lawyer must, in addition to serving your notice of appearance, serve a copy of
the evidence on the applicant's lawyer or, where the applicant does not have a
lawyer, serve it on the applicant, and file it, with proof of service, in the
court office where the application is to be heard as soon as possible, but not
later than 2 p.m. on the day before the hearing.
IF YOU FAIL TO APPEAR AT THE HEARING, JUDGMENT MAY BE GIVEN IN YOUR
ABSENCE AND WITHOUT FURTHER NOTICE TO YOU.
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If you wish to oppose this application but are unable to pay legal
fees, legal aid may be available to you by contacting a local legal aid office.
Date: ?, 1998 Issued by: (signed)
Local registrar
Address of
Court office: 393 University Avenue
Toronto, Ontario
TO: All holders of securities of Global Equity Corporation as at ?, 1998
AND TO: [THE DIRECTORS OF GLOBAL EQUITY CORPORATION AS AT ?, 1998]
AND TO: [GEC AUDITORS]
AND TO: [COUNSEL TO THE SPECIAL COMMITTEE OF GLOBAL EQUITY CORPORATION]
<PAGE> 132
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APPLICATION
1. THE APPLICANT MAKES APPLICATION FOR:
(a) An interim Order for advice and direction pursuant to section
182(5) of the Business Corporations Act, R.S.O. 1990, B.16, as
amended (the "OBCA"), with respect to a proposed arrangement
(the "Arrangement") between Global Equity Corporation ("GEC")
and PICO HOLDINGS, Inc. ("PICO") and with respect to the
within application; and
(b) A final Order (the "Final Order") pursuant to section 182(3)
of the OBCA, approving the Arrangement; and
(c) Such further and other relief as this Honourable Court may
deem just.
2. THE GROUNDS FOR THE APPLICATION ARE:
(a) All statutory requirements under the Act have been fulfilled;
(b) The Arrangement is in the best interests of the holders of
securities of GEC and is fair and reasonable;
(c) If made, the Final Order will constitute the basis for an
exemption under the Securities Act of 1933, as amended, of the
United States of America, with respect to the securities of
PICO to be issued under the arrangement;
(d) Section 182 of the OBCA;
(e) Rules 14.02, 14.05(3)(f), 17.02(n) and 17.02(o) of the Rules
of Civil Procedure; and
(f) Such further and other grounds as counsel may advise and this
Honourable Court may permit.
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3. THE FOLLOWING DOCUMENTARY EVIDENCE WILL BE USED AT THE HEARING OF THE
APPLICATION:
(a) Affidavit of ? , to be sworn ? , together with the exhibits
annexed thereto; and
(b) Such further and other material as counsel may advise and this
Honourable Court may permit.
Date of issue: ?, 1998 GOODMAN PHILLIPS & VINEBERG
Barristers & Solicitors
Suite 2400, P.O. Box 24
250 Yonge Street
Toronto, Ontario
M5B 2M6
Tom Friedland / LSUC #31848L
Phone: (416) 979-2211
Fax: (416) 979-1234
Solicitors for the Applicant,
Global Equity Corporation
<PAGE> 134
ANNEX C
<PAGE> 135
COMBINATION AGREEMENT INCLUDING PLAN OF ARRANGEMENT
THIS AGREEMENT dated ?, 1998
B E T W E E N :
PICO HOLDINGS, INC., a corporation incorporated under the laws of California
(hereinafter called "PICO")
OF THE FIRST PART;
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GLOBAL EQUITY CORPORATION, a corporation incorporated under
the laws of the Province of Ontario (hereinafter called "GEC")
OF THE SECOND PART.
WHEREAS subject to the terms and conditions set forth in this
Agreement, GEC intends to propose the Arrangement to the holders of the Common
Shares pursuant to and in accordance with the provisions of section 182 of the
OBCA;
AND WHEREAS pursuant to the Arrangement, each issued and outstanding
Common Share, other than those owned by PICO or held by Shareholders who duly
exercise rights of dissent, will be exchanged for 0.4628 of a PICO Share, and
each GEC Warrant will be exchanged for 0.4628 of a PICO Warrant;
AND WHEREAS the parties hereto have entered into this Agreement to
provide for the matters referred to in the foregoing recitals and for other
matters relating to the Arrangement;
THEREFORE, in consideration of their respective covenants and
agreements herein, the parties agree:
ARTICLE I.
INTERPRETATION
1.1 DEFINITIONS.
In this Agreement, including the recitals, the following terms have the
following meanings:
"AGREEMENT", "hereof", "hereunder" and similar expressions mean this
Agreement, including the exhibits hereto, and not any particular
article, section or other portion hereof, and include any agreement or
instrument supplementary or ancillary hereto;
"ARRANGEMENT" means the arrangement under section 182 of the OBCA on
the terms and conditions set out in the Plan of Arrangement and any
amendment or variation thereof made in accordance with section 6.2
hereof;
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"ARRANGEMENT RESOLUTION" means the special resolution to authorize the
Arrangement, to be considered by GEC Shareholders at the GEC
Shareholders' Meeting;
"BUSINESS DAY" means a day other than a Saturday, Sunday or holiday
within the meaning of the Interpretation Act (Ontario), R.S.O. 1990, c.
I.11, as amended;
"CGCL" means the California General Corporation Law, as amended;
"COURT" means the Ontario Court of Justice (General Division);
"DISSENTING SHAREHOLDERS" means GEC Shareholders who have duly
exercised, and who do not prior to the Effective Date withdraw or
otherwise relinquish, the right of dissent available to such GEC
Shareholders in respect of the Arrangement Resolution;
"EFFECTIVE DATE" means the date shown on the Certificate of Amendment
to be issued under the OBCA giving effect to the Arrangement;
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the Effective Date;
"EXCHANGE RATIO" means the ratio of 0.4628 of a PICO Share to one
Common Share, and the ratio of 0.4628 of a PICO Warrant to one GEC
Warrant, being the exchange ratio contemplated by subsection 2.1.2;
"FAIRNESS OPINION" means the opinion dated ?, 1998, provided to the GEC
Board by the Independent Financial Adviser stating that the Arrangement
is fair, from a financial point of view, to GEC Public Shareholders,
which Fairness Opinion includes a Valuation;
"FINAL ORDER" means the final order of the Court approving the
Arrangement;
"GEC BOARD" means the board of directors of GEC;
"GEC COMMON SHARES" means the common shares in the capital of GEC;
"GEC FINANCIAL STATEMENTS" means the audited financial statements of
GEC for and as at the year ended December 31, 1997, prepared on a
consolidated basis;
"GEC OPTION PLAN" means GEC's Employee and Director Stock Option Plan
(1993), as amended;
"GEC OPTIONS" means options granted under the GEC Option Plan;
"GEC PUBLIC SHAREHOLDERS" means GEC Shareholders, other than:
(a) GEC;
(b) PICO;
(c) any Related Party of PICO;
(d) any person or company acting jointly or in concert
with any person referred to in paragraph (a), (b) or
(c) in respect of the Arrangement; or
(e) an affiliate of any of the foregoing;
"GEC SHAREHOLDERS" means the holders of GEC Common Shares;
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"GEC SHAREHOLDERS' MEETING" means the special meeting of the GEC
Shareholders to be held on or about November ?, 1998 to consider, among
other matters, and if deemed advisable, to approve, the Arrangement
Resolution;
"GEC WARRANTS" means common share purchase warrants issued by GEC under
an indenture dated October 21, 1993, between GEC and Montreal Trust
Company of Canada, as supplemented and amended;
"HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended;
"INDEPENDENT FINANCIAL ADVISER" means First Marathon Securities
Limited;
"INTERIM ORDER" means the interim order of the Court under subsection
182(5) of the OBCA providing for, among other things, the calling and
holding of the GEC Shareholders' Meeting;
"JOINT PROXY STATEMENT" means the joint management information circular
and proxy statement to be sent by GEC to the GEC Shareholders in
connection with the GEC Shareholders' Meeting and to be sent by PICO to
its shareholders in connection with the PICO Shareholders' Meeting;
"OBCA" means the Business Corporations Act, R.S.O. 1990, c. B.16, as
amended;
"PICO ARTICLES" means the articles of incorporation of PICO;
"PICO COMMON STOCK" means the class of common stock in the authorized
capital of PICO, and any other securities into which such shares may be
changed or for which such shares may be exchanged or any other
consideration which may be received by the holders of such shares
pursuant to a recapitalization, reconstruction, reorganization or
reclassification of, or an amalgamation, merger, liquidation or similar
transaction affecting, such shares;
"PICO FINANCIAL STATEMENTS" means the audited financial statements of
PICO for and as at the year ended December 31, 1997 prepared on a
consolidated basis;
"PICO REVERSE STOCK SPLIT" means the proposed one-for-five
consolidation of PICO Common Stock which, if approved at the PICO
Meeting, will be effected immediately after the Effective Time;
"PICO SHARE" means a share of PICO Common Stock;
"PICO SHAREHOLDERS' MEETING" means the annual meeting of the
Shareholders of PICO to be held on or about November ?, 1998 to
consider, among other matters, and if deemed advisable, to approve the
transactions contemplated by the Arrangement;
"PICO SUBSIDIARIES" means the subsidiaries of PICO excluding GEC and
subsidiaries of GEC;
"PICO WARRANT" means a PICO Share purchase warrant to be issued
pursuant to the PICO Warrant Indenture by PICO under the Arrangement,
each of which will entitle the holder thereof to purchase one PICO
share for U.S.$4.76 on or before June 30, 1999;
"PICO WARRANT INDENTURE" means the warrant indenture to be entered into
by PICO and a warrant agent effective as of the Effective Time;
"PLAN OF ARRANGEMENT" means the statement of the Arrangement set out as
Exhibit 1 hereto;
"POLICY 9.1" means Ontario Securities Commission Policy Statement No.
9.1 and Policy Q-27 of the Quebec Securities Commission;
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"RELATED PARTY" has the meaning ascribed thereto in Policy Statement
No. 9.1 of the Ontario Securities Commission;
"SEC" means the Securities and Exchange Commission;
"SPECIAL COMMITTEE" means the special committee of the GEC Board
appointed by resolution passed by the GEC Board on April 14, 1998;
"TRANSFER AGENT" means Equity Transfer Services Inc.; and
"VALUATION" means a valuation opinion (valuing the GEC Common Shares
and the PICO Common Stock) forming part of the Fairness Opinion
provided to the GEC Board by the Independent Financial Adviser.
1.2 SUBSIDIARIES AND AFFILIATES.
For the purposes of this Agreement, a corporation shall be deemed to be
a subsidiary or affiliate of another corporation if the former corporation is a
subsidiary or affiliate, as the case may be, of the latter corporation within
the meaning of those terms provided in the OBCA.
1.3 CURRENCY.
All sums of money which are referred to in this Agreement are expressed
in lawful money of Canada unless otherwise specified.
1.4 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Agreement into articles, sections and other
portions and the insertion of headings are for convenience of reference only and
shall not affect the construction or interpretation of this Agreement.
1.5 NUMBER, ETC.
Unless the subject matter or context requires the contrary, words
importing the singular number only shall include the plural and vice-versa;
words importing the use of any gender shall include both genders; and words
importing persons shall include firms and corporations.
1.6 DATE OF ANY ACTION.
In the event that any date on which any action is required to be taken
hereunder by any party hereto is not a Business Day in the place where the
action is required to be taken, such action shall be required to be taken on the
next succeeding day which is a Business Day in such place.
1.7 ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement between the parties
pertaining to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, whether oral or written, between
the parties with respect to the subject matter hereof. There are no
representations, warranties, covenants or conditions with respect to the subject
matter hereof except as contained herein, or in any other written agreement,
document or instrument signed and delivered contemporaneously with the execution
and delivery of this Agreement or contemplated by or referred to in this
Agreement.
1.8 KNOWLEDGE.
The use in this Agreement of the phrases "GEC's knowledge", "knowledge
of GEC" and "known to GEC" with respect to any matter or thing shall, unless the
context otherwise requires, be interpreted to mean
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the actual knowledge of the senior officers of GEC after inquiry by such
officers of the management or employees of GEC who have management
responsibility over the area of GEC's business to which the subject matter of
GEC's actual knowledge relates, and the phrases "PICO' knowledge", "knowledge of
PICO" and "known to PICO" have, unless the context otherwise requires, a
corresponding meaning.
ARTICLE 2
THE ARRANGEMENT
2.1 THE ARRANGEMENT.
2.1.1 As soon as reasonably practicable, GEC shall file, proceed
with and diligently prosecute an application to the Court for
the Interim Order. The Interim Order applied for shall provide
that the requisite majority for the approval of the
Arrangement at the GEC Shareholders' Meeting shall be (i)
two-thirds of the votes cast by the GEC Shareholders, and (ii)
a majority of the votes cast by the GEC Public Shareholders.
GEC shall call the GEC Shareholders' Meeting and shall deliver
the Joint Proxy Statement to all GEC Shareholders. If the
approval of the Arrangement, given by the requisite majorities
required by the Interim Order, is obtained at the GEC
Shareholders' Meeting, as soon as reasonably practicable
thereafter, subject to fulfilment of the conditions set forth
in subsection 5.1.6, GEC shall promptly and diligently take
the necessary steps to obtain the Final Order under section
182 of the OBCA approving the Arrangement. If such Final Order
is obtained, as soon as reasonably practicable thereafter, and
subject to the fulfilment or waiver of any conditions
contained in Article 5 hereof, GEC shall file, pursuant to
subsection 183(1) of the OBCA, articles of arrangement to give
effect to the Arrangement.
2.1.2 Pursuant to the Plan of Arrangement the following distinct
events will occur, at the Effective Time in the sequence set
out:
(a) all GEC Common Shares (other than the GEC Common
Shares held by PICO or by Dissenting Shareholders)
shall be assigned and transferred to PICO in
consideration of PICO Shares on the basis of 0.4628
of a PICO Share for each GEC Common Share. No
fractional PICO Shares will be issued. All PICO
Shares to be so issued shall be rounded to the next
lowest whole number if the first decimal place is
less than five and rounded to the next highest whole
number if the first decimal place is five or greater,
without compensation therefor to the holders of such
shares;
(b) upon the exchange referred to in paragraph (a) above,
each Shareholder whose GEC Common Shares have been so
exchanged shall cease to be a holder of GEC Common
Shares, shall have its name removed from the register
of GEC Common Shares, and shall become a holder of a
number of fully paid PICO Shares to which he is
entitled as above described, and such holder's name
shall be added to the register of holders of PICO
Shares;
(c) all GEC Warrants shall be exchanged for PICO Warrants
on the basis of 0.4628 of a PICO Warrant for each GEC
Warrant. No fractional PICO Warrants will be issued.
All PICO Warrants to be so issued shall be rounded to
be next lowest whole number if the first decimal
place is less than five and rounded to be next
highest whole number if the first decimal place is
five or greater, without compensation therefor to the
holders; and
(d) all GEC Common Shares held by Dissenting Shareholders
shall, if the Dissenting Shareholder is ultimately
entitled to be paid the fair value thereof, be deemed
to be transferred to GEC for cancellation at the
Effective Time;
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all as more specifically provided for in the Plan of
Arrangement.
2.1.3 On or before the Effective Time:
(a) PICO shall (if necessary) file with the Secretary of
State of California amendments to the PICO Articles
pursuant to the CGCL which shall authorize the
issuance of a sufficient number of PICO Shares so
that the issuances contemplated by subsection 2.1.2
may be effected and the rights of holders of PICO
Warrants may be honoured; and
(b) PICO and a warrant agent shall execute and deliver
the PICO Warrant Indenture.
2.1.4 If, prior to the Effective Date, PICO or GEC recapitalizes
through a subdivision of its outstanding shares into a greater
number of shares or a consolidation of its outstanding shares
into a lesser number of shares, or reorganizes, reclassifies
or otherwise changes its outstanding shares into the same or a
different number of shares of other classes, or declares a
dividend on its outstanding shares payable in shares of its
capital stock or securities convertible into shares of its
capital stock, the Exchange Ratio will be adjusted
appropriately to maintain the relative proportionate interests
of the holders of the GEC Common Shares and the holders of
PICO Common Stock.
2.1.5 Holders of GEC Common Shares may exercise rights of dissent
with respect of such shares in connection with the Arrangement
pursuant to and in the manner set forth in Section 185 of the
OBCA and Article 5 of the Plan of Arrangement (such holders
are referred to in this Agreement as "Dissenting
Shareholders"). GEC shall give PICO (i) prompt notice of any
written demands of a right of dissent, withdrawals of such
demands, and any other instruments served pursuant to the OBCA
and received by GEC in connection therewith, and (ii) the
opportunity to participate in all negotiations and proceedings
with respect to such rights. GEC shall not, except with the
prior written consent of PICO, voluntarily make any payment
with respect to any such rights or settle any such rights.
2.1.6 At the Effective Time:
(a) the directors and officers of GEC will be as
designated by PICO;
(b) each GEC Common Share and GEC Warrant outstanding
immediately prior to the Effective Date will be
exchanged as provided in section 2.1.2; and
(c) the Arrangement will, from and after the Effective
Time, have all of the effects provided by applicable
law, including, without limitation, the OBCA.
2.1.7 As soon as is possible after the Effective Time, PICO shall
file with the Secretary of State of California amendments to
the PICO Articles reflecting the PICO Reverse Stock Split.
2.1.8 The parties intend to adopt this Agreement and the Plan of
Arrangement as a plan of reorganization constituting a
recapitalization under Section 368(a)(1)(B) of the U.S.
Internal Revenue Code, as amended.
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ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF GEC.
GEC represents and warrants to PICO as follows (and acknowledges that
PICO is relying upon such representations and warranties in connection with the
matters contemplated by this Agreement):
3.1.1 each of GEC and its subsidiaries has been duly incorporated
and is a validly existing corporation under the laws of its
jurisdiction of incorporation, and each has the corporate
power and authority to own, lease and operate its properties
and assets and to carry on its business as it is now being
carried on;
3.1.2 GEC has the corporate power and authority to enter into this
Agreement and, subject to the Interim Order and the Final
Order and obtaining the requisite approvals contemplated
hereby and thereby, to perform its obligations hereunder and
under the Arrangement;
3.1.3 this Agreement has been duly authorized, executed and
delivered by GEC and constitutes a valid and binding
obligation of GEC enforceable against GEC in accordance with
its terms, subject to the availability of equitable remedies
and the enforcement of creditors' rights generally;
3.1.4 the execution and delivery of this Agreement by GEC and the
consummation by GEC of the transactions contemplated hereby
and by the Arrangement do not and will not:
(a) result in the breach of, or violate any term or
provision of, the articles or by-laws of GEC;
(b) violate or contravene any applicable laws, the
contravention of which could reasonably be expected
to (i) prevent or hinder the completion of the
Arrangement, or (ii) prevent or materially hinder the
completion of any other transaction contemplated by
this Agreement (provided that GEC: (i) files the
Joint Proxy Statement with all Canadian provincial
securities regulatory authorities having jurisdiction
and the Court and mails the Joint Proxy Statement to
all Shareholders in connection with the GEC
Shareholders' Meeting (ii) obtains the approval of
the Court to the Arrangement and files the Articles
of Arrangement and any other documents required by
the OBCA; and (iii) makes such filings and obtain
such authorizations, orders and approvals as may be
required under applicable securities laws and stock
exchange rules); or
(c) conflict with, result in a breach of, constitute a
default under, or accelerate or permit the
acceleration of the performance required by any
indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument, written or oral, to
which GEC is a party or by which it may be bound, the
contravention of which could reasonably be expected
to (i) prevent or hinder the completion of the
Arrangement, or (ii) prevent or materially hinder the
completion of any other transaction contemplated by
this Agreement;
3.1.5 the authorized share capital of GEC consists of an unlimited
number of GEC Common Shares and an unlimited number of
preferred shares, issuable in series, of which 81,853,076 GEC
Common Shares and no preferred shares were issued and
outstanding as of the close of business on September 17, 1998;
3.1.6 no person has any agreement, right or option, or any privilege
capable of becoming an agreement, right or option, for the
purchase or issuance of any unissued GEC Common Shares or any
unissued shares of any subsidiary of GEC, except for GEC
Options to purchase an
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aggregate of 6,567,600 GEC Common Shares currently granted and
outstanding under GEC's Option Plan (including 1,327,600 held
by a former director of GEC) and 2,411,263 GEC Warrants;
3.1.7 except for the fees and expenses payable to the Independent
Financial Adviser, neither GEC nor any of its subsidiaries has
paid or become obligated to pay any fee or commission to any
broker, finder or intermediary in connection with the
transactions contemplated by this Agreement; and
3.1.8 the Special Committee has received the Fairness Opinion.
3.2 REPRESENTATIONS AND WARRANTIES OF PICO.
PICO represents and warrants to GEC as follows (and acknowledges that GEC is
relying upon such representations and warranties in connection with the matters
contemplated by this Agreement):
3.2.1 each of PICO and the PICO Subsidiaries has been duly
incorporated and is a validly existing corporation under the
laws of its jurisdiction or incorporation, and has the
corporate power and authority to own, lease and operate its
properties and assets and to carry on its business as it is
now being carried on;
3.2.2 PICO has the corporate power and authority to enter into this
Agreement and, subject to the Interim Order and the Final
Order and obtaining the requisite approvals contemplated
hereby (and in particular by subsection 5.1.6 hereof) and
thereby, to perform its obligations hereunder and under the
Arrangement;
3.2.3 this Agreement has been duly executed and delivered by PICO
and constitutes a valid and binding obligation of PICO
enforceable against PICO in accordance with its terms, subject
to the availability of equitable remedies and the enforcement
of creditors' rights generally;
3.2.4 the execution and delivery of this Agreement by PICO and the
consummation by PICO of the transactions contemplated hereby
and by the Arrangement have been duly authorized by the board
of directors of each of PICO and do not contravene:
(a) the articles or by-laws of PICO; or
(b) any applicable laws (subject to fulfilment of the
conditions hereof), the contravention of which could
reasonably be expected to (i) prevent or hinder the
completion of the Arrangement, or (ii) prevent or
materially hinder the completion of any other
transaction contemplated by this Agreement (provided
that PICO: (i) files the Joint Proxy Statement with
the SEC; (ii) makes such filings, authorizations,
orders and approvals as may be required under State
"control share acquisition", "anti-take-over" or
similar statutes and regulations; (iii) makes such
filings and obtains such authorizations, orders and
approvals as may be required under foreign laws,
state securities laws and applicable stock exchange
rules; and (iv) makes such filings and notifications
as may be required under the HSR Act); or
(c) any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument, written
or oral, to which PICO is a party or by which it may
be bound, the contravention of which could reasonably
be expected to (i) prevent or hinder the
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completion of the Arrangement, or (ii) prevent or
materially hinder the completion of any other
transaction contemplated by this Agreement;
3.2.5 the authorized share capital of PICO consists of 100,000,000
Shares of PICO Common Stock and 2,000,000 preferred shares of
which 32,591,718 shares of PICO Common Stock and no preferred
shares were issued and outstanding as of the close of business
on September 17, 1998;
3.2.6 no person has any agreement, right or option, or any privilege
capable of becoming an agreement, right or option, for the
purchase or issuance of any unissued PICO Shares or any
unissued shares of any of PICO Subsidiaries, except for
options to purchase an aggregate of 2,572,031 shares (not
including 2,425,072 options granted to members of the GEC
management group, which options are conditional on the waiver
by the grantee of their GEC options and on completion of the
Arrangement) of PICO Common Stock currently granted and
outstanding under PICO Holding's stock option plans;
3.2.7 each of PICO and the PICO Subsidiaries holds such right and
title to the assets used in connection with its business as
may be requisite for the carrying on of its business in
accordance with current and normal industry practice;
3.2.8 the PICO Financial Statements have been prepared in accordance
with generally accepted accounting principles in the United
States applied on a basis consistent with prior periods and
present fairly and disclose in all material respects, on a
consolidated basis, the assets and liabilities and the
financial condition of PICO as of the date thereof and the
results of its operations and cash flow for the period then
ended. Neither PICO nor any of the PICO Subsidiaries has any
material liabilities or obligations, whether accrued,
absolute, contingent or otherwise, other than as reflected in
the PICO Financial Statements;
3.2.9 the books of account and other records of PICO, whether of a
financial or accounting nature or otherwise, have been
maintained in accordance with prudent business practices in
all material respects, and the minute books of PICO are true
and correct and contain the minutes of all meetings and
resolutions of the directors and shareholders of PICO;
3.2.10 neither PICO nor any of the PICO Subsidiaries is:
(a) in breach or violation of any of the material terms
or provisions of any indenture, mortgage, deed of
trust, loan agreement or other agreement (written or
oral) or instrument to which PICO or any of the PICO
Subsidiaries is a party or by which PICO or any of
the PICO Subsidiaries is bound or to which any of the
property or assets of PICO or any of the PICO
Subsidiaries is subject; or
(b) in breach or violation of any of the provisions of
its articles, by-laws or resolutions or, where such
breach or violation could have a material adverse
effect on PICO and the PICO Subsidiaries (on a
consolidated basis), any statute or any order, rule
or regulation of any court or government or
governmental agency or authority having jurisdiction
over PICO or any of the PICO Subsidiaries or any of
their properties or assets;
3.2.11 there are no actions, suits, proceedings or investigations
commenced, or to the best of the knowledge of PICO (after due
inquiry) contemplated or threatened against or affecting PICO
or any of the PICO Subsidiaries at law or in equity, or before
or by any governmental department, commission, board, bureau,
court, agency, arbitrator or instrumentality, domestic or
foreign, of any kind nor, to the best of the knowledge of PICO
(after due inquiry) are there any existing facts or conditions
which may reasonably be expected to be a proper basis for any
actions, suits, proceedings or investigations which in any
case would prevent or hinder the Arrangement or which can
reasonably be expected to materially adversely affect the
business, operations, prospects, properties, assets or affairs
of PICO and the PICO Subsidiaries on a consolidated basis;
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3.2.12 since December 31, 1997:
(i) there has been no material adverse change (or any
event, condition or state of facts which may
reasonably be expected to give rise to any such
change), in the assets, financial condition, business
or prospects of PICO and the PICO Subsidiaries on a
consolidated basis, other than as disclosed in the
Joint Proxy Statement;
(ii) PICO has conducted its business, and caused the PICO
Subsidiaries to conduct their respective businesses,
in the ordinary course of business consistent with
normal industry practice;
(iii) PICO has not made any change in its accounting
principles and practices as theretofore applied
including, without limitation, the basis upon which
its assets and liabilities are recorded on its books
and its earnings and profits and losses are
ascertained; and
(iv) PICO has not declared, paid or set aside for payment
any dividend or distribution of any kind in respect
of any of its outstanding shares, nor made any
repayments of share capital.
3.2.13 PICO has made available to the Special Committee and its
professional advisers all files, documents and other materials
and information in its possession, under its direct or
indirect control or within its knowledge, after due enquiry,
that could reasonably be considered to be material to the
Special Committee and its professional advisers in the context
of the transactions contemplated herein and has provided the
Special Committee and its professional advisers with an
opportunity to discuss all such files, documents or other
materials and information with directors or officers of PICO
and the PICO Subsidiaries who could reasonably be expected to
be aware of such files, documents or other materials and
information. Additionally, PICO has not failed to disclose to
the Special Committee and its professional advisers any
information regarding any event, circumstance or action taken
or failed to be taken which could have a material adverse
effect on the business, operations, assets, capitalization,
financial condition, prospects, rights or liabilities of or
relating to PICO and the PICO Subsidiaries, taken as a whole,
or which may be prejudicial to or reduce the likelihood of
approval by the Court of the Arrangement or the success of the
transactions contemplated herein, including, without limiting
the generality of the foregoing, disclosure of any information
relating to any material action, suit, claim, condemnation,
order or other proceeding pending before any court or
governmental commission, department, board, authority or any
other administrative agency or office, or any state of facts
existing which could constitute the basis of any such action,
suit, claim, condemnation, order or other proceeding involving
or affecting PICO or any of the PICO Subsidiaries;
3.2.14 the information contained (or incorporated by reference) in
the Joint Proxy Statement relating to PICO will (unless
superseded by more current information contained therein)
contain no untrue statement of a material fact or will not
omit to state a material fact that is required to be stated or
if it is necessary to make a statement not misleading in light
of the circumstances in which it is made, and the Joint Proxy
Statement will comply as to form in all material respects with
regulatory requirements applicable to PICO;
3.2.15 provided that the Arrangement is completed on the terms set
forth herein and in the Plan of Arrangement, the PICO Common
Stock to be issued under the Arrangement, including the PICO
Common Stock issuable upon the exercise of PICO Warrants, will
be duly and validly authorized and (in the case of the PICO
Common Stock issuable upon exercise of the PICO Warrants, on
receipt of the exercise price therefor) will be duly and
validly issued as fully paid and non-assessable shares in the
capital of PICO;
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3.2.16 the issuance of PICO Common Stock and of PICO Warrants under
the Arrangement is exempt from the prospectus requirements of
applicable U.S. and Canadian provincial securities
legislation;
3.2.17 except as disclosed in the Joint Proxy Statement, neither PICO
nor any of its affiliates has paid or become obligated to pay
any fee or commission to any broker, finder or intermediary in
connection with the transactions contemplated by this
Agreement;
3.2.18 each of PICO and the PICO Subsidiaries has paid or made
adequate provision in accordance with applicable accounting
principles for all taxes and other amounts owing to any
governmental authority which are due and payable by them prior
to the Effective Date. There are no unpaid assessments or
reassessments for any taxes and no outstanding material issues
raised by any governmental authority other than as disclosed
to the Special Committee and/or its professional advisers on
or prior to the date of this Agreement;
3.2.19 PICO has not failed to file any report, notice, declaration or
other document that is required to be filed by it pursuant to
the requirements of the applicable securities laws which
would, if filed, disclose a material change in the business,
operations, assets, capitalization, financial condition,
prospects, rights or liabilities of or relating to PICO and
the PICO Subsidiaries, taken as a whole.
ARTICLE 4
COVENANTS
4.1 COVENANTS OF GEC.
GEC covenants that prior to the Effective Date, it shall, and it shall
cause each of its affiliates, to do, take or perform or refrain from doing,
taking and performing such actions and steps as may be necessary or advisable to
ensure compliance with the following:
4.1.1 GEC will not take any action which might, directly or
indirectly, interfere or be inconsistent with or otherwise
adversely affect the completion of the Arrangement and,
without limiting the generality of the foregoing, GEC:
(i) will carry on its business in, and only in, the
ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent
with such business, use all reasonable efforts to
preserve intact its present business organization,
licenses and permits to the end that its goodwill and
business shall be maintained;
(ii) will not disclose to any person, other than officers,
directors and key employees and professional advisers
of GEC, confidential information relating to PICO
except information disclosed in the Joint Proxy
Statement, information required to be disclosed by
law, or information otherwise legally known to the
public or GEC; and
(iii) will not, directly or indirectly, solicit, initiate
or encourage proposals or offers from, or
negotiations with, any person, or provide information
to any person relating to any other potential
transaction with respect to, or assist or participate
in or facilitate any effort or attempt with respect
to, the disposition of all or a material portion of
its business or assets or its outstanding securities
or any merger, business combination or a similar
transaction involving GEC or the GEC Common Shares,
provided that nothing in this Agreement shall be construed as limiting the power
of the GEC Board to respond as required by law to any submission or proposal
regarding any acquisition or disposition of assets or to amalgamate, merge or
effect an arrangement or otherwise fulfil their fiduciary duties to GEC and its
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shareholders in relation to such transaction if to do so would, in the opinion
of the GEC Board (having consulted qualified outside counsel), be a proper
exercise of such directors' fiduciary duties and provided further that the
foregoing shall not entitle GEC to terminate this Agreement, to not proceed with
the GEC Shareholders' Meeting as contemplated herein or to withdraw from the
shareholders' vote on the Arrangement, and provided further that in the event
that GEC or any of its affiliates receives any proposal or offer referred to in
subparagraph 4.1.1(iii) or an inquiry with respect thereto, GEC shall promptly
notify PICO in writing of all relevant details relating thereto;
4.1.2 GEC will use all reasonable efforts to do all acts and things
as may be necessary or desirable to ensure the successful
implementation of the Arrangement and, without limiting the
generality of the foregoing:
(a) subject to the granting of the Interim Order, GEC
will use all reasonable efforts to, as soon as
practicable and in any event on or before October ?,
1998 (provided that PICO has complied with its
covenant in subsection 4.2.4), complete the
preparation of the Joint Proxy Statement and mail to
its shareholders and file in all jurisdictions where
the Joint Proxy Statement and other document are
required in connection with the GEC Shareholders'
Meeting, all in accordance with National Policy No.
41 of the Canadian Securities Administrators, the
Interim Order and applicable law, and GEC will use
all reasonable efforts to, as soon as practicable and
in any event on or before December 15, 1998, convene
the GEC Shareholders' Meeting for the purpose of
approving the Arrangement in accordance with the
Interim Order;
(b) GEC will cause a list of GEC Shareholders as of the
record date for the GEC Shareholders' Meeting, in a
form suitable for soliciting of GEC Shareholders and
prepared by the transfer agent of GEC, to be
delivered to PICO not later than the second business
day after such record date; and
(c) GEC will use all reasonable efforts to cause each of
the conditions precedent set forth in sections 5.1
and 5.3 which is within its control to be complied
with;
4.1.3 subject to compliance by PICO with subsection 4.2.4, GEC will
ensure that the Joint Proxy Statement complies with all
applicable disclosure laws and, without limiting the
generality of the foregoing, provides GEC Shareholders to
which such Joint Proxy Statement is sent with information in
sufficient detail to reach an informed decision concerning the
matters before them; and
4.1.4 the indenture governing the GEC Warrants will, prior to
October 21, 1998, be supplemented and amended in accordance
with its terms to extend the expiry date of the GEC Warrants
to May 31, 1999 and to provide for the exchange contemplated
by subsection 2.1.2.
4.2 COVENANTS OF PICO.
PICO covenants that prior to the Effective Date, it shall, and it shall
cause each of the Affiliates of PICO, to do, take or perform or refrain from
doing, taking and performing such actions and steps as may be necessary or
advisable to ensure compliance with the following:
4.2.1 PICO will take all necessary corporate action to allot and to
issue conditionally the PICO Common Stock to be issued in
connection with the Arrangement and will issue such PICO
Common Stock on the basis contemplated thereby and will also
use its best efforts to obtain the listing of such PICO Common
Stock on the Nasdaq National Market;
4.2.2 PICO will not take any action which might, directly or
indirectly, interfere or be inconsistent with or otherwise
adversely affect the completion of the Arrangement and,
without limiting the generality of the foregoing, PICO:
(a) will carry on its business in, and only in, the
ordinary course in substantially the same manner as
heretofore conducted and, to the extent consistent
with such business, use
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all reasonable efforts to preserve intact its present
business organization, licenses and permits to the
end that its goodwill and business shall be
maintained;
(b) will not declare any dividends on or make any other
distributions in respect of its outstanding shares,
and will not amend its articles or by-laws;
(c) will not disclose to any person, other than officers,
directors and key employees of and professional
advisers of PICO any confidential information in the
Joint Proxy Statement relating to GEC except
information legally disclosed in the Joint Proxy
Statement, information required to be disclosed by
law, or information otherwise known to the public or
PICO;
(d) shall promptly advise GEC orally and in writing of
any change in the business, operations, affairs,
assets, liabilities, capitalization, financial
condition, licences, permits, rights or privileges,
whether contractual or otherwise, of PICO or any of
the PICO Subsidiaries that could be materially
adverse to PICO and the PICO Subsidiaries, taken as a
whole; and
(e) shall not enter into any transaction or perform any
act which might interfere or be inconsistent with or
delay the successful completion of the Arrangement or
which would result in any of the representations and
warranties set forth herein to be inaccurate in any
material respect,
provided that nothing in this Agreement shall be construed as
limiting the power of the board of directors of PICO to
respond as required by law to any submission or proposal
regarding any acquisition or disposition of assets or to
amalgamate, merge or effect an arrangement or otherwise to
fulfil their fiduciary duties to PICO and its shareholders in
relation to such a transaction and to do so would, in the
opinion of the board of directors (having consulted qualified
outside counsel), be a proper exercise of such directors'
fiduciary duties and provided further that the foregoing shall
not entitle PICO to terminate this Agreement;
4.2.3 PICO will use all reasonable efforts to do all acts and things
as may be necessary or desirable to ensure the successful
implementation of the Arrangement and, without limiting the
generality of the foregoing, PICO will use all reasonable
efforts (to the extent within its control) to complete the
Joint Proxy Statement, to file it with the SEC (and use all
reasonable efforts to resolve any SEC comments thereon) and
mail it to its Shareholders and file in all jurisdictions
where the Joint Proxy Statement and other documents are
required in connection with the PICO Shareholders' Meeting,
all in accordance with applicable law; and (ii) as soon as
practicable and in any event, on or before November 16, 1998,
convene the PICO Shareholders' Meeting for the purposes of
(among other things) approving the transactions contemplated
by the Arrangement, and will use all reasonable efforts to
cause each of the conditions precedent set forth in sections
5.1 and 5.2 which is within its control to be complied with;
4.2.4 PICO will provide GEC in a timely and expeditious manner with
all information relating to PICO and PICO Subsidiaries
required to be included in the Joint Proxy Statement in order
for the Joint Proxy Statement to comply with disclosure laws
applicable to GEC and the Interim Order, and PICO will
indemnify and save harmless the directors of GEC from and
against any and all claims, suits, actions, causes of action,
liabilities, damages, costs, charges and expenses of every
nature and kind whatsoever for which the directors of GEC may
become personally liable by virtue of the inclusion of such
information in the Joint Proxy Statement, provided such
information was included in full and in the form provided by
PICO with only such amendments as shall be approved in writing
by PICO;
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4.2.5 PICO shall (if no exemption from registration is available)
prepare and file with the SEC a registration statement with
respect to the issuance by PICO of PICO Common Stock on the
exercise of PICO Warrants, and PICO shall use all commercially
reasonable efforts to maintain the effectiveness of such
registration for such period as the PICO Warrants remain
outstanding;
4.2.6 PICO will vote, and will cause its affiliates to vote, to
approve the Arrangement at the GEC Shareholders' Meeting in
their capacity as Shareholders; and
4.2.7 PICO will take all steps necessary to ensure that all rights
to indemnification now existing in favour of the directors or
officers of GEC as provided in its articles of incorporation,
by-laws or other agreements between GEC and such persons shall
survive the Arrangement and shall continue in full force and
effect for a period of not less than six years from the
Effective Date, and PICO further agrees that there shall be
maintained in effect, for not less than six years from the
Effective Date, coverage equivalent to that in effect under
the current policies of the directors' and officers' liability
insurance maintained by GEC which is no less advantageous.
4.3 MUTUAL COVENANTS.
Each of PICO and GEC covenants that prior to the Effective Date, it
shall do, take or perform or refrain from doing, taking and performing such
actions and steps as may be necessary or advisable to satisfy (or cause the
satisfaction of) the conditions precedent to its obligations hereunder and to
take, or cause to be taken, all other action and to do, or cause to be done, all
other things necessary, proper or advisable under applicable laws and
regulations to complete the Arrangement, including using its best efforts:
(a) to obtain the Interim Order and the Final Order;
(b) to ensure that the Joint Proxy Statement shall comply
with all disclosure laws applicable to such party
and, without limiting the generality of the
foregoing, ensure that the Joint Proxy Statement
provides Public Shareholders with information in
sufficient detail to permit them to make an informed
judgment concerning the matters described therein;
(c) to file and mail the Joint Proxy Statement in
accordance with applicable law;
(d) to obtain all necessary waivers, consents and
approvals required to be obtained by it from other
parties to loan agreements, leases and other
contracts;
(e) to obtain all necessary consents, approvals and
authorizations as are required to be obtained by it
under any applicable law or regulation, including,
without limitation, (i) consents or approvals
required under applicable antitrust legislation, and
(ii) any necessary order or ruling of the securities
commission or similar regulatory authority of a
province of Canada where necessary to exempt first
trades in PICO Common Stock and the PICO Warrants to
be issued pursuant to the Arrangement and in PICO
Shares issued on the exercise of PICO Warrants from
the prospectus requirements of the securities
legislation of such province;
(f) to defend vigorously all law suits or other legal
proceedings against it challenging this Agreement,
the Plan of Arrangement or the completion of the
Arrangement;
(g) to effect all necessary registrations and filings and
submissions of information requested by governmental
authorities required to be effected by it in
connection with the Arrangement; and
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(h) to promptly notify the other in writing upon becoming
aware of any misrepresentation in section 3.1 (in the
case of GEC) or section 3.2 (in the case of PICO),
and each of PICO and GEC will use its best efforts to
cooperate with the other in connection with the performance by
the other of its obligations under this subsection.
ARTICLE 5
CONDITIONS
5.1 MUTUAL CONDITIONS.
The respective obligations of GEC and PICO to complete the transactions
contemplated hereby and to file articles of arrangement to give effect to the
Arrangement shall be subject to the fulfilment, or mutual waiver by GEC and
PICO, on or before the Effective Date, of each of the following conditions:
5.1.1 the Interim Order shall have been obtained in form and
substance satisfactory to the Special Committee and PICO,
acting reasonably, including those provisions as to the
designation of requisite majorities described in section
2.1.1;
5.1.2 the Arrangement shall have been approved at the GEC
Shareholders' Meeting in the manner and by the majorities
required by the Interim Order and by Policy 9.1;
5.1.3 immediately prior to the Effective Date, shareholders shall
not have exercised the right of dissent provided for in
Article 6 of the Plan of Arrangement in respect of more than
2?% of the then issued and outstanding GEC Common Shares owned
by GEC Public Shareholders and/or 5% of the issued and
outstanding PICO Shares unless same shall have been abandoned;
5.1.4 all necessary regulatory approvals shall have been obtained
and no governmental or regulatory authority shall have
indicated that the Arrangement should be subject to any
additional approval of GEC Shareholders beyond that provided
in the Interim Order;
5.1.5 the issuance of PICO securities as contemplated under the
Arrangement shall have been duly registered where required in
accordance with applicable securities laws (or exempt from
such registration requirements) and shall not be the subject
of any stop-order or proceedings seeking a stop-order;
5.1.6 the transactions contemplated by this Agreement shall have
been approved by the shareholders of PICO at the PICO
Shareholders' Meeting in accordance with applicable law and
the requirements of the Nasdaq National Market System;
5.1.7 the Final Order shall have been obtained in form and substance
satisfactory to GEC, the Special Committee and PICO, acting
reasonably;
5.1.8 the Fairness Opinion shall not have been withdrawn or amended
in a way that adversely alters the conclusions therein;
5.1.9 all other consents, orders, regulations and approvals,
including regulatory and judicial approvals and orders,
required, necessary for the completion of the Arrangement
shall have been obtained or received from the persons,
authorities or bodies having jurisdiction in the
circumstances;
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5.1.10 none of the consents, orders, regulations or approvals
required in connection with the Arrangement shall contain
terms or conditions or require undertakings or security deemed
unsatisfactory or unacceptable by either GEC or PICO acting
reasonably;
5.1.11 no preliminary or permanent injunction, restraining order,
cease trading order or other order or decree of any court,
regulatory body or agency which preventing the consummation of
the transactions contemplated by this Agreement shall have
been issued and remain in effect and no action or proceeding
to obtain such an order shall be pending or threatened;
5.1.12 PICO and GEC shall have received a favourable opinion in form
and substance reasonably satisfactory to the Special Committee
and its legal counsel addressed to both PICO and GEC dated as
of the Effective Date from PICO's auditors to the effect that
the Arrangement should be treated for U.S. federal income tax
purposes as a tax-free reorganization under Section
368(a)(1)(B) of the Internal Revenue Code; and
5.1.13 this Agreement shall not have terminated pursuant to Article 6
hereof.
5.2 ADDITIONAL CONDITIONS OF GEC'S OBLIGATIONS.
The obligations of GEC to complete the transactions contemplated hereby
and to file articles of arrangement to give effect to the Arrangement shall be
subject to the fulfilment, or waiver by GEC, on or before the Effective Date, of
each of the following additional conditions:
5.2.1 PICO shall have performed each obligation to be performed by
it hereunder on or prior to the Effective Date;
5.2.2 the representations and warranties of PICO set out in section
3.2 shall be true and correct in all material respects on and
as of the Effective Date as if made on and as of such date,
except as affected by transactions contemplated or permitted
by this Agreement, and there shall not have been, since the
date hereof, any materially adverse change in the business,
operations, affairs, assets, liabilities, financial condition,
licenses, permits, rights or privileges, whether contractual
or otherwise;
5.2.3 GEC shall have received a certificate of PICO, dated the
Effective Date, signed by a senior officer, to the effect
that, to the best of the knowledge, information and belief of
the officer, the conditions specified in subsections 5.2.1 and
5.2.2 have been fulfilled; and
5.2.4 any necessary order or ruling of the securities commission or
similar regulatory authority of a province of Canada shall
have been obtained.
5.3 ADDITIONAL CONDITIONS OF PICO'S OBLIGATIONS.
The obligations of PICO to complete the transactions contemplated
hereby shall also be subject to the fulfilment, or waiver by PICO, on or before
the Effective Date, of each of the following additional conditions:
5.3.1 GEC shall have performed each obligation to be performed by it
hereunder on or prior to the Effective Date;
5.3.2 the representations and warranties of GEC set out in section
3.1 shall be true and correct in all material respects on and
as of the Effective Date as if made on and as of such date,
except as affected by transactions contemplated or permitted
by this Agreement, and there shall not have been, since the
date hereof, any change in the business, operations, affairs,
assets,
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liabilities, financial condition, licenses, permits, rights or
privileges, whether contractual or otherwise;
5.3.3 PICO shall have received a certificate of GEC, dated the
Effective Date, signed by a senior officer to the effect that,
to the best of the knowledge, information and belief of the
officer, the conditions specified in subsection 5.3.1 and
5.3.2 have been fulfilled; and
5.3.4 PICO shall have received a favourable legal opinion in form
and substance satisfactory to its board of directors and its
legal counsel addressed to PICO as to such matters incidental
to the transaction provided for herein as the PICO board of
directors as legal counsel may reasonably request.
5.4 NOTICE AND CURE PROVISIONS.
5.4.1 Each of GEC and PICO shall give prompt notice to the others of
the occurrence, or failure to occur, at any time from the date
hereof to the Effective Date of any event or state of facts,
which occurrence or failure would, or would be likely to, (a)
cause any of the representations or warranties of any party
contained herein to be untrue or inaccurate in any material
respect, or (b) result in the failure to comply with or
satisfy any covenant, condition or agreement to be complied
with or satisfied by any party hereunder, provided, however,
that no such notification shall affect the representations or
warranties of the parties or the conditions to the obligations
of the parties hereunder.
5.4.2 No party may elect not to complete the transaction
contemplated hereby pursuant to the conditions precedent
contained in subsections 5.2.1, 5.2.2, 5.3.1 or 5.3.2 unless,
prior to the filing on the Effective Date of articles of
arrangement for the purpose of giving effect to the
Arrangement, the party intending to rely thereon has delivered
a written notice to the party it alleges to be in breach (the
"defaulting party"), specifying in reasonable detail all
breaches of covenants, representations and warranties or other
matters which the party delivering such notice is asserting as
the basis for the non-fulfilment of the applicable conditions
precedent. More than one such notice may be delivered by a
party.
5.5 SATISFACTION OF CONDITIONS.
GEC shall file articles of arrangement to give effect to the
arrangement only upon the satisfaction or waiver by PICO of all the conditions
for PICO's benefit set forth in sections 5.1 and 5.3 in the manner contemplated
therein.
The conditions set out in this Article 5 shall be conclusively deemed
to have been satisfied, waived or released when, with the agreement of the
parties, articles of arrangement are filed under the OBCA to carry into effect
the Arrangement.
ARTICLE 6
TERMINATION AND AMENDMENT
6.1 TERMINATION.
This Agreement may be terminated by mutual agreement of the parties at
any time prior to the Effective Time. Also, either party may terminate this
Agreement prior to the Effective Time if all conditions for closing the
Arrangement have not been satisfied or waived by March 31, 1999 or if: (i) there
has been a breach of any representation, warranty, covenant or agreement
contained in this Agreement on the part of the other party that has or is likely
to have a material adverse effect on the breaching party, and such breach has
not been cured within five business days after notice thereof; (ii) any required
approval of the shareholders of GEC or the stockholders of PICO shall not have
been obtained; or (iii) any permanent injunction or other order of
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a court has been issued and become final and non-applicable which would prohibit
or otherwise restrain consummation of the Arrangement and, except for the
obligations under paragraphs 4.1.1(ii) and 4.2.3(c), no party hereto shall have
any liability or further obligation to any other party hereunder except in
respect of any breach of this Agreement which occurred on or before the date of
termination.
6.2 AMENDMENT.
Subject to applicable law, this Agreement may, at any time and from
time to time before and after the holding of the GEC Shareholders' Meeting, but
not later than the Effective Date, be amended by written agreement of the
parties, without further notice to or action on the part of their respective
shareholders; provided that, after the holding of the GEC Shareholders' Meeting,
this Agreement shall not be amended in a manner prejudicial to GEC Public
Shareholders (which, without limitation, will include any material variation in
the rights, privileges, restrictions and conditions attaching to the PICO Common
Stock or the Exchange Ratio), without the approval of the GEC Shareholders given
in the same manner as required for the approval of the Arrangement or as may be
further ordered by the Court.
ARTICLE 7
7.1 NOTICES.
Notices and other communications hereunder shall be in writing and
shall be delivered by hand or sent by telecopier to the parties at the following
addresses or at such other addresses as shall be specified by the parties by
like notice, and shall be deemed to be received at the time of delivery by hand
or at the time such telecopy is received:
7.1.1 If to PICO:
875 Prospect Street, Suite 301
La Jolla, California, USA
92037
Attention: President
Telephone: (619) 456-6022
Telecopier: (619) 456-6480
with a copy to:
Gray Cary Ware Freidenrich LLP
4365 Executive Drive, Suite 1600 San
Diego, California U.S.A.
92121-2189
Attention: Doug Rein
Telephone: (619) 677-1400
Telecopier: (619) 677-1477
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<PAGE> 153
and to:
Goodman Phillips & Vineberg
250 Yonge Street
Suite 2400
Toronto, Ontario
M5B 2M6
Attention: Stephen H. Halperin
Telephone: (416) 979-2211
Telecopier: (416) 979-1234
7.1.2 If to GEC:
80 Richmond Street West
Suite 1805
Toronto, Ontario
M5H 2A4
Attention: President
Telephone: (416) 861-1592
Telecopier: (416) 861-0128
with a copy to:
David A. Williams
(in his capacity as Chairman of the
Special Committee of the Board of Directors
of Global Equity Corporation)
President
Roxborough Holdings Limited
1 First Canadian Place
Suite 6250
Toronto, Ontario
M5X 1C7
Telephone: (416) 364-4700
Telecopier: (416) 364-6650
and to:
Stikeman, Elliott
Commerce Court West
Suite 5300
Toronto, Ontario
M5L 1B9
Attention: Edward J. Waitzer
Telephone: (416) 869-5587
Telecopier: (416) 947-0866
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<PAGE> 154
7.2 SPECIAL COMMITTEE.
Other than as expressly provided herein all consents, waivers, notices,
amendments delivered on behalf of GEC hereunder shall be effective for the
purpose of this Agreement only if executed by (among others, as the case may be)
at least one member of the Special Committee.
7.3 SURVIVAL OF REPRESENTATIONS.
All representations, warranties and covenants of the parties contained
in this Agreement will remain operative and in full force and effect, regardless
of any investigation made by or on behalf of the parties to this Agreement,
until the earlier of the termination of this Agreement or the Effective Date,
whereupon such representations, warranties and covenants will expire (except for
covenants that by their terms survive for a longer period).
7.4 FURTHER ASSURANCES.
Each party agrees to cooperate fully with the other party and to
execute such further instruments, documents and agreements and to give such
further written assurances as may be reasonably requested by the other party to
evidence and reflect the transactions described herein and contemplated hereby
to carry into effect the intents and purposes of this Agreement.
7.5 ENTIRE AGREEMENT.
This Agreement and the exhibits hereto constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and supersede all prior and contemporaneous agreements or
understandings, inducements or conditions, expressed or implied, written or
oral, between the parties with respect to the subject matter hereof.
7.6 SEVERABILITY.
If any provision of this Agreement, or the application thereof, will
for any reason and to any extent be invalid or unenforceable, the remainder of
this Agreement and application of such provision to other persons or
circumstances will be interpreted so as reasonably to give effect to the intent
of the parties hereto. The parties further agree to replace such void or
unenforceable provisions of this Agreement with a valid and enforceable
provision that will achieve, to the greatest extent possible, the economic,
business and other purposes of the void or unenforceable provision.
7.7 PUBLIC DISCLOSURE.
The parties agree to consult with each other before making any public
disclosure announcement of or pertaining to this Agreement and that any such
disclosure or announcement shall be mutually satisfactory to all parties,
provided, however, that this section 7.2 shall not apply in the event that any
party hereto is advised by its counsel that certain disclosures or announcements
which the other parties after reasonable notice will not consent to or require
to be made by applicable laws, stock exchange rules or policies of regulatory
authorities having jurisdiction.
7.8 APPLICABLE LAW.
This Agreement shall be governed by, and construed in accordance with,
the laws of the Province of Ontario and the laws of Canada applicable therein
and shall be treated in all respects as an Ontario contract.
7.9 ASSIGNMENT.
This Agreement and all the provisions hereof shall be binding upon and
enure to the benefit of the parties hereto and their respective successors and
permitted assigns. Neither this Agreement nor any of the
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<PAGE> 155
rights hereunder or under the Arrangement shall be assigned by any party without
the prior written consent of the others.
7.10 COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall be
deemed an original, and all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF each of the parties has executed this Agreement as
of the date first written above.
PICO HOLDINGS INC.
By: /s/ James F. Mosier
------------------------
James F. Mosier,
General Counsel and
Corporate Secretary
GLOBAL EQUITY CORPORATION
By: /s/ James F. Mosier
------------------------
James F. Mosier,
Secretary
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<PAGE> 156
EXHIBIT 1
PLAN OF ARRANGEMENT UNDER SECTION 182
OF THE BUSINESS CORPORATIONS ACT
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Plan of Arrangement, unless there is something in the subject
matter or context inconsistent therewith:
"AFFILIATE" has the meaning ascribed thereto in the OBCA;
"ARRANGEMENT" means the arrangement under section 182 of the OBCA on
the terms and conditions set out in the Plan of Arrangement and any
amendment or variation thereof made in accordance with section 6.2
hereof;
"ARRANGEMENT RESOLUTION" means the special resolution to authorize the
Arrangement, to be considered by GEC Shareholders at the GEC
Shareholders' Meeting;
"BUSINESS DAY" means a day other than a Saturday, Sunday or holiday
within the meaning of the Interpretation Act (Ontario), R.S.O. 1990, c.
I.11, as amended;
"COMBINATION AGREEMENT" means the combination agreement dated ?, 1998
between PICO and GEC;
"COURT" means the Ontario Court of Justice (General Division);
"DEPOSITARY" means Equity Transfer Services Inc. at its principal
office(s) in Toronto;
"DISSENTING SHAREHOLDERS" means GEC Shareholders who have exercised,
and who do not prior to the Effective Date withdraw or otherwise
relinquish, the right of dissent available to such GEC Shareholders in
respect of the Arrangement Resolution;
"EFFECTIVE DATE" means the date shown on the Certificate of Amendment
to be issued under the OBCA giving effect to the Arrangement;
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the Effective Date;
"GEC" means Global Equity Corporation;
"GEC COMMON SHARES" means the common shares in the capital of GEC;
"GEC SHAREHOLDERS" means the holders of GEC Common Shares;
"GEC WARRANT AGENT" means Montreal Trust Company of Canada;
"GEC WARRANTS" means common share purchase warrants issued by GEC under
the GEC Warrant Indenture;
"GEC WARRANT INDENTURE" means the indenture dated October 21, 1993,
between GEC and the GEC Warrant Agent, as supplemented and amended;
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<PAGE> 157
"JOINT PROXY STATEMENT" means the joint management information circular
and proxy statement to be sent by GEC to the GEC Shareholders in
connection with the GEC Shareholders' Meeting and to be sent by PICO to
holders of PICO Shares in connection with the PICO Shareholders'
Meeting;
"LETTER OF TRANSMITTAL" means a Shareholders' Letter of Transmittal or
a Warrantholders' Letter of Transmittal, as the context requires;
"OBCA" means the Business Corporations Act, R.S.O. 1990, c. B.16, as
amended;
"PICO" means PICO HOLDINGS, Inc.;
"PICO COMMON STOCK" means the shares of common stock of PICO , and any
other securities into which such shares may be changed or for which
such shares may be exchanged or any other consideration which may be
received by the holders of such shares pursuant to a recapitalization,
reconstruction, reorganization or reclassification of, or an
amalgamation, merger, liquidation or similar transaction affecting,
such shares;
"PICO REVERSE STOCK SPLIT" has the meaning ascribed thereto in section
3.3;
"PICO SHARE" means a share of PICO Common Stock;
"PICO SHAREHOLDERS' MEETING" means the annual meeting of the GEC
Shareholders of PICO to be held on or about November ?, 1998 to
consider, among other matters, and if deemed advisable, to approve the
transactions contemplated by the Arrangement;
"PICO WARRANT" means a common share purchase warrant to be issued by
PICO under the Arrangement, each of which will entitle the holder
thereof to purchase one PICO share for U.S.$4.76 on or before June 30,
1999;
"SHAREHOLDERS' LETTER OF TRANSMITTAL" means the letter of transmittal
to be sent to GEC Shareholders together with the Joint Proxy Statement,
relating to the transmittal of GEC Common Shares to the Depositary for
purpose of effecting the delivery to the GEC Shareholders pursuant to
Article 4 of PICO Shares in exchange for their GEC Common Shares,
pursuant to Article 3;
"WARRANTHOLDERS" means holders of GEC Warrants; and
"WARRANTHOLDERS' LETTER OF TRANSMITTAL" means the letter of transmittal
to be sent to Warrantholders together with the Joint Proxy Statement,
relating to the transmittal of GEC Warrants to the Depositary for the
purpose of effecting the delivery to such Warrantholders pursuant to
Article 4 of PICO Warrants in exchange for their GEC Warrants, pursuant
to Article 4.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Plan of Arrangement into articles, sections and
other portions and the insertion of headings are for convenience of reference
only and shall not affect the construction or interpretation of this Plan of
Arrangement.
1.3 NUMBER, ETC.
Unless the subject matter or context requires the contrary, words
importing the singular number only shall include the plural and vice-versa;
words importing the use of any gender shall include both genders; and words
importing persons shall include firms and corporations.
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<PAGE> 158
1.4 HOLDERS OF SECURITIES
For the purpose of effecting the exchange of the GEC Common Shares and
GEC Warrants pursuant to Article 3, such securities shall be deemed to be held
by the registered holder thereof as shown on the appropriate register maintained
by GEC as of the Effective Date.
1.5 DATE OF ANY ACTION
In the event that any date on which any action is required to be taken
hereunder by any person is not a Business Day in the place where the action is
required to be taken, such action shall be required to be taken on the next
succeeding day which is a Business Day in such place.
1.6 PAYMENTS
All payments to be made hereunder shall be made without interest and
less any tax required by law to be deducted and withheld. Any cheque deliverable
to a Shareholder whose address is recorded in the securities register of GEC is
in Canada shall be payable in Canadian dollars, and cheques delivered to all
other GEC Shareholders shall be payable in U.S. dollars.
ARTICLE 2
COMBINATION AGREEMENT
2.1 COMBINATION AGREEMENT
This Plan of Arrangement is made pursuant to, is subject to the
provisions of, and forms part of the Arrangement Agreement.
ARTICLE 3
THE ARRANGEMENT
3.1 THE ARRANGEMENT
At the Effective Time the following distinct events shall occur and be
deemed to occur without any further act or formality in the sequence set out:
(a) subject to section 4.3.1, each Common Share (other than GEC
Common Shares held by PICO and by holders who have exercised
their rights of dissent in accordance with Article 5 and who
are entitled to be paid fair value for such shares) shall be
exchanged for 0.4628 of a fully paid and non-assessable PICO
Share;
(b) upon the exchange referred to in paragraph (a) above, each
Shareholder whose GEC Common Shares have been so exchanged
shall cease to be a holder of GEC Common Shares, shall have
its name removed from the register of GEC Common Shares, and
shall become a holder of a number of fully paid PICO Shares to
which he is entitled as above described, and such holder's
name shall be added to the register of holders of PICO Shares;
(c) subject to section 4.3.1, all GEC Warrants shall be exchanged
for PICO Warrants on the basis of 0.4628 of a PICO Warrant for
each GEC Warrant; and
(d) all GEC Common Shares held by Dissenting Shareholders shall,
if the Dissenting Shareholder is ultimately entitled to be
paid the fair value thereof be deemed to be transferred to GEC
for cancellation at the Effective Time.
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<PAGE> 159
3.2 BINDING NATURE
This Plan of Arrangement will become effective at, and will be bind on
and after the Effective Time (i) GEC, (ii) PICO and its Affiliates, (iii) all
holders of GEC Common Shares and (iv) all holders of GEC Warrants.
3.3 POST-ARRANGEMENT MATTERS
Immediately following the implementation of the Arrangement, PICO may
contribute or sell all of the GEC Common Shares and GEC Warrants acquired by it
under the Arrangement to a wholly-owned subsidiary of PICO incorporated under
the OBCA. Immediately after the Arrangement and (if applicable) the contribution
or sale hereinbefore described, PICO will (provided that all requisite
shareholder approvals shall have previously been obtained) effect a one-for-five
reverse stock split of the PICO Shares (including the PICO Shares issuable under
the Arrangement). The GEC Shareholders by their approval of the Arrangement
shall be deemed to have approved of the matters described in this section 3.3.
ARTICLE 4
OUTSTANDING CERTIFICATES AND PAYMENTS
4.1 DELIVERY OF SHARE AND WARRANT CERTIFICATES
On the Effective Date, GEC shall cause to be delivered to the
Depositary, for the benefit of the holders of GEC Common Shares and GEC Warrants
exchanged pursuant to section 3.2, certificates representing the aggregate
number of PICO Shares and PICO Warrants issued pursuant to Article 3 (adjusted
for the PICO Reverse Stock Split, if applicable) in exchange for their GEC
securities for delivery to such holders in accordance with section 4.2. As soon
as practicable after the Effective Time, and in any event before the later of
the tenth day after the Effective Date and the tenth day after receipt of the
relevant Letter of Transmittal completed and accompanied by such other documents
as contemplated by subsection 4.2.1, certificates representing such PICO Shares
and PICO Warrants (adjusted for the PICO Reverse Stock Split, if applicable)
shall be delivered by the Depositary to the persons entitled thereto in
accordance with subsections 4.2.1 and 4.2.2, and such former GEC Shareholders
and Warrantholders shall be entered into the books of PICO as the registered
holders of PICO Shares and PICO Warrants, respectively. Unless otherwise
directed in accordance with any Letter of Transmittal, the Depositary shall
forward all such certificates by first class mail, postage prepaid, or, in the
case of a postal disruption in Canada, by such other means as the Depositary may
deem prudent, to such former holders of GEC Common Shares and GEC Warrants at
their addresses specified in their Letter of Transmittal. Certificates forwarded
pursuant to this section will be deemed to have been delivered at the time they
are delivered to the post office, or to such other party as may be charged with
the responsibility for the transmission of them.
4.2 ENTITLEMENT TO SHARE AND WARRANT CERTIFICATES
4.2.1 Upon the later of the Effective Time and the receipt of the
Letter of Transmittal duly completed and executed in the
manner described therein, together with the certificates
representing the GEC Common Shares or GEC Warrants referred to
therein, in the case of GEC Common Shares, duly endorsed for
transfer, where required, together with such other documents
and instruments as would have been required to effect the
transfer of the shares formally represented by such
certificate under the OBCA and, in the case of both GEC Common
Shares and GEC Warrants, together with such additional
documents and instruments as the Depositary and GEC (and, in
the case of the GEC Warrants, the GEC Warrant Agent) may
reasonably require, the Depositary shall deliver certificates
representing PICO Shares or GEC Warrants, as the case may be,
as provided in section 4.1.
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4.2.2 On and after the Effective Date, certificates formerly
representing GEC Common Shares or GEC Warrants shall, subject
to section 4.5, represent only the right to receive a
certificate for PICO Shares or PICO Warrants, respectively, in
accordance with this Plan of Arrangement.
4.2.3 All dividends paid and distributions made in respect of PICO
Shares for which a certificate has not been delivered to the
holder thereof in accordance with section 4.1 shall be made
payable to the Depositary and shall be held by the Depositary
in trust for such holder. All moneys so received by the
Depositary shall be invested by it in interest-bearing trust
accounts upon terms which the Depositary may reasonably
consider appropriate. The Depositary shall, subject to
compliance with subsection 4.2.1, pay and deliver to any such
holder, as soon as reasonably practicable after application
therefor is made by such holder to the Depositary in such form
as the Depositary may reasonably require, such dividends,
distributions and interest accrued thereon, net of withholding
and other taxes, to which such holder is entitled.
4.3 NO FRACTIONAL PICO SHARES OR PICO WARRANTS
4.3.1 No certificates representing fractional PICO Shares or PICO
Warrants will be issued or delivered in respect of PICO Shares
or PICO Warrants issuable to former GEC Shareholders pursuant
to subsection 3.1.1. All PICO Shares and PICO Warrants to be
so issued shall be rounded to the next lowest whole number if
the first decimal place is less than five and rounded to the
next highest whole number if the first decimal place is five
or greater, without compensation therefor to the holders of
such shares.
4.4 LOST CERTIFICATES
4.4.1 If any certificate which immediately prior to the Effective
Time represents outstanding GEC Common Shares or GEC Warrants
that were exchanged pursuant to section 3.2 has been lost,
stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming such certificate to be lost,
stolen or destroyed, the Depositary will issue in exchange for
such lost, stolen or destroyed certificate, a certificate
representing PICO Shares (and a cheque for any dividends or
distributions with respect thereto pursuant to subsection
4.2.3) or PICO Warrants, as the case may be, deliverable in
respect thereof. When authorizing such payment in exchange for
any lost, stolen or destroyed certificate, a person to whom a
certificate representing PICO Shares or PICO Warrants is to be
issued shall, as a condition precedent to the issuance
thereof, give a bond satisfactory to PICO and the Depositary,
in such sum as PICO may direct, or otherwise indemnify GEC,
PICO and the Depositary in a manner satisfactory to them
against any claim that may be made against GEC, PICO or the
Depositary with respect to the certificate alleged to have
been lost, stolen or destroyed.
4.5 EXTINGUISHMENT OF RIGHTS
4.5.1 Notwithstanding any other provision hereof, any certificate
which immediately prior to the Effective Time represented
outstanding GEC Common Shares or GEC Warrants that were
exchanged pursuant to section 3.2 and has not been surrendered
with all other instruments required by section 4.2 on or prior
to the sixth anniversary of the Effective Date shall cease to
represent a claim or interest of any kind or nature. On such
date, the PICO Shares or PICO Warrants (as the case may be) to
which the former registered holder of such certificate was
ultimately entitled shall be deemed to have been surrendered
to PICO together with (in the case of PICO Shares) all
entitlements to dividend and distributions held thereon held
for such former registered holder for nil consideration.
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ARTICLE 5
SHAREHOLDER RIGHTS OF DISSENT
5.1 RIGHTS OF DISSENT
GEC Shareholders may exercise rights of dissent with respect to the GEC
Common Shares pursuant to and in the manner set forth in section 185 of the OBCA
and this section 5.1 in connection with the Arrangement, and GEC Shareholders
who duly exercise such rights of dissent and who:
(a) are ultimately entitled to be paid fair value for their GEC
Common Shares shall be deemed to have transferred such shares
to GEC for cancellation at the Effective Time; or
(b) for any reason are ultimately not entitled to be paid fair
value for their GEC Common Shares shall be deemed to have
participated in the Arrangement on the same basis as any
non-dissenting holder of GEC Common Shares as at and from the
Effective Time and, subject to Article 4, shall receive PICO
Shares on the basis determined in accordance with section 3.2,
but in no case shall PICO or GEC be required to recognize such holders as
holders of GEC Common Shares at and after the Effective Date, and the names of
such holders shall be deleted from GEC's register of holders of such shares as
of the Effective Time.
5.2 PAYMENT
Holders of GEC Common Shares who are ultimately entitled to be paid
fair value for their GEC Common Shares in accordance with section 5.1 shall be
paid by GEC with money provided by GEC.
ARTICLE 6
FURTHER ASSURANCES
6.1 FURTHER ASSURANCES
Notwithstanding that the transactions and events set out herein occur
and shall be deemed to occur in the order set out in this Plan of Arrangement
without any further act or formality, each of PICO and GEC agrees to make, do
and execute, or cause to be made, done and executed, all such further acts,
deeds, agreements, transfers, assurances, instruments or documents as may be
required by any of them in order further to document or evidence any of the
transactions or events set out herein.
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ANNEX D
<PAGE> 163
ANNEX D -- OPINION OF FIRST MARATHON SECURITIES LIMITED
September 17, 1998
The Special Committee of
the Board of Directors
Global Equity Corporation
80 Richmond Street West
Suite 1805
Toronto, ON M5H 2A4
Dear Sirs:
First Marathon Securities Limited ("First Marathon") understands that PICO
Holdings Inc. ("PICO"), the majority shareholder of Global Equity Corporation
("Global"), has proposed to enter into an agreement with Global to be dated as
of September 17, 1998 (the "Combination Agreement") providing for a plan of
arrangement (the "Arrangement") under the Business Corporations Act (Ontario)
pursuant to which each outstanding common share of Global (a "Global Share"),
other than those owned by PICO or its affiliates or held by Global shareholders
who duly exercise rights of dissent, will be exchanged for 0.4628 of a share of
common stock of PICO (a "PICO Share"). Immediately following the Arrangement,
PICO will effect a one-for-five reverse stock split of the then outstanding PICO
Shares. The terms and conditions of the Arrangement are more fully described in
the accompanying Joint Management Information Circular and Proxy Statement (the
"Circular") which will be mailed to all shareholders of Global and PICO. Unless
otherwise indicated, all monetary amounts referred to herein are in Canadian
funds.
We further understand that the Arrangement constitutes a "related party
transaction" within the meaning of Ontario Securities Commission Policy
Statement 9.1 ("Policy 9.1") and Quebec Securities Commission Policy Statement
Q-27 (collectively, the "Policies") and that accordingly, a formal valuation (as
defined in Policy 9.1) of the Global Shares and the PICO Shares (the
"Valuation") is required to be prepared and summarized in the Circular.
ENGAGEMENT
Pursuant to an engagement letter dated June 4, 1998, (the "Engagement Letter")
the special committee (the "Committee") of the board of directors (the "Board")
of Global retained the services of First Marathon to provide the Valuation and
an opinion as to the fairness of the Arrangement, from a financial point of
view, to the shareholders of Global, other than PICO and
<PAGE> 164
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 2
its affiliates (the "Fairness Opinion" and, together with the Valuation, the
"Opinions"). First Marathon understands the Opinions and a summary thereof will
be included in the Circular and, subject to the terms of the Engagement Letter
between Global and First Marathon, First Marathon consents to such disclosure.
First Marathon was initially contacted by the Committee with respect to the
Arrangement on or about April 29, 1998. First Marathon was interviewed by the
Committee and verbally retained on May 1, 1998. Under the terms of the
Engagement Letter, First Marathon will receive fees totaling $375,000.
Additionally First Marathon will be reimbursed for its reasonable out-of-pocket
expenses, including the reasonable fees and disbursements of its legal counsel,
and will be indemnified by Global and, in certain circumstances, by PICO against
liability in certain circumstances arising in connection with the services
provided under the Engagement Letter. The fees payable to First Marathon are not
contingent upon completion of the Arrangement.
RELATIONSHIP WITH INTERESTED PARTIES
First Marathon is not an insider, associate or affiliate of, nor has it provided
any financial advisory services to or participated in any financing on behalf of
Global or PICO during the 24 months preceding the date First Marathon was first
contacted with respect to the Opinions.
First Marathon acts as a trader and dealer, both as principal and agent, in all
major Canadian financial markets and as such may have had positions in the
securities of Global and PICO from time to time and has executed or may execute
transactions on behalf of such corporations or affiliated entities for which it
receives compensation. In addition, as an investment dealer, First Marathon
conducts research on securities and may, in the ordinary course of its business,
be expected to provide research reports and investment advice to its clients on
investment matters, including the transaction that is the subject of the
Arrangement.
Other than its engagement pursuant to the Engagement Letter, there are no
understandings or agreements between First Marathon and Global or PICO with
respect to any future business dealings. However, First Marathon may from time
to time in the future seek or be provided with assignments from Global or PICO.
CREDENTIALS OF FIRST MARATHON
First Marathon is a leading, independent Canadian investment dealer whose
businesses include corporate finance, mergers and acquisitions, equity and fixed
income sales and trading and investment research. The opinions expressed herein
are those of First Marathon and the form and content of the Opinions have been
reviewed and approved for release by a group of directors
<PAGE> 165
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 3
of First Marathon, each of whom is experienced in mergers, acquisitions,
divestiture, valuation and fairness opinion matters.
SCOPE OF REVIEW
In connection with rendering the Opinions, First Marathon has reviewed and
relied upon or carried out, among other things, the following:
(1) drafts of the Combination Agreement between PICO and Global, including
the Plan of Arrangement, and the Circular pertaining to the Arrangement
each dated September 15, 1998;
(2) the audited consolidated financial statements, annual reports and Annual
Information Forms of Global for two years ended December 31, 1997;
(3) the unaudited consolidated interim financial statements of Global for
the three-month period ended March 31, 1998;
(4) the audited consolidated financial statements and reports on Form 10-K
and 10K/A of PICO for the two years ended December 31, 1997;
(5) the unaudited consolidated interim financial statements and report on
Form 10-Q of PICO for the three-month period ended March 31, 1998;
(6) discussions with the managements of Global, PICO and certain of their
subsidiaries with respect to the current operations and future prospects
of their respective businesses;
(7) information prepared (during late 1997) regarding a planned initial
public offering by Vidler Water Company, Inc. ("Vidler"), a subsidiary
of Global;
(8) information prepared (during late 1997) regarding a planned equity
private placement offering by Vidler;
(9) Vidler's $25,000,000 Private Placement Memorandum dated July 6, 1998
prepared by HSBC Securities Inc.;
(10) valuation analysis prepared by HSBC Securities Inc. dated July 14, 1998;
(11) discussions with representatives of HSBC Securities Inc;
(12) management's financial projections and supporting documentation on
Vidler;
(13) letter of intent relating to the proposed divestiture of Vidler to
Western Water Company ("Western Water"), dated December 11, 1997;
(14) purchase and sale agreement relating to the purchase of Nevada Land &
Resource Company, LLC ("NLRC") from Western Water in April, 1997;
<PAGE> 166
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 4
(15) precedent NLRC acreage sales in "landrush" auction;
(16) proposed transactions with the Bureau of Land Management;
(17) residential, industrial and commercial land sales development leasing
agreements;
(18) the 1998 preliminary assessment of potential mineralization of the NLRC
properties;
(19) current trading values of the public market portfolio of securities held
by Global;
(20) the audited consolidated financial statements of Conex Continental Inc.
("Conex") for the year ended December 31, 1997, the unaudited financial
statements for the nine months ended December 31, 1996 and year ended
March 31, 1996;
(21) the subscription agreement dated October 9, 1997, regarding the purchase
by Impris Investors LLC of 27,430,000 common shares in Conex;
(22) the audited financial statements of the Chinese Joint Venture investment
("JV") held by Conex for the year ended December 31, 1997;
(23) the unaudited financial statements, variance report and management
analysis of the JV for the three-month period ended March 31, 1998;
(24) TPC Exploration management agreement dated May 12, 1997;
(25) General Partnership Agreement for TPC Exploration Company, an Oklahoma
general partnership dated May 12, 1997;
(26) TPC Exploration marketing material entitled "Tioga Prospect: Ratcliffe
Evaporate Shoreline Project, Williston Basin, North Dakota";
(27) an appraisal dated May 30, 1994 prepared by Kellough, Pestle, Singh
Associates Inc. relating to Global's real estate holdings;
(28) the audited financial statements of Citation Insurance Company
("Citation") and Sequoia Insurance Company ("Sequoia") for the years
ended December 31, 1995 to 1997 inclusive;
(29) the projected operating results for Citation and Sequoia for the years
ending December 31, 1998 to 2001 inclusive, as prepared by management;
(30) public information relating to the business, operations, financial
performance and stock trading history of Global and PICO and other
selected public companies which First Marathon considered to be
relevant;
(31) public information with respect to other transactions of a comparable
nature which First Marathon considered to be relevant;
(32) the report dated July 10, 1998 and prepared by KPMG, Global's auditors,
regarding the market value of Global's portfolio of European investments
(the "KPMG Report");
<PAGE> 167
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 5
(33) representations contained in certificates addressed to First Marathon,
dated September 11, 1998, from senior officers of Global and PICO
attesting to the accuracy and completeness of the information upon which
the Opinions are based;
(34) the potential tax ramifications to the shareholders of the Arrangement;
and
(35) such other information, data and material as First Marathon considered
necessary or appropriate in the circumstances.
First Marathon also conducted such other analyses, investigations, research and
testing of assumptions as were considered by it to be necessary in the
circumstances. First Marathon was granted access, as requested, to Global's and
PICO's senior management and advisors and was not, to the best of its knowledge,
denied any access to information that was requested of either Global or PICO,
other than detailed information of securities holdings referred to in the KPMG
Report which Global's management considered to be of a proprietary and
confidential nature. In the circumstances, First Marathon and the Committee are
prepared to rely on the KPMG Report.
ASSUMPTIONS AND LIMITATIONS
The Opinions have been rendered on the basis of securities markets, economic and
general business and financial conditions prevailing as at the date hereof and
the conditions and prospects, financial and otherwise, of Global and PICO as
they are reflected in the information, data and other material (financial or
otherwise) reviewed by us and as they were represented to First Marathon in our
discussions with the managements of Global and PICO. In our analysis and in
connection with the preparation of the Opinions, we have made assumptions with
respect to industry performance, ongoing general business, market and economic
conditions and other matters, many of which are beyond the control of any party
involved with the Arrangement.
First Marathon has relied upon, and assumed the completeness, accuracy and fair
representation of, all financial and other information, data, advice, opinions
and representations obtained by us from public sources or provided to us by
Global and PICO and their respective subsidiaries, affiliates, and advisors, or
otherwise obtained by us pursuant to our engagement. With respect to internal
financial statements and projections and other financial and operating data
provided by Global and/or PICO, First Marathon has assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the prospects of Global and PICO, respectively. We have not
attempted to verify independently the accuracy or completeness of any such
information, data, advice, opinions and representations.
Further, First Marathon has assumed that all conditions required to implement
the Arrangement will be satisfied, that the Arrangement will be completed as
described in the Circular and that the disclosure provided or incorporated by
reference in the Circular with respect to the Arrangement and the parties
thereto is complete and accurate in all material respects.
<PAGE> 168
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 6
The respective managements of Global and PICO have represented to First Marathon
that no prior valuations (as defined in Policy 9.1) have been prepared regarding
Global or PICO or any of their respective material assets within the last two
years of the date hereof with the sole exception being certain valuation
analyses relating to Vidler which was considered in our analysis. Such
managements have further respectively represented that, except as disclosed to
First Marathon, there are no material contingent liabilities or assets of Global
or PICO or any of their respective subsidiaries.
Our Opinions do not imply any conclusion as to the likely trading range for the
Global Shares or the PICO Shares which, in either case, may vary depending on
numerous factors which generally influence the prices of securities, or
constitute a recommendation to shareholders of Global with respect to the
advisability of disposing of or retaining their Global Shares.
First Marathon is of the view that its analyses must be considered as a whole
and that the Fairness Opinion must be considered in conjunction with the
Valuation. Selecting portions of such analyses or the factors taken into
consideration, without considering all factors and analyses together could
create a misleading or incomplete view of the process underlying the Opinions.
The preparation of a valuation or a fairness opinion is a complex process and is
not necessarily susceptible to partial analysis or summary description. Any
attempt to do so could lead to undue emphasis on any particular factor or
analysis. Therefore, any summary of the Opinions should be read in conjunction
with this report.
First Marathon is providing the Valuation and the Fairness Opinion as of June
30, 1998 and, subject to the Policies, disclaims any undertaking or
responsibility to advise any person of any change in any fact or matter
affecting either of the Opinions which may come or be brought to First
Marathon's attention after such date. Without limiting the foregoing, in the
event that there is any material change in any fact or matter affecting either
of the Opinions after June 30, 1998, First Marathon reserves the right to
change, modify or withdraw the Opinions.
The Opinions have been provided for the use of the Committee and the Board in
considering the Arrangement. Neither the Valuation nor the Fairness Opinion is
to be construed as a recommendation or opinion as to how any holder of Global
Shares should vote at the shareholders' meeting to be held in connection with
the Arrangement.
Our opinion has not contemplated alternative courses of action that may be
available to the Global shareholders. However, in view of PICO's controlling
interest in Global, it is unlikely that alternatives to the proposed transaction
would be available without the consent of PICO.
<PAGE> 169
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 7
DEFINITION OF FAIR MARKET VALUE
For the purpose of the Valuation, fair market value is defined as the highest
price available in an open and unrestricted market between informed, prudent
parties, acting at arm's length and under no compulsion to transact, expressed
in terms of money or money's worth. First Marathon has not made any downward
adjustment to reflect the fact that the Global Shares held by shareholders other
than PICO or the PICO Shares held by Global may not form part of a controlling
interest.
This value is based upon the concept of "highest and best use" which may be
defined, in effect, as that reasonable and probable use that will support the
highest present value as of the effective date of the appraisal or,
alternatively, as that use which is most likely to produce the greatest net
return over a given period of time.
VALUATION AND FAIRNESS METHODOLOGY
The Opinions have been prepared by First Marathon in accordance with the
Policies. Accordingly, the Opinions are based upon techniques and relevant
assumptions that First Marathon considers appropriate in the circumstances for
the purposes of arriving at an opinion as to the range of values for the Global
Shares and the PICO Shares and the fairness of the Arrangement, from a financial
point of view, to the holders of Global Shares other than PICO and its
affiliates (the "Minority Shareholders"). The Policies require First Marathon to
perform a valuation of both the Global Shares and the PICO Shares.
First Marathon utilized a net asset valuation approach in arriving at the value
of Global and PICO as this approach most accurately reflects full value of the
common shares of these companies. Under the net asset value approach, the
aggregate market value of the assets of a corporation is determined, net of the
value of its liabilities adjusted to reflect appropriate premiums or discounts
from stated book value. The value of the corporation's assets and liabilities is
determined on a going concern basis and, to the extent necessary, adjustments
are made for capitalized overhead and income taxes. Publicly traded holding
companies usually trade at a discount to net asset value and it was concluded
that a valuation approach for Global and PICO based on public market prices was
inappropriate in these circumstances.
First Marathon also considered the liquidation value of Global and PICO
respectively, but determined that the application of such methodology was not
appropriate in the circumstances, given that it is the reasonable intention of
management that the combined enterprise be run as an ongoing entity.
<PAGE> 170
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 8
In arriving at its Valuation conclusions, First Marathon determined the range of
value for each of the major assets of Global, comprising its investment in
Vidler, its 74.77% membership interest in NLRC and its 13.07% interest in PICO.
After determining the range of value of Vidler and Global's interests in NLRC
and PICO, the remaining assets and liabilities were adjusted to reflect
appropriate premiums and discounts from their stated book value. Likewise, First
Marathon determined the range of value for each of the major assets of PICO,
comprising its 25.23% membership interest in NLRC, its 51.17% interest in Global
and its wholly-owned property and casualty ("P&C") insurance operations. The
remaining assets and liabilities of PICO were adjusted to reflect appropriate
premiums and discounts from their stated book value.
VALUATION OF GLOBAL SHARES
- - - --------------------------
GLOBAL EQUITY CORPORATION
Global operates primarily as an international investment company, holding a
portfolio of equities and convertible instruments in North American, Asian and
European companies as well as a number of interests in water rights in the
western United States. Global's most significant holdings include its 100%
ownership of Vidler and its 74.77% membership interest in NLRC. Global also
holds a 13.07% interest in PICO and investments in several domestic and foreign
companies.
VIDLER WATER COMPANY, INC.
Global's investments in water rights are held by Vidler and, to a lesser extent,
by Vidler's immediate parent company, Forbes & Walker (USA) Inc., itself a
wholly-owned subsidiary of Global. For the purposes of the following
description, all of these water rights have been treated as though they are held
by Vidler.
Vidler is a private-sector water company focused solely on the development of
permanent, reliable water supplies through the acquisition, management,
development and reallocation of water rights and related assets in the
southwestern United States. Vidler's primary strategy is to convert water used
in the production of agriculture to municipal and industrial use.
We considered the most appropriate methodology for valuing Vidler as a going
concern to be the discounted cash flow approach. The discounted cash flow
approach takes into account the amount, timing and relative certainty of future
cash flows expected to be generated by a business.
<PAGE> 171
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 9
DISCOUNTED CASH FLOW ANALYSIS
METHODOLOGY
The discounted cash flow approach involves the discounting of an expected stream
of future cash flows and any residual or "terminal" value beyond the projection
period, using a range of appropriate discount rates. First Marathon utilized an
unlevered discounted cash flow analysis whereby pre-interest and after-tax
earnings, after deducting capital expenditures, were used to calculate free cash
flows. To determine a range of present value for the expected stream of cash
flow, the free cash flows and terminal value were discounted at the weighted
average cost of capital ("WACC") for Vidler, assuming an appropriate industry
capital structure.
This range of value was then adjusted for any assets or liabilities not taken
into account in the determination of the free cash flows or terminal value, such
as redundant assets or contingent liabilities, to calculate a range of value for
Vidler's business. Finally to determine the fair market value of the common
equity employed in Vidler's business the fair market value of Vidler's debt, if
any, was deducted from the value of Vidler's business.
The discounted cash flow methodology requires that certain assumptions be made
regarding, among other things, future cash flows, discount rates and terminal
growth rates. The possibility that some of these assumptions will prove to be
inaccurate is one factor involved in the determination of the discount rates to
be used and results in a range of value.
Vidler intends to engage in various water rights acquisition, management,
development, sale and lease activities. The long term future profitability and
cash flow will be primarily dependent on the ability of Vidler to develop and
sell or lease water and water rights, and will be dependent on various factors
including the timing of acquisitions, divestitures, transportation arrangements
and changing technology. To the extent that Vidler possesses junior or
conditional water rights, such rights may be subordinated to superior water
rights holders in periods of low water or drought. The demand for Vidler's water
assets is dependent in part on the population growth of certain urban centres in
the western United States.
The discounted cash flow analysis takes into consideration many variables in the
estimation of pre-debt service cash flows. With respect to Vidler, the following
important elements of the DCF analysis were considered:
(1) WATER RIGHTS REVENUE - growth rates in western states and the estimated
growth in water usage for selected states and cities, water resource
fees charged in several western cities, the timing of converting
agricultural water rights to urban usages;
<PAGE> 172
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 10
(2) STORAGE REVENUE - ability to accumulate storage facilities and the
timing under which Vidler will be able to realize revenue relating to
the stored water;
(3) CAPITAL EXPENDITURES - the level of annual capital expenditure relating
to the accumulation of water storage facilities and land purchases were
projected in fiscal 1998, 1999 and 2000 at US$1.8 million, US$5.4
million and US$1.1 million, respectively. Thereafter, capital
expenditures were projected to be not material to the future cash flows;
(4) LAND SALES - redundant land sales were projected for fiscal 1998, 1999
and 2000 at US$3 million, US$7 million and US$7 million, respectively;
and
(5) INCOME TAXES - state and federal income tax were assumed to be in
accordance with projected rates and cash taxes payable were calculated
optimizing the tax shelter available from the combination of available
operating tax loss carryforwards and capital cost allowance.
First Marathon's estimate of free cash flows was based on Vidler's projections,
after first considering the reasonableness of the underlying assumptions and
making certain adjustments to these projections. In making adjustments to
Vidler's projections, First Marathon performed a range of sensitivity analyses
on projected sales growth, land sales and capital expenditures.
DETERMINATION OF TERMINAL VALUE AND WACC
First Marathon determined the terminal value of the Vidler's business at the end
of the cash flow period (2005) by estimating the present value of free cash
flows after that period, assuming that free cash flow would increase in
perpetuity at a rate of 3% to 4% annually, and using the WACC as the discount
rate. To test the reasonableness of the terminal values calculated we also
derived terminal values based on multiples of earnings before interest and taxes
("EBIT") in the range of 8 times to 10 times.
The WACC was determined to be in the range of 12% to 14% after considering risk
free rates of return, market risk premiums, the appropriate capital structure
for Vidler, and the cost of debt and equity capital of Vidler as follows:
(1) Risk free rate of return of 5.63% was used based on the yield of
ten-year U.S. treasuries;
(2) A market risk premium factor of 9.7% was selected which is approximately
the maturity and default premiums from Stocks, Bonds, Bills and
Inflation by Ibbotson Associates Inc.;
(3) A beta factor was selected based on identified comparable North American
companies being 0.62 and 0.80 adjusted for leverage;
<PAGE> 173
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 11
(4) Our analysis of the financial leverage of comparable companies indicates
that Vidler's leverage would be more comparable to industry norms if it
were approximately 20% debt and 80% equity; and
(5) An additional risk factor of 2% to 3% to reflect the risk and stage of
the business's operations.
The results using a discounted cash flow approach indicated a range of value for
Vidler of US$67.2 million to US$84.3 million.
<TABLE>
<CAPTION>
TERMINAL VALUE
MULTIPLIER DISCOUNT RATE
- - - -------------------- ------------------------------------------------------------------------
12.0% 12.5% 13.0% 13.5% 14.0%
<S> <C> <C> <C> <C> <C> <C>
11.0 x $75.4 $73.2 $71.1 $69.1 $67.2
11.5 x $77.6 $75.4 $73.2 $71.1 $73.0
12.0 x $79.8 $77.5 $75.3 $73.1 $74.9
12.5 x $82.0 $79.7 $77.4 $75.1 $76.9
13.0 x $84.3 $81.8 $79.4 $77.1 $78.8
</TABLE>
We compared this value range to the aborted April 1997 Western Water
transaction, which valued Vidler in the range of US$91 million to US$99 million,
and also to the preliminary indications of value received from investment
banking advisors under a proposed initial public offering in the fall of 1997,
which valued Vidler in the range of US$75 million to US$107 million.
We also reviewed and considered the July 6, 1998 US$25 million Private Placement
Memorandum prepared by HSBC Securities Inc. ("HSBC") and supporting valuation
analysis. The valuation approach and discounted cash flow methodology employed
by HSBC was consistent with First Marathon's. The fundamental assumptions
regarding the nature of Vidler's operations during the forecast period were also
consistent with the assumptions utilized in our valuation analysis. The primary
differences between the projections utilized by HSBC and First Marathon included
the timing of certain land sales associated with the Big Springs Ranch and the
forecast capacity and utilization rates for the MBT Ranch facilities. HSBC
utilized a higher discount rate to discount projected cash flows and a free cash
flow multiplier that was within our range of multipliers to derive a terminal
value based on Vidler's estimated 2005 results. The value conclusion implied by
the HSBC analysis is within the value range for Vidler determined by First
Marathon.
Based upon our analysis of the prevailing valuation benchmarks, we have valued
Vidler in the range of US$70.0 million ($102.7 million) to US$90.0 million
($132.0 million).
<PAGE> 174
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 12
NEVADA LAND & RESOURCE COMPANY, LLC
NLRC is a land holding company whose primary asset is 1.365 million acres of
land, 3,020 acre feet of permitted water rights, 10,249 acre feet of
certificated water rights and 53,040 acre feet of water rights currently under
application in Nevada. NLRC's business plan anticipates pursuing a number of
activities in order to harvest the value of these land holdings including, but
not limited to, land exchanges, land sales, development of mineral and water
rights, development of geothermal potential, as well as industrial/commercial
and residential development.
Global's 74.77% membership interest in NLRC was purchased from Western Water in
April 1997 for consideration of $50.2 million. In addition, an affiliate of
Western Water, Western Agua, L.P. ("Agua") retains an upside interest in NLRC
through a consulting agreement. The agreement between NLRC and Agua states that,
in exchange for consulting services, Agua will receive a fee calculated as 50%
of any net proceeds that NLRC receives from the sale, leasing or other
disposition, refinancing or revenues from any source, provided that NLRC has
received such net proceeds in excess of a threshold amount of:
(1) the capital investment by Global and PICO;
(2) a 20% cumulative return on such capital investment; and
(3) a sum sufficient to pay the U.S. federal tax liability.
The agreement may be canceled in April 2002, provided Agua has not received, nor
been entitled to receive by that time, any amount of the consulting fee. In
March 1998, NLRC gave notice of termination of the consulting agreement based on
its determination that a breach of such agreement had occurred. Agua has since
replied that it believes that no such breach has occurred. This dispute over the
ongoing enforceability of the consulting agreement by Agua is a source of
considerable uncertainty in determining the upper end of the valuation range for
NLRC.
In valuing NLRC, First Marathon examined a number of valuation benchmarks
including the purchase from Western Water in April 1997, PICO's and Global's
internal valuation analyses, precedent acreage sales in "landrush" auction,
proposed land exchanges with governmental agencies, initial valuations of
residential and industrial/commercial land sales, development and leasing
projects, proposals for geothermal development, as well as preliminary
assessments of potential mineralization.
In applying these valuation benchmarks, as well as considering developmental
work performed on the properties and regulatory developments since the
acquisition from Western Water, and the size of the land portfolio in comparison
to the size of precedent transactions, First Marathon valued NLRC's enterprise
value at US$80 million to US$100 million. After deducting NLRC's net debt, as at
June 30, 1998, of US$4.4 million, we have valued Global's 74.77% interest in the
<PAGE> 175
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 13
range of $82.9 million (US$56.5 million) to $104.8 million (US$71.5 million). In
determining this value we have been cognizant of a number of risk factors which
may have a considerable impact on the value of NLRC. These include, but are not
necessarily limited to, the undefined framework for land swaps with governmental
agencies, potential for adverse regulatory changes or new environmental
regulations, level of future mining exploration, demographics, completion of
residential and industrial/commercial developments and the uncertainty regarding
the Agua consulting agreement.
PORTFOLIO INVESTMENTS
It is our understanding that the investments classified as portfolio investments
by Global represent minority or non-controlling interests in publicly traded
companies. Accordingly, we have selected a market value approach for this asset
category and have restated these holdings to their market value, based on the
20-day average closing prices prior to the valuation date.
The management of Global did not provide First Marathon with the details of
Global's European investment portfolio as such information was considered by
management to be proprietary and confidential. These securities accounted for
approximately 70% of the carrying value of the portfolio investments at March
31, 1998. To provide a basis for valuing these assets, Global engaged its
auditors, KPMG, to provide a report regarding the market value of these
securities (attached as an Appendix). The scope of our review for the valuation
of these securities was limited to the KPMG Report and the representations of
management. The effective date of the KPMG Report is June 30, 1998.
Several of the securities in the non-European portion of the portfolio have
limited regular trading volume which could result in Global having some
difficulty liquidating 100% of its holdings at the quoted market value. To
account for this potential liquidity issue, we have applied a discount factor of
25% to their respective market values to arrive at our lower end of the
valuation range. This discount has been applied to all securities in the
portfolio.
<TABLE>
<CAPTION>
($Millions) LOW HIGH
--- ----
<S> <C> <C>
European Portfolio $26.2
U.S. Marketable Securities 2.1
Korean Marketable Securities 0.6
Sri Lankan Investments 5.6
---------- ----------
$25.9 $34.5
========== ==========
</TABLE>
<PAGE> 176
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 14
STRATEGIC INVESTEMENTS
Global's strategic investments are comprised of its investments in Conex and
Siscom Inc. ("Siscom").
CONEX
Conex's primary asset is a 60% interest in a JV located in China. The JV's
business is divided into the wheeled excavator and tracked excavator business
segments. Global holds approximately 32% of the issued and outstanding common
shares of Conex as well as additional common share purchase warrants ("Conex
Warrants") ($0.0566 exercise price, expiring August 2, 1999) which would allow
Global to increase its ownership to in excess of 62%. In addition, Global holds
all of the issued Class B Preferred Voting Shares of Conex and has a loan
receivable of $2.1 million owing to it from Conex.
In valuing Global's interest in Conex, First Marathon considered the trading
activity in the common shares of Conex, historical financing transactions and an
analysis of the status of the JV's operating results.
Conex's common shares trade in the over-the-counter market and very infrequently
and have insufficient trading volume to allow Global to liquidate its holdings
without significantly affecting the market price. The most significant recent
day of trading occurred on April 20, 1998 when 1.3 million shares were traded
and the closing share price was $0.13. However, during the month preceding this
day of trading only 86,000 shares were traded.
On October 9, 1997, Conex concluded a private placement of 27.4 million common
shares for US$5 million at a price of C$0.25 per share to Impris Investors LLC,
an affiliate of Wexford Management LLC. The proceeds from this financing were
utilized to fund Conex's second round of financing to the JV. To date, US$10
million has been directly invested in the JV by Conex with a further US$5
million financing commitment pending the achievement of certain milestones.
The JV commenced operations on January 1, 1997. The operating results for fiscal
1997 and the first quarter of 1998 are summarized in Schedule "E". In our
analysis, we have considered the JV's 1997 operating results, the 1998 Plan and
the JV's financial performance compared to budget through March 31, 1998.
Due to the stage of development of the JV and the inherent risks associated with
its operations, we have concluded that the fair market value of Conex is in the
range of $15 million to $18 million. This valuation range is near Global's
aggregate investment to date at the lower
<PAGE> 177
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 15
bound and represents a premium of 20% on invested capital at the higher bound,
reflecting the progress in the development of the JV's operations. Allocating
this value range (after consideration of the cash to be received upon the
exercise of the Conex Warrants) to Global's holdings in Conex results in a value
of Global's holdings in Conex of $11.8 million to $13.7 million.
SISCOM
Siscom is a small eight-person software company based in Boulder, Colorado with
approximately $1.5 million of annual revenue. Global holds 4,000,000 Series A
Convertible Preferred Shares of Siscom.
In valuing Global's investment in Siscom, First Marathon considered the
following as valuation benchmarks:
(a) recent trading activity;
(b) a US$500,000 preferred share financing provided by PICO affiliates; and
(c) market value multiples for companies in similar lines of business as
Siscom and the breakdown between software, service, hardware and other
revenues of Siscom.
Siscom's shares have traded between U.S.$0.28 (02/06/98) and U.S.$0.49
(04/01/98) per share over the 52-week period prior to June 30, 1998. Trading
volume for Siscom's shares is limited. The most significant recent trading of
its shares occurred on March 17, 1998 when 292,000 shares were traded at
US$0.455 per share and on April 13, 1998 when 88,000 shares were traded at
US$0.41.
Recently two PICO affiliates purchased a total of 1,250,000 Series A Preferred
Shares in Siscom for $500,000 implying a price of US$0.40 per share.
Applying a range of revenue multiples to the various revenue components, we have
arrived at a value range of US$0.27 to US$0.41 per Series A Preferred Share for
Siscom.
Based on these valuation benchmarks, we have concluded that the value of
Global's 4,000,000 Series A Convertible Preferred Shares of Siscom is in the
range of $1.6 million and $2.4 million.
<PAGE> 178
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 16
The following is a summary of the value range for Global's strategic
investments:
<TABLE>
<S> <C> <C>
($Millions) LOW HIGH
Conex $11.8 $13.7
Siscom 1.6 2.4
----------------- ------------------
$13.4 $16.1
================= ==================
</TABLE>
INVESTMENT IN PICO
At June 30, 1998, Global held 4,258,415 or 13.07% of the issued and outstanding
shares of PICO.
MARKET VALUE
At June 30, 1998, the closing price of PICO Shares was US$4-5/16 which would
imply a market value for these holdings of US$19.7 million ($28.9 million).
Considering PICO's average daily trading volume of 73,565 shares per day during
the 20 trading day period prior to announcement on May 8, 1998 of initial
discussions regarding the proposed Arrangement, it would take some time for
Global to sell these shares into the market. There is the potential for the
supply of these shares into the market to put downward pressure on the share
price.
However, as discussed previously in our valuation methodology, we have not
considered the trading value or liquidation approach to the valuation of either
Global or PICO. Accordingly, we have valued Global's investment in PICO on a net
asset value basis.
NET ASSET VALUE
Considering the net asset value per share range for PICO of US$4.99 to US$6.09,
as described below and summarized in Schedule "A", the value range for Global's
holding would be $31.2 million to $38.1 million.
OTHER ASSETS AND LIABILITIES
TPC EXPLORATION
Global, through its wholly-owned subsidiary, Global Oil & Gas Corporation
("GOG"), holds an interest in TPC Exploration ("TPC") an Oklahoma Limited
Partnership established in May 1997.
<PAGE> 179
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 17
TPC was formed for the purpose of acquiring leasehold interests in oil and gas
producing and non-producing properties that are suited to precision horizontal
drilling. GOG is entitled to a 100% interest in distributions of TPC until its
original investment plus a cumulative preferential return of 20% per annum is
refunded. After that time, GOG is entitled to a 45% economic interest in the
partnership.
TPC currently holds in excess of 120,000 acres of oil and gas leases in the
Williston Basin, North Dakota.
In valuing Global's interest in TPC through its ownership of GOG, we have
reviewed the original investment in TPC, developmental work performed on the
prospect since that time and initial letters of intent and expressions of
interest for the purchase of GOG's interest in the partnership.
GOG has received two letters of intent for their interest in the property, both
of which have expired. The valuation range implied by these expressions of
interest was $6.5 million to $11.0 million.
Based on these valuation benchmarks, the expiry of the two expressions of
interest and the significant deterioration in the price of oil since the
original investment was made, we have valued GOG at its current carrying value
of $6.4 million.
LAND AND BUILDING
Global owns the land and building of its Toronto office located at 30 and 30A
Hazelton Avenue. Internal analysis prepared by Global's management and provided
to an external real estate services firm valued these assets at $4.1 million. An
appraisal dated May 30, 1994 prepared by Kellough, Pestl, Singh Associates Inc.
valued these assets at $4.3 million. Based on this information and our
discussions with management, we have attributed a value range of
$4.0 million to $4.5 million for the Hazelton Avenue property and building.
MKG ENTERPRISES INC. CONVERTIBLE DEBENTURE
Pursuant to a Loan Agreement made as of February 7, 1996 between MKG Enterprises
Corp. ("MKG") as borrower and Global, MKG borrowed $10 million from Global by
way of a convertible debenture. Pursuant to the Loan Agreement, MKG pledged all
of the issued and outstanding shares of Vignoble Wines Agency Inc., a
wholly-owned subsidiary of MKG, as security for the loan.
On December 19, 1996, Global demanded payment from MKG of the principal amount
of the debenture outstanding and related interest owing. Affidavits were
obtained and attempts were
<PAGE> 180
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 18
made to appoint a receiver. Throughout 1997, settlement discussions were pursued
but were unsuccessful in reaching agreement.
At the date of the Valuation, insufficient current financial information was
available to allow a thorough assessment of the underlying security for the
loan. Management of Global has been in ongoing discussions to reach a settlement
in this matter and has indicated that they expect to recover the full amount of
the carrying value of the debenture.
Based on our discussions with management and review of the associated
documentation relating to Global's recovery efforts, we have estimated a
valuation range of $5.5 million to $10.9 million. The range selected represents
the full carrying value of $10.9 million at the high end of the range and 50% of
the carrying value at the low end, reflecting an applied discount of 50% to
account for the uncertainty of the ultimate settlement amount received by Global
and the timing thereof.
OTHER ASSETS AND LIABILITIES
We have attributed a fair market value for these assets and liabilities
equivalent to their respective carrying values as at March 31, 1998. This asset
group is primarily comprised of receivables, prepaid expenses, furniture and
equipment. The assets associated with Vidler and NLRC have been excluded from
this asset group as they were considered separately in our analysis.
In valuing the Global Shares, First Marathon considered whether any material
advantage or synergy would accrue to PICO by virtue of acquiring 100% of the
Global Shares as a result of the Arrangement. The simplification of the
ownership of Global and PICO is, in First Marathon's view, the primary benefit
to PICO associated with the Arrangement, which, in turn, could reduce the market
discount to net asset value applied to the PICO Shares. However, in First
Marathon's opinion, this potential reduction in the market discount is not
determinable. First Marathon also reviewed the costs and duplication of efforts
inherent in maintaining two public entities, the potential reduction in costs
was determined to not be material.
<TABLE>
<CAPTION>
SUMMARY
($Millions) LOW HIGH
--- ----
<S> <C> <C>
TPC $6.4 $6.4
Land and building 4.0 4.5
MKG convertible 5.5 10.9
Other assets 0.7 0.7
Liabilities (4.7) (4.7)
--------------- --------------
$11.9 $17.8
=============== ==============
</TABLE>
<PAGE> 181
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 19
VALUATION CONCLUSION
Based upon and subject to the foregoing, First Marathon is of the opinion that,
as of June 30, 1998, the fair market value of the Global Shares was in the range
of $3.35 to $4.18 per share. (See Valuation Summary in Schedule "A".)
VALUATION OF PICO SHARES
- - - ------------------------
PICO HOLDINGS INC.
Similar to Global, PICO is an investment holding company and accordingly, First
Marathon's valuation approach focused on valuing the individual component
investments. For purposes of our valuation analysis, we have classified PICO's
investments into four segments:
(a) minority interest (25.23%) in NLRC;
(b) property and casualty insurance operations;
(c) controlling interest (51.17%) in Global; and
(d) other assets (net).
NEVADA LAND & RESOURCE COMPANY, LLC
In our valuation analysis of Global, we arrived at a value range for NLRC as a
whole of US$80 million to US$100 million. After adjusting for NLRC's net debt at
June 30, 1998 of US$4.4 million and applying PICO's pro rata interest, we have
valued PICO's membership interest in NLRC in the range of US$19.1 million to
US$24.1 million. Due to PICO's controlling position in Global, we have not
applied a discount to the pro rata value.
PROPERTY & CASUALTY INSURANCE OPERATIONS
PICO operates its property and casualty insurance business through Citation and
Sequoia. These companies write predominately light commercial and multiple peril
insurance coverage in central and northern California. The recent financial
results for these companies are summarized in Schedule "D".
<PAGE> 182
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 20
COMPARABLE PUBLIC COMPANIES
First Marathon considered the current stock market trading multiples of
comparable companies to PICO's property and casualty insurance operations
(Schedule "F"). There are many similar insurance companies in the U.S. market of
varying size and scope of operations. The 25 companies selected in our analysis
ranged in market capitalization from US$50 million to US$400 million.
The range of trading multiples as at June 30, 1998 for the selected companies
are summarized in the following table:
<TABLE>
<CAPTION>
PRICE / TEV /(3) TEV/(3)
PRICE-EARNINGS BOOK REVENUE PREM. REV.
-------------- ---- ------- ----------
LTM(2) 1998E 1999E CURRENT LTM(2) LTM(2)
------ ----- ----- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
High 38.8 62.5 36.9 2.3 2.8 3.4
Average 14.5 18.5 12.9 1.4 1.3 1.5
Adjusted Average(1) 13.6 17.0 12.1 1.4 1.3 1.5
Low 9.3 9.1 7.7 0.6 0.3 0.4
</TABLE>
(1) Adjusted average is calculated as the average excluding the highest and
lowest values in the group.
(2) LTM = last 12 months.
(3) TEV = Total Enterprise Value - calculated as market capitalization +
short term debt + long-term debt +preferred stock + minority interest -
cash equivalents.
First Marathon believes that PICO's property and casualty insurance operations
warrant a revenue and a book value multiple at or below the average of the range
of comparable public companies for the following reasons:
(i) the relatively high Loss and Expense ("LAE") and underwriting ratios
experienced in recent periods;
(ii) the declining premium revenue of the business; and
(iii) the level of profitability achieved during the 12 month period ended
March 31, 1998.
<PAGE> 183
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 21
The results of the comparable public companies analysis are provided below:
<TABLE>
<CAPTION>
MULTIPLE BENCHMARK (US$) IMPLIED VALUE (US$)
-------- --------------- -------------------
<S> <C> <C> <C>
LTM Revenue 1.0 - 1.2 $51.0 $51.0 - $61.2
LTM Premium Revenue 1.2 - 1.4 $44.9 $53.9 - $62.9
Book Value 1.3 - 1.5 $38.8(1) $50.4 - $58.2
</TABLE>
(1) Excludes inter-company holdings valued separately in this report.
COMPARABLE TRANSACTIONS
First Marathon reviewed publicly available information on selected acquisition
transactions of U.S. P&C insurance companies. We have examined multiples based
on the total consideration for each of the comparable transactions compared to
such acquired companies' revenues (total and net premiums earned) and compared
the implied equity value to the reported book value of the acquired net assets.
However, in many recent comparable transactions insufficient financial
information was disclosed in order to derive meaningful value multiples.
INDICATIONS OF INTEREST
In our discussions with the management of PICO, it was indicated that a
qualified purchaser has expressed an interest in the P&C business operations of
PICO. However, as at the date of these Opinions, no specific information or
documentation has been provided to First Marathon that would imply that a
transaction is imminent at a price that would be materially different from the
valuation conclusion reached.
CONCLUSION
Based upon our analysis and discussions with PICO's management, First Marathon
estimated the fair market value, as at June 30, 1998, of the P&C insurance
business to be in the range of US$50 million to US$60 million.
<PAGE> 184
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 22
INVESTMENT IN GLOBAL
At June 30, 1998, PICO held 41,883,445 or 51.17% of the issued and outstanding
Global Shares.
MARKET VALUE
As of June 30,1998, the closing price of the Global Shares was $2.75 which would
imply a market value for these holdings of $115.2 million (US$78.5 million).
However, as discussed previously in our valuation methodology, we have not
considered the market value or liquidation approach to the valuation of either
Global or PICO. Accordingly, we have valued PICO's investment in Global on a net
asset value basis.
NET ASSET VALUE
Considering the net asset value per share range for the Global Shares of $3.35
to $4.18, summarized in Schedule "A", the value range for PICO's holding of
Global Shares would be US$95.7 million to US$119.4 million.
OTHER ASSETS AND LIABILITIES
The remaining assets of PICO that have not been valued separately include:
(a) the remaining claims and LAE reserves associated with the Medical
Professional Liability insurance business which was sold to Mutual
Assurance Inc. on August 25, 1995;
(b) Summit Global Management Inc., an investment management operation which
has historically provided services to Global and PICO and affiliate
companies;
(c) American Physicians Life Insurance Company's net assets which were sold
on June 16, 1997, the closing of which is subject to regulatory approval
which is still pending;
(d) investment in PC Quote; and
(e) other miscellaneous assets.
Also included in the balance of this asset group are the associated reserves and
liabilities within Physicians Insurance Company of Ohio Group ("Physicians").
The key assets within Physicians, including the investment in Global, have been
valued separately and, as a result, serve as a net reduction.
<PAGE> 185
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 23
We have attributed a fair market value for these net assets equivalent to their
respective carrying values as at March 31, 1998 of US$3.7 million.
VALUATION CONCLUSION
Based upon and subject to the foregoing, First Marathon is of the opinion that,
as of June 30, 1998, the fair market value of the PICO Shares was in the range
of US$4.99 to US$6.09 per share. (See Valuation Summary in Schedule "A".)
FAIRNESS OPINION
- - - ----------------
The assessment of fairness, from a financial point of view, must be determined
in the context of the particular transaction. In assessing the financial
fairness of the Arrangement to the Minority Shareholders, First Marathon focused
primarily on the proposed exchange ratio of 0.4628 (i.e., the number of Pico
Shares for which each Global Share will be exchange pursuant to the Arrangement)
and considered a number of factors, the most important of which are discussed
below.
RELATIVE VALUE ANALYSIS
Due to the extent of inter-company holdings, the value of either Global or PICO
has a direct impact on the value of the other. In our valuation analyses and
assessment of the financial fairness of the Arrangement, it was important to
gain a clear understanding of the impact of these inter-company holdings and the
extent to which certain valuation components affected the valuation conclusion
reached for PICO and Global. In addition, considering the extent of these
inter-company holdings and the significance of PICO's holdings in Global as
compared to its entire asset base, the current shareholders of Global will
retain a substantial continuing interest in Global's net assets.
SUMMARY OF HOLDINGS
(a) PICO holds 41,883,445 shares in Global or approximately 51% of the
issued and outstanding Global Shares.
(b) Global holds 4,258,415 shares in PICO or approximately 13% of the issued
and outstanding PICO Shares.
<PAGE> 186
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 24
VALUATION CONSIDERATIONS FOR INTER-COMPANY HOLDINGS
Due to the extent of inter-company holdings and the shared interest in NLRC, the
valuation and proportional allocation of value of the various asset components
of Global and PICO varies from the direct interest held.
The table below illustrates the proportional interest and relative allocation of
value for Global and PICO for the major investments held, based on issued and
outstanding shares as at June 30, 1998:
<TABLE>
<CAPTION>
PICO SHAREHOLDERS GLOBAL SHAREHOLDERS
----------------- -------------------
<S> <C> <C>
NLRC
Direct interest 25.23% 74.77%
Indirect interest 43.17% 9.60%
Combined interest 68.04% 83.66%
Proportional interest 44.85% 55.15%
VIDLER / WHOLLY-OWNED GLOBAL ASSETS
Direct interest 0.00% 100.00%
Indirect interest 54.84% 7.16%
Combined interest 54.84% 107.16%
Proportional interest 33.85% 66.15%
P&C / WHOLLY-OWNED PICO ASSETS
Direct interest 100.00% 0.00%
Indirect interest 7.16% 14.00%
Combined interest 107.16% 14.00%
Proportional interest 88.44% 11.56%
Shares owned of other 41,883,445 4,258,415
Shares issued and outstanding 81,853,076 32,591,718
Ownership % 51.17% 13.07%
</TABLE>
<PAGE> 187
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 25
SHARE EXCHANGE RATIO - HISTORICAL MARKET PRICE
The following chart illustrates the exchange ratio implied by the relative
market prices of the PICO Shares and the Global Shares over the last twelve
months of trading. The ratio has been calculated based on the daily closing
market price of the Global Shares and the PICO Shares, adjusted to a common
currency based on the end of day Canadian dollar/U.S. dollar exchange rate.
<TABLE>
<CAPTION>
Share Exchange Ratio
LTM June 30, 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0.50
0.45
0.40
[INSERT GRAPH]
0.35
0.30
0.25
7/1/97 7/29/97 8/26/97 9/23/97 10/21/97 11/18/97 12/16/97 1/13/98 2/10/98 3/10/98 4/7/98 5/5/98 6/2/98 6/30/98
</TABLE>
The relative value or exchange ratio of Global Shares to PICO Shares has trended
downwards over the past twelve months due to a more rapid falling-off of
Global's share price (as compared to PICO's).
Exchange Ratio based on Valuation of Net Assets
Considering the determined ranges of net asset value per share of $3.35 to $4.18
for Global and US$4.99 to US$6.09 for PICO, the resultant exchange ratio range
based on a CAD/US$ exchange rate of 1.46665 would be 0.4577 to 0.4680 with a mid
point of 0.4628.
<PAGE> 188
The Independent Committee of
the Board of Directors of
Global Equity Corporation
September 17, 1998
Page 26
COMPARISON OF TRANSACTION PRICE
TO HISTORIC MARKET PRICES
The following table summarizes the implied share exchange ratio based on
Global's and PICO's recent trading levels:
<TABLE>
<CAPTION>
IMPLIED
GLOBAL $ PICO US$ EXCHANGE RATIO
-------- -------- --------------
<S> <C> <C> <C>
05/08/98 - Date of merger discussions announcement 2.90 4-5/16 0.4088
Avg. closing price 20 trading days prior to 05/08/98 2.77 5.23 0.3693
06/18/98 - Date of exchange ratio announcement. 2.40 4-5/16 0.3781
Avg. closing 20 trading days prior to 06/18/98 2.59 4.56 0.3906
</TABLE>
(1) Based on the Canadian/U.S. exchange rate at the specified date or the
average over the indicated period.
The proposed exchange ratio of 0.4628 offered pursuant to the Arrangement
represents a premium of 13.2%, 25.3%, 22.4%, and 18.5%, respectively, over the
above implied share exchange ratios ( in the order set forth in the table).
FAIRNESS CONCLUSION
Based upon and subject to the foregoing, First Marathon is of the opinion that,
as of June 30, 1998, the Arrangement was fair, from a financial point of view,
to the Minority Shareholders .
The Opinions may be relied upon by the Committee and the Board for the purpose
of their consideration of the Arrangement. First Marathon consents to the
inclusion of the Opinions in their entirety and a summary thereof in the
Circular and to the filing thereof with the securities commissions or similar
regulatory authorities in such provinces of Canada and in the United States as
may be required.
Yours very truly,
FIRST MARATHON SECURITIES LIMITED
<PAGE> 189
SCHEDULE "A"
Valuation Summary
-----------------
<TABLE>
<CAPTION>
Global Equity Corporation
($Millions)
Low High
--- ----
<S> <C> <C>
Cash and cash equivalents 11.2 11.2
Vidler 102.7 132.0
NRLC 82.9 104.8
Portfolio investments in public companies 25.9 34.5
Strategic investments 13.4 16.1
Investment in PICO Holdings, Inc. 31.2 38.1
Other assets - net 11.9 17.8
Cash from exercise of options 25.4 25.4
----- -----
Net asset value 304.6 379.9
----- -----
Shares outstanding - fully diluted 90.8 90.8
Net asset value per share $3.35 $4.18
----- -----
US$/CAD$ exchange rate - 1.46665
-------
<CAPTION>
PICO Holdings Inc.
(US$Millions)
Low High
--- ----
<S> <C> <C>
NRLC 19.1 24.1
Insurance operations 50.0 60.0
Investment in Global Equity Corporation 95.7 119.4
Other assets - net 3.7 3.7
Cash from exercise of options 6.9 7.0
----- -----
Net asset value 175.4 214.2
----- -----
Shares outstanding - fully diluted 35.2 35.2
Net asset value per share $4.99 $6.09
----- -----
</TABLE>
<PAGE> 190
<TABLE>
<CAPTION>
SCHEDULE "B"
SHARE STRUCTURE SUMMARY
JUNE 30, 1998
GLOBAL EQUITY CORPORATION
<S> <C>
Common shares issued and outstanding 81,853,076
==========
Common stock options:
EXERCISE PRICE
--------------
(CAD$)
2.450 1,980,334
2.500 3,099,666
2.650 32,250
3.325 1,327,600
3.250 127,750
----------
6,567,600
----------
Common share purchase warrants:
EXERCISE PRICE
--------------
(CAD$)
3.250 2,411,263
=========
- - - -------------------------------------------------------------------
PICO HOLDINGS INC.
Common shares issued and outstanding 32,591,718
----------
Common stock options:
EXERCISE PRICE
--------------
(US$)
2.69 2,545,031
6.00 12,000
2.88 15,000
----------
2,572,031
=========
</TABLE>
<PAGE> 191
SCHEDULE "C"
GLOBAL EQUITY CORPORATION
CORPORATE STRUCTURE
(MAY 1998)
GLOBAL EQUITY CORPORATION
(ONTARIO)
100%
Global Oil & Gas Inc.
(Delaware)
H
100%
Forbes & Walker
(USA) Inc.
(Delaware)
100%
Global Nevada Inc.
(Delaware)
H
100%
2941861 Limited
(United Kingdom)
I
100%
Forbes & Walker
Securities Limited
(Ontario)
100%
361404
Ontario, Inc.
(Ontario)
I
100%
TPC Exploration
(Oklahoma
General
Partnership
100%
Vidler Water
Company, Inc.
(Colorado)
74.77%
Nevada Land
& Resource
Company LLC
(Delaware)
100%
Forbes & Walker
International
Limited
(Barbados)
100%
Loewen, Ondaatje,
McCutcheon
(International) B.V.
(Netherlands)
H
100%
109144
Ontario Inc.
(Ontario)
I
100%
1091432
Ontario, Inc.
(Ontario)
I
100%
Forbes
Securities
Corporation
(Ontario)
I
100%
Lomcap
Trading
Limited
(Ontario)
I
32%
Conex
Continental Inc.
(Delaware)
100%
BSND, Inc.
(Delaware)
H
100%
Forbes & Walker
(1881) Limited
(United Kingdom)
I
100%
Global Equity SA
(Switzerland)
100%
CC Johnson
International
Co. Ltd.
(Delaware)
99.99%
Big Springs
Associates
(Nevada
Partnership)
60%
Guizhou Jonyang
Machinery
Industry Co. Ltd.
(Chinese Joint
Venture)
H = Holding company; no other holdings but Investment(s) listed
I - Inactive; no activity, no holdings
<PAGE> 192
SCHEDULE "D"
Property & Casualty Insurance Summary of Financial Results
<TABLE>
<CAPTION>
(US$ Millions) LTM(1)
03/31/98 1997 1996
-------- ---- ----
<S> <C> <C> <C>
Earned Premiums
Sequoia 30.1 32.8 26.3
Citation 14.8 17.4 5.1
44.9 50.2 31.4
TOTAL REVENUE 51.0 57.0 35.3
EARNINGS BEFORE TAXES 4.3 5.6 3.3
</TABLE>
(1) LTM = Last 12 Months
At March 31, 1998, the P&C insurance operations had net assets of US$38.8
million, excluding inter-company holdings valued separately in this report.
Citation's and Sequoia's GAAP industry ratios for the first quarters of 1998 and
1997 and for fiscal 1997, are summarized below:
<TABLE>
<CAPTION>
Citation Sequoia
------------------------------------------ ------------------------------------------
March 31, March 31, December 31, March 31, March 31, December 31,
1998 1997 1997 1998 1997 1997
<S> <C> <C> <C> <C> <C> <C>
Loss and LAE Ratio 84.8% 74.6% 84.8% 83.1% 72.1% 57.3%
Underwriting Expense Ratio 37.7% 35.7% 32.9% 41.2% 35.9% 38.1%
----- ----- ----- ----- ----- ----
COMBINED RATIO 122.5% 110.3% 117.7% 124.3% 108.0% 95.4%
----- ----- ----- ----- ----- ----
</TABLE>
<PAGE> 193
SCHEDULE "E"
SUMMARY OF JV OPERATING RESULTS
CURRENCY = CHINESE RENMINBI
<TABLE>
<CAPTION>
Q1
MARCH 31, 1998 1997
ACTUAL ACTUAL
--------------- -------------
<S> <C> <C>
Sales 28,841,437 135,961,639
Gross Profit 6,660,793 30,475,264
Gross Margin 23.1% 22.4%
General Administration 10,506,000 41,816,288
Financial expense 3,147,000 17,458,192
Selling expenses 1,596,000 7,077,508
Other income (expense) (482,452) (781,700)
NET EARNINGS (LOSS) (9,070,659) (36,658,424)
---------- -----------
</TABLE>
RESTATED TO CAD$
Exchange rate of 1 Chinese Renminbi = 0.1777 Canadian dollar
<TABLE>
<CAPTION>
Q1
MARCH 31, 1998 1997
ACTUAL ACTUAL
-------------- ------------
<S> <C> <C>
Sales 5,125,123 24,160,383
Gross Profit 1,183,623 5,415,454
Gross Margin 23.1% 22.4%
General Administration 1,866,916 7,430,754
Financial expense 559,222 3,102,321
Selling expenses 283,609 1,257,673
Other income (expense) (85,732) (138,908)
---------- ----------
NET EARNINGS (LOSS) (1,611,856) (6,514,202)
========== ==========
</TABLE>
<PAGE> 194
SCHEDULE "F"
COMPARABLE PUBLIC COMPANIES
PROPERTY AND CASUALTY INSURANCE OPERATIONS
JUNE 30, 1998
<TABLE>
<CAPTION>
Net Price- TEV/ TEV/
Combined Total Premium Earnings Price- Total Prem
Company Name LAE Ratio U/W Ratio Ratio Revenue Revenue 1997A 1998E 1998E Book Rev Rev
- - - ---------------------------------------------------------------------------------------------------------------------
LTM LTM LTM LTM LTM
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Acceptance Insurance 69.7% 32.9% 102.6% 370.4 333.0 10.6 10.5 9.2 1.45 1.3 1.4
2. American Indemnity 82.4% 40.9% 123.2% 70.8 63.9 n/a 62.5 8.2 0.58 0.3 0.4
3. Amwest 33.0% 52.0% 85.0% 104.1 97.8 10.0 10.3 8.6 0.93 0.7 0.7
4. Atlantic American 67.6% 32.3% 99.9% 103.0 89.5 15.2 12.5 10.0 1.16 0.9 1.1
5. Capitol Transamerica 59.0% 34.6% 93.6% 114.0 89.3 15.6 16.4 15.5 1.57 2.0 2.6
6. Danielson 70.9% 23.7% 94.6% 66.3 56.3 38.8 42.2 36.9 1.77 1.7 2.0
7. Donegal 58.1% 34.5% 92.6% 122.4 108.1 10.0 13.4 12.1 1.19 1.0 1.1
8. EMC 66.5% 34.4% 100.9% 204.8 180.4 10.5 15.5 14.4 1.00 0.8 0.9
9. Farm Family Holdings 75.1% 26.2% 101.3% 157.6 181.1 11.1 13.6 11.4 1.54 1.3 1.1
10. GAINSCO 104.2% 29.4% 113.6% 112.9 100.0 n/a n/a 13.6 1.31 1.2 1.4
11. Gryphon 66.4% 47.3% 113.7% 128.7 101.7 12.5 14.3 11.8 1.05 1.0 1.3
12. Highlands Insurance 75.0% 38.0% 113.0% 456.0 365.5 14.9 25.0 11.3 0.73 0.8 1.0
13. Meadowbrook 58.1% 33.6% 91.7% 107.7 72.9 18.4 15.2 12.8 1.99 2.3 3.4
14. Merchants 71.0% 35.5% 106.3% 98.6 90.5 16.6 12.9 12.4 1.02 0.7 0.8
15. Meridian 70.5% 31.5% 102.0% 216.2 194.6 13.9 13.2 11.8 0.92 0.6 0.7
16. MMI Companies 81.0% 26.7% 107.7% 241.4 190.7 9.3 13.0 11.7 1.07 1.8 2.3
17. Mobile America 59.7% 35.2% 94.9% 57.6 43.3 11.3 9.1 7.8 1.80 1.4 1.9
18. Old Guard Group 53.8% 48.1% 101.9% 75.0 69.1 18.0 45.6 17.0 0.95 1.0 1.1
19. Penn-America 62.0% 32.8% 94.8% 105.8 93.8 11.5 13.6 12.3 1.34 1.3 1.4
20. Philadelphia Consolidated 55.2% 30.4% 85.6% 115.0 105.5 15.1 16.1 14.0 2.16 2.2 2.4
21. RLI 35.6% 52.6% 88.2% 171.2 143.7 14.4 18.9 17.5 1.56 2.8 3.3
22. Symons International 77.8% 20.4% 98.2% 321.4 310.3 12.5 9.2 7.7 2.32 0.6 0.6
23. Unico American 51.4% 28.0% 79.4% 41.6 36.6 11.9 11.2 10.1 1.99 2.3 2.6
24. United Fire & Casualty 54.2% 50.0% 104.2% 315.9 245.0 13.9 13.1 11.2 1.48 1.3 1.7
25. Zenith National 76.0% 33.5% 109.5% 599.1 485.1 17.7 17.4 13.9 1.40 0.8 1.0
HIGH 38.8 62.5 36.9 2.3 2.8 3.4
AVERAGE 14.5 18.5 12.9 1.4 1.3 1.5
-----------------------------------------------------------------
ADJUSTED AVERAGE 13.6 17.0 12.1 1.4 1.3 1.5
-----------------------------------------------------------------
LOW 9.3 9.1 7.7 0.6 0.3 0.4
</TABLE>
* LAE, U/W and Combined ratios based on most recently reported results
* Adjusted average calculated as the average excluding the maximum and
minimum results
* Sources: Bloomberg, Company 10K and 10Q filings and The Insurance and
Financial Review - April 1988.
* PICO's LAE, U/W and combined ratio has been calculated as the average
between CIC and Sequoia.
* TEV: Total Enterprise Value - calculated as market capitalization +
short-term debt + long-term debt + preferred stock + minority
interest - cash equivalents
<PAGE> 195
KPMG Suite 3300 Commerce Court West Telephone (416) 777-8500
Chartered Accountants PO Box 31 Stn Commerce Court Telefax (416) 777-8818
Toronto Ontario M51 1B2 http://www.kpmg.co
The Board of Directors
Global Equity Corporation
As specifically agreed, we have performed the following procedures in connection
with the attached listing of securities dated June 30, 1998 (the "Attached
Listing"):
1. We have compared the market prices per share denominated in the foreign
currency of the securities as provided by the Company to
publicly-quoted prices provided by an independent service organization
at the same date. In determining such market prices, we obtained a
listing from the Company detailing the actual name and type of the
underlying security, as well as the number of units of the underlying
security owned by the Company as at June 30, 1998. However, we note
that as specifically agreed we have not performed any procedures
addressing the completeness, existence and ownership of the underlying
securities as at June 30, 1998.
2. We have compared the exchange rate used to convert the foreign currency
denominated market prices per share into Canadian dollars as provided
by the Company to publicly-quoted foreign exchange rates provided by an
independent service organization at the same time.
3. We have recalculated the Canadian dollar market prices per share by
multiplying the foreign currency denominated market prices per share by
the exchange rate as provided by the Company.
4. We have recalculated the total Canadian dollar market value of the
individual securities by multiplying the unit position of the
securities outstanding on June 30, 1998 as provided by the Company by
the Canadian dollar market prices of the securities as provided by the
Company at the same date.
5. We have compared the average daily market prices per share denominated
in Canadian dollars of the securities as provided by the Company (see
note 1) to the simple average of the publicly-quoted closing prices
denominated in the foreign currency provided by an independent service
organization for the period June 2, 1998 to June 30, 1998 translated
into Canadian dollars using an average exchange rate for the period. We
note that in certain instances, certain of the securities did not trade
on each one of the trading days during such period and the average
daily market value was computed only on the dates on which securities
were traded during that period.
As a result of applying the procedures, 1 through 4 inclusive, we have found no
exceptions in total Canadian market value of the individual securities greater
than $9 (Nine Dollars)
<PAGE> 196
KPMG
Page 2
on any individual security. As a result of applying procedure 5, we found no
exception that exceeded 0.05% on any individual security.
However, these procedures do not constitute an audit of the Attached Listing
and therefore we express no opinion thereon.
This report is for use solely in connection with the report being issued by
First Marathon Securities Limited on the valuation of the Company as at June 30,
1998 and is not to be referred to or distributed for any other purpose.
/s/ KPMG
Chartered Accountants
Toronto, Canada
July 10, 1998
<PAGE> 197
<TABLE>
<CAPTION>
- - - -------------------------------------------------------------------------------
CDN.
CDN. AVERAGE CLOSING PRICE
UNIT POSITION TOTAL MARKET 20 DAYS PRIOR TO
Investment June 30, 1998 June 30, 1998 June 30, 1998
- - - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Euro I 4,070 $3,494,949 $856.46
- - - -------------------------------------------------------------------------------
Euro II 2,900 $914,960 $324.17
- - - -------------------------------------------------------------------------------
Euro III 25,200 $6,443,218 $265.89
- - - -------------------------------------------------------------------------------
Euro IV 27,300 $6,084,586 $224.34
- - - -------------------------------------------------------------------------------
Euro V 13,215 $3,697,614 $282.92
- - - -------------------------------------------------------------------------------
Euro VI 5 $17,874 $3,642.13
- - - -------------------------------------------------------------------------------
Euro VII 2,020 $984,236 $471.70
- - - -------------------------------------------------------------------------------
Euro VIII 3,640 $3,648,996 $969.50
- - - -------------------------------------------------------------------------------
Euro X 310 $717,843 $2,338,37
- - - -------------------------------------------------------------------------------
78,660 $26,004,276
===============================================================================
</TABLE>
<PAGE> 198
ANNEX E
<PAGE> 199
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (619) 456-6022
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. [ X ]
Approximate aggregate market value of the registrant's common stock held by
nonaffiliates of the registrant (based on the closing sales price of such stock
as reported in the Nasdaq National Market) on March 20, 1998 was $118,539,069.
Excludes shares of common stock held by directors, officers and each person who
holds 5% or more of the registrant's common stock.
Number of shares of common stock, $.001 par value, outstanding as of March 20,
1998 was 32,591,718. As of such date, 4,572,015 shares of common stock were held
by subsidiaries of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the definitive proxy statement for the annual meeting of
stockholders held June 5, 1997 are incorporated by reference in Part
III herein.
================================================================================
<PAGE> 200
PICO HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
---
<S> <C>
PART I.............................................................................................................. 3
Item 1. BUSINESS............................................................................................... 3
Item 2. PROPERTIES............................................................................................. 25
Item 3. LEGAL PROCEEDINGS...................................................................................... 25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................................... 25
PART II............................................................................................................. 26
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................. 26
Item 6. SELECTED FINANCIAL DATA................................................................................ 27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................................................... 28
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS........................................... 43
Item 8. FINANCIAL STATEMENTS................................................................................... 44
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................................................... 80
PART III............................................................................................................ 80
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................... 80
Item 11. EXECUTIVE COMPENSATION................................................................................ 81
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................................................... 81
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................ 81
PART IV............................................................................................................. 81
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 10-K...................................... 81
SIGNATURES.......................................................................................................... 84
</TABLE>
2
<PAGE> 201
PART I
THIS FORM 10-K CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS, INCLUDING,
WITHOUT LIMITATION, STATEMENTS ABOUT THE COMPANY'S PLANS FOR EXPANSION,
INVESTING PHILOSOPHY, THE YEAR 2000 COMPUTING SYSTEMS COMPATIBILITY, AND
BUSINESS EXPECTATIONS, WHICH STATEMENTS REFLECT THE COMPANY'S CURRENT VIEWS WITH
RESPECT TO FUTURE EVENTS THAT WILL HAVE AN EFFECT ON THE COMPANY'S FINANCIAL
PERFORMANCE. THE COMPANY CAUTIONS INVESTORS THAT ANY FORWARD-LOOKING STATEMENTS
MADE BY THE COMPANY ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING
THOSE SET FORTH UNDER "BUSINESS RISKS" AND ELSEWHERE HEREIN, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS OR FROM
HISTORICAL RESULTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS.
ITEM 1. BUSINESS
INTRODUCTION
PICO Holdings, Inc. ("PICO") is a holding company principally engaged in
five industry segments: portfolio investing; property and casualty insurance;
surface, water, geothermal and mineral rights; medical malpractice liability
("MPL") insurance; and other. Management has added the surface, water,
geothermal and mineral rights segment for this annual report based on recent
acquisitions and management's strategic initiatives (see below). PICO has also
been active in life and health insurance operations through 1997, and is under
contract to sell this business. PICO operates through a number of direct and
indirect subsidiaries (with PICO and its subsidiaries, collectively referred to
herein as the "Company"). The Company's objective is to use its resources to
increase shareholder value through investments in businesses which the Company
believes are undervalued or will benefit from additional capital, restructuring
of operations or management, or improved competitiveness through operational
efficiencies with the Company's existing operations. This business strategy was
implemented beginning in 1994 and was not fully in place until 1996. See
"HISTORY OF THE COMPANY." Guinness Peat Group plc ("GPG"), a strategic
investment company domiciled in London, England owns approximately 17.6% of the
Company. GPG is a publicly held company with its shares listed on the London,
Australia and New Zealand stock exchanges.
PICO was incorporated in 1981 and began operations in 1982. Its principal
executive office is located at 875 Prospect Street, Suite 301, La Jolla,
California 92037, and its telephone number is (619) 456-6022.
Subsidiaries
Unless otherwise indicated, each subsidiary is directly or indirectly
wholly-owned by PICO. The Company's operating subsidiaries and their principal
subsidiaries or affiliates are as follows:
Citation Insurance Company ("CIC")
CIC is a California-domiciled insurance company licensed to write commercial
property and casualty insurance in Arizona, California, Colorado, Nevada,
Hawaii, New Mexico and Utah. CIC has also written Workers Compensation
insurance; however, the Company sold that line of business through a transfer to
and sale of its wholly-owned subsidiary, Citation National Insurance Company
("CNIC"), effective June 30, 1997. CNIC wrote no new business in 1997 prior to
its sale. See "History of the Company -- Developments Since the Merger."
Summit Global Management, Inc. ("Summit")
Summit is a Registered Investment Advisor that offers investment management
services to clients throughout the United States.
Nevada Land and Resource Company, LLC ("NLRC")
NLRC is the owner of approximately 1,365,000 acres of deeded land in
northern Nevada. On April 23, 1997, PICO acquired 25.23% of NLRC. Global-Nevada
Land Resource Corporation, a wholly-owned subsidiary of Global Equity
Corporation ("GEC") which is approximately 51.17% owned by the Company, acquired
the remaining 74.77% of NLRC. See "GLOBAL EQUITY CORPORATION" in this section.
3
<PAGE> 202
Physicians Insurance Company of Ohio ("Physicians")
Physicians, an Ohio licensed insurance corporation, operates primarily as a
diversified investment and insurance company. Its operations and those of its
direct and indirect subsidiaries include strategic investing, property and
casualty insurance, the runoff of its former MPL insurance claims reserves, and
other. Through 1997, an indirect subsidiary of Physicians engaged in life and
health insurance. That company, American Physicians Life Insurance Company, is
under contract to be sold. Physicians has been licensed as a property and
casualty insurer by the Ohio Department of Insurance ("Ohio Department") since
1976 and is also licensed by the Kentucky Department of Insurance. Disclosure in
this section regarding the business of "Physicians" includes all operations of
its subsidiaries.
Physicians' Subsidiaries and Affiliated Companies
SEQUOIA INSURANCE COMPANY ("SEQUOIA"). Sequoia is a California-domiciled
insurance company licensed to write insurance coverage for property and casualty
risks within the State of California. Sequoia writes business through
independent agents and brokers covering risks located primarily within northern
and central California. Although multiple line underwriting is conducted and at
one time or another all major lines of property and casualty insurance except
workers' compensation and ocean marine have been written, Sequoia has, over the
past few years, transitioned from writing primarily personal lines of business
(automobile, homeowners, etc.) to commercial lines.
AMERICAN PHYSICIANS LIFE INSURANCE COMPANY ("APL"). APL offers critical
illness insurance through "Survivor Key" policies as well as other life and
health insurance products. APL is wholly owned by The Physicians Investment
Company ("PIC"), a subsidiary of Physicians, Sequoia, and CIC. On June 16, 1997,
Physicians entered into an agreement to sell APL and APL's wholly-owned
subsidiary, Living Benefit Administrators Agency, Inc. The closing is subject to
certain closing conditions, which have not yet been met. See "History of the
Company -- Developments Since the Merger".
THE PROFESSIONALS INSURANCE COMPANY ("PRO"). PRO is an Ohio domiciled
insurance company first licensed to write property and casualty insurance in
Ohio in 1979. It is also licensed in Kentucky, West Virginia and Wisconsin.
CLM INSURANCE AGENCY, INC. ("CLM"). CLM, purchased on July 1, 1995, is an
inactive California insurance agency which placed insurance with California
insurers, including Sequoia.
GLOBAL EQUITY CORPORATION. PICO and its subsidiaries own approximately
51.17% of GEC, a Canadian international investment company. PICO increased its
ownership interest in GEC from 38.2% prior to July 30, 1997, to 49.9% on July
30, 1997 and to 51.17% in August 1997 and has consolidated the accounts of GEC
with those of the Company for 1997. Set forth below as of December 31, 1997, are
the names and respective jurisdictions of incorporation of certain direct and
indirect subsidiaries of GEC, all of which are wholly-owned except for NLRC
which is 74.77% owned by Global-Nevada Land Resource Corporation, a wholly-owned
subsidiary of GEC. The following list includes, but is not limited to, all
subsidiaries the total assets of which constituted more than 10% of the
consolidated assets of GEC as of December 31, 1997 or the total revenues of
which constituted more than 10% of the consolidated revenues of GEC during
fiscal 1997. GEC owns approximately 13% of PICO as of December 31, 1997.
<TABLE>
<CAPTION>
Jurisdiction
of
Subsidiary Incorporation
---------- -------------
<S> <C>
Direct:
Forbes & Walker Securities Limited.......................... Canada
Forbes & Walker (USA) Inc................................... Delaware
Indirect:
Forbes & Walker International Limited....................... Barbados
Vidler Water Company, Inc................................... Colorado
Nevada Land and Resource Company, LLC....................... Delaware
Global Equity SA............................................ Switzerland
</TABLE>
Subsidiaries of GEC are either holding companies or inactive, with the
exception of the following: Vidler Water Company, Inc. ("Vidler"), and NLRC. The
other subsidiaries may be utilized in the future in furtherance of the
international investment, asset management or corporate finance activities of
GEC.
4
<PAGE> 203
MAJOR BUSINESSES AND PROPERTIES OF GLOBAL EQUITY CORPORATION
Vidler Water Company, Inc.
Effective November 14, 1995, a wholly-owned subsidiary of GEC acquired all
of the outstanding common stock of Vidler. Vidler is a corporation formed under
the laws of the state of Colorado. The purchase price was $5,575,299 in cash.
Vidler is engaged in the water marketing and transfer business. The business
plan calls for Vidler to identify areas where water supplies are needed in the
southwestern United States and then facilitate the transfer from current
ownership to Vidler, and subsequently to municipalities, water districts,
developers and others. This process requires knowledge and skills in the
identification, certification, upgrading, managing, transfer, marketing and
financing of water projects. Vidler has created opportunity through its ability
to aggregate water supplies from disparate owners and locations and redirect the
water to its highest and best use.
As a comprehensive provider of water services, Vidler performs the following
functions:
- Water asset acquisitions, purchasing appropriative water rights,
upgrading the priority and functionality wherever possible, and
marketing the product to the end-user; and
- Development and operation of water recharge (storage) facilities
directed to municipalities and water districts in the southwestern
United States. Storage provides flexibility. Surplus supplies can be
stored inexpensively and can be sold and delivered to meet peak
demands.
Since its acquisition by GEC, Vidler and its immediate parent company have
purchased water rights and related assets in Colorado, Nevada and Arizona.
Nevada Land and Resource Company, LLC
On April 23, 1997, a wholly-owned subsidiary of GEC acquired a 74.77%
interest in NLRC. The remaining 25.23% interest was acquired by PICO. The total
purchase price for NLRC was $48.6 million. NLRC's principal asset consists of
approximately 1.365 million acres of deeded land located in northern Nevada,
together with appurtenant water, geothermal and mineral rights. NLRC is actively
engaged in maximizing the property's value in relation to water rights, mineral
rights, geothermal resources, and land development.
The activities of Vidler and NLRC are considered by PICO to be a reportable
segment of surface, water, geothermal and mineral rights. This determination was
made for this annual report based on the acquisition of the majority ownership
in GEC by PICO and management's strategic initiatives.
Conex Continental Inc.
In August 1996, a wholly-owned subsidiary of GEC made an investment in Conex
Continental Inc. ("Conex"). Conex is a corporation formed under the laws of
Ontario, Canada. At Conex's January 7, 1998 Annual Meeting of Shareholders, the
shareholders approved a plan to change the domicile of Conex to the state of
Delaware and management is working to accomplish this change.
Conex's principal asset is a 60% interest, through a wholly-owned
subsidiary, in a sino-foreign joint venture. This joint venture operates a
manufacturing facility in Guiyang City, Guizhou Province, China and manufactures
wheeled and tracked hydraulic excavators.
A wholly-owned subsidiary of GEC invested approximately $5,000,000 and
received 6,750,000 voting class B preferred shares in August 1996 plus
89,096,888 separate and detachable warrants each exercisable at a price of
approximately $0.0398 into one common share. In 1997, the subsidiary of GEC
exercised warrants and purchased 22,195,043 common shares of Conex at a price of
approximately $0.0398 per common share.
SISCOM, Inc.
In August 1996, GEC purchased 4,000,000 newly-issued voting preferred shares
of SISCOM, Inc. ("SISCOM") for an aggregate purchase price of $1,000,000. The
preferred shares pay quarterly non-cumulative dividends at the rate of 7% per
annum. The preferred shares are convertible on a one-for-one basis into common
shares of SISCOM.
In February 1998, CIC and Sequoia each purchased 625,000 newly-issued
convertible preferred shares of SISCOM for a purchase price of $250,000 each.
5
<PAGE> 204
SISCOM is a corporation formed under the laws of the state of Colorado.
SISCOM is a provider of multimedia software solutions to the electronic news
media, Internet providers, and sports industries.
GEC also has a portfolio of investments in other equity securities in the
United States, Europe and Asia. These investments include GEC's investments in
PICO. They also include investments in certain Korean equities which have been
heavily impacted by the recent decline in Korean financial markets. In 1997, GEC
wrote down its investment in these securities to approximately $0.8 million
through an approximate $8.0 million charge to GEC's statement of operations,
including a foreign currency loss of approximately $3.8 million. The preceding
amounts were reduced by minority interests of approximately 48% when
consolidated into the Company's financial statements.
HISTORY OF THE COMPANY
Recent Merger
On November 20, 1996, Citation Holdings, Inc., an Ohio corporation ("Sub"),
merged with and into Physicians, (the "Merger") pursuant to an Agreement and
Plan of Reorganization (the "Merger Agreement") dated as of May 1, 1996, as
amended by and among Citation Insurance Group, Physicians and Sub. Pursuant to
the Merger, each outstanding share of Class A Common Stock of Physicians (the
"Physicians Stock") was converted into the right to receive 5.0099 shares of
PICO's Common Stock. As a result, (i) the former shareholders of Physicians
owned approximately 80% of the outstanding Common Stock of PICO immediately
after the Merger and controlled the Board of Directors of PICO and (ii)
Physicians became a wholly owned subsidiary of PICO. Pursuant to the Merger
Agreement, PICO also assumed all outstanding options to acquire Physicians
Stock.
As a result of the Merger, the business and operations of Physicians and its
subsidiaries became a substantial majority of the business and operations of the
Company.
Effective upon the Merger, PICO's name, which was previously "Citation
Insurance Group" was changed to "PICO Holdings, Inc." and the Nasdaq symbol for
the Company's stock was changed from "CITN" to "PICO."
Physicians
Physicians was incorporated under the laws of Ohio in September 1976 and was
licensed by the Ohio Department in December 1976. Physicians was formed with the
sponsorship of the Ohio State Medical Association ("OSMA") to provide MPL
insurance coverage to physicians who were members of the OSMA. Physicians was
formed in response to a then-existing crisis in the MPL insurance marketplace in
Ohio. MPL claims had increased substantially in severity and frequency.
Insurance companies providing MPL coverage responded in some cases by increasing
premiums significantly or even by leaving the marketplace. The OSMA sought to
provide a stable insurance provider for its members in the face of this volatile
MPL marketplace by forming Physicians.
Until 1993, OSMA held shares representing a majority of Physicians' voting
power. Physicians' Code of Regulations also contained the requirement that three
OSMA officers sit on Physicians' Board of Directors and that Physicians only
write MPL insurance for the OSMA members. Physicians secured the endorsement of
its insurance products by the OSMA pursuant to an endorsement contract.
The strategic direction of Physicians changed in 1993. First, Physicians
repurchased its shares from the OSMA and amended its Code of Regulations to
delete the requirements that three OSMA officers sit on Physicians' Board. The
MPL product endorsement was terminated and the three Physicians directors who
were affiliated with the OSMA resigned as directors.
Additionally in 1993, Physicians was approached by an investor who could
provide a significant capital infusion. Physicians sold 1,428,571 newly-issued
and authorized shares of Physicians stock, representing, at that time, 32% of
Physicians' voting power, for $5 million to GPG, a London-based strategic
investment company. At that same time, four designees of GPG (Messrs. Broadbent,
whose term expired in 1995, Langley, Hart and Dr. Weiss) were elected to
Physicians' Board. GPG subsequently purchased from Physicians $3.0 million of
additional shares of Physicians stock, thereby increasing GPG's equity position
in Physicians. In May and June 1996, GPG sold a total of 850,000 shares of
Physicians to GEC (which converted into 4,258,415 shares of PICO pursuant to the
Merger).
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<PAGE> 205
During 1995, there was another overall shift in the strategic direction of
Physicians. As discussed further below, Physicians sold its recurring MPL
business, purchased a property and casualty insurance company in California
(Sequoia) which does not write MPL insurance, and made a significant investment
in GEC which operates primarily as an international investment company.
Physicians' objective was and continues to be to use its resources and those of
its subsidiaries and affiliates to increase shareholder value through
investments in businesses which Physicians believes to be undervalued or will
benefit from additional capital, restructuring of operations or management, or
improved competitiveness through operational efficiencies with existing
Physicians operations. This business strategy was implemented beginning in 1994
and was not fully in place until 1996.
On March 7, 1995, Physicians executed the Stock Purchase Agreement with
Sydney Reinsurance Corporation ("SRC") to acquire all of the outstanding stock
of SRC's wholly-owned subsidiary, Sequoia, a property and casualty insurance
company incorporated under the laws of California in 1946 and licensed to write
insurance in California. Sequoia provides light commercial and multiperil
insurance in northern and central California through an independent agency
system. The acquisition price of $1,350,000 was paid in cash on August 1, 1995.
Physicians initially capitalized Sequoia with $2.6 million in paid-in
capital and an additional $5.9 million in paid-in surplus. Subsequently,
Physicians contributed an additional $17.3 million to Sequoia to cover 1995 net
losses, to strengthen Sequoia for purposes of maintaining or improving Sequoia's
"B++" (Very Good) A.M. Best Company rating (See "A.M. BEST COMPANY" under
"Competition")and its NAIC risk-based capital ratio, and to provide capital for
growth.
All policy and claims liabilities of Sequoia prior to closing are the
responsibility of SRC and have been unconditionally and irrevocably guaranteed
by QBE Insurance Group Limited ("QBE"), an Australian corporation of which SRC
indirectly is a wholly-owned subsidiary. Physicians is required to maintain a
minimum surplus in Sequoia of $7.5 million and, through a management agreement,
is supervising the run-off of SRC's liabilities. As part of the management
agreement, Physicians was reimbursed for certain expenses incurred in the
servicing of the business existing prior to closing. Since its acquisition by
Physicians, Sequoia has continued to write light commercial and multiperil
insurance in northern and central California.
On July 14, 1995, Physicians and PRO entered into an Agreement for the
Purchase and Sale of Certain Assets (the "Mutual Agreement") with Mutual
Assurance Inc. ("Mutual"). This transaction was approved by Physicians'
shareholders on August 25, 1995 and closed on August 28, 1995. Pursuant to the
Mutual Agreement, Physicians sold the recurring professional liability insurance
business and related liability insurance business for physicians and other
health care providers (the "Book of Business") of Physicians and PRO. Physicians
and PRO were engaged in, among other things, the business of offering MPL
insurance and related insurance to physicians and other health care providers
principally located in Ohio. Mutual acquired the Book of Business in
consideration of the payment of $6.0 million, plus interest at a rate of 6% per
annum from July 1, 1995 until the date of closing, or an aggregate of $6.1
million.
Simultaneously with execution of the Mutual Agreement, Physicians and Mutual
entered into a Reinsurance Treaty pursuant to which Mutual agreed to assume all
risks attaching after July 15, 1995 under medical professional liability
insurance policies issued or renewed by Physicians on physicians, surgeons,
nurses, and other health care providers, dental practitioner professional
liability insurance policies including corporate and professional premises
liability coverage issued by Physicians, and related commercial general
liability insurance policies issued by Physicians (the "Policies"), net of
inuring reinsurance. The premium payable to Mutual for such reinsurance is an
amount equal to 100% of the premiums paid to Physicians, net of inuring
reinsurance, on the Policies subject to a ceding commission equal to the sum of
(i) the commissions payable by Physicians, to agents procuring the Policies;
(ii) Mutual's allocable share of Physicians' premium taxes or franchise taxes,
whichever is lower; and (iii) Mutual's allocable share of any guaranty fund
assessment against Physicians with respect to premiums paid on the Policies.
Physicians and PRO have reinsured a portion of the insurance written prior
to July 16, 1995 with unaffiliated reinsurers and 100% of the insurance written
between July 16, 1995 and January 1, 1996 with Mutual. Subject to such
reinsurance, Physicians and PRO remain primarily liable to policyholders.
As part of the Mutual Agreement, Physicians and PRO agreed not to sell the
following insurance products for a period of five years ending August 27, 2000,
in any state in which Physicians, PRO or Mutual was licensed to offer MPL
insurance products as of August 28, 1995: professional liability insurance for
physicians, surgeons, dentists, hospitals, ambulatory surgical clinics, and
other health care providers (collectively, "Health Care Providers"); reinsurance
for insurers writing professional liability insurance for such Health Care
Providers; comprehensive general liability insurance for Health Care Providers;
stop loss insurance for Health Care Providers who have contracted to provide
health care services at a fixed rate; and managed care liability insurance
providing coverage for liability arising from errors and omissions of a managed
care organization, for the vicarious liability of a managed care organization
for acts and omissions by contracted and employed providers, and for liability
of directors and officers of a managed care organization.
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<PAGE> 206
Physicians will continue to administer the runoff of claims on policies
written or renewed prior to July 16, 1995. Physicians estimates based upon
actuarial indications that approximately 75% of Physicians' claim liabilities
which existed at the end of 1995 should be paid out by the end of the year 2000.
In 1983, Physicians incorporated Summit and subsequently registered it with
the SEC as an investment adviser. Summit was inactive from 1990 through 1994,
and in January 1995, Summit was reactivated. In addition to its registration
with the SEC, Summit is registered as an investment adviser in California,
Florida, Kansas, Louisiana, Oregon, Virginia and Wisconsin. Summit maintains an
office in California. Funds under management are approximately $700 million,
most of which are funds which Summit is managing on behalf of PICO and its
subsidiaries and affiliates. Summit provides an opportunity for the Company to
be further diversified and will provide fee based revenues. Since February 1995,
Summit has provided investment management services to Physicians and its
insurance affiliates. Summit also offers its services to other individuals and
institutions.
On September 5, 1995, Physicians purchased 21,681,084 common shares of GEC
for $34.4 million in cash. GEC is a Canadian corporation which has its offices
in Toronto, Canada and La Jolla, California. GEC is a publicly-held corporation
and is listed on the Toronto Stock Exchange ("TSE") and The Montreal Exchange
under the symbol "GEQ." Physicians' purchase amounted to 38.2% of GEC's
outstanding common shares. GEC operates primarily as an international investment
company. On July 30, 1997, subsidiaries of PICO purchased 6,616,218 existing
shares of GEC from a non-affiliated shareholder, increasing the Company's
ownership of GEC to approximately 49.9%. On August 19, 1997, PICO and Physicians
purchased 13,586,143 newly issued shares pursuant to a public offering of shares
by GEC. These purchases increased PICO's ownership of GEC to approximately 51.17
%. GEC currently owns 4,258,415 shares, or approximately 13%, of PICO's
outstanding Common Stock.
Immediately prior to the Merger, Physicians operated in five industry
segments: property and casualty insurance, life and health insurance, portfolio
investing, MPL insurance and other. MPL insurance was written by Physicians and
its wholly-owned subsidiary, PRO, an Ohio corporation organized in 1979.
Physicians and PRO sold MPL insurance to physicians, dentists, nurses and other
allied health care professionals. Physicians and PRO discontinued writing MPL
insurance at the end of 1995, but continue to administer the adjustment of
claims and the investment of related assets for policies in force prior to July
16, 1995. Physicians has conducted its life and health insurance business
through APL, an Ohio-domiciled life insurer that was formed in 1978 and is
currently under contract to be sold subject to certain closing conditions,
including regulatory approval, which have yet to be met. In July 1993, APL began
aggressively marketing a critical illness policy which Physicians and APL
believed to be unique to the U.S. market. However, APL's success with this
innovative product has been significantly less than expected. The portfolio
investing segment was engaged in primarily by Physicians. The property and
casualty insurance segment was engaged in by Sequoia, which Physicians acquired
on August 1, 1995. The Company's other operations consisted primarily of
Summit's investment adviser operations.
On December 20, 1996, Physicians transferred its ownership in Summit to
PICO.
In addition to PRO, PIC, APL, and Sequoia, at December 31, 1997, Physicians
had five wholly-owned subsidiaries, none of whose current operations are
material to the financial position of the Company. CLM Insurance Agency, Inc.
("CLM") was purchased by Physicians on July 1, 1995. Prior to 1997, CLM brokered
insurance in California for Sequoia and other unaffiliated companies. CLM is
currently inactive. Raven Development Company was incorporated in Ohio in 1981
as a real estate development corporation. It is currently involved in one
development in central Ohio but is in the process of withdrawing from the real
estate development industry. Medical Premium Finance Company ("MPFC") was
incorporated in Ohio to conduct insurance premium finance business. MPFC ceased
writing new loans effective September 30, 1994, and became totally dormant as of
October 1, 1995. S.M.B. Financial Planning, Inc. ("SMB") is an Ohio corporation
acquired in 1983 to provide financial planning services. SMB has not been
operating for the past five years.
Citation
The following describes the history of PICO, which was previously known as
"Citation Insurance Group", prior to the Merger. All references to "CIG" are
references to PICO as it existed prior to the Merger. CIG was a holding company
principally engaged in writing workers' compensation and commercial property and
casualty insurance through its wholly-owned subsidiaries, CIC and CNIC.
"Citation" refers to CIG and its subsidiaries, excluding Citation General
Insurance Company (CGIC), as they existed before the Merger. CGIC, a
wholly-owned subsidiary of CIG, was placed into conservation in July 1995 by the
State of California. Citation had effectively written off its investment in CGIC
in November 1994.
CIC has historically specialized in providing workers' compensation coverage
for California businesses and, more recently, in Arizona, Colorado and Utah.
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<PAGE> 207
In October 1989, CIC entered the commercial property and casualty business.
Since that time, CIC has underwritten general liability and property insurance
for small and medium-sized businesses with uniform risk characteristics and
coverage needs. CIC typically provides general liability, theft, inland marine,
property, glass and incidental products liability coverage. Commercial auto and
umbrella liability are written for accounts where CIC writes other lines of
business.
In October 1993, CIG completed the acquisition of Madison Capital, Inc. and
its subsidiaries ("Madison") for which CIG issued 2,158,545 shares of its common
stock and paid $3,650,000 to the former shareholders of Madison in exchange for
all of the issued and outstanding stock of Madison. Madison was merged with and
into CIG and Madison's former wholly-owned subsidiaries, The Canadian Insurance
Company of California, California Consumers Insurance Company and Madison
Acceptance Corporation, became wholly-owned subsidiaries of CIG. In February
1994, the names of The Canadian Insurance Company of California and California
Consumers Insurance Company were changed to Citation General Insurance Company,
(CGIC), and Citation National Insurance Company (CNIC), respectively.
CGIC and CNIC specialized in insuring accounts in commercial
property-oriented business classifications, including investment properties,
retail operations, restaurants, wholesale distribution operations and other
service-related businesses. Until October 1994, they also provided coverage for
artisan contractors.
Madison Acceptance Corporation ("MAC") is licensed by the California
Department of Corporations as an industrial loan company empowered to transact
premium financing in California. MAC does not presently conduct premium
financing operations.
During 1994, Citation increased CGIC's loss reserves and, in the third
quarter of 1994, the increase in CGIC's loss reserves aggregated approximately
$6.2 million. These increases were due primarily to re-evaluation of potential
losses related to construction defect claims emanating from CGIC's artisan
contractor policies written in years prior to the Merger. Subsequent to the
third quarter loss reserve increases, Citation notified the California
Department of Insurance (the "California Department") that the cumulative effect
of these increases brought CGIC below the minimum surplus required by the State.
Citation began working with the California Department to formulate a plan for
resolving the situation. Based upon discussions with the California Department
regarding the possible conservation of CGIC, Citation concluded that its control
over CGIC had become temporary and, as a result, has accounted for the results
of CGIC on the equity method since November 1994, resulting in a write off of
its remaining investment in CGIC of $4.2 million at that date. At that time,
CGIC and CNIC stopped writing any new business.
In February 1995, Citation reached an agreement in principle with the
California Department regarding CGIC. Under the terms of the agreement, an
inter-company pooling reinsurance agreement between CGIC and CNIC was commuted
effective September 30, 1994. In addition, CNIC transferred approximately $1.1
million of securities into a contingency fund for potential further development
of CGIC's loss reserves associated with accident years 1990 to 1994 during which
time the inter-company pooling agreement was in effect. Further, CIG agreed to
pay $600,000 in cash to CGIC and transfer its 25% ownership of CIG's Costa Mesa
property to CGIC. As a result of this agreement, CIG recorded a liability for
the cost of the disposition of CGIC, which includes the above described payments
and transfers which, when combined with its write off of its investment in CGIC,
resulted in a $6.7 million charge to Citation's operating results in 1994.
Further, CIC agreed to acquire the in-force book of business of CGIC for
approximately $1.7 million, which was accrued as a liability of Citation and
recorded as an other asset at December 31, 1994.
During July 1995, CGIC was placed into conservation by the State of
California, effectively transferring control of CGIC's assets to the California
Department. In August 1995, CGIC was placed into liquidation by the State of
California.
On November 30, 1995, CIG contributed all of the capital stock of CNIC to
CIC. This transaction increased the paid-in and contributed surplus of CIC by
$5,303,731. CNIC has been essentially inactive since mid-December 1994.
In February 1994, Citation entered the personal automobile insurance
business in California by offering low limit policies marketed through a
Managing General Agent. Primarily as a result of poor operating results in this
line, Citation decided in early 1995 to withdraw from this business and focus on
its primary business segments, i.e., workers' compensation and commercial
property and casualty.
CIC is currently licensed to write business in Arizona, California,
Colorado, Hawaii, Nevada, New Mexico and Utah and is currently writing business
in Arizona, California, Colorado, Nevada and Utah. CNIC is licensed in
California.
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Developments Since the Merger
In November 1996, Physicians purchased a $2.5 million convertible debenture
from PC Quote, Inc. ("PC Quote"). Physicians currently owns approximately 16.8%
of PC Quote's outstanding shares. PC Quote is an electronic provider of
real-time securities quotations and news. On May 5, 1997, PICO agreed to provide
a line of credit to PC Quote. The initial credit was for $1 million with
repayment due September 30, 1997. The credit has since been increased to
$2,250,000 with repayment due April 30, 1998. The Company received warrants to
purchase common shares of PC Quote, Inc. in connection with these transactions.
The value of such warrants is not material to the Company's financial position
or results of operations.
On April 14, 1997, GEC and PICO entered into an agreement for the purchase
of NLRC, owner of approximately 1,365,000 acres of deeded land with appurtenant
water, geothermal and mineral rights in Northern Nevada, for a total purchase
price of $48.6 million. The closing date was April 23, 1997.
On June 16, 1997, Physicians announced the signing of a definitive agreement
to sell its wholly-owned life and health insurance subsidiary, APL, and its
wholly-owned subsidiary, Living Benefit Administrators Agency, Inc. to IFS
Insurance Holdings Corporation. Closing is subject to closing conditions,
including regulatory approval which is still pending.
On June 30, 1997, CIC sold its workers' compensation business through a
transfer to and sale of its wholly-owned subsidiary, CNIC, to an unaffiliated
insurance company.
On July 30, 1997, PICO acquired additional common stock of GEC increasing
the Company's ownership to approximately 49.9%.
On August 19, 1997 PICO acquired additional shares of GEC common stock,
increasing the Company's ownership to approximately 51.17%.
On December 17, 1997 Physicians contributed an additional $5.5 million to
Sequoia.
OPERATIONS
The Company operates in five industry segments: portfolio investing;
surface, water, geothermal and mineral rights; property and casualty insurance;
MPL insurance and other. Life and health insurance was written through 1997, but
has been treated as "discontinued operations" due to the pending sale of APL.
Physicians ceased writing MPL insurance at the end of 1995 but continues to
administer the adjustment of claims and the investment of related assets.
Effective June 30, 1997, Citation sold its workers' compensation operations and
its subsidiary, CNIC, principally due to recent changes in California
regulations with regard to rating of policies and to better utilize capital and
concentrate on the synergies of the property and casualty insurance businesses
common to both Sequoia and Citation.
PORTFOLIO INVESTING OPERATIONS
In late 1994, Physicians began the process of changing its strategic
direction from the operation of an MPL insurance business to investing in
businesses which PICO believes are undervalued or will benefit from additional
capital, restructuring of operations or management or improved competitiveness
through operational efficiencies with existing PICO operations. Accordingly, in
January 1995, Physicians reactivated its investment advisory subsidiary, Summit;
in August 1995, Physicians acquired Sequoia and entered new lines of property
and casualty insurance; in September 1995, Physicians purchased 38.2% of GEC, a
Canadian corporation active in international investments, water rights, and
other businesses and in 1996 Physicians acquired control of Citation pursuant to
the Merger.
In July and August 1997, the Company increased its ownership in GEC to
approximately 51.17%. GEC's financial results have been consolidated with those
of the Company, resulting in increased levels of portfolio investing activities.
See Footnote 19 to the Consolidated Financial Statements entitled "Segment
Reporting."
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GEC is a Canadian corporation engaging in strategic investment; surface,
water, geothermal and mineral rights; and other services. In addition to GEC's
investments in its subsidiaries, GEC also has a portfolio of investments in
other equity securities in the United States, Canada, Europe and Asia. These
investments include GEC's investments in PICO. They also include investments in
certain Korean equities which have been heavily impacted by the recent decline
in Korean financial markets. With the exception of the operations of Vidler and
NLRC, most of GEC's activities fall under the business segment category of
portfolio investing. At times, GEC may come to hold securities of companies for
which no market exists or which may be subject to restrictions on resale. As a
result, a portion of GEC's assets may not be liquid. Furthermore, as a result of
its global diversification with respect to existing investments, GEC's revenues
may be adversely affected by economic, political and governmental conditions in
countries where it maintains investments or operations, such as volatile
interest rates or inflation, the imposition of exchange controls which could
restrict or prohibit GEC's ability to withdraw funds, political instability and
fluctuations in currency exchange rates.
Due to the Company's limited experience in the operation of the businesses
of each of these subsidiaries, which currently constitute a substantial portion
of the Company's operations, there can be no assurance as to the future
operating results of the Company or the recently acquired businesses of the
Company.
The Company will continue to make selective investments for the purpose of
enhancing and realizing additional value by means of appropriate levels of
shareholder influence and control. This could involve the restructuring of the
financing or management of the entities in which the Company invests and
initiating and facilitating mergers and acquisitions. This business strategy was
implemented beginning in 1994 and was not fully in place until 1996.
Consequently, the results of this strategy are not fully reflected in prior
years' financial statements, nor are the financial statements indicative of
possible results of this new business strategy in the future. Shareholders will
be relying on the experience and judgment of the Company's management to locate,
select and develop new acquisition and investment opportunities. There can be no
assurance that sufficient opportunities will be found or that this business
strategy will be successful. Failure to successfully implement this strategy may
negatively impact the business and financial condition and results of operations
of the Company.
Application of Physicians' new strategy since 1995 and the consolidation
with GEC in 1997 have resulted in a greater concentration of equity investments
held by the Company. Market values of equity securities are subject to changes
in the stock market, which may cause the Company's shareholders' equity to
fluctuate from period to period. At times, the Company may come to hold
securities of companies for which no market exists or which may be subject to
restrictions on resale. As a result, periodically, a portion of the Company's
assets may not be readily marketable.
SURFACE, WATER, GEOTHERMAL AND MINERAL RIGHTS
Effective November 14, 1995, a wholly-owned subsidiary of GEC acquired all
the outstanding common stock of Vidler, a Colorado corporation engaged in the
water marketing and transfer business. Vidler's business plan calls for Vidler
to identify areas where water supplies are needed in the southwestern United
States and then facilitate the transfer from current ownership to Vidler and
subsequently to municipalities, water districts, developers and others. Since
its acquisition, Vidler and its immediate parent company have purchased water
rights and related assets in Colorado, Nevada and Arizona.
NLRC, which is 74.77% owned by GEC and 25.23% by PICO owns approximately
1.365 million acres of deeded land located in northern Nevada, together with
appurtenant water, geothermal and mineral rights. NLRC is actively engaged in
maximizing the property's value in relation to water rights, mineral rights,
geothermal resources, and land development.
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INSURANCE
Premiums
The following table shows the total net premiums written (gross premiums
less premiums ceded pursuant to reinsurance treaties) by line of business by the
Company and its subsidiaries for the periods indicated as reported in financial
statements filed with the Ohio Department and the California Department using
statutory accounting principles:
NET PREMIUMS WRITTEN
BY LINE OF BUSINESS
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Property and Casualty-Commercial and Other $40,093 $35,201 $10,755
Medical Professional Liability 239 28 11,824
Workers' Compensation (38,730) 1,556 0
------------ ------------ ------------
Total Property and Casualty Premiums $1,602 $36,785 $22,579
------------ ------------ ------------
Life and Health:
Individual:
Life 1,424 1,232 1,122
Health 59 74 86
Annuity 2,121 2,665 1,480
Group:
Life 410 449 475
Health 39 82 274
Annuity 1,087 921 462
------------ ------------ ------------
Total Life and Health Insurance Premiums 5,140 5,423 3,899
------------ ------------ ------------
Total Insurance Premiums $6,742 $42,208 $26,478
============ ============ ============
</TABLE>
Physicians experienced significant declines in MPL net premiums written in
recent years. Net premiums equal direct premiums plus assumed premiums, minus
premiums ceded under reinsurance treaties. The amount of reinsurance assumed by
Physicians over the years has been negligible. However, PRO and Physicians
entered into a 100% quota share reinsurance treaty effective October 1, 1997
whereby PRO ceded and Physicians assumed all of PRO's existing claims
liabilities, net of existing reinsurance. See "REINSURANCE." Direct MPL premiums
written have declined significantly, from near $50 million prior to 1993 to
$22.6 million in 1995, $167,000 in 1996 and to $38,000 in 1997. Additionally,
MPL premiums ceded under reinsurance treaties have varied greatly from year to
year. See "REINSURANCE." APL's premium writings have also declined significantly
since 1994, mostly as a result of exiting the group health insurance business in
mid-1994. Interest in APL's critical illness policy, Survivor Key, has been less
than expected and not enough to offset the decline in health premiums from 1994
levels. Sequoia's property and casualty premium writings are included for the
periods subsequent to August 1, 1995. Citation's premiums are included for
periods after November 20, 1996. The $38.7 million negative workers'
compensation net premiums written in 1997 by CIC reflects the 100% reinsurance
cession of CIC's entire existing book of workers' compensation insurance to CNIC
just prior to the sale of CNIC and the workers' compensation business. See
"INTRODUCTION-Citation Insurance Company."
Property and Casualty Insurance
Sequoia underwrites property and casualty insurance in California only. CIC
underwrites property and casualty insurance in California and, to a lesser
extent in Arizona, Colorado, Nevada and Utah.
Sequoia is licensed to write insurance in California and is represented by
independent insurance agents and has been represented by Physicians'
wholly-owned subsidiary insurance agency, CLM, until 1997. CLM is currently
inactive. Sequoia writes primarily light commercial and multiperil insurance in
northern and central California. Sequoia's principal sources of premium
production represent farm insurance and small to medium-sized commercial
accounts, most of which are located outside of large urban areas. A small amount
of earthquake coverage is provided, either as an endorsement to an existing
insurance policy or as a result of participation in a state-mandated pool. Most
business is written at independently filed rates.
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<PAGE> 211
CIC underwrites general liability and property insurance for small and
medium-sized businesses, including restaurants, hotels and motels, retail
stores, owners of small commercial centers, and until October 1994, artisan
contractors, with uniform risk characteristics and coverage needs. CIC targets
specific types of accounts within predetermined business classifications
containing certain characteristics including low potential for loss severity, no
long delay between loss occurrence and loss reporting, and a relatively short
and uncomplicated claim settlement process. CIC typically provides general
liability, theft, inland marine, property, glass, commercial automobile,
incidental products liability coverage and umbrella liability. CIC sells
policies through independent producers located in its operating territories.
Net earned premiums, incurred losses and the corresponding loss ratio
(excluding loss adjustment expense ("LAE")) for Sequoia and CIC for 1997 were
(dollars in thousands) $50,232, $23,976 and 47.7%, respectively, excluding
workers' compensation insurance.
This compares to $31,399, $13,908 and 44.3%, respectively, in 1996.
Sequoia and CIC combined results for 1997 by line of business, excluding
workers' compensation insurance, were as
follows:
<TABLE>
<CAPTION>
1997
---------------------------------------------
Net
Premiums Net Losses Net Loss
Earned Incurred* Ratio*
------------ ------------- ------------
(in thousands)
<S> <C> <C> <C>
Fire $824 $73 8.9%
Allied lines 141 96 68.1%
Homeowners multiperil 4 13 325.0%
Commercial multiperil 37,022 14,392 38.9%
Inland marine (39) 0.0%
Earthquake 336 (3) 0.9%
Other liability 814 5,151 632.8%
Auto liability 7,201 3,276 45.5%
Auto physical damage 3,890 1,017 26.1%
------------ -------------
Total $50,232 $23,976 47.7%
============ =============
</TABLE>
- - - ----------------
* Net losses incurred and net loss ratios shown exclude LAE.
Sequoia's total net loss ratio improved 5.4 percentage points over 1996
principally as a result of improved loss experience in the commercial multiperil
line of business. CIC's results continue to be significantly influenced by
extremely poor claims experience in artisan/contractors (classified above under
"other liability") insurance which is no longer offered by CIC.
The underwriting staffs of Sequoia and CIC (the "P & C Insurance Group") are
solely responsible for the ultimate acceptance, underwriting and pricing of
applications for commercial insurance. Premium pricing levels are based on a
variety of factors, including industry historical loss costs, anticipated loss
costs, acceptable profit margins and anticipated operating expenses.
The objective of pricing structures in all product lines is to provide
sufficient funds to pay all costs of policy issuance and administration, premium
taxes and losses and related claims handling expenses and provide a profit
margin as well. Because pricing structures are based on estimates of future loss
patterns developed from historical information and because losses and expenses
may differ substantially from estimates, product pricing may ultimately prove
inadequate. Factors causing inadequate rates may include catastrophic losses or
a lack of correlation between the loss forecast for the market and that
applicable to the customers which actually purchase the policies. In addition,
if underlying statistical information understates the value of known claims,
forecasts may understate prospective claims patterns.
The P & C Insurance Group's policy is to settle valid claims promptly and
equitably. The P & C Insurance Group employs claim technicians, located in
various locations throughout California, to administer the claim settlement
process. It is the P & C Insurance Group's policy to limit the number of claims
assigned to each technician, based in part on the complexity of the individual
claims. It is also the P & C Insurance Group's policy that the most experienced
technicians handle the most complex claims. In general, claims in litigation are
the most complex and require the most experienced personnel.
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<PAGE> 212
The Company's claim staff, working closely with claim department
supervisors, may retain independent adjusters, appraisers and defense counsel,
based on the nature of the claim. In addition, the P & C Insurance Group has
implemented procedures and programs to detect and investigate claim fraud and
believes that, to date, these programs have resulted in substantial savings
relative to the claimed amounts involved.
Sequoia has expended considerable effort and expense in streamlining and
reordering its operations in the latter part of 1995 and in 1996 and 1997.
Computer systems have been developed to facilitate decentralization of
underwriting and claims adjusting functions. In evidence of this, in July 1997,
Sequoia and CIC consolidated their home office operations in Monterey,
California. Both companies are in the process of sub-leasing their former office
spaces in Pleasanton and San Jose, California.
The P & C Insurance Group has emphasized the development and maintenance of
information and processing systems for use in all areas of its business.
Management believes that its information and processing systems enable the P & C
Insurance Group to compete effectively through enhanced policyholder services,
efficient underwriting, claim support systems, reduced processing costs and
timely management information. In addition, CIC's systems are not dependent on
specific hardware vendors, thereby providing it with greater control over
hardware costs and flexibility in terms of operating hardware. An internally
integrated software system has been designed for the processing of CIC's
commercial property and casualty business, including automated policy issuance
and claim processing.
CIC's claim function has been supported by its on-line automated claim
system, which has been internally developed and refined over several years.
Utilizing this system, claim technicians have on-line, direct access to all
claim files through their own computer terminal. All P & C computer systems are
expected to be year 2000 compliant by January 1, 1999.
CIC and Sequoia collect premiums either by direct billing or producer
billing. Sequoia has recently developed its own direct billing system and began
utilizing this system for all new and renewal policies, thereby eliminating its
reliance on the outside service vendor.
CIC and Sequoia write property and casualty insurance policies. Most of
CIC's and Sequoia's net premiums are attributable to property and casualty. The
property and casualty insurance industry has been highly cyclical, and the
industry has been in a cyclical downturn over the last several years due
primarily to premium rate competition, which has resulted in lower
profitability. Premium rate levels are related to the availability of insurance
coverage, which varies according to the level of surplus in the industry. The
level of surplus in the industry varies with returns on invested capital and
regulatory barriers to withdrawal of surplus. Increases in surplus have
generally been accompanied by increased price competition among property and
casualty insurers. The cyclical trends in the industry and the industry's
profitability can also be affected significantly by volatile and unpredictable
developments, including natural disasters (such as hurricanes, windstorms,
earthquakes and fires), fluctuations in interest rates and other changes in the
investment environment which affect market prices of insurance companies'
investments and the income from those investments, inflationary pressures that
affect the size of losses and judicial decisions affecting insurers'
liabilities. The demand for property and casualty insurance can also vary
significantly, generally rising as the overall level of economic activity
increases and falling as such activity decreases.
MPL
Prior to the sale of the MPL insurance business in August 1995, Physicians
and PRO sold primarily MPL coverage. Physicians and PRO were represented by
approximately 40 independent insurance agents and by Physicians' wholly-owned
subsidiary insurance agency, PICO Insurance Agency, Inc. While Physicians and
PRO were licensed collectively in the states of Ohio, Kentucky, Michigan, West
Virginia and Wisconsin, MPL coverage was actively sold only in Ohio and
Kentucky. Physicians and PRO continue to administer the adjustment of claims and
the investment of related assets for policies written or renewed prior to July
16, 1995.
Life and Health
APL is represented on a commission basis by approximately 400 independent
agents, some of whom may also be licensed with other unaffiliated companies.
APL, an Ohio-domiciled life insurer, has written life, annuity and group health
insurance since its inception in 1978. In July, 1993, APL began marketing a
critical illness policy which APL believed was unique to the U.S. market. In the
face of heightened competition for group health insurance and to concentrate on
the Survivor Key product, on July 1, 1994, APL ceased writing group, health and
dental coverages with the exception of the Physicians Group Plans, which were
terminated in March 1996. To date, response to APL's critical illness policy,
Survivor Key, has been less than expected. On June 16, 1997, Physicians
announced the signing of a definitive agreement to sell APL and its wholly-owned
subsidiary, Living Benefit Administrators Agency, Inc. The closing is subject to
certain closing conditions, including regulatory approval which is still
pending. See "HISTORY OF THE COMPANY--Developments Since the Merger".
14
<PAGE> 213
Liabilities for Unpaid Loss and Loss Adjustment Expenses
Liabilities for unpaid loss and LAE are estimated based upon actual and
industry experience, and assumptions and projections as to claims frequency,
severity and inflationary trends and settlement payments. Such estimates may
vary from the eventual outcome. The inherent uncertainty in estimating reserves
is particularly acute for lines of business for which both reported and paid
losses develop over an extended period of time.
Several years or more may elapse between the occurrence of an insured MPL,
or casualty loss, the reporting of the loss and the final payment of the loss.
Loss reserves are estimates of what an insurer expects to pay claimants, legal
and investigative costs and claims administrative costs. The Company's
subsidiaries are required to maintain reserves for payment of estimated losses
and loss adjustment expense for both reported claims and claims which have
occurred but have not yet been reported ("IBNR"). Ultimate actual liabilities
may be materially more or less than current reserve estimates.
Reserves for reported claims are established on a case-by-case basis. Loss
and loss adjustment expense reserves for IBNR are estimated based on many
variables including historical and statistical information, inflation, legal
developments, the regulatory environment, benefit levels, economic conditions,
judicial administration of claims, general trends in claim severity and
frequency, medical costs and other factors which could affect the adequacy of
loss reserves. Management reviews and adjusts IBNR reserves regularly.
The liabilities for unpaid losses and LAE for Physicians, PRO, Sequoia, and CIC
(the "Combined Insurance Group") were $196.1 million in 1997, $252.0 million in
1996, and $229.8 million in 1995, net of discount on MPL reserves. Of those
amounts, the liabilities for unpaid loss and LAE of prior years increased by
$0.9 million in 1997, $2.3 million in 1996 and $3.2 million in 1995. These
changes in reserves for prior years' reserves were due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
(in millions)
<S> <C> <C> <C>
Decrease in provision for prior year claims $ (1.0) $ (2.6) $ (0.3)
Retroactive reinsurance (1.2) - (2.4)
Accretion of reserve discount 3.1 4.9 5.9
------------ ------------- ------------
Net increase decrease in liabilities for unpaid loss
and LAE of prior years $ 0.9 $ 2.3 $ 3.2
============ ============= ============
</TABLE>
See schedule in Note 13 of Notes to the Company's Consolidated Financial
Statements for additional information regarding reserve changes.
Although the Combined Insurance Group's reserves are certified annually by
independent actuaries for each insurance company as required by state law,
significant fluctuations in reserve levels can occur based upon a number of
variables used in actuarial projections of ultimate incurred losses and LAE.
Physicians' liability for unpaid MPL losses and LAE is discounted to reflect
investment income as permitted by the Ohio Department. The method of discounting
is based upon historical payment patterns and assumes an interest rate at or
below Physicians' investment yield, and is the same rate used for statutory
reporting purposes. Physicians uses a 4% discount rate for MPL reserves.
All members of the Combined Insurance Group seek to reduce the loss that may
arise from individually significant claims or other events that cause
unfavorable underwriting results by reinsuring certain levels of risk with other
insurance carriers.
Various reinsurance treaties remain in place to limit the Combined Insurance
Group's exposure levels. See "REINSURANCE" following this section and Note 12 of
Notes to Consolidated Financial Statements - Reinsurance.
Reconciliation of Unpaid Loss and Loss Adjustment Expenses
An analysis of changes in the liability for unpaid losses and LAE for 1997,
1996 and 1995 is set forth in Note 13 of Notes to the Company's Consolidated
Financial Statements.
15
<PAGE> 214
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
The following table presents the development of balance sheet liabilities for
1987 through 1997 for all property and casualty line of business including MPL.
The "Net liability as originally estimated" line shows the estimated liability
for unpaid losses and LAE recorded at the balance sheet date on a discounted
basis for each of the indicated years. Reserves for other lines of business that
Physicians ceased writing in 1989, which are immaterial, are excluded. The
"Gross liability as originally estimated" represents the estimated amounts of
losses and LAE for claims arising in all prior years that are unpaid at the
balance sheet date on an undiscounted basis, including losses that had been
incurred but not reported.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992
------------ ------------ ------------ ------------ ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Liability as originally estimated: $104,495 $109,435 $126,603 $128,104 $129,768 $159,804
Discount 35,146 37,100 36,806 30,230 30,647 31,269
Gross liability as originally estimated: 139,641 146,535 163,409 158,334 160,413 191,073
Cumulative payments as of:
One year later 35,339 27,229 43,725 42,488 42,986 41,550
Two years later 61,228 69,335 84,463 81,536 81,489 73,012
Three years later 96,680 105,274 110,291 108,954 103,505 103,166
Four years later 123,254 122,589 128,737 120,063 120,073 116,278
Five Years later 135,034 136,454 135,170 126,100 127,725 139,028
Six years later 144,405 138,907 138,912 130,146 142,973
Seven years later 145,589 140,451 141,854 142,484
Eight years later 145,733 141,641 152,706
Nine years later 145,431 146,841
Ten years later 147,533
Liability re-estimated as of:
One year later 149,426 148,847 162,653 160,200 188,811 197,275
Two years later 145,432 148,932 162,371 179,915 184,113 179,763
Three years later 149,243 154,177 176,123 172,715 174,790 182,011
Four years later 152,427 165,596 169,488 170,847 177,811 176,304
Five Years later 158,868 163,676 171,532 171,968 172,431 181,721
Six years later 160,414 165,996 170,873 165,255 175,830
Seven years later 164,727 166,144 167,341 168,185
Eight years later 164,893 161,328 170,941
Nine years later 160,683 163,426
Ten years later 161,946
Cumulative Redundancy (Deficiency) ($22,305) ($16,891) ($7,532) ($9,851) ($15,417) $9,352
</TABLE>
RECONCILIATION TO FINANCIAL STATEMENTS
Gross Liability - end of year
Reinsurance recoverable
Net liability - end of year
Net discount
Discounted net liability - end of year
Discounted reinsurance recoverable
Discontinued personal lines insurance
Balance sheet liability (discounted)
Gross re-estimated liability - latest
Re-estimated recoverable - latest
Net re-estimated liability - latest
Net re-estimated discount - latest
Discounted net re-estimated liability - latest
Gross cumulative redundancy (deficiency)
16
<PAGE> 215
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Liability as originally estimated: $179,390 $153,212 $137,523 $165,629 $128,205
Discount 32,533 20,144 16,568 12,216 9,159
Gross liability as originally estimated: 211,923 173,356 154,091 177,845 137,364
Cumulative payments as of:
One year later 34,207 35,966 27,128 59,918
Two years later 69,037 61,263 65,062
Three years later 90,904 93,908
Four years later 118,331
Five Years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Liability re-estimated as of:
One year later 183,560 170,411 147,324 177,734
Two years later 184,138 163,472 146,653
Three years later 175,308 162,532
Four years later 178,544
Five Years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative Redundancy (Deficiency) $33,379 $10,824 $7,438 $111
RECONCILIATION TO FINANCIAL STATEMENTS
Gross Liability - end of year $248,951 $266,320 $208,351
Reinsurance recoverable (94,860) (88,474) (70,987)
------------ ------------- ------------
Net liability - end of year 154,091 177,846 137,364
Net discount (16,568) (12,217) (9,159)
------------ ------------- ------------
Discounted net liability - end of year 137,523 165,629 128,205
Discounted reinsurance recoverable 91,089 85,217 67,654
------------ ------------- ------------
228,612 250,846 195,859
Discontinued personal lines insurance 1,185 1,178 237
------------ ------------- ------------
Balance sheet liability (discounted) $229,797 $252,024 $196,096
============ ============= ============
Gross re-estimated liability - latest $246,613 $279,119
Re-estimated recoverable - latest (99,960) (101,384)
------------ -------------
Net re-estimated liability - latest 146,653 177,735
Net re-estimated discount - latest (8,589) (9,159)
------------ -------------
Discounted net re-estimated liability - latest $138,064 $168,576
============ =============
Gross cumulative redundancy (deficiency) $7,438 $111
============ =============
</TABLE>
Each decrease or (increase) amount includes the effects of all changes in
amounts during the current year for prior periods. For example, the amount of
the redundancy related to losses settled in 1990, but incurred in 1987 will be
included in the decrease or (increase) amount for 1987, 1988 and 1989.
Conditions and trends that have affected development of the liability in the
past may not necessarily occur in the future. For example, Physicians commuted
reinsurance contracts in several different years that significantly increased
the estimate of net reserves for prior years by reducing the recoverable loss
and LAE reserves for those years. Accordingly, it may not be appropriate to
extrapolate future increases or decreases based on this table.
17
<PAGE> 216
The data in the above table is based on Schedule P from each of the Combined
Insurance Group's 1987 to 1997 Annual Statements, as filed with state insurance
departments; however, the development table above differs from the development
displayed in Schedule P, Part-2, of the insurance Annual Statements as Schedule
P, Part-2, excludes unallocated LAE.
LOSS RESERVE EXPERIENCE. The inherent uncertainties in estimating loss
reserves are greater for some insurance products than for others, and are
dependent on the length of the reporting lag or "tail" associated with a given
product, the diversity of historical development patterns among various
aggregations of claims, the amount of historical information available during
the estimation process, the degree of impact that changing regulations and legal
precedents may have on open claims, and the consistency of reinsurance programs
over time, among other things. Because MPL, and commercial casualty claims may
not be fully paid for several years or more, estimating reserves for such claims
can be more uncertain than estimating reserves in other lines of insurance. As a
result, precise reserve estimates cannot be made for several years following a
current accident year for which reserves are initially established.
There can be no assurance that the insurance subsidiaries in the Combined
Insurance Group and APL have established reserves adequate to meet the ultimate
cost of losses arising from such claims. It has been necessary, and will over
time continue to be necessary, for the insurance companies to review and make
appropriate adjustments to reserves for estimated ultimate losses, LAE, future
policy benefits, claims payables and annuity and other policyholder funds. To
the extent reserves prove to be inadequate, the insurance companies would have
to adjust their reserves and incur a charge to earnings, which could have a
material adverse effect on the financial results of the Company.
REINSURANCE
MPL
Prior to July 16, 1995, Physicians ceded a portion of the insurance it wrote
to unaffiliated reinsurers through reinsurance agreements. Physicians'
reinsurers for insurance policies with effective dates between July 1, 1993 and
July 15, 1995, were TIG Reinsurance Company (rated A (Excellent) by Best),
Transatlantic Reinsurance Company (rated A+ (Superior) by Best) and Cologne
Reinsurance Company of America (rated NR-3 (Rating Procedure Inapplicable) by
Best). Physicians ceded insurance to these carriers on an automatic basis when
retention limits were exceeded. Physicians retained all risks up to $200,000 per
occurrence. All risks above $200,000, up to policy limits of $5 million, were
transferred to reinsurers, subject to the specific terms and conditions of the
various reinsurance treaties. Physicians remains primarily liable to
policyholders for ceded insurance should any reinsurer be unable to meet its
contractual obligations. Physicians has not incurred any material loss resulting
from a reinsurer's breach or failure to comply with the terms of any reinsurance
agreement. MPL insurance written or renewed after July 15, 1995 was fully
reinsured by Mutual.
Property and Casualty
CIC has excess of loss reinsurance treaties for its property and casualty
insurance business with General Reinsurance Corporation ("Gen Re") for policies
written on or after October 1, 1991 through December 31, 1993, and primarily
with North Star Reinsurance Corporation, a subsidiary of Gen Re, and Western
Atlantic Management Corporation, a subsidiary of North American Reinsurance
Corporation, for policies written prior to October 1, 1991. For losses that
occurred from October 1, 1989 to September 30, 1990 on policies written prior to
October 1, 1990, the reinsurers assume liability on that portion of loss which
exceeds $75,000 per occurrence, up to a maximum of $3.0 million per occurrence
for property losses and up to a maximum of $1.0 million per occurrence for
casualty losses. For losses that occur after September 30, 1990, on policies
written prior to October 1, 1991, the maximum coverage for property losses is
$2.0 million. For losses occurring after October 1, 1991 on policies written
between October 1, 1991 and December 31, 1993, the reinsurer assumes liability
on that portion of loss which exceeds $75,000 per occurrence, up to a maximum of
$3.0 million per occurrence for property losses and that portion of loss which
exceeds $125,000 per occurrence, up to a maximum of $3.0 million per occurrence
for casualty losses occurring prior to December 31, 1993. CIC obtains
facultative reinsurance for those policies it issues with policy limits above
its excess of loss reinsurance treaties. Currently, the number of such policies
is insignificant.
CGIC and CNIC's casualty excess of loss reinsurance treaty through December
31, 1993 provided $850,000 of coverage in excess of a retention of $150,000 per
auto liability or general liability loss and was placed with National
Reinsurance Corporation ("National") (75%) and Prudential Reinsurance Company
("Prudential") (25%). Another treaty, placed primarily with Prudential, provided
$3.0 million in additional limits. The $150,000 retention has been in place
since January 1, 1992. Between February 1, 1986, and December 31, 1991, the
retention was $100,000. CIG believes that, before February 1, 1986, the CGIC
reinsurance program had retentions ranging up to $250,000 per occurrence.
18
<PAGE> 217
CGIC and CNIC's property reinsurance program, which covered all policies
incepting before January 1, 1994, is structured as follows:
- A surplus share treaty providing $6.0 million in available limits is
maintained with Prudential (55%) and Munich American Reinsurance Company
("Munich") (45%).
- A property excess of loss treaty provides $450,000 in limits in excess of
a $50,000 per occurrence retention. This treaty is maintained with National
(75%) and Prudential (25%).
- A property catastrophe program, supported by several reinsurers, provided
95% of $8.5 million in excess of a $1.5 million per occurrence retention.
- Several facultative reinsurance agreements provide direct access to as
much as $6.0 million in additional reinsurance coverage as needed.
CGIC's and CNIC's commercial umbrella liability treaty was placed with
Prudential for all policies incepting before January 1, 1994. Prudential
reinsures 95% of the first $1.0 million of umbrella coverage and 100% of any
limits purchased above $1.0 million. The maximum limit reinsured under this
treaty is $5.0 million. For higher umbrella limits, facultative reinsurance is
obtained.
CGIC entered into a Stop Loss reinsurance treaty with Scandinavian
Reinsurance Company, Ltd. ("Scandinavian") in 1991. Since CGIC and CNIC had
entered into an intercompany pooling reinsurance agreement, CNIC shared in the
results of this treaty. This treaty, effective November 1, 1991, involved the
transfer of $8.5 million of portfolio investments to Scandinavian in exchange
for $13,175,000 of coverage, including $6.5 million of existing loss and loss
adjustment expense reserves and $6,675,000 of coverage for potential future
adverse development of loss and loss adjustment expense reserves associated with
accident years 1991 and prior. All $6,675,000 was ceded as of December 31, 1991.
Additional limits were purchased during 1992, providing $5.1 million of coverage
for the accident years 1991 and prior. This involved the payment of $3.5 million
in April 1992 representing $3.5 million in existing loss and loss adjustment
expense reserves. All $5.1 million was ceded as of year end 1992. Other
provisions of the treaty permit CGIC and CNIC to purchase additional limits to
protect accident years 1992 through 1995. As of December 31, 1994, CGIC and CNIC
had purchased approximately $2,126,000 of limits for the 1992 accident year, all
of which has been ceded, had purchased approximately $2,182,000 of limits for
the 1993 accident year, all of which has been ceded, and had purchased
approximately $1,950,000 of limits for the 1994 accident year, $1,844,000 of
which has been ceded. The coverage provided by the Stop Loss treaty cannot be
canceled or commuted by the reinsurer. As of December 31, 1996, CNIC has
received payment for all losses ceded to this treaty for accident year 1992.
CNIC has a letter of credit from the reinsurer for unpaid losses ceded to this
treaty for accident years 1993 and 1994.
Effective January 1, 1994, CIC and CNIC have in place reinsurance agreements
for their property and casualty business. CIC and CNIC have an excess of loss
reinsurance treaties with Gen Re for casualty losses occurring from January 1,
1995 through December 31, 1995. This treaty provides $5,850,000 of coverage in
excess of $150,000 per occurrence. CIC and CNIC also have an excess and
commercial umbrella liability treaty with American Reinsurance Company which
reinsures 95% of the first $1.0 million of umbrella coverage and 100% of any
limits purchased above $1.0 million, up to $10.0 million. For property losses, a
surplus share treaty providing up to $4.5 million of proportional coverage is
placed with Munich. A property excess of loss treaty with National Re provides
up to $1,350,000 of coverage in excess of $150,000. Facultative reinsurance
agreements with American Re and Munich Re provide coverage of up to an
additional $6.0 million. Property catastrophe reinsurance is provided by several
reinsurers and provides 95% of $8.5 million of coverage in excess of a $1.5
million per occurrence retention.
Effective March 31, 1995, CIC entered into a reinsurance agreement with
National Re to provide coverage for property and casualty losses incurred in
excess of $50,000 per occurrence up to $150,000, at which level CIC's other
reinsurance agreements provide coverage. This reinsurance agreement provides
reinsurance commission income to CIC on the premiums ceded pursuant to the
agreement.
Effective January 1, 1996, CIC cancelled the property and casualty excess of
loss agreement described above with National Re. In addition, CIC and CNIC
cancelled on a run off basis the surplus share treaty with Munich Re and the pro
rata automatic facultative agreements with American Re and Munich Re. There were
no cancellation penalties associated with the cancellation of these reinsurance
contracts. CIC and CNIC have an excess of loss treaty with National Re for
property and casualty loss occurring on or after January 1, 1996. This treaty
provides $4,750,000 of coverage in excess of $250,000 per occurrence. An
automatic facultative agreement with Munich Re provides coverage up to $6.0
million in excess of $5.0 million per occurrence. Property catastrophe
reinsurance, which is provided by several reinsurers, was increased to provide
95% of $18.5 million of coverage in excess of a $1.5 million per occurrence
retention. The commercial umbrella agreement with American Re continues to
provide coverage as described above.
19
<PAGE> 218
Effective January 1, 1997, CIC cancelled its reinsurance contracts and
replaced them with the following coverages. For policies in force at December
31, 1996 and for policies written with effective dates from January 1, 1997
through February 28, 1997, CIC has reinsurance providing coverage for both
property and casualty business, excluding umbrella coverage, of $4,750,000
excess of $250,000. For policies written with effective dates March 1, 1997 and
after, CIC has the same reinsurance as Sequoia's 1997 reinsurance program which
is outlined as follows. For property business, reinsurance provides coverage of
$10,350,000 excess of $150,000. For casualty business, excluding umbrella
coverage, reinsurance provides coverage of $4,850,000 excess of $150,000.
Umbrella coverages are reinsured $9,900,000 excess of $100,000. The catastrophe
treaties provide coverage of 95% of $19,000,000 excess of $1,000,000 per
occurrence for the combined losses of CIC and Sequoia. Facultative reinsurance
is placed with various reinsurers.
Effective June 30, 1997, immediately prior to the sale of CNIC, CIC ceded
and CNIC assumed all of CIC's historical workers' compensation net reserves and
inforce workers' compensation policies. CNIC then ceded and CIC assumed all of
CNIC's net commercial property and casualty reserves and inforce commercial
property and casualty insurance policies (other than workers' compensation).
Where the reinsurers are "not admitted" for regulatory purposes, the P & C
Insurance Group presently maintains sufficient collateral with approved
financial institutions to secure cessions of paid losses and outstanding
reserves.
With regard to Sequoia, all policy and claims liabilities prior to August 1,
1995 have been 100% reinsured with SRC and unconditionally guaranteed by QBE.
Sequoia, however, retains primary responsibility to its policyholders and
claimants should SRC and QBE fail. Sequoia's net retention for both property and
casualty business, excluding umbrella coverage, is $150,000 per risk or
occurrence. The working layers provide coverage up to $5,500,000 excess of
$150,000 per risk on property losses subject to occurrence limits and unlimited
reinstatements. General liability coverage, excluding umbrella coverage, is
provided up to $3,000,000 excess of $150,000 per occurrence. Two excess
catastrophe treaties provide additional property reinsurance up to $10,000,000
each occurrence, excess of $500,000 each occurrence, with allowances for one
full reinstatement each at pro rata pricing. Sequoia retains the first $100,000
of each umbrella loss up to $5,000,000. Facultative reinsurance is placed with
various reinsurers.
Reinsurance recoverable concentration for all property and casualty lines of
business, including MPL, as of December 31, 1997 is summarized in the following
table:
<TABLE>
<CAPTION>
REINSURANCE RECOVERABLE CONCENTRATION
UNEARNED REPORTED UNREPORTED REINSURER
PREMIUMS CLAIMS CLAIMS BALANCES
-------- ------ ------ --------
(in millions)
<S> <C> <C> <C> <C>
Sydney Reinsurance Corporation $ 0.1 $ 10.0 $14.1 $24.2
Kemper Reinsurance Corporation $ 1.5 $ 1.5
Continental Casualty Company $ 1.1 $ 0.6 $ 1.0 $ 2.7
San Francisco Reinsurance Company $ 0.1 $ 0.2 $ 0.3
TIG Reinsurance Group $ 1.2 $11.1 $12.3
Transatlantice Reinsurance Company $ 9.1 $ 9.1
Cologne Reinsurance Company of America $ 0.9 $ 0.9
Mutual Assurance, Inc. $ 4.1 $ 3.9 $ 8.0
General Reinsurance $ 2.9 $ 2.9
National Reinsurance Corporation $ 3.8 $ 0.5 $ 4.3
</TABLE>
The Company remains contingently liable with respect to reinsurance
contracts in the event that reinsurers are unable to meet their obligations
under the reinsurance agreements in force.
Life and Health
APL's net retention for life insurance products is a maximum of $50,000 per
risk, except for their combined critical illness and life insurance product
which has a maximum of $25,000.
20
<PAGE> 219
Reinsurance Risks
As with other property and casualty insurers, CIC's and Sequoia's operating
results and financial condition can be adversely affected by volatile and
unpredictable natural and man-made disasters, such as hurricanes, windstorms,
earthquakes, fires and explosions. CIC and Sequoia generally seek to reduce
their exposure to such events through individual risk selection and the purchase
of reinsurance. CIC's and Sequoia's estimates of their exposures depend on their
views of the possibility of a catastrophic event in a given area and on the
probable maximum loss to CIC or Sequoia should such an event occur. While CIC
and Sequoia attempt to limit their exposure to acceptable levels, it is possible
that an actual catastrophic event or multiple catastrophic events could
significantly exceed the probable maximum loss previously assumed, resulting in
a material adverse effect on the financial condition and results of operations
of the Company.
The future financial results of the insurance subsidiaries could be
adversely affected by disputes with their respective reinsurers with respect to
coverage and by the solvency of such reinsurers. None of the Company's insurance
subsidiaries is aware of actual or potential disputes with any of their
respective reinsurers that could materially and adversely impact the financial
results of the Company or is aware of any insolvent reinsurer whose current
obligations to CIC, Physicians, PRO, APL or Sequoia are material to such
companies.
Competition
There are several hundred property and casualty insurers licensed in
California, many of which are larger and have greater financial resources than
the P & C Insurance Group and offer more diversified types of insurance
coverage, have greater financial resources and have greater distribution
capabilities than the P & C Insurance Group.
A.M. BEST COMPANY ("Best") has assigned Sequoia a rating of B++ (Very Good)
and APL has had a Best rating of B+ (Very Good) since 1983. CIC is currently
rated B+ (Very Good) by Best. Physicians and PRO are currently rated, and have
been for a number of years, NR-3 (Rating Procedure Inapplicable). Best's ratings
reflect the assessment of Best of the insurer's financial condition as well as
the expertise and experience of its management. Therefore, Best ratings are
important to policyholders. Best ratings are subject to review and change over
time. There can be no assurance that Sequoia, CIC, or APL will maintain their
ratings. If Sequoia, CIC, or APL fail to maintain their current ratings, it
would possibly have a material adverse effect on their ability to write new
insurance policies as well as potentially reduce their ability to maintain or
increase market share.
As a result of the reported losses and the increase in reserves, primarily
from construction defect claims, in 1995, Best at that time reduced its rating
of CIC from B+ to B-. Best recently upgraded CIC's rating to B+ (Very Good).
Management believes that many potential customers will not insure with an
insurer that carries a Best rating of less than B+, and that customers who do so
will demand lower rate structures. There can be no assurances that CIC's Best
ratings will be maintained or increased.
There is fierce competition in the property and casualty insurance industry
which is populated by large insurers doing business on a countrywide basis, as
well as regional and local insurers. Insurers compete on the basis of price,
product, and service. Many of the competitors in the market have higher ratings
from Best as well as other financial rating services and offer a broader array
of coverages than do CIC and Sequoia.
Commercial insurance markets are commodity-oriented, highly fragmented and
reflective of intense price competition. Nevertheless, because each commercial
risk is somewhat unique in terms of insurance exposure, different insurers can
develop widely divergent estimates of prospective losses. Most insurers attempt
to segment classes within commercial markets so that they target the more
profitable sub-classes with lower, although adequate rates, given the estimated
profitability of the segment. In some cases, no statistics are available for the
sub-classes involved, and the insurer implements discounted rate structures
based solely on theoretical judgment. Finally, different insurers have widely
divergent internal expense positions, due to method of distribution, scale
economies and efficiency of operations. Therefore, although insurance is a
commodity, the price of insurance does not necessarily reflect commodity
pricing.
Sequoia's and CIC's ability to attract and retain customers results from
price structures which have been tailored to attract certain sub-segments of the
commercial insurance market. In addition, several of their competitors have
either restricted writings in California or have withdrawn from the state due to
a variety of competitive pressures and adverse litigation and regulatory
climates.
However, CIC's and Sequoia's marketing is focused in a limited number of
commercial business classifications. In general, these classifications are
considered preferred by most competitors because of historically profitable
results realized from underwriting such classifications. CIC's and Sequoia's
customer bases and prospective revenues are vulnerable to the pricing actions of
larger or more efficient competitors who target CIC's and Sequoia's desired
classifications or individual policyholders and offer substantially lower rates.
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<PAGE> 220
The life and health insurance industry is highly competitive. There are
approximately 700 life and health insurers licensed in Ohio, many of which are
larger and have greater financial resources than APL. APL currently is rated B+
(Very Good) by Best. APL is, to the Company's knowledge, one of the few life
insurance companies in the U.S. offering a critical illness policy which pays a
lump sum benefit equal to the face amount even if the insured is not terminally
ill (in contemplation of death within twelve months). This critical illness
policy, which is called "Survivor Key," has been the main focus of APL's
marketing efforts in recent years.
Physicians and its subsidiaries no longer compete in the MPL industry. CIC
sold its workers' compensation businesses in 1997. On June 16, 1997, Physicians
announced the signing of a definitive agreement to sell APL. See "HISTORY OF THE
Company--Developments Since the Merger."
Regulation
Physicians, CIC and their respective insurance subsidiaries are subject to
extensive state regulatory oversight in the jurisdictions in which they are
organized and in the jurisdictions in which they do business.
Physicians, PRO, APL, Sequoia, and CIC investments are strictly regulated by
investment statutes in their states of domicile. In general, these investment
laws place limits on the amounts of investment in any one company, the owned
percentage of any one company and the quality of investments and seek to ensure
the claims-paying ability of the insurer.
Ohio has enacted legislation that regulates insurance holding company
systems, including Physicians and its insurance subsidiaries. Each insurance
company in the holding company system is required to register with the Ohio
Department and furnish information concerning the operations of companies within
the holding company system that may materially affect the operations, management
or financial condition of the insurers within the system. Pursuant to these
laws, the Ohio Department may examine Physicians and/or its insurance
subsidiaries at any time and require disclosure of and/or approval of material
transactions involving the insurers within the system, such as extraordinary
dividends from any one of Physicians or any of its insurance subsidiaries. All
material transactions within the holding company system affecting Physicians or
its Ohio-domiciled insurance subsidiaries must be fair and reasonable. Sequoia
and CIC are subject to similar legislation in California.
Ohio insurance law provides that no person may acquire direct or indirect
control of Physicians, PRO or APL unless it has obtained the prior written
approval of the Ohio Superintendent of Insurance for such acquisition unless
such transaction is exempt. Similarly, California insurance law provides that no
person may acquire direct or indirect control of Sequoia or CIC unless it has
obtained the prior written approval of the California Insurance Commissioner of
such acquisition.
Since Physicians, PRO and APL are domiciled in Ohio, the Ohio Department is
the principal supervisor and regulator of each of these companies. Since Sequoia
and CIC are domiciled in California, the California Insurance Commissioner is
its principal supervisor and regulator. However, each of the companies are also
subject to supervision and regulation in the states in which they transact
business, and such supervision and regulation relate to numerous aspects of an
insurance company's business and financial condition. The primary purpose of
such supervision and regulation is to ensure financial stability of insurance
companies for the protection of policyholders. The laws of the various states
establish insurance departments with broad regulatory powers relative to
granting and revoking licenses to transact business, regulating trade practices,
required statutory financial statements, and prescribing the types and amount of
investments permitted. Although premium rate regulations vary among states and
lines of insurance, such regulations generally require approval of the
regulatory authority prior to any changes in rates.
Insurance companies are required to file detailed annual reports (statutory
Annual Statements) with the insurance departments in each of the states in which
they do business, and their financial condition and market conduct are subject
to examination by such agencies at any time.
Physicians, PRO and APL are restricted by the insurance laws of Ohio as to
the amount of dividends they may pay without prior approval. The maximum
dividend that may be paid during any 12-month period without the prior approval
of the Ohio Department is limited to the greater of 10% of the insurer's surplus
as regards policyholders as of the preceding December 31 or the net income of
the insurer for the year ended the previous December 31. Any dividend paid from
other than earned surplus is considered to be an extraordinary dividend and must
be approved.
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<PAGE> 221
On December 30, 1996, Physicians paid a dividend of approximately $13.2
million to its sole shareholder, PICO. On April 14, 1997, Physicians paid a
dividend of approximately $8.6 million to PICO. With the approval of the Ohio
Department, on November 19, 1997, PRO amended its license to delete the
authority to write MPL insurance and paid a dividend of approximately $5.5
million to its sole shareholder, Physicians. On December 17, 1997, Physicians
contributed an additional $5.5 million to Sequoia. On December 30, 1997,
Physicians paid a dividend of approximately $13.2 million to PICO in the form of
5,557,347 shares of GEC common stock. In January 1998, approximately $15.8
million and $220,000 will be available for payment by Physicians and APL,
respectively, without the prior approval of the Ohio Department. No amounts were
available for payment by PRO based upon December 31, 1997 financial statements.
The California Insurance Code limits the amount of dividends or
distributions an insurance subsidiary may pay in any 12-month period without 30
days prior written notice to the Commissioner to the greater of (a) net income
for the preceding year as determined under statutory accounting principles or
(b) 10% of statutory policyholders' surplus as of the preceding December 31.
Insurers may pay dividends only from earned surplus. Payments of dividends in
excess of these amounts may only be made if the Commissioner has not disapproved
such payment, or specifically approves such payment, within the 30 day-period.
No ordinary dividends were available for payment by Sequoia or CIC based upon
December 31, 1997 financial statements.
The insurance industry is also affected by court decisions. Premium rates
are actuarially determined to enable an insurance company to generate an
underwriting profit. These rates contemplate a certain level of risk. The courts
may undercut insurers' expectations with respect to the level of risk being
assumed in a number of ways, including eliminating exclusions, multiplying
limits of coverage and creating rights for policyholders not set forth in the
contract. These decisions can adversely affect an insurer's profitability.
In recent years, the NAIC and state insurance regulators have been examining
existing laws and regulations, with an emphasis on insurance company investment
and solvency issues, risk-based capital guidelines, interpretations of existing
laws, the development of new laws and the implementation of nonstatutory
guidelines. From time to time, legislation has also been introduced in Congress
that would result in the federal government assuming some role in the regulation
of the insurance industry. Each of the Company's insurance subsidiaries are also
subject to assessment by state guaranty associations to fund the insurance
obligations of insolvent insurers. There can be no assurance that such
assessments will not have an adverse effect on the financial condition of the
Company and its insurance subsidiaries. However, assessments are calculated
based upon market share and none of the Company's insurance subsidiaries has a
significant market share in any line of business in any jurisdiction.
The regulation and supervision of insurance companies by state agencies is
designed principally for the benefit of their policyholders, not their
stockholders. In addition, MAC is subject to regulation by the California
Department of Corporations, which includes various requirements relating to the
financial condition of MAC as well as all aspects of the marketing of premium
financing. MAC is currently totally dormant.
The California Department completed its latest market conduct examination of
Sequoia and CNIC in 1992 and of CIC in 1993. The California Department also
completed a financial examination of CIC in 1997 covering the three years ended
December 31, 1995. The California Department's final examination report did not
require CIC to take any significant action.
The California Department also completed in 1997 a financial examination of
Sequoia covering 1993 through 1996. The Ohio Department completed its regular
triennial examinations of Physicians, PRO and APL for the three year period
1993-1995. Nothing of significance was reported for any of the companies
examined.
In July 1993, the California legislature enacted a series of seven bills to
significantly change the California workers' compensation system (the "1993
Reforms"). The 1993 Reforms increased costs as a result of benefit increases
commencing July 1, 1994 and continuing through July 1, 1996. In addition, the
1993 Reforms reduced revenues through an immediate reduction in minimum rates of
7%. The legislation permitted the Insurance Commissioner to approve rates even
lower. Effective January 1, 1994, the Insurance Commissioner ordered a further
12.7% reduction in minimum rates and a 16% reduction in minimum rates effective
October 1, 1994. Effective January 1995, California's minimum rate law was
replaced by a competitive rating system. The 1993 Reforms contain numerous other
provisions, including limitations on grounds for cancellation of policies. The
Company sold its workers' compensation business in 1997. See
"BUSINESS-Developments Since the Merger."
Proposed federal legislation has been introduced from time to time in recent
years that would provide the federal government with substantial power to
regulate property and casualty insurers, primarily through the establishment of
uniform solvency standards. Proposals also have been discussed to modify or
repeal the antitrust exemption for insurance companies provided by the
McCarran-Ferguson Act. The adoption of such proposals could have a material
adverse impact upon the operations of the Company.
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<PAGE> 222
Proposition 103, a ballot initiative passed by California voters on November
8, 1988, requires rate rollbacks and prior approval of rates and imposes other
requirements on property and casualty insurers. Proposition 103, by its terms,
does not apply to workers' compensation insurance, but does apply to the types
of property and casualty insurance that Sequoia and CIC write. The rate rollback
provisions of Proposition 103 do not apply to CIC since CIC did not commence
writing property and casualty insurance prior to the effective date of
Proposition 103. Beginning on November 8, 1989, insurance rates may be increased
only after application to and approval by the Insurance Commissioner and, under
certain circumstances, after a public hearing. In June 1993, CIC received final
approval from the California Department for its inland marine and other
liability rate filings. Sequoia has fulfilled its Proposition 103 rate rollback
obligation and received approval from California for its rate filings.
Since 1990, numerous rates and underwriting rules have been filed by CIC and
approved by the California Department including certain rate increases. No
assurance can be given as to what actions, if any, the California Department
will take with respect to the approval of CIC's or Sequoia's future rate
filings.
Substantially all liabilities resulting from the roll back of insurance
rates under Proposition 103 had been settled or reserved for prior to
Physicians' purchase of Sequoia.
Proposition 103 also subjects the insurance industry to California antitrust
and unfair business practices laws (although the relevant provision of
Proposition 103 may only apply to automobile and certain other insurers),
prohibits cancellation or nonrenewal of insurance policies except for specified
reasons and provides that the Insurance Commissioner shall be an elected
official.
Beginning in 1994, Physicians, PRO, APL, CIC, and Sequoia became subject to
the provisions of the Risk-Based Capital for Insurers Model Act (the "Model
Act") which has been adopted by the NAIC for the purpose of helping regulators
identify insurers that may be in financial difficulty. The Model Act contains a
formula which takes into account asset risk, credit risk, underwriting risk and
all other relevant risks. Under this formula, each insurer is required to report
to regulators using formulas which measure the quality of its capital and the
relationship of its modified capital base to the level of risk assumed in
specific aspects of its operations. The formula does not address all of the
risks associated with the operations of an insurer. The formula is intended to
provide a minimum threshold measure of capital adequacy by individual insurance
company and does not purport to compute a target level of capital. Companies
which fall below the threshold will be placed into one of four categories:
Company Action Level, where the insurer must submit a plan of corrective action;
Regulatory Action Level, where the insurer must submit such a plan and the
regulator will issue a corrective order; Authorized Control Level, which
includes the above actions and may include rehabilitation or liquidation; and
Mandatory Control Level, where the regulator must rehabilitate or liquidate the
insurer.
The Model Act is not expected to cause any material change in any of the
insurance companies' future operations. All companies' risk-based capital
results as of December 31, 1997 exceed their minimum thresholds.
OTHER OPERATIONS
The Company conducts its other operations principally through Summit. See
"INTRODUCTION -- Subsidiaries." Other operations are currently or have been in
prior years conducted by Raven Development Corp., CLM Insurance Agency,
Stonebridge Partners AG and others. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" -"OTHER OPERATIONS."
Summit is registered as an investment adviser in California, Florida,
Kansas, Louisiana, Oregon, Virginia and Wisconsin as well as with the SEC. Since
February 1995, Summit has provided investment management services to Physicians
and its insurance affiliates. Summit also offers its services to other
individuals and institutions in the jurisdictions in which it is registered as
an investment adviser and in other states where registration is not required.
The investment advisory business is highly competitive. Many of Summit's
competitors are larger and have greater financial resources than Summit. There
can be no assurance that Summit will be able to compete effectively in the
markets that it serves.
As a registered investment adviser, Summit is subject to regulation by, and
files annual reports with, the SEC and the securities administrators in some of
the jurisdictions in which it is registered to do business.
EMPLOYEES
At December 31, 1997, the Company, excluding GEC and NLRC, had 172
employees. 158 employees worked in the Company's insurance operations including
121 in property and casualty, 20 in MPL, and 17 in life and health. A total of
eight employees worked in portfolio investing and six were engaged in holding
company activities.
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<PAGE> 223
EXECUTIVE OFFICERS
The executive officers of PICO are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Ronald Langley 53 Chairman of the Board, Director
John R. Hart 38 President, Chief Executive Officer and
Director
Richard H. Sharpe 42 Chief Operating Officer
Gary W. Burchfield 51 Chief Financial Officer and Treasurer
James F. Mosier 50 General Counsel and Secretary
</TABLE>
Each executive officer of PICO was an executive officer of Physicians prior
to the Merger and became an officer of PICO in November 1996 as a result of the
Merger.
Mr. Langley has been Chairman of the Board of Physicians and PRO since July
1995, Chairman of the Board of Summit since November 1994, and a Director and
Chairman of the Board of GEC since September 1995. Mr. Langley has been a
Director of Physicians since 1993. Mr. Langley has been a Director of Sequoia
since August 1995 and a Director of CIC since November 1996. Mr. Langley has
been a Director of PC Quote, Inc. since 1995.
Mr. Hart has been President and Chief Executive Officer of Physicians and
PRO since July 1995 and President and Chief Executive Officer and a Director of
GEC since September 1995. Mr. Hart has been a Director of Physicians since 1993.
Mr. Hart has been a director of Summit since 1994. Mr. Hart has been a Director
and Chairman of the Board of Sequoia since August 1995 and a Director and
Chairman of the Board of CIC since November 1996. Mr. Hart has been a Director
of PC Quote, Inc. since 1997.
Mr. Sharpe has been Chief Operating Officer of Physicians since June 1994,
an officer of APL for more than 10 years, and a Director of APL since June 1993.
Mr. Sharpe has been a Director of Sequoia since August 1995 and a Director of
CIC since November 1996.
Mr. Burchfield has been Chief Financial Officer of Physicians since November
1995 and Treasurer since November 1994. Mr. Burchfield was Controller of
Physicians from March 1990 to November 1995 and Chief Accounting Officer of
Physicians from December 1993 to November 1995.
Mr. Mosier has served as General Counsel and Secretary of Physicians since
October 1984 and in various other executive capacities since joining Physicians
in 1981.
ITEM 2. PROPERTIES
The Company leases approximately 5,354 square feet in La Jolla, California
for its Principal Executive Offices.
Physicians owns a facility with approximately 56,000 square feet in
Pickerington, Ohio. APL leases office space in Indianapolis, Indiana for its
sales office located there. APL's Cleveland Regional Sales Director leases
office space in Cleveland; APL is a party to the lease and reimburses the
Regional Sales Director for all of the lease costs. Sequoia leases office space
for its headquarters in Monterey, California and for its regional claims and
underwriting offices in Modesto, Monterey, Rancho Cordova, Ventura, Visalia,
Oceanside, Orange, Pleasanton, and San Jose, California, as well as Reno,
Nevada. CLM's only office space consists of a leased facility in Monterey,
California. GEC owns a commercial office building in Toronto, Ontario, Canada
and also shares office space with PICO in La Jolla, California. Vidler and NLRC
lease office space in Ft. Collins, Colorado, and Reno, Nevada, respectively.
Vidler and NLRC hold significant investments in land, water and mineral rights
in the western United States. See "ITEM 1-BUSINESS-INTRODUCTION."
ITEM 3. LEGAL PROCEEDINGS
Members of the Combined Insurance Group and APL are frequently a party in
claims proceedings and actions regarding insurance coverage, all of which the
Company considers routine and incidental to its business. Neither PICO nor its
subsidiaries are parties to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 224
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of PICO is traded on the Nasdaq National Market under the
symbol PICO. Prior to November 1996, the symbol was CITN. The following table
sets forth for each period indicated, the high and low sale prices as reported
on the Nasdaq National Market. These reported prices reflect interdealer prices
without adjustments for retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
High Low High Low
---------- -------- ---------- ---------
<S> <C> <C> <C> <C>
1st Quarter $4.75 $3.50 $4.75 $3.625
2nd Quarter 4.625 3.875 4.625 3.6875
3rd Quarter 4.4375 3.375 6.375 4.375
4th Quarter 4.375 3.375 6.4375 5.875
</TABLE>
As of December 31, 1997, the closing sale price of PICO's common stock was
$6.4375 and there were 1,596 holders of record of PICO's Common Stock.
PICO has not declared or paid any dividends in the last two years and does
not expect to pay any dividends in the foreseeable future.
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<PAGE> 225
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Form 10-K and the consolidated financial
statements and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS (In thousands, except ratios and per share data)
Revenues
Premiums income earned $ 49,876 $ 38,761 $ 19,542 $ 20,026 $ 50,384
Net investment income 11,686 8,086 9,165 12,452 17,802
Other income 26,017 29,889 12,482 1,596 2,307
------------ ------------ ------------ ------------ ------------
Total revenues $ 87,579 $ 76,736 $ 41,189 $ 34,074 $ 70,493
============ ============ ============ ============ ============
Income (loss) before discontinued operations and
cumulative effect of changes in accounting
principal $ 19,035 $ 21,019 $ 14,895 $ 16,348 $ (2,522)
Income from discontinued operations 456 3,301 778 2,483 3,177
Cumulative effect of change in accounting principal (4,110) (547)
------------ ------------ ------------ ------------ ------------
$ 19,491 $ 24,320 $ 15,673 $ 14,721 $ 108
============ ============ ============ ============ ============
PER COMMON SHARE RESULTS--BASIC:
Income (loss) from continuing operations $ 0.59 $ 0.75 $ 0.54 $ 0.60 $ (0.09)
Income from discontinued operations 0.01 0.12 0.03 0.09 0.12
Loss from cumulative effect of change in
accounting principal (0.15) (0.02)
------------ ------------ ------------ ------------ ------------
Net income $ 0.60 $ 0.87 $ 0.57 $ 0.54 $ 0.01
============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 32,551,951 28,004,595 27,436,191 27,436,191 27,436,191
============ ============ ============ ============ ============
PER COMMON SHARE RESULTS--DILUTED:
Income (loss) from continuing operations $ 0.57 $ 0.72 $ 0.54 $ 0.59 $ (0.09)
Income from discontinued operations 0.01 0.12 0.03 0.09 0.12
Loss from cumulative effect of change in
accounting principal (0.15) (0.02)
------------ ------------ ------------ ------------ ------------
Net income $ 0.58 $ 0.84 $ 0.57 $ 0.53 $ 0.01
============ ============ ============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 33,741,265 29,055,669 27,436,191 27,588,667 27,436,191
============ ============ ============ ============ ============
</TABLE>
Note: Prior year share values have been adjusted to reflect the November 20,
1996 reverse acquisition between Physicians Insurance Company of Ohio
and Citation Insurance Group and prior year operating results have been
adjusted to reflect the treatment of APL as a discontinued operation.
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ----------- ------------- ------------ ------------
(In thousands, except ratios and per share data)
FINANCIAL CONDITION
<S> <C> <C> <C> <C> <C>
Assets $ 430,293 $ 490,425 $ 421,816 $ 297,163 $ 297,887
Unpaid losses and loss adjustment expenses,
net of discount $ 196,096 $ 252,024 $ 229,797 $ 180,691 $ 191,735
Total liabilities $ 318,142 $ 380,222 $ 342,466 $ 261,419 $ 271,780
Shareholders' equity $ 112,151 $ 110,203 $ 79,350 $ 35,744 $ 26,107
Book value per share $ 3.73 $ 3.61 $ 3.04 $ 1.40 $ 1.17
</TABLE>
27
<PAGE> 226
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY SUMMARY AND RECENT DEVELOPMENTS
Introduction
Readers of Citation Insurance Group's prior financial statements will find
that these financial statements differ greatly from those presented for periods
prior to December 31, 1996. Whereas Citation Insurance Group was previously
engaged predominantly in property and casualty operations, PICO Holdings, Inc.
specializes in portfolio investing, property and casualty insurance, investment
management, surface, water, geothermal and mineral rights and other services.
These changes are a result of the November 20, 1996 merger of Physicians
Insurance Company of Ohio and a subsidiary of Citation Insurance Group, in which
Physicians Insurance Company of Ohio was the surviving corporation. Upon
consummation of the Merger, Citation Insurance Group changed its name to PICO
Holdings, Inc. For accounting purposes the transaction has been treated as a
reverse acquisition with Physicians Insurance Company of Ohio being the
acquiror. As a result, these financial statements reflect prior years data of
Physicians Insurance Company of Ohio and its subsidiaries and affiliates only.
Citation Insurance Group's information for 1995 and operating results and
account balances prior to the Merger have not been included in these financial
statements. See Note 3 to the Consolidated Financial Statements entitled
"Acquisitions" for further information on the accounting treatment of the
reverse acquisition.
Background
Prior to July 16, 1995, the effective date of Physicians and PRO's 100%
quota share reinsurance of their MPL businesses with Mutual and the subsequent
sale of the rights to these MPL books of business, effective January 1, 1996,
the Physicians group of affiliated companies consisted primarily of two property
and casualty insurance companies writing MPL insurance (Physicians and PRO) and
one life and health insurance company, APL. For various reasons, in November
1994, the respective boards of directors of Physicians and PRO determined that
it was in the best interests of Physicians and PRO and their respective
shareholders to sell their MPL insurance businesses. This sale was part of an
overall shift in the strategic direction of Physicians and PRO.
On August 1, 1995, Physicians purchased Sequoia, a California property and
casualty insurance company writing light commercial and multiple peril insurance
in northern and central California. Sequoia does not write MPL insurance.
On September 5, 1995, Physicians purchased 38.2% of the common stock of GEC,
a Canadian company operating in portfolio investments, agricultural services,
and other business segments. Through acquisitions on July 30 and August 19,
1997, the Company increased its ownership in GEC to an aggregate of
approximately 51.17%. As a result of such acquisition, GEC's financial
statements have been consolidated with those of the Company for 1997.
On November 20, 1996, Physicians and its subsidiaries merged with a
subsidiary of CIG and CIG then changed its name to PICO Holdings, Inc. This
reverse acquisition brought another California property and casualty insurance
company, CIC, into the affiliated group and provided a non-insurance holding
company structure.
In addition to the operation of its subsidiaries, the Company's objective is
to use its resources and those of its subsidiaries and affiliates to increase
shareholder value through investments in businesses that the Company believes
are undervalued. The Company's acquisition philosophy is to make selective
investments, predominantly in public companies, for the purpose of enhancing and
realizing additional value by means of appropriate levels of shareholder
influence and control. This could involve the restructuring of the financing or
management of the companies in which the Company invests. It may also encompass
initiating and facilitating mergers and acquisitions within the relevant
industry to achieve constructive rationalization. This business strategy was
adopted in late 1994, but was not fully implemented until 1996. Therefore, the
results of this business strategy are not fully reflected in the historical
financial statements. There can be no assurance that sufficient opportunities
will be found or that this business strategy will be successful. This strategy
may negatively impact the business and financial condition and results of the
Company.
See the Notes to Consolidated Financial Statements for additional
information regarding events affecting PICO subsequent to the date of these
financial statements.
28
<PAGE> 227
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
SUMMARY
PICO reported net income of $19.5 million, or $0.60 per share for 1997,
compared with net income of $24.3 million, or $0.87 per share during 1996, and
$15.7 million, or $0.57 per share in 1995. Per share amounts are expressed as
basic earnings per share. Net income for 1997 included income from discontinued
operations of approximately $456,000, net of federal income taxes and minority
interests. Shares outstanding and per share calculations for 1995 have been
adjusted for comparison purposes to reflect the November 20, 1996 merger between
Physicians and the Citation Insurance Group. Year-to-year comparisons are
somewhat distorted as a result of the inclusion of Sequoia beginning August 1,
1995 and the addition of the Citation group effective November 20, 1996. Sequoia
contributed net income of $2.8 million to PICO's 1997 consolidated income, $1.5
million to 1996 and a post-acquisition net loss of $2.5 million to 1995.
Citation's added $1.1 million to 1997 consolidated net income and $675,000 to
1996, following the Merger. GEC's operations added a net loss of $6.1 million to
consolidated income for 1997.
Shareholders' equity per share increased $0.12 during 1997, principally as a
result of the $19.5 million net income, partially offset by a $14.6 million
reduction in unrealized appreciation of investments, net of taxes from January
1, 1997 through December 31, 1997. Shareholders' equity per share calculated on
an undiluted basis at December 31, 1997 was $3.73, compared to $3.61 and $3.04
at December 31, 1996 and 1995, respectively. Prior years per share amounts have
been adjusted to reflect the November 1996 merger. Shareholders' equity of
$112.2 million increased $1.9 million, or 1.8% compared to $110.2 million at
December 31, 1996.
Much of the 1997 decline in unrealized appreciation of investments resulted
from the sale of appreciated securities during the year. Realized investment
gains provided $21.4 million in revenues and income before taxes and minority
interests in 1997, compared to $27.1 million and $5.0 million in 1996 and 1995,
respectively. Realized investment gains during 1997 included a gain of
approximately $2 million from the sale of the Company's holdings in AmVestors
Financial Corporation common stock during the first quarter; approximately $27
million from the sale of the Resource America common stock during the third
quarter; and a realized investment loss of approximately $8 million, before
minority interests, resulting from the write down of GEC's investments in Korean
securities, including a foreign currency loss of approximately $3.8 million (See
"PORTFOLIO INVESTING--GLOBAL EQUITY CORPORATION" following).
During 1997, the Company's assets decreased approximately $60.1 million to
$430.3 million. Reclassification of APL as discontinued operations reduced
assets by $53.4 million.
Revenues of $87.6 million increased $10.9 million over 1996 and $46.5
million over 1995. Property and casualty insurance revenues increased $21.7
million over 1996 and nearly $55 million over 1995. CIC added $21.0 million and
$6.5 million to revenues in 1997 and 1996, respectively, following the Merger.
Sequoia's 1997 revenues were $35.4 million, up $6.7 million from 1996 and up $33
million from the five-month period of inclusion in 1995. GEC provided $1.5
million in revenues during 1997 which was more than offset by approximately $8.0
million in realized investment losses. GEC was not consolidated with the Company
in 1996 and 1995. MPL revenues decreased $8.3 million during 1997 as compared to
1996 and more than $25 million compared to 1995 due to the reduction in earned
premiums associated with the wind down of the business.
The Company's ongoing operations are organized into five segments: portfolio
investing: surface, water, geothermal and mineral rights; property and casualty
insurance; medical professional liability insurance, and other operations. GEC's
portfolio investing results are shown separately below for consistency of
presentation and to simplify analysis since GEC's results were not consolidated
with those of PICO until the effective date of the Company's majority ownership
of GEC. In addition, as a result of the acquisition of the majority ownership of
GEC and management's strategic initiatives, the surface, water, geothermal and
mineral rights activities of PICO and GEC have been disclosed as a segment in
this annual report. Life and health insurance operations and certain of GEC's
operations are shown as discontinued operations based upon the sale or pending
sale of those operations. See Note 6 of Notes to Consolidated Financial
Statements, "Discontinued Operations" for additional information.
29
<PAGE> 228
Revenues and income before taxes and minority interests from CONTINUING
OPERATIONS, by business segment, are shown in the following schedules:
Operating Revenues--Continuing Operations:
------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996 1995
------- ------- -------
(in millions)
<S> <C> <C> <C>
Portfolio Investing $30.6 $27.0 $ 8.0
Global Equity Corporation (6.5)
Surface, Water, Geothermal and Mineral Rights 2.5
Property and Casualty Insurance 57.0 35.3 2.5
Medical Professional Liability Insurance 3.9 12.2 29.0
Other 0.1 2.2 1.6
----- ----- -----
Total Revenues-Continuing Operations $87.6 $76.7 $41.1
===== ===== =====
</TABLE>
Income Before Taxes and Minority Interest--Continuing Operations:
-----------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1996 1995
------- ------- -------
(in millions)
<S> <C> <C> <C>
Portfolio Investing $27.9 $23.3 $ 5.3
Global Equity Corporation (10.1)
Surface, Water, Geothermal and Mineral Rights -
Property and Casualty Insurance 5.6 3.3 (3.7)
Medical Professional Liability Insurance 0.8 8.5 6.0
Other (0.7) (1.1) (0.5)
----- ----- -----
Income Before Tax and Minority Interest $23.5 $34.0 $ 7.1
===== ===== =====
</TABLE>
PORTFOLIO INVESTING
- - - -------------------
Portfolio investing operations are principally conducted by PICO, Physicians
and GEC. GEC's portfolio investing results are shown separately in the following
section. Investment revenues and realized investment gains or losses generated
by Physicians are first allocated to MPL equal to the amount of loss reserve
discount accretion recorded during the period. The remainder is shown as
portfolio investing revenue.
For a number of reasons, including the existence of an experienced claims
adjustment staff and Physicians' success in managing invested assets, it was
decided that it would be more advantageous to manage the assets remaining at the
cessation of writing MPL business than to sell off or fully reinsure the
reserves. As a result, assets are managed for the maximum overall return, within
prudent safety guidelines. Assets are not designated on an individual security
basis as either MPL or portfolio investing. As a result, Physicians' invested
assets produce income in both MPL and portfolio investing segments.
Revenues and income or losses generated by PICO through its own portfolio
are assigned entirely to portfolio investing. GEC's portfolio investing
operations exclude the results of Vidler and NLRC which are assigned to surface,
water, geothermal and mineral rights segment.
Excluding GEC, which is stated separately below, portfolio investing
revenues for 1997 of $30.6 million increased $3.6 million over the $27 million
recorded in 1996 and $22.6 over the $8 million of 1995. Excluding realized
investment gains, portfolio investing increased approximately $700,000 over 1996
and decreased $1.7 million as compared to 1995. The increase in 1997 investment
income over 1997 principally reflects investment income earned by PICO on
dividends from Physicians. The decline in 1996 investment income compared to
1995 was principally due to a significant shift in the mix of the Company's
investment portfolio from interest bearing fixed maturity and cash equivalent
securities toward equity securities. See "PART 1-BUSINESS-HISTORY OF THE
COMPANY-Physicians."
30
<PAGE> 229
Portfolio investing revenues are summarized below:
PORTFOLIO INVESTING
-------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
------- ------- ------
(in millions)
<S> <C> <C> <C>
Portfolio Investing Revenues:
- - - -----------------------------
Realized Investment Gains $ 29.3 $ 26.4 $ 5.0
Investment Income 1.3 0.6 3.0
------- ------- ------
Portfolio Investing Revenues $ 30.6 $ 27.0 $ 8.0
======= ======= ======
</TABLE>
Most of the $29.3 million in 1997 realized investment gains, or
approximately $27 million before taxes, resulted from the exercise of the
Company's warrants to buy common stock of Resource America and the subsequent
sale of that stock. Resource America was a 1994 investment made by Physicians
after its change in strategic direction. See "ITEM 1-BUSINESS-HISTORY OF THE
COMPANY." Realized investment gains in 1996, principally from the sale of
Physicians' holdings in Fairfield Communities common stock amounted to $26.4
million. This compares to $5.0 million in realized investment gains in 1995.
At December 31, 1997, the consolidated investment portfolio was in a net
unrealized loss position of approximately $2.7 million, net of taxes. This
compares to net unrealized investment gains at December 31, 1996 of
approximately $11.8 million. Much of this decline resulted from the conversion
of unrealized investment gains to realized investment gains resulting from the
sale of the Company's holdings in Resource America common stock during the third
quarter of 1997 and AmVestors Financial Corporation ("AmVestors") common stock
at a gain of $1.3 million, net of tax, during the first quarter of 1997.
Unrealized investment gains, net of taxes, at December 31, 1996 attributable to
Resource America and AmVestors were approximately $9.4 million and $1.2 million,
respectively. PC Quote, one of the Company's technology stocks and a provider of
real time and delayed stock market quotes continued to decline in value during
1997. The Company has provided a loan of $2.5 million and a line of credit of
approximately $2 million, and received certain warrants for the purchase of PC
Quote common stock as an inducement, to provide working capital and other funds
necessary for PC Quote to continue to develop and market its products.
Net of expenses, but before taxes, portfolio investing operations, excluding
those of GEC, contributed $27.9 million to pre-tax operating income in 1997
compared to $23.3 million during 1996 and $5.3 million in 1995. Realized
investment gains, as discussed above, accounted for nearly $29.3 million, $26.4
million and $5.0 million of this pre-tax income in 1997, 1996 and 1995,
respectively. While past results are very encouraging, future results cannot and
should not be predicted based upon past performance alone.
The breakdown of pre-tax operating income from portfolio investing
operations follows:
PORTFOLIO INVESTING
-------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
-------- --------- -------
(in millions)
<S> <C> <C> <C>
Portfolio Investing Income Before Tax:
- - - --------------------------------------
PICO and Physicians $ 27.9 $ 22.3 $ 5.8
Equity in Unconsolidated Subsidiaries 1.0 (0.5)
-------- --------- -------
Portfolio Investing Pre-Tax Income $ 27.9 $ 23.3 $ 5.3
======== ========= =======
</TABLE>
Equity in unconsolidated subsidiaries represents the Company's share of
GEC's net income prior to its consolidation with PICO. GEC's financial results
are consolidated with those of the Company for 1997.
PORTFOLIO INVESTING--GLOBAL EQUITY CORPORATION
- - - ----------------------------------------------
GEC is an international investment company with offices in Toronto, Ontario,
Canada and in La Jolla, California. GEC holds a portfolio of equity securities
and convertible instruments in North American, Asian and European companies, as
well as a number of interests in land, water and mineral rights in the western
United States through Vidler and NLRC. The operations of Vidler and NLRC are
reported below in a separate segment entitled "Surface, Water, Geothermal and
Mineral Rights," and are excluded from this discussion of GEC's portfolio
investments.
31
<PAGE> 230
Following is a breakdown of GEC's portfolio investing revenues and loss:
PORTFOLIO INVESTING--GLOBAL EQUITY CORPORATION
<TABLE>
<CAPTION>
Year Ended
December 31,
------------
1997
----
(in millions)
Global Equity Corporation-Revenues:
- - - -----------------------------------
<S> <C>
Realized Investment Losses $ (8.0)
Investment Income 1.0
Other Income 0.5
-------
Global Equity Corporation Revenues $ (6.5)
=======
GEC Loss Before Tax and Minority Interest:
- - - ------------------------------------------
Global Equity Corporation $ (10.1)
-------
Loss Before Tax and Minority Interest $ (10.1)
=======
</TABLE>
Physicians initially acquired approximately 38.2% of GEC on September 5,
1995. PICO and its wholly-owned subsidiaries acquired additional shares of GEC
in July and August 1997, bringing the Company's holdings up to approximately
51.17% as of August 19, 1997. As a result of the increased ownership of GEC,
GEC's results have been consolidated with those of the Company beginning August
19, 1997. Appropriate provisions have been made in these financial statements to
reflect the interests of other GEC shareholders, where applicable.
Most of GEC's $6.5 million in combined revenues and realized investment
losses and $10.1 million loss before taxes and minority interest resulted from
an approximate $8 million write down of GEC's investments in Korean securities.
This permanent write down reflects management's opinion that the decline in the
market value of these securities is "other than temporary" and includes a loss
on foreign currency exchange of approximately $3.8 million. These Korean
investments were heavily impacted by the recent downturn in the Korean and Asian
financial markets. GEC's investment in these Korean securities as of December
31, 1997, subsequent to the write down, is less than $1.0 million.
See "DISCONTINUED OPERATIONS" below regarding GEC's contribution to income
from discontinued operations.
SURFACE, WATER, GEOTHERMAL AND MINERAL RIGHTS
- - - ---------------------------------------------
Effective November 14, 1995, a wholly-owned subsidiary of GEC acquired all
the outstanding common stock of Vidler, a Colorado corporation engaged in the
water marketing and transfer business. Vidler's business plan calls for Vidler
to identify areas where water supplies are needed in the southwestern United
States and then facilitate the transfer from current ownership to Vidler, and
subsequently to municipalities, water districts, developers and others. Since
its acquisition, Vidler and its immediate parent company have purchased water
rights and related assets in Colorado, Nevada and Arizona. On April 23, 1997,
GEC acquired 74.77% of the common stock of NLRC and PICO acquired the remaining
25.23%. NLRC owns approximately 1.365 million acres of deeded land located in
northern Nevada, together with appurtenant water, geothermal and mineral rights.
NLRC is actively engaged in maximizing the property's value in relation to water
rights, mineral rights, geothermal resources, and land development.
As these subsidiaries of the Company were not part of the consolidated group
until 1997, prior years' results are not included with those of the Company.
Revenues from continuing operations included in the consolidated financial
statements of the Company from land, water and mineral rights generated by
Vidler and NLRC were $2.5 million. Revenues include land sales; lease of land,
principally for grazing purposes; water sales and leasing and other income.
Income from continuing operations before taxes and minority interests included
in the consolidation amounted to approximately $12,000.
32
<PAGE> 231
PROPERTY AND CASUALTY INSURANCE
- - - -------------------------------
Sequoia and CIC account for all of the ongoing property and casualty ("P &
C") insurance revenues. These companies write predominately light commercial and
multiple peril insurance coverage in central and northern California. CNIC is no
longer a part of the group following the sale of CNIC on June 30, 1997 along
with CIC's workers compensation business.
Since CIC and CNIC became part of the group in November 1996, their
activities are not included in the Company's financial results prior to that
date. Sequoia has been part of the group since August 1, 1995. Therefore,
Sequoia's financial results are not included with those of the Company prior to
August 1, 1995. Sequoia and CIC are continually seeking ways to realize savings
and synergies and to combine operations, wherever possible. In evidence of this,
Sequoia and CIC consolidated their home office operations in Monterey,
California in July 1997. Both companies are in the process of subleasing their
former office spaces in Pleasanton and San Jose, California.
As shown below, earned premiums made up most of the P & C revenues. Premiums
are earned pro-rata throughout the year according to the coverage dates of the
underlying policies.
PROPERTY AND CASUALTY INSURANCE
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1996 1995
----- ----- ------
P & C Revenues: (in millions)
- - - ---------------
<S> <C> <C> <C>
Earned Premiums - Sequoia $32.8 $26.3 $ 2.4
Earned Premiums - Citation 17.4 5.1
Investment Income 5.6 2.6 0.2
Realized Investment Gains 0.2 0.7
Other 1.0 0.6 (0.1)
----- ----- ------
Total P&C Revenues $57.0 $35.3 $ 2.5
===== ===== ======
P & C Income (Loss) Before Taxes:
- - - ---------------------------------
Sequoia Insurance Company $ 4.3 $ 2.3 $ (3.7)
Citation Insurance Company 1.3 1.0 -
----- ----- ------
$ 5.6 $ 3.3 $ (3.7)
===== ===== ======
</TABLE>
Total P&C revenues for 1997 of $57.0 million surpassed those of 1996 by
$21.7 million and 1995 by $54.5 million. Of these amounts, CIC added $21.0
million to the 1997 revenues and $6.5 million to 1996 following the merger.
Sequoia's 1997 revenues were $35.4 million, up $6.7 million from 1996 and $33.0
million from the five-month period of the Company's ownership in 1995. Included
in these amounts, investment income and realized investment gains from P&C
operations rose to $5.8 million in 1997, up $2.5 million from 1996 and $5.6
million over 1995. Sequoia's earned premiums increased $6.5 million, or 24.7%,
as compared to 1996 and $30.4 million compared to the partial year of inclusion
in 1995.
P&C income before taxes for 1997 amounted to $5.6 million, an increase of
$2.3 million or 67% over the 1996 level of $3.3 million. CIC added approximately
$300,000 to the 1997 increase due to its inclusion for a full year. Sequoia's
income before taxes increased $2.0 million from 1996 to 1997. Most of Sequoia's
improvement was attributable to greatly improved claims experience. As shown
below, Sequoia's GAAP industry combined ratio declined 5.5 percentage points
during 1997. The P&C loss before taxes for 1995 of $3.7 million included only
five months of Sequoia's income and none of CIC's. Much of Sequoia's five-month
1995 loss was attributable to expenditures that may provide benefits in future
years through improved operating efficiencies. These expenses included, among
others, those associated with development of a new policy quoting and processing
system and integrated claims processing and accounting systems. Software was
developed and is now in use which allows underwriters and agents to
decentralize, rate policies in the field, and download the information via modem
to the home office, allowing them to spend much more time in the field
inspecting risks and servicing policies.
33
<PAGE> 232
Sequoia's direct premium writings for 1997 were $41.0 million, up $3.3
million from the $37.7 million reported for 1996 and down slightly from the
$42.0 million reported by Sequoia for the full year 1995. The $42.0 million of
1995 direct written premium included seven months of activity prior to
Physicians' purchase of Sequoia on August 1, 1995. This reduction in premium
writings in 1997 and 1996 reflects, in part, the increased underwriting
selectivity of Sequoia's management team. Sequoia and CIC stress quality of
business over quantity. As policies came up for renewal in 1995 and through much
of 1996, they were reviewed carefully by underwriting management for excessive
loss experience and unwanted risks. New policy writings have been less than
expected, largely due to increased competition, and have not offset renewal
policies cancelled or non-renewed. The loss of renewal policies with higher loss
ratios and greater exposures to risk may improve Sequoia's loss ratios in the
future. Nevertheless, there can be no assurance that Sequoia and Citation will
be successful in reducing their policies with higher loss ratios or that their
loss ratios will improve in the future.
Industry ratios as determined on the basis of generally accepted accounting
principles ("GAAP") for Citation are shown in the following chart:
CIC'S GAAP INDUSTRY RATIOS
--------------------------
<TABLE>
<CAPTION>
1997
-----
<S> <C>
Loss and LAE Ratio 84.8%
Underwriting Expense Ratio 32.9%
-----
Combined Ratio 117.7%
=====
</TABLE>
Industry ratios as determined on a GAAP basis for Sequoia were:
SEQUOIA'S GAAP INDUSTRY RATIOS
------------------------------
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Loss and LAE Ratio 57.3% 62.9%
Underwriting Expense Ratio 38.1% 38.0%
--------- ---------
Combined Ratio 95.4% 100.9%
========= =========
</TABLE>
Loss and LAE Ratios, Underwriting Expense Ratios and Combined Ratios are
calculated using net earned premiums as a denominator. Theoretically, a combined
ratio of less than 100% indicates that the insurance company is making a profit
on its base insurance business before consideration of investment income,
realized investment gains or losses, extraordinary items, taxes and other
non-insurance items. Sequoia's loss experience improved considerably in 1997
from a GAAP loss ratio of 62.9% in 1996 to 57.3% in 1997. Sequoia's reduced loss
ratios reflect Sequoia's improved loss experience principally resulting from
management's efforts to reduce exposure to risk through re-underwriting existing
business during 1995 and 1996, tighter underwriting and careful selection of
risks.
The management of Sequoia and CIC estimate that storm losses incurred by the
companies as a result of the recent El Nino phenomenon is less than $1.0 million
for the first quarter of 1998.
MEDICAL PROFESSIONAL LIABILITY OPERATIONS
- - - -----------------------------------------
Physicians' and PRO's MPL insurance business was sold to Mutual on August
28, 1995. Except for a few minor policy coverage extensions and adjustments
which are 100% reinsured by Mutual, for all intents and purposes, the Company
ceased writing MPL policies effective January 1, 1996. The Company continues to
administer and adjust the remaining claims and LAE reserves. Based upon careful
analysis of various alternative scenarios for handling the runoff of the
remaining claims reserves, the Company determined that the best option was to
process the existing claims internally with existing staff, rather than through
a third party administrator or through an outright sale of the claims and LAE
reserves. In addition, it is expected that shareholders' equity may be better
served by retaining the investments necessary to fund the payment of these
claims and LAE reserves, managing them along with the rest of the Company's
investment holdings, as opposed to selling or fully reinsuring these reserves
and giving up the corresponding funds. However, there can be no assurance that
funds generated by such retained investments will exceed claims. Accordingly,
although the Company ceased writing MPL insurance, MPL is treated as a separate
business segment of continuing operations due to the continued management of
claims and associated investments.
34
<PAGE> 233
Revenues and pre-tax income or loss from MPL operations included the
following:
MEDICAL PROFESSIONAL LIABILITY INSURANCE
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
------- ------- --------
(in millions)
<S> <C> <C> <C>
MPL Revenues:
Earned Premiums $0.2 $7.4 $17.1
Investment Income, Net of Expenses 3.7 4.8 5.9
Income from Sale of MPL Business 6.0
------- ------- --------
MPL Revenues $3.9 $12.2 $29.0
======= ======= ========
MPL Income Before Tax: $0.8 $8.5 $6.0
- - - ---------------------- ======= ======= ========
</TABLE>
Since the withdrawal of Physicians and PRO from their personal automobile
and homeowners lines of business in the late 1980's, MPL has, for all intents
and purposes, been these two companies' only sources of insurance premiums.
Earned premium steadily declined from $17.1 million in 1995 to $7.4 million in
1996 and slightly less than $240,000 in 1997.
The following table shows the decline in Physicians' and PRO's direct
written premiums over the past five years:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(in millions)
<S> <C> <C> <C> <C> <C>
Direct Written Premiums $0.0 $0.2 $22.6 $28.0 $37.6
</TABLE>
The marked decline in direct written premiums prior to 1996 is indicative of
the increasing competitive pressures within Ohio which, among other factors, led
Physicians and PRO to increase premium rates, to be more selective in
underwriting and, ultimately, to withdraw from the MPL line of business.
MPL premiums continued to be earned during 1996 based upon premiums written
prior to July 16, 1995, the effective date of the 100 percent quota share treaty
with Mutual. Investment income revenues will continue to accrue to the MPL
runoff.
MPL insurance revenues amounted to $3.9 million during 1997 compared to
$12.2 million and $29.0 million during 1996 and 1995, respectively. The decline
in MPL earned premiums accounted for most of this variance between years, other
than the $6 million in revenues in 1995 from the sale of the Company's MPL
business. Investment income also declined during 1997 as compared to 1996 and
1995, principally as a result of the reduced level of MPL claims and the
associated reduced level of invested assets allocated to the MPL insurance
business segment.
MPL operations produced pre-tax operating income of approximately $765,000
in 1997 compared to income of $8.5 million and $6.0 million during 1996 and
1995, respectively. Results for 1997 were negatively impacted by a $2 million
addition to loss and LAE reserves. This addition to reserves during the third
quarter of 1997 was based upon an actuarial analysis as of June 30, 1997 which
indicated some unfavorable loss experience had occurred during the first six
months of 1997. Pre-tax operating results for 1996 were aided by a $1.4 million
reduction in MPL death, disability and retirement unearned premium reserves
related to the Mutual transaction, and loss and LAE reserve reductions of
approximately $6.0 million due to continued favorable development of MPL
reserves. The $6.0 million pre-tax operating income recorded during 1995 was
equal to the $6.0 million realized on the sale of Physicians' and PRO's MPL
businesses. Investment income was also higher in 1996 and 1995 due to greater
reserve levels and higher loss reserve discount accretion.
Greatly reduced earned premiums, somewhat lower investment income, and
certain non-recurring expense accruals associated with the MPL claims runoff
were responsible for the remainder of the decline in pre-tax MPL income from
1996 to 1997.
Physicians' claims department staff continues to process the runoff of the
remaining MPL loss and loss adjustment expense claims which is progressing
routinely. At December 31, 1997, MPL reserves totaled $ 77.5 million, net of
reinsurance and discount. This compares to $112.9 million and $136.2 million at
December 31, 1996 and 1995, respectively. MPL loss and LAE reserves continue to
decline as a result the disposition of claims.
35
<PAGE> 234
MPL INSURANCE -- LOSS AND LAE RESERVES
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1996 1995
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Direct Reserves $ 121.4 $ 158.4 $ 192.5
Ceded Reserves (34.8) (33.3) (38.5)
Discount of Net Reserves (9.1) (12.2) (17.8)
-------- -------- --------
Net MPL Revenues $ 77.5 $ 112.9 $ 136.2
======== ======== ========
</TABLE>
Although MPL reserves are certified annually by two independent actuaries,
as required by Ohio insurance regulations, significant fluctuations in reserve
levels can occur based upon a number of variables used in actuarial projections
of ultimate incurred losses and LAE.
OTHER OPERATIONS
- - - ----------------
Other operations consists principally of Summit's investment management
operations, the wind down of Raven Development Company's ("Raven") real estate
development projects, and various other activities as summarized below:
OTHER OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
-------- ------- -------
(in millions)
<S> <C> <C> <C>
Revenues from Other Operations:
- - - -------------------------------
Investment Management Services $ 1.1 $ 0.8 $ 0.2
Less: Intercompany Portfolio Mgmt. Charges (0.5) (0.5) -
Other (0.5) 1.9 1.4
----- ----- -----
Revenue from Other Operations $ 0.1 $ 2.2 $ 1.6
===== ===== =====
Other Operations-Loss Before Tax:
- - - ---------------------------------
Investment Management Services $ 0.2 $ 0.1 $(0.1)
Less: Intercompany Portfolio Mgmt. Charges (0.5) (0.5) -
Other (0.4) (0.7) (0.4)
----- ----- -----
Other Operations-Loss Before Tax $(0.7) $(1.1) $(0.5)
===== ===== =====
</TABLE>
Revenues from other operations decreased from $2.2 million in 1996 and $1.6
million in 1995 to approximately $100,000 in 1997. Nearly all this decline
resulted from the wind down of real estate operations of Physician's subsidiary,
Raven, which saw virtually no activity in 1997. The remainder of Raven's real
estate holdings was sold in early 1998. Raven's real estate activity is minimal,
generally consisting of wind down costs.
Investment management revenues and operating income from Summit, before
elimination of intercompany transactions, increased over 1996 and 1995. In 1997
Summit's revenues before intercompany eliminations were $1.1 million compared to
approximately $762,000 in 1996 and $209,000 in 1995. Summit now has more than
$700 million in assets under management, up approximately 75% over a year ago.
Summit's revenues have increased due to the addition of additional clients and
increased intercompany portfolio management fees.
Other operations produced an approximate $700,000 pre-tax loss for 1997
compared to pre-tax losses of $1.1 million and $0.5 million in 1996 and 1995,
respectively.
Under the category of "Other," Stonebridge Partners AG ("Stonebridge"), a
Swiss corporation wholly-owned by Physicians which brokered annuities and other
insurance products within Europe, produced a pre-tax operating loss of
approximately $386,000 in 1997 and a $1 million loss for 1996. The pre-tax loss
for 1995 was $234,000. Stonebridge began operations in late 1995, resulting in
significant start-up costs in 1995 which continued into 1996. For various
reasons, Stonebridge has been unsuccessful in marketing their brokerage
business, as well as in collecting accounts which they believe are due them from
clients. Stonebridge was deactivated in 1997.
36
<PAGE> 235
DISCONTINUED OPERATIONS
- - - -----------------------
Discontinued operations consists of the operations of APL, the Company's
life and health insurance subsidiary and GEC's former Sri Lankan subsidiaries
which engaged in various activities including stock and commodity brokerage and
agricultural services.
APL, Physicians' wholly-owned life insurance subsidiary, produced revenues
of $5.3 million and a pre-tax loss of $112,000 during 1997. This compares to
$9.0 million and $6.8 million in revenues and $4.0 million and approximately
$859,000 million in pre-tax income in 1996 and 1995, respectively. Revenues and
income before tax for 1996 included realized investment gains of approximately
$3.9 million from the sale of APL's investment in Fairfield Communities common
stock.
APL has been concentrating its efforts on its unique critical illness
product "Survivor Key" during the past several years. This life insurance
product combines the benefits of a lump sum cash payout upon the diagnosis of
certain critical illnesses with a death benefit. Gross written premiums for
Survivor Key continually increased from 1994 through 1997.
On June 16, 1997, Physicians announced the signing of a binding agreement to
sell APL subject to certain closing conditions including regulatory approval,
which are still pending. See "HISTORY OF THE COMPANY--Developments Since the
Merger" regarding the pending sale of APL and its wholly owned subsidiary.
GEC has elected to treat its Sri Lankan operations as discontinued in
recognition of their sale in November and December 1997. These operations
produced approximately $3.3 million in pre-tax income during 1997 as recorded in
GEC's financial results, prior to the elimination of minority interests when
consolidated with PICO. This included approximately $3.5 million of realized
pre-tax gain in 1997 on the sale and reversal of a foreign currency translation
adjustment relating to those operations of approximately $2.3 million, prior to
recognition of minority interest. See Note 6 of Notes to the Consolidated
Financial Statements, "Discontinued Operations."
The net assets of the discontinued operations of APL have been shown as one
line on the 1997 balance sheet as net assets of discontinued operations totaling
$15.9 million.
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
PICO Holdings, Inc. is a holding company whose assets principally consist of
the stock of its subsidiaries. PICO continually evaluates the operations of its
existing operations and searches for new opportunities in order to maximize
shareholder value. Because of this business strategy, PICO's cash needs and
those of its subsidiaries vary considerably from period to period. At times cash
may not be readily available when an opportunity arises requiring the
liquidation of securities, advances from subsidiaries, direct purchases of
investments by subsidiaries, or the borrowing of funds. It may also become
necessary and/or advantageous for PICO to offer stock or debt through public
offerings from time to time. At times PICO may come to possess cash balances in
excess of cash needs. Such cash is invested to provide maximum returns within
the constraint of remaining liquid enough to meet expected future cash
requirements. PICO, the parent company, had a minimal cash and cash equivalent
balance at year-end 1997 compared to a $13.1 million balance at the end of 1996.
The year-end 1996 balance reflected the receipt of a $13.2 million cash dividend
from Physicians.
The history of the Company is one of change and changing cash requirements.
In 1995, Physicians took a significant step in changing its strategic direction
by selling its ongoing MPL insurance business and related liability insurance
business. During 1995, Physicians reactivated its investment advisory
subsidiary, Summit; acquired a California property and casualty insurance
company, Sequoia; and purchased 38.2% of GEC, a Canadian corporation active in
international investments, surface, water, geothermal and mineral rights, and
other businesses. See "ITEM 1--BUSINESS--HISTORY OF THE COMPANY." In 1996,
Physicians took another large step in the continuing process of changing its
strategic direction to maximize shareholder value with the reverse acquisition
of Citation. On April 23, 1997, GEC and PICO purchased NLRC, owner of
approximately 1,365,000 acres of deeded land in Northern Nevada, for a total
purchase price of $48.6 million. During 1997, PICO increased its ownership in
GEC to approximately 51.17 %. On June 16, 1997, Physicians announced the signing
of a definitive agreement to sell its wholly-owned life and health insurance
subsidiary, APL, and its wholly-owned subsidiary. In November and December 1997,
GEC sold its investment in its Sri Lankan subsidiaries, providing funds for
repayment of debt and additional investments.
PICO's principal sources of funds are its available cash resources, bank
borrowings, public financings, repayment of subsidiary advances, funds
distributed from its subsidiaries as tax sharing payments, management and other
fees, and borrowings and dividends from its subsidiaries.
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It is expected that each of PICO's major subsidiaries currently within the
group will be able to stand on its own and cover its own cash flow needs without
the need for long-term borrowing or additional capital infusions, with the
possible exceptions of additional capital requirements of Sequoia and CIC to
maintain or improve their Best ratings or to meet minimum capital requirements.
Physicians contributed an additional $5.5 million to Sequoia in 1997 for this
purpose. However, from time to time funds may be needed to cover short-term
operating shortfalls (i.e. timing differences) or to expand the Company's
operations (principally through investments and/or acquisitions) both at the
subsidiary level and at the parent company level. Additional funding may be
generated through, among other avenues, disposition or transfer of existing
assets, issuance of additional capital stock through a public offering, or
through a public debt offering or other borrowing.
Insurance has always been and continues to be a major source of funds for
the Company. Physicians initially provided virtually all the funding necessary
for the Company to execute its revised business strategy. Since the acquisition
of Sequoia in 1995, management has made significant strides in improving
Sequoia's operating performance. Sequoia made a profit of approximately $2.8
million in 1997 and produced positive cash flows of $9.3 million from
operations. Management has taken a number of steps to improve CIC's
profitability and cash flow since its acquisition in November 1996, including
the sale of its workers' compensation business and its subsidiary, CNIC, in June
1997. CIC used nearly $13.7 million in cash in operating activities during 1997.
Much of CIC's negative operating cash flow relates to its unusually high GAAP
combined industry ratio of 117.7% for 1997. SEE MANAGEMENT'S DISCUSSION AND
ANALYSIS-PROPERTY AND CASUALTY INSURANCE. Physicians' cash flows have had the
greatest impact on the consolidated group during the past three years and should
continue to do so for the foreseeable future, due to the wind down of the MPL
business. Physicians, Sequoia and Citation had cash and cash equivalent balances
at December 31, 1997 of $9.3 million, $38.3 million, and a deficit of $1.1
million, respectively. This compares to $12.5 million, $19.1 million, and
$843,000, respectively, at the end of 1996. A large portion of Sequoia's and
Citation's investments is kept in the form of cash and cash equivalents to pay
claims and expenses due to the relatively short lag period between the receipt
of premiums and payment of claims in the commercial property and casualty
insurance business lines written by those companies.
As a result of ceasing to write MPL insurance, Physicians' operating cash
flows have become, and should continue for the foreseeable future, to be
negative. Positive cash flows from other sources within Physicians, primarily
reinsurance recoveries, investment income and the sale of invested assets may
partially offset such uses of cash. Major cash outflows most likely will include
the funding of claims and loss adjustment expenses, investment purchases,
dividend distributions, and operating costs. The Company's active insurance P &
C subsidiaries, Sequoia and CIC, should provide positive cash flows from premium
writings, investment income, and the sale of invested assets. Cash will be used
to fund the payment of their own claims and operating expenses, as well as in
purchasing investments. Summit should produce positive cash flow in the form of
investment management fees in excess of operating costs.
As of December 31, 1995, when Physicians and PRO ceased writing MPL,
Physicians and PRO reported discounted unpaid loss and loss adjustment expense
reserves of approximately $136.2 million, net of reinsurance. Based upon
projections from past actuarial information, more than 75%, or $102 million, of
these reserves are expected to be settled by the end of the year 2000. Past
experience indicates that funding requirements should be greatest in the first
through third years (1996 through 1998), accounting for more than 60% of the
total eventual reserve and loss adjustment expense payments. As expected, loss
and LAE reserves at December 31, 1996 declined more than 17.1% to $112.9 million
after payment of more than $30 million in claims and LAE. During 1997, MPL
reserves of approximately $77.5 million at December 31, 1997, decreased an
additional $35.4 million, or 31.4%, after payment of more than $38 million in
losses and LAE.
The Company's insurance subsidiaries attempt to structure the duration of
their invested assets to match the cash flows required to settle the related
unpaid claims liabilities. Their invested assets provide adequate liquidity to
fund projected claims and LAE payments for the coming years. The Ohio and
California Insurance Departments monitor and set guidelines for the insurance
companies' investments. The Ohio and California Insurance Departments also set
minimum levels of policyholder capital and surplus and monitor these levels
through various vehicles such as RBC. All the Company's insurance subsidiaries
have more than adequate, if not strong, RBC levels as of December 31, 1997.
To the extent that funds necessary for settling claims and paying operating
expenses are not provided by existing cash and cash equivalents, investment
income, reinsurance recoveries, and rental other income, invested assets will be
liquidated. Short term and fixed maturity investments are managed to mature
according to projected cash flow needs. Equity securities will be converted to
cash as additional funds are required, with an anticipated maximum liquidation
lead-time of approximately six months.
At December 31, 1997, Physicians' and PRO's investment portfolios on a
stand-alone basis contained invested assets of approximately $120.6 million,
plus cash and cash equivalents of $10.8 million. These invested assets are in
excess of the present value of expected future payouts of losses and loss
adjustment expenses (discounted at 4%) of approximately $77.5 million.
Physicians is in the process of selling APL, its life and health insurance
subsidiary. When sold, the proceeds from this sale may provide additional
available cash.
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Disregarding any appreciation or depreciation of Physicians' investment
portfolio and the results of the operations of its subsidiaries and affiliates,
on a stand alone basis Physicians should experience a decline in total assets
and total liabilities as a result of the payment of claims, loss adjustment
expenses and operating expenses. Absent unfavorable loss experience and
operating and other expenses in excess of investment income, shareholders'
equity should remain relatively unaffected. Income in excess of expenses,
favorable claims experience, appreciation of investments and increases in the
equities of subsidiaries and affiliates all would increase shareholders' equity
and, ultimately, total assets.
PICO management hopes to maximize the return of all assets, including those
needed to fund the eventual wrap-up of the MPL reserves through, among other
things, value investing and managing the invested assets internally rather than
liquidating assets to pay a third party to oversee the runoff of the existing
claims. Management also elected to handle the runoff of the MPL claims
internally to continue to maintain a high standard of claims handling and to
maximize shareholder values. While management expects that certain of the
Company's current and future investments may increase in value, offsetting some
of the decline in assets during the period of runoff and increasing shareholder
value, the impact of future market fluctuations on the value of the Company's
invested assets cannot be accurately predicted. Although assets will be managed
to mature or liquidate according to expected payout projections, at times, in
response to abnormal funding demands, some invested assets may need to be sold
at inopportune times during periods of decline in the stock market or declines
in the market values of the individual securities. Such forced sales are
expected to occur infrequently and only under extreme circumstances; however,
this cannot be guaranteed.
As previously mentioned, reinsurance recoveries (reimbursement of covered
losses from reinsurers) will be a significant source of incoming funds in
upcoming years as claims are settled. As shown in the accompanying financial
statements, consolidated reinsurance receivables amounted to $75.0 million at
December 31, 1997 compared to $97.0 million at December 31, 1996. Physicians'
and PRO's reinsurance receivables were $38.0 million at December 31, 1997 and at
December 31, 1996. Of the $37 million difference between the $75.0 million
consolidated total at December 31, 1997 and the $38.0 million of Physicians and
PRO, $30.3 million was recorded on Sequoia's financial statements, most of which
is due from SRC and guaranteed by QBE. See "ITEM 1--BUSINESS--HISTORY OF THE
COMPANY." Of the remainder, $6.7 million resulted from the inclusion of CIC.
Unsecured reinsurance risk is concentrated in the companies and amounts
shown in the table under Note 12 ("Reinsurance") to the Consolidated Financial
Statements as of December 31, 1997. Most companies listed are highly rated
companies with significant sources of capital.
As an additional source of funding, PICO's subsidiaries as they grow and
accumulate increasing amounts of retained earnings may be able to return some of
PICO's investment in the form of dividend distributions; however, this cannot be
assured. On December 30, 1997, Physicians paid a dividend of $13.2 million to
PICO in the form of GEC stock. This dividend was the maximum dividend that could
be paid under Ohio insurance regulations without specific approval by the Ohio
department.
As shown in the accompanying Consolidated Statements of Cash Flows, the
Company used cash flows of $62.1 million for operations in 1997 and $10.8
million in 1996, compared to $15.1 million in 1995. Cash consumed by operations
in 1997 increased $51.2 million over 1996 and $46.9 million over 1995. The
increase in cash used for operations as compared to 1996 and 1995 included
increased MPL claims and expense payments, federal, foreign and state income tax
payments, and the inclusion of CIC in the consolidated group. Net cash used for
operating activities consisted of $49.3 million from Physicians, $2.2 million
from PRO, $13.7 from CIC, $1.6 million from PICO, and $11.8 million from others,
including a $9.7 million reclassification of APL's cash and cash equivalents to
discontinued operations on the balance sheet at December 31, 1997. Net cash
provided by operating activities included $9.2 million from Sequoia and $7.3
million from GEC.
Cash provided by investing activities in 1997 of $68.1 million principally
reflects fixed income securities maturities and sales and investment gains
realized from the sale of Resource America, Inc. and AmVestors. Cash provided
from investing activities was $31.4 million and $37.6 million in 1996 and 1995,
respectively
Cash used for financing activities increased to $14.3 million, compared to
cash provided of $69,000 and $439,000 in 1996 and 1995, respectively. The
approximate $14 million decrease in funds provided by financing activities
reflects repayments of debt incurred by GEC.
GEC financed acquisitions in its investment portfolio of more than $75
million during 1997. This was accomplished through a mixture of equity,
borrowings, minority interests, operating cash flow and disposition of non-core
assets. GEC held approximately $11.1 in cash and cash equivalents at December
31, 1997.
In November 1996, Physicians purchased a $2.5 million convertible debenture
from PC Quote. On May 5, 1997, PICO agreed to provide a line of credit to PC
Quote. The initial credit was for $1 million with repayment due September 30,
1997. The credit has since been increased to $2,250,000 with repayment due April
30, 1998.
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At December 31, 1997, the Company had no significant commitment for future
capital expenditures, other than in the ordinary course of business and as
discussed herein. The Company has also committed to maintain Sequoia's capital
and statutory policyholder surplus level at a minimum of $7.5 million. Sequoia
was well above this level as of December 31, 1997. The Company has also
committed to make every attempt to maintain Sequoia's Best rating at or above
the "B++" (Very Good) level, which may at some time in the future require
additional capital infusions into Sequoia by the Company. During 1997 Physicians
contributed an additional $5.5 million in paid-in capital to Sequoia.
The Company continues to address the issue of the compatibility of systems
software with the year 2000. Insurance premium, loss and statistical systems are
particularly critical to the successful operation of the insurance companies. It
is believed that the majority of these systems, which are different among the
various insurance companies, currently accept the year 2000 logic. The MPL
insurance systems are known, however, to be incompatible. Projects are under way
to test all insurance systems and correct the logic of these systems to make
them compatible with the year 2000. Other operating systems consist of various
accounting, billing, disbursement, and tracking systems which may or may not be
compatible with the year 2000. For the most part, these systems are in the
process of being updated by their vendors. Tests will be run to ensure the
compatibility of these systems, also. Management expects these projects to be
completed by the end of 1998. In addition to resources expended in researching
and correcting systems, additional outlays may be necessary to purchase and
install new software that is compatible with the year 2000. The estimated costs
of this project are undetermined at this time.
Capital Resources
The Company's principal sources of funds are its available cash resources,
operating cash flow, liquidation of non-essential investment holdings, bank
borrowings, public debt and equity offerings, advances and repayment of balances
between subsidiaries and PICO, funds from consolidated tax savings, investment
management and other fees, and borrowings. During August 1997, GEC issued new
common stock of 25 million shares, raising more than $44.0 million in funds, net
of costs. At December 31, 1997, the Company had $56.4 million in cash and cash
equivalents compared to $64.6 million and $44.0 million at December 31, 1996 and
1995, respectively.
ADDITIONAL RISK FACTORS AND UNCERTAINTIES
In addition to the risks and uncertainties discussed in the preceding
sections of "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the following risk factors are also inherent in the
Company's business operations:
CHANGE IN STRATEGIC DIRECTION. In late 1994, Physicians began the process of
changing its strategic direction from the operation of an MPL insurance business
to investing in businesses which PICO believes are undervalued or will benefit
from additional capital, restructuring of operations or management or improved
competitiveness through operational efficiencies with existing PICO operations.
Accordingly, in January 1995, Physicians reactivated its investment advisory
subsidiary, Summit; in August 1995 Physicians acquired Sequoia and entered new
lines of property and casualty insurance; in August 1995 Physicians sold its MPL
insurance business; in September 1995 Physicians purchased 38.2% of GEC, a
Canadian corporation active in international investments, agricultural services,
water rights, and other businesses; in November 1996 Physicians acquired control
of Citation Insurance Group ("CIG") pursuant to the Merger; in April 1997 PICO
acquired 25.23% ownership of Nevada Land and Resource Company which owns
approximately 1,365,000 acres of deeded land in northern Nevada; in June 1997
PICO sold its workers' compensation business; and in July and August 1997, PICO
increased its ownership in GEC to 51.17%. Due to the Company's limited
experience in the operation of the businesses of each of these subsidiaries,
which currently constitute a substantial portion of the Company's operations,
there can be no assurance as to the future operating results of the Company or
the recently acquired businesses of the Company.
The Company will continue to make selective investments for the purpose of
enhancing and realizing additional value by means of appropriate levels of
shareholder influence and control. This could involve the restructuring of the
financing or management of the entities in which the Company invests and
initiating and facilitating mergers and acquisitions. This business strategy has
only recently been implemented, however, and it is not fully reflected in prior
years' financial statements, nor are the financial statements indicative of
possible results of this new business strategy in the future. Shareholders are
relying on the experience and judgment of the Company's management to locate,
select and develop new acquisition and investment opportunities. There can be no
assurance that sufficient opportunities will be found or that this business
strategy will be successful. Failure to successfully implement this strategy may
negatively impact the business and financial condition and results of operations
of the Company.
Application of Physicians' new strategy since 1995 has resulted in a greater
concentration of equity investments held by Physicians, and, consequently, the
Company. Market values of equity securities are subject to changes in the stock
market, which may cause the Company's shareholders' equity to fluctuate from
period to period. At times, the Company may come to hold securities of companies
for which no market exists or which may be subject to restrictions on resale. As
a result, periodically, a portion of the Company's assets may not be readily
marketable.
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INTEGRATION OF CERTAIN OPERATIONS. CIG and Physicians completed the Merger
with the expectation that the Merger would result in certain benefits for the
combined company. Achieving the anticipated benefits of the Merger will depend
in part upon whether certain of the two companies' business operations can be
integrated in an efficient and effective manner. There can be no assurance that
this will occur or that cost savings in operations will be achieved. The
successful combination of the two companies will require, among other things,
integration of the companies' respective product offerings, medical management
of health care claims and management information systems enhancements. The
difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations. The integration of certain
operations following the Merger will require the dedication of management
resources which may temporarily distract attention from the day-to-day business
of the combined companies. There can be no assurance that integration will be
accomplished smoothly or successfully. Failure to effectively accomplish the
integration of the two companies' operations could have an adverse effect on the
Company's results of operations and financial condition following the Merger.
DEPENDENCE ON KEY PERSONNEL. The Company has several key executive officers,
the loss of whom could have a significant adverse effect on the Company. In
particular, Ronald Langley, PICO's Chairman, and John R. Hart, PICO's President
and Chief Executive Officer, play key roles in the Company's and GEC's
investment decisions. Messrs. Langley and Hart have entered into employment
agreements with PICO and a wholly-owned subsidiary of GEC as of December 31,
1997. Messrs. Langley and Hart are key to the implementation of the Company's
new strategic focus, and the ability of the Company to implement its current
strategy is dependent on its ability to retain the services of Messrs. Langley
and Hart.
RISKS REGARDING PHYSICIANS; CONTINUING MPL LIABILITY. In August 1995,
Physicians sold its and PRO's MPL insurance business and related liability
insurance business. Physicians and PRO retained all assets and liabilities
related to insurance policies written prior to the sale of the recurring book of
business. Physicians and PRO will continue to administer claims and loss
adjustment expenses under MPL insurance policies issued or renewed prior to July
16, 1995.
Cash flow needed to fund the day-to-day operations and the payment of claims
and claims expenses will be provided by investment income, lease income, and
proceeds from the sale or maturity of securities. Physicians and PRO have
established reserves to cover losses and loss adjustment expense ("LAE") on
claims incurred under the MPL policies issued or renewed to date. The amounts
established and to be established by Physicians and PRO for loss and LAE
reserves are estimates of future costs based on various assumptions and, in
accordance with Ohio law, have been discounted (adjusted to reflect the time
value of money). These estimates are based on actual and industry experience and
assumptions and projections as to claims frequency, severity and inflationary
trends and settlement payments. In accordance with Ohio law, Physicians and PRO
annually obtain a certification that their respective reserves for losses and
LAE are adequate from an independent actuary. Physicians and PRO also obtain a
concurring actuarial opinion. Physicians' and PRO's reserves for losses and LAE
for prior years developed favorably in 1994, and these reserves were decreased
by $12.7 million in 1994. Reserves also developed favorably in 1995; however,
accretion of reserve discount exceeded the amount of favorable development and
retroactive reinsurance, resulting in a $3.2 million increase in liabilities for
prior years' claims. As a result of continued favorable claims experience,
reserves for prior years' claims were further reduced in the first and fourth
quarters of 1996. However, based upon actuarial indications from data through
June 30, 1997, Physicians' MPL claims reserves were increased by $2 million
during the third quarter of 1997 due to somewhat deteriorated claims experience
during the first six months of 1997. At the same time, favorable development of
Physicians' and PRO's discontinued personal lines reserves (automobile,
homeowner, etc.) allowed reserve reductions of $750,000 during the third quarter
of 1997. Management believes that the reserving methods and assumptions are
reasonable and prudent and that Physicians' and PRO's reserves for losses and
LAE are adequate. Due to the inherent uncertainties in the reserving process
there is a risk, however, that Physicians' and PRO's reserves for losses and LAE
could prove to be inadequate which could result in a decrease in earnings and
shareholders' equity. Adverse reserve development can reduce statutory surplus
or otherwise limit the growth of such surplus
Under Ohio law the statute of limitations is one year after the cause of
action accrues. Also under Ohio law there is a four-year statutory time bar;
however, this has been construed judicially to be unconstitutional in situations
where the plaintiff could not have reasonably discovered the injury in that
four-year period. Claims of minors must be brought within one year of the date
of majority.
LOSS RESERVE EXPERIENCE. The inherent uncertainties in estimating loss
reserves are greater for some insurance products than for others, and are
dependent on the length of the reporting tail associated with a given product,
the diversity of historical development patterns among various aggregations of
claims, the amount of historical information available during the estimation
process, the degree of impact that changing regulations and legal precedents may
have on open claims, and the consistency of reinsurance programs over time,
among other things. Because MPL and commercial casualty claims may not be fully
paid for several years or more, estimating reserves for such claims can be more
uncertain than estimating reserves in other lines of insurance. As a result,
precise reserve estimates cannot be made for several years following a current
accident year for which reserves are initially established.
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There can be no assurance that the insurance subsidiaries in the group have
established reserves adequate to meet the ultimate cost of losses arising from
such claims. It has been necessary, and will over time continue to be necessary,
for the insurance companies to review and make appropriate adjustment to
reserves for estimated ultimate losses, LAE, future policy benefits, claims
payables, and annuity and other policyholder funds. To the extent reserves prove
to be inadequate, the insurance companies would have to adjust their reserves
and incur a charge to earnings, which could have a material adverse effect on
the financial results of the Company.
REINSURANCE RISKS. Prior to the June 30, 1997 sale of CNIC, all of CNIC's
existing insurance risks and claims liabilities, except for those insuring
workers' compensation, were transferred to CIC through reinsurance treaties in
order to effect the sale of CNIC and the Company's workers' compensation
business. As with other P & C insurers, CIC's and Sequoia's operating results
and financial condition can be adversely affected by volatile and unpredictable
natural and man-made disasters, such as hurricanes, windstorms, earthquakes,
fires, and explosions. CIC and Sequoia generally seek to reduce their exposure
to such events through individual risk selection and the purchase of
reinsurance. CIC's and Sequoia's estimates of their exposures depend on their
views of the possibility of a catastrophic event in a given area and on the
probable maximum loss to the insurance companies should such an event occur.
While CIC and Sequoia attempt to limit their exposure to acceptable levels, it
is possible that an actual catastrophic event or multiple catastrophic events
could significantly exceed the probable maximum loss previously assumed,
resulting in a material adverse effect on the financial condition and results of
operations of the Company.
The future financial results of the insurance subsidiaries could be
adversely affected by disputes with their respective reinsurers with respect to
coverage and by the solvency of such reinsurers. None of the Company's insurance
subsidiaries is aware of actual or potential disputes with any of their
respective reinsurers that could materially and adversely impact the financial
results of the Company, or is aware of any insolvent reinsurer whose current
obligations to CIC, Physicians, PRO, APL, or Sequoia are material to such
companies.
RISKS REGARDING SUMMIT GLOBAL MANAGEMENT. Summit is registered as an
investment adviser in California, Florida, Kansas, Louisiana, Oregon, Virginia
and Wisconsin, as well as with the Securities and Exchange Commission (the
"SEC"). Summit must file periodic reports with the SEC and must be available for
periodic examination by the SEC. Summit is subject to Section 206 of the
Investment Advisers Act of 1940, which prohibits material misrepresentations and
fraudulent practices in connection with the rendering of investment advice, and
to the general prohibitions of Section 208 of such Act. If Summit were to
violate the Investment Advisers Act prohibitions, it would risk criminal
prosecution, SEC injunctive actions and the imposition of sanctions ranging from
censure to revocation of registration in an administrative hearing.
The investment adviser business is highly competitive. There are several
thousand investment advisers registered in the states in which Summit does
business, many of which are larger and have greater financial resources than
Summit. There can be no assurance that Summit will be able to compete
effectively in the markets that it serves.
GLOBAL DIVERSIFICATION OF INVESTMENTS. As a result of global
diversification, investment decisions already made and which may be made in the
future, particularly with regard to GEC, the Company's revenues may be adversely
affected by economic, political and governmental conditions in countries where
it maintains investments or operations, such as volatile interest rates or
inflation, the imposition of exchange controls which could restrict the
Company's ability to withdraw funds, political instability and fluctuations in
currency exchange rates.
FLUCTUATIONS IN HISTORICAL OPERATING RESULTS, P & C RESERVES. PICO's
operating results over the past five years have been volatile. During the past
several years, the levels of the reserves for PICO's insurance subsidiaries have
been very volatile. As a result of its claims experience and the level of
existing reserves with respect to its P & C insurance business, CIC has had to
significantly increase these reserves in four of the past six years.
There can be no assurance that significant increases with respect to the
reserves for the P & C business will not be necessary in the future, that the
level of reserves for PICO's insurance subsidiaries will not be volatile in the
future, or that any such increases or volatility will not have an adverse effect
on PICO's operating results and financial condition.
COMPETITION. There are several hundred P & C insurers licensed in
California, many of which are larger and have greater financial resources than
CIC, and Sequoia; offer more diversified types of insurance coverage; have
greater financial resources and have greater distribution capabilities than the
insurance companies of the group.
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A.M. BEST RATINGS. A.M. Best ("Best") has assigned Sequoia a rating of B++
(Very Good) and APL has had a Best rating of B+ (Very Good) since 1983. CIC was
recently upgraded from a B- (Adequate) to a B+ (Very Good) by Best. Physicians
and PRO are currently rated, and have been for a number of years, NR-3 (rating
procedure inapplicable). Best's ratings reflect the assessment of A.M. Best and
Company of the insurer's financial condition, as well as the expertise and
experience of management. Therefore, Best ratings are important to
policyholders. Best ratings are subject to review and change over time. Failure
to maintain or improve their Best ratings could have a material adverse effect
on the ability of the insurance companies to write new insurance policies, as
well as potentially reduce their ability to maintain or increase market share.
Management believes that many potential customers will not insure with an
insurer that carries a Best rating of less than B+, and that customers who do so
will demand lower rate structures. There can be no assurance that any of the
insurance companies' ratings will be maintained or increased.
CYCLICAL NATURE OF THE P&C INDUSTRY. The P & C insurance industry has been
highly cyclical, and the industry has been in a cyclical downturn over the last
several years due primarily to premium rate competition, which has resulted in
lower profitability. Premium rate levels are related to the availability of
insurance coverage, which varies according to the level of surplus in the
industry. The level of surplus in the industry varies with returns on invested
capital and regulatory barriers to withdrawal of surplus. Increases in surplus
have generally been accompanied by increased price competition among P & C
insurers. The cyclical trends in the industry and the industry's profitability
can also be affected significantly by volatile and unpredictable developments,
including natural disasters, fluctuations in interest rates, and other changes
in the investment environment which affect market prices of insurance companies'
investments and the income from those investments. Inflationary pressures affect
the size of losses and judicial decisions affect insurers' liabilities. The
demand for P & C insurance can also vary significantly, generally rising as the
overall level of economic activity increases and falling as such activity
decreases.
INSURANCE COMPANY CAPITAL AND SURPLUS TESTING. In the past few years, the
NAIC has developed risk-based capital ("RBC") measurements for both property and
casualty and life and health insurers. The measures provide the various state
regulators with varying levels of authority based on the adequacy of an
insurer's RBC. At December 31, 1997, the PICO, PRO, APL, CIC and Sequoia annual
statements reported more than adequate RBC levels.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
43
<PAGE> 242
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997 and the
independent auditors' reports are included in this report as listed in the index
on page 45 of this report.
SELECTED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in thousands, except share and
per share amounts) for 1997 and 1996 are shown below. In management's opinion,
the interim financial data contains all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of results for such
interim periods. Prior period amounts have been adjusted to conform with the
current period presentation, including reclassification for discontinued
operations and adjustment to shares and net income (loss) per share values due
to the Merger.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1996 1996 1996 1996 1997 1997
----------- ------------ ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net premium income $ 6,629 $ 7,112 $ 7,710 $ 17,310 $ 14,503 $ 13,976
Investment income, net 2,211 1,756 4,150 27,049 6,208 2,839
Total revenues 10,563 9,426 12,183 44,563 21,050 17,181
Net income (loss) 1,972 (772) 1,355 21,765 1,992 1,824
----------- ------------ ----------- ----------- ----------- -----------
Basic:
----------- ------------ ----------- ----------- ----------- -----------
Net income (loss) per share $ 0.07 ($ 0.03) $ 0.05 $ 0.73 $ 0.06 $ 0.06
----------- ------------ ----------- ----------- ----------- -----------
Weighted average common
and equivalent shares
outstanding 27,436,191 27,436,191 27,436,191 29,716,050 32,487,898 32,542,551
Diluted:
Net income (loss) per share $ 0.07 (0.03) $ 0.05 $ 0.71 $ 0.06 $ 0.05
----------- ------------ ----------- ----------- ----------- -----------
Weighted average common
and equivalent shares
outstanding 28,606,993 28,536,676 28,366,972 30,583,339 33,362,680 33,512,735
<CAPTION>
-------------------------------
September 30, December 31,
1997 1997
------------ -------------
<S> <C> <C>
Net premium income $ 11,622 $ 9,775
Investment income, net 29,461 (5,429)
Total revenues 43,808 5,541
Net income (loss) 17,860 (2,184)
----------- ------------
Basic:
----------- ------------
Net income (loss) per share $ 0.55 $ ($0.07)
----------- ------------
Weighted average common
and equivalent shares
outstanding 32,584,960 32,591,650
Diluted:
Net income (loss) per share $ 0.53 $ 0.06
----------- ------------
Weighted average common
and equivalent shares
outstanding 33,882,821 34,053,596
</TABLE>
44
<PAGE> 243
PICO HOLDINGS, INC. AND SUBSIDIARIES
AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
AND FOR EACH OF THE
THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports.................................. 46-46.2
Consolidated Balance Sheets as of December 31, 1997 and 1996... 47-48
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995................... 49
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1997, 1996, and 1995.... 50-51
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995................... 52
Notes to Consolidated Financial Statements..................... 53-80
45
<PAGE> 244
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
PICO Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of PICO
Holdings, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We did not audit the
1997 consolidated financial statements of Global Equity Corporation (all
expressed in Canadian dollars), a 51.17% owned consolidated subsidiary, which
constitutes 42% of consolidated total assets as of December 31, 1997. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Global Equity
Corporation (all expressed in Canadian dollars), is based solely on the report
of such other auditors. The consolidated balance sheet of the Company as of
December 31, 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for the years ended December 31, 1996 and
1995 were audited by other auditors whose report, dated April 7, 1997, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
1997 consolidated financial statements present fairly, in all material respects,
the consolidated financial position of PICO Holdings, Inc. and subsidiaries as
of December 31, 1997, and the consolidated results of their operations and their
cash flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
San Diego, California
March 27, 1998
46
<PAGE> 245
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated statement of financial position of Global
Equity Corporation ("GEC") as at December 31, 1997 and the consolidated
statements of operations, deficit and changes in financial position for the year
then ended. These financial statements are the responsibility of GEC's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of GEC as at December 31, 1997 and the
results of its operations and the changes in its financial position for the year
then ended in accordance with generally accepted accounting principles in
Canada.
Accounting principles generally accepted in Canada vary in certain significant
respects from accounting principles generally accepted in the United States in
GEC's circumstances, as described in note 14 to GEC's consolidated financial
statements.
KPMG
Chartered Accountants
Toronto, Canada
March 17, 1998
46.1
<PAGE> 246
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
PICO Holdings, Inc.
We have audited the consolidated balance sheet of PICO Holdings, Inc. and
subsidiaries as of December 31, 1996 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
PICO Holdings, Inc. and subsidiaries as of December 31, 1996 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND, L.L.P.
San Diego, California
April 7, 1997
46.2
<PAGE> 247
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Investments:
Available for sale:
Fixed maturities, at fair value $ 43,266,291 $ 156,864,826
Equity securities, at fair value 85,067,951 79,534,612
Investment in affiliate, at equity 28,047,764
Short-term investments, at cost 28,757,220 848,658
Real estate 3,205,754 1,546,445
--------------- ----------------
Total investments 160,297,216 266,842,305
Cash and cash equivalents 56,435,789 64,581,056
Premiums and other receivables, net 20,681,568 14,876,282
Reinsurance receivables 75,025,576 96,984,261
Prepaid deposits and reinsurance premiums 2,234,688 5,225,054
Accrued investment income 1,722,282 3,372,715
Surface, water, geothermal and mineral rights 75,177,015
Property and equipment, net 8,550,807 4,717,366
Deferred policy acquisition costs 5,320,716 7,921,570
Deferred income taxes 2,965,080 5,625,922
Other assets 5,932,248 7,588,351
Net assets of discontinued operations 15,949,989
Assets held in separate accounts 5,601,828
Net assets of acquired business held for sale 7,088,508
=============== ================
Total assets $ 430,292,974 $ 490,425,218
=============== ================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
47
<PAGE> 248
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1997 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Policy liabilities and accruals:
Unpaid losses and loss adjustment expenses, net of discount $ 196,095,518 $ 252,023,546
Future policy benefits 13,776,207
Annuity and other policyholders' funds 31,739,736
Unearned premiums 21,634,897 35,296,803
Reinsurance balance payable 8,076,659 7,315,939
Deferred gain on retroactive reinsurance 2,168,393 3,355,409
Other liabilities 15,380,716 22,394,118
Taxes payable 968,059 776,784
Integration liability 546,147 1,368,000
Liabilities related to separate accounts 5,601,828
Excess of fair value of net assets acquired over purchase price 5,064,536 6,293,084
---------------- ----------------
Total liabilities 249,934,925 379,941,454
---------------- ----------------
Minority Interest 68,207,311 280,184
---------------- ----------------
Commitments (Notes 3, 6, 11, 12,13, 14, 15, 16, and 17)
Preferred stock, $.01 par value, authorized 2,000,000; none issued
Common stock, $.001 par value; authorized 100,000,000; issued 32,591,718
and 32,486,718 shares in 1997 and 1996, respectively 32,592 32,487
Additional paid-in capital 43,147,105 42,965,063
Net unrealized appreciation (depreciation) on investments (2,717,248) 11,837,511
Cumulative foreign currency translation adjustment (2,201,093) (27,159)
Equity changes of investee company (986,361)
Retained earnings 83,718,335 64,226,714
----------------
----------------
121,979,691 118,048,255
Less treasury stock, at cost (common shares 2,492,631 in 1997 and 1,940,315 in 1996) (9,828,953) (7,844,675)
---------------- ----------------
Total shareholders' equity 112,150,738 110,203,580
---------------- ----------------
Total liabilities and shareholders' equity $ 430,292,974 $ 490,425,218
================ ================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
48
<PAGE> 249
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues:
Premium income $49,876,404 $ 38,760,705 $ 19,541,731
Investment income, net 11,686,072 8,086,156 9,164,616
Net realized gains on investments 21,393,331 27,080,236 5,018,853
Real estate sales 1,546,588 1,547,423 1,336,501
Gain on sale of MPL business 6,000,000
Other income 3,077,369 1,261,760 126,815
----------- ------------ ------------
Total revenues 87,579,764 76,736,280 41,188,516
----------- ------------ ------------
Expenses:
Loss and loss adjustment expenses 34,330,327 22,932,490 23,171,588
Amortization of policy acquisition costs 10,069,308 1,875,324 722,719
Cost of land sales 646,543 1,458,781 1,501,421
Insurance underwriting and other expenses 19,030,581 17,506,477 8,225,875
----------- ------------ ------------
Total expenses 64,076,759 43,773,072 33,621,603
----------- ------------ ------------
Equity in earnings (losses) of investee 1,013,385 (459,928)
----------- ------------ ------------
Income from continuing operations before income taxes
and minority interest 23,503,005 33,976,593 7,106,985
Provision (benefit) for federal, foreign and state income taxes 7,670,128 12,957,811 (7,752,049)
----------- ------------ ------------
Income from continuing operations
before minority interest 15,832,877 21,018,782 14,859,034
Minority interest in loss of subsidiary 3,202,461 35,867
----------- ------------ ------------
Income from continuing operations 19,035,338 21,018,782 14,894,901
Income from discontinued operations, net of federal income tax
provisions of $2,201,010, $701,177, and $80,895 for 1997, 1996,
and 1995, respectively and 1997 minority interest of $764,418 456,283 3,301,229 778,075
----------- ------------ ------------
Net income $19,491,621 $ 24,320,011 $ 15,672,976
=========== ============ ============
Net income per common share (basic):
Continuing operations $ 0.59 $ 0.75 $ 0.54
Discontinued operations 0.01 0.12 0.03
----------- ------------ ------------
Net income per common share $ 0.60 $ 0.87 $ 0.57
=========== ============ ============
Weighted average shares outstanding 32,551,951 28,004,595 27,436,191
=========== ============ ============
Net income per common share (diluted):
Continuing operations $ 0.57 $ 0.72 $ 0.54
Discontinued operations 0.01 0.12 0.03
----------- ------------ ------------
Net income per common share $ 0.58 $ 0.84 $ 0.57
=========== ============ ============
Weighted average shares outstanding 33,741,265 29,055,669 27,436,191
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
49
<PAGE> 250
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Net
Unrealized Foreign Equity
Additional Appreciation Currency Changes
Common Paid-In (Depreciation) Retained Translation of Investee
Stock Capital on Investments Earnings Adjustment Company
------------ ---------------- ----------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ 27,436 $ 17,326,279 $ (4,748,349) $ 24,233,727
Net income 15,672,976
Foreign currency translation
adjustment (14,792)
Equity changes of investee
company (979,066)
Net unrealized appreciation
on investments, net of
adjustment to deferred
policy acquisition costs
of $544,162 and
deferred taxes of
$12,246,591 28,576,166
Issuance of common stock
upon exercise of options 56,000
------------ ---------------- ----------------- --------------- ------------- -------------
Balance, December 31, 1995 27,436 17,382,279 23,827,817 39,906,703 (14,792) (979,066)
------------ ---------------- ----------------- --------------- ------------- -------------
Net income 24,320,011
Foreign currency translation
adjustment (12,367)
Equity changes of investee
company (7,295)
Net unrealized depreciation
on investments, net of
adjustment to deferred
policy acquisition costs of
$17,556 and deferred
taxes of $6,590,684 (11,990,306)
Purchase of common stock
by affiliate, held in treasury
Retirement of treasury stock in
connection with the Merger (1,330) (779,122)
Issuance of common stock in
connection with the Merger 6,381 26,287,986
Issuance of common stock
upon exercise of options 73,920
------------ ---------------- ----------------- --------------- ------------- -------------
Balance, December 31, 1996 $ 32,487 $ 42,965,063 $ 11,837,511 $ 64,226,714 $ (27,159) $ (986,361)
------------ ---------------- ----------------- --------------- ------------- -------------
<CAPTION>
Treasury
Stock Total
--------------- -----------------
<S> <C> <C>
Balance, January 1, 1995 $ (1,095,032) $ 35,744,061
Net income 15,672,976
Foreign currency translation
adjustment (14,792)
Equity changes of investee
company (979,066)
Net unrealized appreciation
on investments, net of
adjustment to deferred
policy acquisition costs
of $544,162 and
deferred taxes of
$12,246,591 28,576,166
Issuance of common stock
upon exercise of options 294,000 350,000
--------------- -----------------
Balance, December 31, 1995 (801,032) 79,349,345
--------------- -----------------
Net income 24,320,011
Foreign currency translation
adjustment (12,367)
Equity changes of investee
company (7,295)
Net unrealized depreciation
on investments, net of
adjustment to deferred
policy acquisition costs of
$17,556 and deferred
taxes of $6,590,684 (11,990,306)
Purchase of common stock
by affiliate, held in treasury (5,844,600) (5,844,600)
Retirement of treasury stock in
connection with the Merger 780,452
Issuance of common stock in
connection with the Merger (2,000,075) 24,294,292
Issuance of common stock
upon exercise of options 20,580 94,500
--------------- -----------------
Balance, December 31, 1996 $ (7,844,675) $ 110,203,580
--------------- -----------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
50
<PAGE> 251
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Net
Unrealized Foreign Equity
Additional Appreciation Currency Changes
Common Paid-In (Depreciation) Retained Translation of Investee
Stock Capital on Investments Earnings Adjustment Company
----------- --------------- ---------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 32,487 $ 42,965,063 $ 11,837,511 $ 64,226,714 $ (27,159) $ (986,361)
Net income 19,491,621
Foreign currency translation
adjustment (2,173,934)
Equity changes of investee
company 986,361
Net unrealized depreciation
on investments, net of
deferred taxes
of $6,060,413 (14,554,759)
Issuance of common stock
upon exercise of options 105 344,895
Increase in ownership of
subsidiary holding common
stock of the Company
Purchase of common stock
in connection with merger (162,853)
----------- --------------- ---------------- --------------- -------------- ------------
Balance, December 31, 1997 $ 32,592 $ 43,147,105 $ (2,717,248) $ 83,718,335 $ (2,201,093) $ -
=========== =============== ================ =============== ============== ============
<CAPTION>
Treasury
Stock Total
-------------- ----------------
<S> <C> <C>
Balance, December 31, 1996 $ (7,844,675) $ 110,203,580
Net income 19,491,621
Foreign currency translation
adjustment (2,173,934)
Equity changes of investee
company 986,361
Net unrealized depreciation
on investments, net of
deferred taxes
of $6,060,413 (14,554,759)
Issuance of common stock
upon exercise of options 345,000
Increase in ownership of
subsidiary holding common
stock of the Company (1,984,278) (1,984,278)
Purchase of common stock
in connection with merger (162,853)
-------------- ----------------
Balance, December 31, 1997 $ (9,828,953) $ 112,150,738
============== ================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
51
<PAGE> 252
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,491,621 $ 24,320,011 $ 15,672,976
Adjustments to reconcile net income to net cash used in
operating activities:
Deferred taxes 440,656 1,990,334 (7,891,246)
Depreciation and amortization 1,181,495 2,131,742 2,114,986
Realized gains on investments (29,344,391) (30,949,863) (4,018,672)
Gain from disposition of MPL business (6,000,000)
Equity in (earnings) losses of investee (1,013,385) 459,928
Minority interest in loss of subsidiary (3,202,461)
Write down of investment 8,018,922
Changes in assets and liabilities, net of effects
from acquisition of business:
Premiums and other receivables 4,878,240 4,803,716 (5,241,564)
Reinsurance receivables and payables 20,528,708 23,417,931 (75,607,649)
Accrued investment income 1,370,499 (302,998) 1,800,431
Deferred policy acquisition costs 56,623 4,034,743 (1,716,745)
Unpaid losses and loss adjustment expenses (57,033,716) (31,097,669) 49,105,562
Future policy benefits (2,011,233) 1,512,337
Discontinued operations (2,186,355)
Unearned premiums (13,173,128) (14,378,764) 14,746,411
Other (13,082,986) 8,197,478 (79,730)
---------------- --------------- ----------------
Net cash used in operating activities (62,056,273) (10,857,957) (15,142,975)
---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of investments:
Fixed maturities 53,988,484 23,236,398 121,651,938
Equity securities 94,473,149 88,415,361 9,258,500
Proceeds from maturity of fixed maturity investments 9,250,000 10,731,369 19,471,068
Purchases of investments:
Fixed maturities (23,082,301) (40,871,986) (24,776,663)
Equity securities (95,175,078) (59,995,893) (53,145,781)
Net sales (purchases) of short-term investments 13,388,506 8,314,267 (7,364,404)
Net sales of real estate 270,978 1,564,389 1,062,798
Increase in surface, water, geothermal and mineral rights (2,336,851)
Proceeds from sale of property and equipment 215,882 106,996 70,782
Purchases of property and equipment (984,623) (106,110) (1,023,317)
Proceeds from disposition of MPL business 6,000,000
Investment in affiliate (35,986,088)
Purchased cash from acquiring consolidated subsidiary 18,108,171 2,428,623
---------------- --------------- ----------------
Net cash provided by investing activities 68,116,317 31,394,791 37,647,456
---------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of bank and other borrowings (16,489,329) (331,895) (77,129)
Net increase in annuity and other policyholders' funds 306,179 166,476
Proceeds of warrants issued by GEC 2,006,567
Issuance of common stock 182,147 94,500 350,000
---------------- --------------- ----------------
Net cash provided by (used in) financing activities (14,300,615) 68,784 439,347
---------------- --------------- ----------------
Effect of exchange rate changes on cash 95,304 (12,367) (14,792)
---------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (8,145,267) 20,593,251 22,929,036
Cash and cash equivalents, beginning of year 64,581,056 43,987,805 21,058,769
---------------- --------------- ----------------
Cash and cash equivalents, end of year $ 56,435,789 $ 64,581,056 $ 43,987,805
================ =============== ================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized $ 200,959 $ 2,427
================ =============== ================
Federal income taxes (recovered) paid $ 10,895,019 $ (1,546,045) $ 2,347,000
================ =============== ================
</TABLE>
The accompanying notes are an integral part of the financial statements.
52
<PAGE> 253
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------
1. ORGANIZATION AND OPERATIONS:
Organization:
PICO Holdings, Inc. and subsidiaries (the "Company") is predominately
an insurance and investment company specializing in commercial property
and casualty insurance; portfolio investing; surface, water, geothermal
and mineral rights; medical professional liability insurance and other
services (Note 19). Surface, water, geothermal and mineral rights has
been added as a segment for this annual report based on recent
acquisitions and management's strategic initiatives. As discussed in Note
3, Physicians Insurance Company of Ohio consummated a reverse merger
transaction on November 20, 1996 with a wholly owned subsidiary of
Citation Insurance Group, with Physicians Insurance Company of Ohio being
the accounting acquirer. Pursuant to the merger, each outstanding share
of the Common Stock of Physicians Insurance Company of Ohio was converted
into the right to receive 5.0099 shares of Citation Insurance Group
common stock. Upon the consummation of the merger, Citation Insurance
Group changed its name to PICO Holdings, Inc. ("PICO"), which is the
continuing registrant. Any references to "the Company" herein as of dates
or for periods prior to the merger, refer to Physicians Insurance Company
of Ohio and its subsidiaries, which included Summit Global Management,
Inc. prior to the consummation of the merger. The Company's principal
subsidiaries as of December 31, 1997 are as follows:
Wholly Owned Subsidiaries (Direct and Indirect):
- Physicians Insurance Company of Ohio ("Physicians"), which owns the
following subsidiaries:
- The Professionals Insurance Company ("PRO")
- Physicians Investment Company ("PIC"), which owns American
Physicians Life Insurance Company ("APL"), which owns Living
Benefit Administrators Agency, Inc.
- Sequoia Insurance Company ("Sequoia")
- Raven Development Company ("Raven")
- CLM Insurance Agency, Inc.
- Citation Insurance Company ("CIC")
- Summit Global Management, Inc. ("Summit")
Majority-owned Subsidiaries:
- Global Equity Corporation ("GEC"). GEC is a publicly held corporation
and is listed on the Toronto Stock Exchange and The Montreal Exchange
under the symbol "GEQ". The Chairman of the Board of Directors
("Chairman") and the Chief Executive Officer ("CEO") of the Company
are the Chairman and CEO of GEC, respectively. The Company acquired an
approximate 38% ownership in GEC on September 5, 1995. The Company
increased its ownership in GEC to approximately 49.9% on July 30, 1997
and to approximately 51.17% on August 19, 1997 (Note 3). As a result,
GEC has been included in the consolidated accounts of the Company for
1997. The Company previously accounted for GEC utilizing the equity
method of accounting wherein the Company's share of GEC's net income
or loss was included in the equity in earnings (losses) of investee on
the statements of income.
- Nevada Land and Resource Company, LLC ("NLRC"). The Company acquired
NLRC on April 23, 1997. PICO owns 25.23% of NLRC and Global-Nevada
Land Resource Corporation, a wholly-owned subsidiary of GEC owns the
remaining 74.77% (Note 3). NLRC owns approximately 1,365,000 acres of
deeded land with appurtenant water, geothermal and mineral rights in
northern Nevada.
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<PAGE> 254
Equity Investment:
Investments in entities in which the Company owns between 20% to 50%
of the voting interest and has the ability to exercise significant
influence and which are made for long term operating purposes, are
accounted for on the equity method of accounting. The Company had no
investment of this type at December 31, 1997 (Note 5).
Operations:
Prior to selling its book of medical malpractice business in 1995,
Physicians engaged in providing medical professional liability coverage
to physicians, surgeons, dentists and nurses, primarily in the state of
Ohio. On August 28, 1995, Physicians entered into an agreement with
Mutual Assurance, Inc. ("Mutual") pursuant to which Physicians sold its
recurring medical professional liability insurance ("MPL") business and
that of its wholly owned subsidiary, PRO, to Mutual. Physicians and PRO
still hold MPL unpaid losses and loss adjustment expense liabilities that
are being settled.
APL provides life and health insurance coverage in a number of states
and is shown as discontinued operations due to a definitive agreement
entered into on June 16, 1997 to sell APL and its wholly owned
subsidiary, Living Benefit Administrators Agency, Inc.
Sequoia, acquired August 1, 1995, writes property and casualty
insurance (primarily light commercial and multi-peril) in California
(Note 3).
CIC and its wholly-owned subsidiary, CNIC, were acquired November 20,
1996 through a reverse acquisition (Note 3). CIC writes commercial
property and casualty insurance in Arizona, California, Colorado, and
Utah. Prior to July 1997, CIC wrote workers compensation insurance.
However, as discussed in Note 3, the Company entered into a Letter of
Intent in January 1997 and sold CNIC and all of the net assets related to
CIC's workers' compensation business effective June 30, 1997. Such net
assets are reflected in the accompanying consolidated balance sheet as of
December 31, 1996 as "Net Assets of Acquired Business Held for Sale."
CNIC previously wrote commercial property and casualty insurance
primarily in the state of California, but ceased writing new business
effective December 1994. For the years ended December 31, 1997 and 1996,
approximately 72% and 89%, respectively, of CIC's direct written premiums
were in California. Consequently, CIC's and Sequoia's operating results
are expected to be largely dependent on their ability to write profitable
insurance in California.
Summit offers investment management services, primarily to its
affiliates.
GEC is a Canadian corporation engaging in strategic investment;
surface, water, geothermal and mineral rights; and other services,
operating primarily in the United States, but also with operations in
Canada, Asia, Europe, and the Caribbean. At times, GEC may come to hold
securities of companies for which no market exists or which may be
subject to restrictions on resale. As a result, a portion of GEC's assets
may not be liquid. Furthermore, as a result of its global diversification
with respect to existing investments, GEC's revenues may be adversely
affected by economic, political and governmental conditions in countries
where it maintains investments or operations, such as volatile interest
rates or inflation, the imposition of exchange controls which could
restrict or prohibit GEC's ability to withdraw funds, political
instability and fluctuations in currency exchange rates.
Effective November 14, 1995, a wholly-owned subsidiary of GEC acquired
all the outstanding common stock of Vidler Water Company, Inc.
("Vidler"), a Colorado corporation engaged in the water marketing and
transfer business. Vidler's business plan calls for Vidler to identify
areas where water supplies are needed in the southwestern United States
and then facilitate the transfer from current ownership to Vidler, and
subsequently to municipalities, water districts, developers and others.
Since its acquisition, Vidler and its immediate parent company have
purchased water rights and related assets in Colorado, Nevada and
Arizona.
NLRC, which is 74.77% owned by GEC and 25.23% by PICO owns
approximately 1.365 million acres of deeded land located in northern
Nevada, together with appurtenant water, geothermal and mineral rights.
NLRC is actively engaged in maximizing the property's value in relation
to water rights, mineral rights, geothermal resources, and land
development.
CLM is an inactive California insurance agency which placed insurance
with California insurers, including Sequoia.
Raven Development Company is a real estate development company in
Ohio. It is in the process of withdrawing from all real estate
development activities and is currently involved in only one development
in Ohio.
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<PAGE> 255
As discussed in Note 11, approximately 17.6% of the Company's common
stock was owned by Guinness Peat Group plc as of December 31, 1997 and
19% as of December 31, 1996. In addition, GEC and CIC own approximately
13.1% and 1%, respectively, of the Company's common stock as of December
31, 1996 and 1997. The Company's common stock owned by GEC and CIC has
been accounted for as treasury stock in the Company's consolidated
financial statements.
2. SIGNIFICANT ACCOUNTING PRINCIPLES:
The following is a description of the significant accounting policies
and practices followed in the preparation of the Company's consolidated
financial statements:
Principles of Consolidation:
The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries (Note 1). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Basis of Presentation:
The accompanying consolidated financial statements have been prepared
in conformity with generally accepted accounting principles.
Investments:
The Company applies the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No. 115,
investments in available for sale securities are recorded at estimated
fair value. Unrealized holding gains and losses on investments classified
as available-for-sale, net of the adjustment to deferred policy
acquisition costs and deferred income taxes, are excluded from earnings
and are reported as a separate component of shareholders' equity. The
Company's entire portfolio of debt and equity securities has been
designated as available-for-sale.
The estimated fair value of fixed maturity and equity securities other
than those carried at equity is based upon quoted market prices or dealer
quotes for comparable securities
A decline in the market value of any available for sale security below
cost that is deemed other than temporary is charged to earnings and
results in the establishment of a new cost basis for the security (Note
4).
Investment income includes amortization of premium and accretion of
discount on the level yield method relating to bonds acquired at other
than par value. Realized investment gains and losses are included in
income and are determined on the identified certificate basis and are
recorded on a trade date basis.
Short-term investments, which consist of certificates of deposit with
an original maturity of greater than three months, are stated at cost,
which approximates fair value.
Real estate represents costs incurred in connection with certain land
development projects and commercial real estate held for resale. Indirect
costs associated with the land development projects, including interest,
are capitalized as part of real estate costs. Selling, general and
administrative expenses related to development projects are expensed as
incurred.
Cash Equivalents:
The Company and its subsidiaries consider highly liquid debt
instruments purchased with an original maturity of three months or less
to be cash equivalents.
Surface, Water, Geothermal and Mineral Rights:
Surface, Water, Geothermal and mineral rights are carried at cost.
This cost includes, when applicable, costs directly related to
acquisition, and interest and other costs directly related to developing
the assets for their intended use.
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<PAGE> 256
Property and Equipment:
Property and equipment are carried at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method over
the estimated lives of the assets ranging from 5 to 45 years.
Maintenance, repairs and minor renewals are charged to expense as
incurred, while significant renewals and betterments are capitalized.
The cost and related accumulated depreciation of assets sold are
removed from the related accounts, and the resulting gains or losses are
reflected in operations.
Deferred Acquisition Costs:
Certain costs of acquiring new insurance business, net of reinsurance
ceding commissions, are deferred and amortized over the terms of the
policy for property and liability insurance and over the average lives of
investment and universal life-type contracts, based on the present value
of the estimated gross profit amounts expected to be realized over the
lives of the contracts, and over the premium paying periods of ordinary
and group life insurance contracts. Future investment income has been
taken into consideration in determining the recoverability of such costs.
Goodwill:
Goodwill represents the difference between the purchase price and the
fair value of the net assets (including tax attributes) of companies
acquired in purchase transactions. Both positive and negative goodwill
are amortized on a straight-line basis over a period of 10 years. There
was negative goodwill (i.e., excess of fair value of assets acquired over
purchase price) as of December 31, 1996 resulting from the acquisition of
Citation Insurance Group in November 1996 (Note 3). Positive goodwill is
included in "Other Assets" in the accompanying consolidated balance
sheets.
Impairment of Long-Lived Assets:
The Company periodically evaluates whether events or circumstances
have occurred that may affect the estimated useful life or the
recoverability of long-lived assets. Impairment of long-lived assets is
triggered when the estimated future undiscounted cash flows (excluding
interest charges) do not exceed the carrying amount. If the events or
circumstances indicate that the remaining balance may be permanently
impaired, such potential impairment will be measured based upon the
difference between the carrying amount and the fair value of such assets
determined using the estimated future discounted cash flows (excluding
interest charges) generated from the use and ultimate disposition of the
respective long-lived asset.
Reinsurance:
The Company records all reinsurance assets and liabilities on the
gross basis, including amounts due from reinsurers and amounts paid to
reinsurers relating to the unexpired portion of reinsured contracts
(prepaid reinsurance premiums).
Unpaid Losses and Loss Adjustment Expenses:
As more fully described in Note 13, reserves for MPL and property and
casualty unpaid losses and loss adjustment expenses include amounts
determined on the basis of actuarial estimates of ultimate claim
settlements, which include estimates of individual reported claims and
estimates of incurred but not reported claims. The methods of making such
estimates and for establishing the resulting liabilities are continually
reviewed and updated based on current circumstances, and any adjustments
resulting therefrom are reflected in current operations. Reserves for MPL
unpaid losses and loss adjustment expenses for medical professional
liability claims have been adjusted to reflect the time value of money
(discounting).
Future Policy Benefits and Annuity and Other Policyholders' Funds:
Liabilities for future policy benefits have been calculated using the
net level premium method based on actuarial assumptions as to anticipated
mortality, withdrawals and interest rates ranging from 3.5% to 8%.
Annuity and other policyholders' funds have been calculated based on
contract-holders' contributions plus interest credited, less applicable
contract charges.
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<PAGE> 257
Recognition of Premium Revenue:
MPL and other property and casualty insurance premiums written are
earned principally on a monthly pro rata basis over the life of the
policy. The premiums applicable to the unexpired terms of the policies
are included in unearned premiums.
Amounts charged on universal life-type contracts that represent the
cost of the insurance component of payments received are recognized as
premium income when earned. Amounts assessed against universal life
policyholder funds to compensate the Company for future services are
reported in unearned premiums and are recognized in income using the same
assumptions and factors used to amortize capitalized acquisition costs.
Premiums on ordinary and group life contracts, including critical
illness, are recognized when due, and premiums on accident and health
contracts are recognized over the contract period. Unearned premiums have
been principally calculated using the monthly pro rata method, resulting
in the earning of premiums evenly over the terms of the policies.
Income Taxes:
The Company's income tax expense includes deferred income taxes
arising from temporary differences between the tax and financial
reporting bases of assets and liabilities. The liability method of
accounting for income taxes also requires the Company to reflect the
effect of a tax rate change on accumulated deferred income taxes in
income in the period in which the change is enacted.
In assessing the realization of deferred income taxes, the Company's
management considers whether it is more likely than not that the deferred
income tax assets will be realized. The ultimate realization of deferred
income tax assets is dependent upon the generation of future taxable
income during the period in which temporary differences become
deductible. If future income does not occur as expected, a deferred
income tax valuation allowance may need to be established.
Earnings per Share:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share," effective for financial
statements issued after December 15, 1997. SFAS No. 128 requires dual
presentation of "Basic" and "Diluted" earnings per share ("EPS") by
entities with complex capital structures, replacing "Primary" and "Fully
Diluted" EPS under Accounting Principles Board ("APB") Opinion No. 15.
Basic EPS excludes dilution from common stock equivalents and is computed
by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution from common stock
equivalents, similar to fully diluted EPS, but uses only the average
stock price during the period as part of the computation. The Company
adopted the new method of reporting EPS for the year ended December 31,
1997, and the 1996 and 1995 financial statements have been restated to
reflect the change.
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<PAGE> 258
Reconciliation of the basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------- ------------
(in thousands except per share amounts)
<S> <C> <C> <C>
Net income $19,492 $24,320 $15,673
------------ ------------- ------------
Basic earnings per share $0.60 $0.87 $0.57
Basic weighted average common shares outstanding 32,552 28,005 27,436
------------ ------------- ------------
Options 1,189 1,051
------------ ------------- ------------
Diluted weighted average common and
common equivalent shares outstanding 33,741 29,056 27,436
============ ============= ============
Diluted earnings per share $0.58 $0.84 $0.57
============ ============= ============
</TABLE>
The weighted average number of shares outstanding for the year ended
December 31, 1995 used in the calculation of earnings per share have been
recomputed to give effect to the stock exchange ratio utilized in
connection with the reverse acquisition of Citation Insurance Group
consummated on November 20, 1996 (Note 3). Stock options of 1,382,715,
1,696,092 and 2,580,098 for 1997, 1996 and 1995, respectively, were not
included in the calculation of weighted average shares because the
impacts of such options were anti-dilutive.
Separate Accounts:
Separate account assets and liabilities represent contract-holders'
funds that have been segregated into accounts with specific investment
objectives and are recorded at estimated fair market value based upon
quoted market prices. The investment income and gains or losses of these
accounts accrue directly to the contract-holders. The activity of the
separate accounts is not reflected in the consolidated statements of
income and cash flows, except for the fees that the Company receives for
administrative services.
Translation of Foreign Currency:
Revenues and expenses of foreign operations are translated at average
rates of exchange in effect during the year. Assets and liabilities are
translated at the exchange rates in effect at the balance sheet date.
Unrealized exchange gains and losses arising on translation, net of
applicable deferred income taxes, are reflected in shareholders' equity.
Use of Estimates in Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
for each reporting period. The significant estimates made in the
preparation of the Company's consolidated financial statements relate to
the assessment of the carrying value of unpaid losses and loss adjustment
expenses, future policy benefits, deferred policy acquisition costs,
deferred income taxes and contingent liabilities. While management
believes that the carrying value of such assets and liabilities are
appropriate as of December 31, 1997 and 1996, it is reasonably possible
that actual results could differ from the estimates upon which the
carrying values were based.
Reclassifications:
Certain amounts in the financial statements for prior periods have
been reclassified to conform with the 1997 presentation.
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<PAGE> 259
Recent Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", SFAS No. 130 establishes requirements for disclosure of
comprehensive income and becomes effective for the Company for the year
ending December 31, 1998. Comprehensive income includes such items as
foreign currency translation adjustments, unrealized holding gains and
losses on available for sale securities, and equity changes of investee
company that are currently being presented by the Company as a component
of stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for disclosure about operating segments in annual
statements and selected information in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise". The new
standard becomes effective for the Company for the year ending December
31, 1998, and requires that comparative information from earlier years be
restated to conform to the requirements of this standard. The Company does
not expect this pronouncement to materially change the Company's current
reporting and disclosures.
3. ACQUISITIONS:
On November 20, 1996, Physicians consummated a transaction (the
"Merger") pursuant to which Citation Holdings, Inc. ("Holdings"), a
wholly owned subsidiary of Citation Insurance Group ("CIG"), merged with
and into Physicians pursuant to an Agreement and Plan of Reorganization
dated as of May 1, 1996 with Physicians being the accounting acquiror.
Pursuant to the Merger, each outstanding share of the common stock of
Physicians was converted into the right to receive 5.0099 shares of CIG's
common stock. CIG's other significant direct and indirect subsidiaries
just prior to the merger were CIC and CNIC. Upon the consummation of the
merger, CIG changed its name to PICO Holdings, Inc., which is the
continuing registrant.
As a result of the Merger, the former shareholders of Physicians own
approximately 80% of the outstanding common stock of the Company and
control the Board of Directors of the Company. Accordingly, for
accounting purposes, the merger has been treated as a recapitalization of
Physicians with Physicians as the acquirer (i.e., a reverse acquisition).
Therefore, the statements of income, changes in shareholders' equity and
cash flows of the year ended December 31, 1995 represent the historical
results of Physicians and its subsidiaries, which is the predecessor
entity. Physicians' equity as of December 31, 1995 and the changes in its
equity for the year ended December 31, 1995 have been retroactively
recapitalized for the equivalent number of shares of PICO Holdings,
Inc.'s common stock received in the merger transaction. The difference
between the par value of Physicians' and PICO Holdings, Inc.'s common
stock has been added to additional paid-in capital.
The Merger was accounted for under the purchase method of accounting.
Financial results for the year ended December 31, 1996 include the
operations of CIG as if the Merger had occurred on November 1, 1996.
Financial activity for the period November 1, 1996 through November 20,
1996 was not significant.
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<PAGE> 260
The allocation of the purchase price of CIG was as follows:
<TABLE>
<S> <C>
Purchase Price:
Value of CIG approximately 6,381,000 shares exchanged $ 23,231,667
Acquisition costs 979,000
Value of CIG options assumed 83,625
------------
$ 24,294,292
============
Allocation of Purchase Price:
Historic CIG shareholders' equity $ 34,060,405
Adjust assets and liabilities:
Write down of workers' compensation net assets held for sale (3,652,894)
Write down of property and equipment (820,500)
Deferred income taxes 2,962,861
Integration liability (1,716,201)
Other (859,526)
Excess of fair value of net assets acquired over purchase price (5,679,853)
------------
$ 24,294,292
============
</TABLE>
The allocation of the purchase price was adjusted as of December 31,
1997 to reflect changes from the estimates made as of December 31, 1996.
These changes in estimates did not affect the purchase price; however,
the net result was a decrease in negative goodwill from $6,293,084
estimated at December 31, 1996 to $5,679,853 recorded as of December 31,
1997.
The excess of the fair value of the net assets acquired over the
purchase price of such net assets (negative goodwill) is being amortized
over a 10 year period using the straight-line method. As discussed in
Note 1, the Company entered into a Letter of Intent in January 1997 and,
effective June 30, 1997, sold CNIC and the net assets related to CIC's
workers' compensation operations.
The FASB's Emerging Issues Task Force Abstract 87-11 "Allocation of
Purchase Price to Assets to be Sold" ("EITF 87-11") provides guidance on
the accounting for the purchase price allocation to components of
acquired businesses expected to be sold within one year of the
acquisition date. The guidance in EITF 87-11 states the following:
- expected cash flows from the operations of the net assets of acquired
entities that are expected to be sold within one year of the date of
acquisition should be considered in the purchase price allocation, and
- earnings or losses relating to the operation of the net assets to be
sold should not affect earnings or losses of the acquiring company
during the holding period (i.e., the date of acquisition to the date
of sale).
The Company accounted for the allocation of the purchase price and the
net assets of CIC's workers' compensation line of business in accordance
with the EITF 87-11 guidance stated above. Accordingly, the net assets
related to CIC's workers' compensation line of business as of December
31, 1996 are reflected on a single line item in the accompanying balance
sheet as Net Assets of Acquired Business Held for Sale. The fair value
assigned to such net assets was based upon management's estimate of the
proceeds from the sale of CIC's workers' compensation line of business of
approximately $7.7 million less the estimated loss from operations for
such line of business during the expected holding period of November 1996
through April 1997 of approximately $0.5 million.
The difference between the carrying amount of the net assets of CIC's
workers compensation line of business at the date of sale and the actual
proceeds from such sale resulted in a reallocation of the purchase price
of CIG of $3,652,894. This amount differed from the $2,864,092 estimated
as of December 31, 1996 by $788,802.
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<PAGE> 261
On August 1, 1995, the Company acquired from Sydney Reinsurance
Corporation ("SRC") all the outstanding stock of SRC's wholly owned
subsidiary, Sequoia, a property and casualty insurance company. The
acquisition price of $1,350,000 was paid in cash August 1, 1995.
Approximately $350,000 was paid to acquire Sequoia's fixed assets, while
the remaining $1,000,000 was used in the purchase of intangible assets
and goodwill. These intangible assets are being amortized over a 10-year
period using the straight-line method. The Company used available working
capital to make the purchase. All policy and claims liabilities of
Sequoia prior to closing are the responsibility of SRC and have been
unconditionally and irrevocably guaranteed by QBE Insurance Group Limited
("QBE"), a publicly-held corporation based in Sydney, Australia, of which
SRC indirectly is a wholly-owned subsidiary. Sequoia's operating results
are included in the consolidated statements of income for the years ended
December 31, 1997 and 1996 and for the period August 1, 1995 to December
31, 1995.
The Company is required to maintain a minimum surplus in Sequoia of
$7.5 million and, through a management agreement, will supervise the
run-off of SRC's liabilities. As part of the management agreement,
Sequoia will be reimbursed $4.8 million in management fees by the seller
for processing the run off of claims and policy receivables and servicing
the business existing prior to closing. This management fee is to be
received from SRC over a three-year period and is recognized based on the
percentage of completion method based on total anticipated claims.
Approximately $1.0 million, $1.7 million and $1.6 million have been
recognized as management fee income for the years ended December 31, 1997
and 1996 and for the period August 1, 1995 through December 31, 1995,
respectively.
The following unaudited pro forma information presents (i) a summary
of consolidated results of operations of the Company and CIG and its
subsidiaries for the years ended December 31, 1996 and 1995 as if the
acquisition of CIG and its subsidiaries occurred at the beginning of
1995, with proforma adjustments to give effect to the amortization of
goodwill and the accounting for CIC's workers' compensation line of
business held for sale in accordance with EITF 87-11, as discussed above
(in thousands, except per share data) and (ii) a summary of consolidated
results of operations of the Company and Sequoia for the year ended
December 31, 1995 as if the acquisition of Sequoia had occurred at the
beginning of 1995, with pro forma adjustments to give effect to the
amortization of goodwill and related income tax effects (in thousands,
except per share data):
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
------- --------
<S> <C> <C>
Total revenues $133,539 $118,658
Income before income taxes 35,572 8,588
Net income 16,564 16,076
Net income per share-Basic $0.59 $0.58
Net income per share-Diluted $0.57 $0.58
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes and do not purport to be indicative of the results of operations
which actually would have resulted had the combinations been in effect on
January 1, 1995 or of future results of operations of the consolidated
entities.
On September 5, 1995, Physicians purchased 38.2% of the outstanding
common shares of GEC for $34.4 million. Approximately $33.5 million was
paid to acquire the net assets, while the remaining $887,000 was
allocated to goodwill. The goodwill is being amortized over a 10-year
period using the straight-line method. Physicians used available working
capital to make the purchase. On July 30, 1997, Physicians, PRO, Sequoia,
and CIC purchased from Mackenzie Financial Corporation 6,616,218
additional shares of GEC at a total cost of $11,406,435 increasing the
Company's ownership of GEC to approximately 49.9%. On August 19, 1997,
PICO and Physicians acquired through a public offering 13,586,143
additional shares of GEC at a cost of $25,270,266, increasing PICO's
ownership in GEC to approximately 51.17%.
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<PAGE> 262
GEC is included in the consolidated results of the Company for 1997.
The following unaudited information presents a summary of the stand alone
results of operations of GEC for 1997 and the pro forma consolidated
results of operations of the Company and GEC for 1996 as if the
acquisition of a majority interest in GEC occurred at the beginning of
1996:
<TABLE>
<CAPTION>
(unaudited)
1997 1996
---------------- ---------------
<S> <C> <C>
Total revenues (realized losses) ($4,010,902) $98,787,093
Income (loss) from continuing operations
before taxes and minority interest (10,631,709) 37,656,935
Discontinued operations, net of taxes 564,698 3,301,229
Minority interest in loss (income) of subsidiary (110,253) 2,254,570
Net income (loss) (6,630,108) 24,664,085
Net income per share-Basic - $0.88
Net income per share-Diluted - $0.84
</TABLE>
The unaudited pro forma results for 1996 have been prepared for
comparative purposes and do not purport to be indicative of the results of
operations which actually would have resulted had the combinations been in
effect on January 1, 1996 or of future results of operations of the
consolidated entity.
As discussed in Note 1, on April 23, 1997, GEC and the Company
purchased NLRC. The total purchase price was approximately $48.6 million.
A wholly-owned subsidiary of GEC owns 74.77% of NLRC. The Company paid
approximately $12 million for the remaining interest. GEC financed its
portion of the acquisition in part by issuing to the Company a 7%
debenture in the principal amount of approximately $25 million. The
debenture was subsequently repaid along with accrued interest.
In connection with the sale of their interests in NLRC by the former
members, a limited partnership agreed to act as consultant to NLRC in
connection with the maximization of the development, sales, leasing,
royalties or other disposition of land, water, mineral and oil and gas
rights with respect to the Nevada property. In exchange for these
services, the partnership will receive from NLRC a consulting fee
calculated as 50% of any net proceeds that NLRC actually receives from the
sale, leasing or other disposition of all or any portion of the Nevada
property or refinancing of the Nevada property provided that NLRC has
received such net proceeds in a threshold amount equal to the aggregate
of: (i) the capital investment by GEC and the Company in the Nevada
property (ii) a 20% cumulative return on such capital investment, and
(iii) a sum sufficient to pay the United States federal income tax
liability, if any, of NLRC in connection with such capital investment.
Either party may terminate this consulting agreement in April 2002 if the
partnership has not received or become entitled to receive by that time
any amount of the consulting fee. No payments have been made under this
agreement through December 31, 1997. By letter dated March 13, 1998, NLRC
gave notice of termination of the consulting agreement based on NLRC's
determination of a default by the partnership under the terms of the
agreement. The partnership has yet to formally respond to NLRC regarding
the notice of termination.
On August 26, 1997 CIC purchased 113,743 newly issued shares of The
Physicians Investment Company ("PIC") and Sequoia purchased 40,162 newly
issued shares of PIC. The purchase price was $56.26 per share.
On July 1, 1997, Sequoia purchased all of the outstanding shares of
MacCready & Gutmann Insurance Services Nevada, Inc., a licensed Nevada
insurance agency, for $550,000 in cash and other considerations.
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<PAGE> 263
4. INVESTMENTS:
At December 31, the cost (amortized cost for fixed maturities) and
estimated fair value of available for sale investments are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
1997: Cost Gains Losses Value
--------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 13,147,587 $ 130,540 $ (190,174) $ 13,087,953
Corporate securities 18,270,118 197,166 (288,946) 18,178,338
Mortgage-backed and
other securities 12,000,000 12,000,000
--------------- -------------- --------------- -----------------
43,417,705 327,706 (479,120) 43,266,291
Equity securities 78,648,715 12,921,373 (6,502,137) 85,067,951
--------------- -------------- --------------- -----------------
Total $ 122,066,420 $ 13,249,079 $ (6,981,257) $ 128,334,242
=============== ============== =============== =================
</TABLE>
Excluded from above are fixed maturity and equity securities
investments with estimated fair values of $18,186,963 and $5,503,877,
respectively, that have been classified as net assets of discontinued
operations on the consolidated balance sheet as of December 31, 1997.
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
1996: Cost Gains Losses Value
--------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 74,508,884 $ 319,041 $ (439,085) $ 74,388,840
Corporate securities 108,858,788 1,191,257 (369,254) 109,680,791
Mortgage-backed and
other securities 25,212,464 100,847 (50,326) 25,262,985
--------------- -------------- --------------- -----------------
208,580,136 1,611,145 (858,665) 209,332,616
Equity securities 61,688,546 19,907,520 (2,061,454) 79,534,612
--------------- -------------- --------------- -----------------
Total $ 270,268,682 $ 21,518,665 $ (2,920,119) $ 288,867,228
=============== ============== =============== =================
</TABLE>
Included above are fixed maturity investments with an estimated fair
value of $52,467,790 that have been classified as net assets of acquired
business held for sale on the consolidated balance sheet as of December
31, 1996.
63
<PAGE> 264
Equity securities as of December 31, 1996 include certain warrants to
purchase the common stock of a publicly traded company. The estimated
fair value of such warrants is their intrinsic value based on the quoted
market price of the underlying common stock of the investee company. The
estimated fair value and cost of such warrants were $14,530,957 and
$240,000, respectively, as of December 31, 1996. The warrants were
converted in 1997.
The amortized cost and estimated fair value of investments in fixed
maturities at December 31, 1997, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
--------------- --------------
<S> <C> <C>
Due in one year or less $1,409,756 $1,418,473
Due after one year through five years 16,929,665 16,777,155
Due after five years through ten years 10,335,597 10,330,609
Due after ten years 2,742,687 2,740,054
Mortgage-backed and other securities 12,000,000 12,000,000
--------------- --------------
$43,417,705 $43,266,291
=============== ==============
</TABLE>
Investment income is summarized as follows for each of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Investment income from:
Available for sale:
Fixed maturities $ 3,665,643 $ 4,883,162 $ 6,192,869
Equity securities 1,122,274 1,546,020 439,028
Short-term investments
and other 7,412,342 2,332,626 2,896,678
-------------- -------------- ---------------
Total investment income 12,200,259 8,761,808 9,528,575
Investment expenses (514,187) (675,652) (363,959)
-------------- -------------- ---------------
Net investment income $ 11,686,072 $ 8,086,156 $ 9,164,616
============== ============== ===============
</TABLE>
64
<PAGE> 265
Pre tax net realized gains (losses) on investments were as follows for
each of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Gross realized gains:
Available for sale:
Fixed maturities $ 300,167 $ 36,123 $ 625,189
Equity securities 31,083,312 27,469,731 6,101,557
------------ ------------ ------------
Total gains 31,383,479 27,505,854 6,726,746
------------ ------------ ------------
Gross realized losses:
Available for sale:
Fixed maturities (1,253,139) (292,612) (1,465,357)
Equity securities (8,737,009) (133,006) (242,536)
------------ ------------ ------------
Total losses (9,990,148) (425,618) (1,707,893)
------------ ------------ ------------
Net realized gains $ 21,393,331 $ 27,080,236 $ 5,018,853
============ ============ ============
</TABLE>
Approximately $26.8 million of the total gross realized gains for the
year ended December 31, 1997 were generated from the conversion of the
Company's Resource America, Inc. warrants and the immediate sale of the
converted common stock. As of December 31, 1997, GEC recorded a permanent
write down of $8.0 million (of which approximately $3.8 million
represented the realization of accumulated foreign currency translation
adjustments recorded by GEC) in the value of its investment in Korean
securities in recognition of what is expected to be an other than
temporary decline in the market value of those securities. The value of
these securities was sharply impacted by the recent decline in the Korean
financial market This write down has been recorded as a realized loss. In
1996, approximately $26.0 million of the total gross realized gains for
the year resulted from the sale of the Company's Fairfield Communities,
Inc. common stock in November 1996.
5. INVESTMENTS IN AFFILIATE:
Investments in entities which the Company owns between 20% to 50% of
the voting interest and has the ability to exercise significant influence
and which are made for long term operating purposes, are accounted for on
the equity method of accounting. The financial statements of all
affiliates of the Company have been consolidated with those of the
Company for 1997 as a result of the increase in the Company's ownership
in GEC to approximately 51.17%. However, the following information
presents a summary of the financial position of GEC as of December 31,
1996 along with the results of operations for the year ended December 31,
1996 and the three- month period ended December 31, 1995.
<TABLE>
<CAPTION>
1996 1995
--------------------------------
<S> <C> <C>
Total assets $ 121,897,000
Total liabilities 11,880,000
Minority interest 22,724,000
Shareholders' equity 87,293,000
Total revenue 22,051,000 $ 6,685,000
Income (loss) before income taxes 4,997,000 (340,000)
Net income (loss) 2,653,000 (1,204,000)
</TABLE>
6. DISCONTINUED OPERATIONS
On June 16, 1997, Physicians announced the signing of a definitive
agreement to sell its indirectly wholly-owned life and health insurance
subsidiary, American Physicians Life Insurance Company ("APL") and its
wholly-owned subsidiary, Living Benefit Administrators Agency, Inc. to IFS
Insurance Holdings Corporation. The closing is subject to certain closing
conditions, including regulatory approval which is still pending. The
expected purchase price is approximately $17 million and is expected to be
paid in cash.
65
<PAGE> 266
Because APL and its subsidiary represent a major segment of the
Company's business, in accordance with Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business," APL's operations for all of 1997
have been classified as discontinued operations. Net income for 1996 and
1995 have also been reclassified for comparative purposes to reflect the
discontinued operations. In addition, the net assets of APL have been
shown as a single line item in the accompanying 1997 balance sheet as "Net
assets of discontinued operations" at December 31, 1997.
The GAAP book value assigned to such net assets at December 31, 1997
of $15,949,989 was based upon the net book value of APL as of December 31,
1997 as determined on the basis of generally accepted accounting
principles. The primary remaining assets and liabilities of APL as of that
date were investments, cash and cash equivalents, and accident and health
insurance reserves. The Company expects to realize a small gain on the
sale.
Following is an unaudited summary of APL's stand alone financial
results for the periods included in the statements of income as
discontinued operations in the accompanying financial statements:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Total revenues $5,310,330 $9,031,846 $6,756,453
Income (loss) before taxes (112,012) 4,002,406 858,970
Net income (loss) (167,327) 3,301,229 778,075
Net income per share-Basic and Diluted $0.00 $0.11 $0.02
</TABLE>
On August 21, 1997, GEC announced the signing of a definitive
agreement to sell its Sri Lankan subsidiaries. The closings occurred on
November 19 and December 22, 1997. The purchase price was approximately
$25 million paid in cash of $17.3 million and marketable securities of
$7.7 million. A gain of approximately $3.5 million was realized on the
sale before taxes.
Because these subsidiaries represent a major segment of GEC's
business, in accordance with Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations--Reporting the Effects of Disposal of
a Segment of a Business," these companies' operations for the year ended
December 31, 1997 have been classified as discontinued operations.
Operating results for 1996 and 1995 are not shown since these periods were
prior to the effective date of consolidation of GEC and PICO.
Following is an unaudited summary of these Sri Lankan companies stand
alone financial results for the period included as discontinued operations
in the accompanying financial statements:
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Total revenues $12,449,347
Income before taxes
and minority interests 3,309,699
Minority interest in income of subsidiary 764,418
Net income 288,956
Net income per share-Basic and Diluted $0.00
</TABLE>
66
<PAGE> 267
7. PREMIUMS AND OTHER RECEIVABLES:
Premiums and other receivables consisted of the following at December
31:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Agents' balances and unbilled premiums $20,723,259 $14,993,199
Other accounts receivable 77,333
----------------- -----------------
20,800,592 14,993,199
Allowance for doubtful accounts (119,024) (116,917)
----------------- -----------------
$20,681,568 $14,876,282
================= =================
</TABLE>
8. FEDERAL INCOME TAX:
The Company and its U.S. subsidiaries file a consolidated
life/non-life federal income tax return. Non-U.S. subsidiaries file tax
returns in various foreign countries.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
Significant components of the Company's deferred tax assets and
liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 6,800,000 $ 6,719,612
Loss reserves 17,312,601 19,018,582
Future policy benefits 798,894
Unearned premium reserves 1,319,214 2,011,642
Deferred gain on retroactive reinsurance 758,938 1,140,839
Integration liability 185,690 527,341
Other, net 1,713,417 1,154,432
-------------- --------------
Total deferred tax assets 28,089,860 31,371,342
-------------- --------------
Deferred tax liabilities:
Reinsurance receivables 10,868,442 10,325,734
Deferred policy acquisition costs 1,809,043 2,563,812
Unrealized appreciation on securities 125,801 6,060,413
Revaluation of Vidler net assets purchased 1,950,000
Revaluation of NLRC net assets purchased 3,036,358
Accretion of bond discount 72,076 106,529
Depreciation 463,060 24,932
-------------- --------------
Total deferred tax liabilities 18,324,780 19,081,420
-------------- --------------
Net deferred tax assets before
valuation allowance 9,765,080 12,289,922
Less valuation allowance (6,800,000) (6,664,000)
-------------- --------------
Net deferred tax assets $ 2,965,080 $ 5,625,922
============== ==============
</TABLE>
The deferred tax asset valuation allowances as of December 31, 1997
and 1996 relate to the net operating loss carryforwards (NOL's) of CIC,
PICO and Sequoia. Such NOL's are subject to the separate return
limitation year rules and, therefore, can only be used to offset the
respective future taxable income generated by CIC, PICO and Sequoia.
Given management's uncertainty as to the ability of CIC, PICO and Sequoia
to generate sufficient future taxable income to utilize such NOL's, they
do not currently believe that it is more likely than not that the
deferred tax asset related to such NOL's will be realized. Net deferred
tax assets, the recorded valuation allowance and federal income tax
expense in future years can be significantly affected by changes in
enacted tax rates or by changes in circumstances that would influence
management's conclusions as to the ultimate realizability of deferred tax
assets.
67
<PAGE> 268
Income tax expense (benefit) from continuing operations consists of
the following for each of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- --------------
<S> <C> <C> <C>
Current $ 9,292,120 $ 11,042,744 $ 221,997
Deferred (1,621,992) 1,915,067 (7,974,046)
-------------- --------------- --------------
$ 7,670,128 $ 12,957,811 $ (7,752,049)
============== =============== ==============
</TABLE>
The difference between income taxes provided at the Company's
effective tax rate and federal statutory rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Federal income tax at statutory rate $ 8,226,052 $ 11,891,807 $ 2,416,375
Change in the valuation allowance (136,000) (53,323) (9,408,371)
Other (419,924) 1,119,327 (760,053)
--------------- --------------- --------------
Federal income tax expense (benefit) $ 7,670,128 $ 12,957,811 $ (7,752,049)
=============== =============== ==============
</TABLE>
The aggregate NOL's of approximately $25,009,452 expire between 1999
and 2012. There is an annual limitation on the NOL's of approximately
$1,400,000.
9. PROPERTY AND EQUIPMENT:
The major classifications of property and equipment are as follows at
December 31:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Land $ 1,923,015 $ 500,016
Buildings 7,012,657 4,841,059
Office furniture, fixtures and equipment 6,265,524 4,361,510
Building and leasehold improvements 12,499 678,223
--------------- ---------------
15,213,695 10,380,808
Accumulated depreciation (6,662,888) (5,663,442)
--------------- ---------------
Net book value $ 8,550,807 $ 4,717,366
=============== ===============
</TABLE>
Depreciation expense was $872,969, $751,000, and $589,000 in 1997,
1996, and 1995, respectively.
68
<PAGE> 269
10. DEFERRED POLICY ACQUISITION COSTS:
Changes in deferred policy acquisition costs are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- --------------
<S> <C> <C> <C>
Balance, January 1 $ 5,377,339 $ 2,894,644 $ 2,812,936
Additions
Commissions 7,677,146 4,158,421 3,303,513
Other 2,933,501 1,860,247 582,763
Acquired in merger 1,593,930
Ceding commissions (13,596) (397,698) (864,432)
--------------- -------------- --------------
Deferral of expense 10,597,051 7,214,900 3,021,844
--------------- -------------- --------------
Adjustment for expected gross
profits on investment and
life-type contracts resulting
from SFAS 115 market-to-market 17,556 (544,163)
Adjustment for premium
deficiency (584,366) (1,305,099)
Amortization to expense (10,069,308) (2,205,530) (1,090,874)
--------------- -------------- --------------
Balance, December 31 $ 5,320,716 $ 7,921,570 $ 2,894,644
=============== ============== ==============
</TABLE>
The difference between the December 31, 1996 ending balance of
$7,921,570 and the January 1, 1997 beginning balance of $5,377,339 is
equal to the amount of deferred policy acquisition costs attributable to
1997 discontinued operations of APL.
11. SHAREHOLDERS' EQUITY (ALL SHARE AMOUNTS HAVE BEEN RESTATED TO GIVE EFFECT
TO THE STOCK EXCHANGE RATIO UTILIZED IN CONNECTION WITH THE REVERSE
ACQUISITION OF CIG (NOTE 3):
In December 1993, the Company issued 7,156,997 common shares (adjusted
for the merger exchange rate) to Guinness Peat Group plc for $5,000,000.
In accordance with their original stock purchase agreement, Guinness Peat
Group plc was entitled to purchase additional common shares at a price
based upon the average closing bid price of the stock for a period prior
to the date of notice of intent to buy up to an aggregate purchase price
of $5,000,000. In June 1994, the Company issued 3,164,147 common shares
(adjusted for the merger exchange rate) to Guinness Peat Group plc for
$3,000,000, increasing their ownership to approximately 40%.
On May 9, 1996, the Company, Guinness Peat Group plc ("GPG"), and GEC
entered into an agreement whereby GPG agreed to sell 4,258,415 common
shares (adjusted for the merger exchange rate) of the Company's common
stock to GEC in two blocks, subject to regulatory approval, at an average
price of approximately $3.60 per share. GPG agreed to sell the shares to
GEC at a discount to market due to their status as restricted stock and
in consideration of the quantity of shares to be purchased. On May 13,
and June 4, 1996 GEC purchased the shares. Prior to these transactions,
GPG owned approximately 40% of the Company's common stock. Following
these transactions, GPG and GEC owned approximately 23% and 16% of the
Company's common stock, respectively. GPG and GEC owned approximately 19%
and 13.1%, respectively, of the Company's common stock subsequent to the
merger with CIG in November 1996. The shares of the Company owned by GEC
have been accounted for as treasury shares in the Company's consolidated
financial statements. GPG sold 324,000 shares of PICO in May 1997
pursuant to Securities Exchange Commission Rule 144 on the open market to
an unrelated party or parties, decreasing its ownership of the Company as
of December 31, 1997 to approximately 17.6%.
In connection with the merger, the PICO Board of Directors adopted a
Stockholders' Rights Plan and, pursuant to such Plan, declared a dividend
on its common stock of one right (a "Right") for each share of common
stock outstanding. Upon the occurrence of certain events, each Right
becomes exercisable to purchase 1/100 of a share of Series A Junior
Participating Cumulative Preferred Stock at an initial price of $35.00.
The Rights expire on July 22, 2001 and prior to the occurrence of certain
events, may be redeemed at a price of $.01 per Right. Of the Company's
2,000,000 authorized shares of preferred stock, 1,000,000 shares have
been designated as Series A Junior Participating Cumulative Preferred
Stock. Each share of Series A Junior Participating Cumulative Preferred
Stock shall entitle the holder thereof to 100 votes on all matters
submitted to a vote of the stockholders of the Company.
69
<PAGE> 270
In connection with the merger, CIG's existing Employee Stock Ownership
Plan ("ESOP") continued in effect. Pursuant to direction by the Board of
Directors in the last quarter of 1997, management is in the process of
terminating the CIG ESOP. Such plan covers substantially all of the
employees of the Company and its subsidiaries. Contributions are made to
the plan at the discretion of the Board of Directors. No contributions
were made to the plan in 1996 or 1997.
The Company sponsors various stock-based incentive compensation plans
(the "Plans"). The Company applies APB Opinion No. 25 and related
interpretations in accounting for the Plans and, therefore, does not
recognize any compensation cost related to such plans. In 1995, the FASB
issued SFAS No. 123, "Accounting for Stock-Based Compensation . Adoption
of the cost recognition provisions of SFAS No. 123 is optional and the
Company has decided not to elect these provisions of SFAS No. 123.
However, pro forma disclosures of the impact on the Company's net income
and earnings per share for the years ended December 31, 1997, 1996 and
1995 as if the Company adopted the cost recognition provisions of SFAS
123 are presented below.
Under the Plans, Physicians is authorized to issue 2,572,029 shares of
Common Stock pursuant to awards granted in various forms, including
incentive stock options (intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended), non-qualified stock options,
and other similar stock-based awards to full-time employees (including
officers) and directors. The total options available for future grants as
of December 31, 1997 were 25,050. The Company granted stock options in
1996 and 1995 under the Plans in the form of incentive stock options and
non-qualified stock options. In conjunction with the Merger, the Company
assumed all of Physicians' options outstanding. The exercise price of all
options granted was equal to the fair market value of the Company's
common stock at the date of grant.
No options were granted in 1997. The Company granted stock options in
1996 and 1995 to employees and directors. The stock options granted in
1996 and 1995 have terms of 10 years. The options granted to directors
were vested immediately on the grant date. The options granted to
employees vest either (i) at the rate of 25%, 33% or 50% per year on each
of the first four, three or two year anniversaries of the date of grant,
as applicable, or (ii) at a rate of 33% upon grant and 33% per year on
each of the first two anniversaries of the date of grant. All options
granted under the CIG plan became fully vested upon consummation of the
merger.
A summary of the status of the Company's stock options is presented
below for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
# Shares of Average # Shares of Average # Shares of Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
------------ ------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,759,506 $2.83 2,580,095 $2.69 500,990 $0.70
Granted 70,138 2.69 2,580,095 2.69
Exercised (105,000) 3.29 (35,069) 2.69 (500,990) 0.70
Canceled (82,480) 6.64 (70,138) 2.69
Options assumed in merger 214,480 4.49
Outstanding at end of year 2,572,026 2.71 2,759,506 2.83 2,580,095 2.69
Exercisable at end of year 2,572,026 2.71 2,495,651 2,029,009
Weighted-average fair value
of options granted during
the year $3.62 $1.62
</TABLE>
The fair value of each stock option granted is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1995, respectively:
no dividend yield for all years; risk-free interest rates are different
for each grant and range from 5.94% to 6.97%; the expected lives of
options are estimated at 7 years; and a volatility of 50% for all grants.
70
<PAGE> 271
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- - - ---------------------------------------------------------- --------------------------
Weighted
Average Weighted
Number Remaining Average Number Weighted
Range of Outstanding Contractual Exercise Exercisable Average
Exercise Prices at 12/13/97 Life Price at 12/31/97 Exercise Price
- - - ----------------------------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
$2.69 to $2.88 2,560,026 7.64 $2.69 2,560,026 $2.69
$6.00 12,000 5.48 $6.00 12,000 $6.00
----------- ----------
$2.69 to $6.00 2,572,026 7.63 $2.71 2,572,026 $2.71
=========== ==========
</TABLE>
Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net income
and net income per common share would approximate the pro forma amounts
below for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Net income, as reported $ 19,491,621 $ 24,320,011 $ 15,672,976
SFAS No. 123 charge (1,462,477) (1,954,185) (1,005,921)
------------ ------------ ------------
Pro forma net income $ 18,029,144 $ 22,365,826 $ 14,667,055
============ ============ ============
Pro forma net income per common share: Basic $ 0.55 $ 0.80 $ 0.53
============ ============ ============
Pro forma net income per common share: Diluted $ 0.53 $ 0.77 $ 0.53
============ ============ ============
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts.
12. REINSURANCE:
In the normal course of business, the Company's insurance subsidiaries
have entered into various reinsurance contracts with unrelated
reinsurers. The Company's insurance subsidiaries participate in such
agreements for the purpose of limiting their loss exposure and
diversifying their business. Reinsurance contracts do not relieve the
Company's insurance subsidiaries from their obligations to policyholders.
All reinsurance assets and liabilities are shown on a gross basis in
the accompanying consolidated financial statements. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policy. Such amounts are included
in "reinsurance receivables" in the consolidated balance sheets as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------- -----------------
<S> <C> <C>
Estimated reinsurance recoverable on:
Unpaid losses and loss adjustment expense (net of
discount of $3,332,309 and $3,259,190, respectively) $ 67,654,430 $ 85,213,815
Reinsurance recoverable on paid losses and loss expenses 4,671,146 4,279,324
Future policy benefits 2,537,789
--------------- -----------------
72,325,576 92,030,928
Other balances receivable from reinsurers 2,700,000 4,953,333
--------------- -----------------
Reinsurance receivables $ 75,025,576 $ 96,984,261
=============== =================
</TABLE>
Unsecured reinsurance risk is concentrated in the companies shown in
the table below. The Company remains contingently liable with respect to
reinsurance contracts in the event that reinsurers are unable to meet
their obligations under the reinsurance agreements in force.
71
<PAGE> 272
CONCENTRATION OF REINSURANCE
(in millions)
<TABLE>
<CAPTION>
Unearned Reported Unreported Reinsurer
Premiums Claims Claims Balances
----------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Sydney Reinsurance Corporation $ 0.1 $ 10.0 $ 14.1 $ 24.2
Kemper Reinsurance Company $ 1.5 $ 1.5
Continental Casualty Company $ 1.1 $ 0.6 $ 1.0 $ 2.7
San Francisco Reinsurance Company $ 0.1 $ 0.2 $ 0.3
TIG Reinsurance Group $ 1.2 $ 11.1 $ 12.3
Transatlantic Reinsurance Company $ 9.1 $ 9.1
Cologne Reinsurance Company of America $ 0.9 $ 0.9
Mutual Assurance, Inc. $ 4.1 $ 3.9 $ 8.0
General Reinsurance $ 2.9 $ 2.9
National Reinsurance Corporation $ 3.8 $ 0.5 $ 4.3
</TABLE>
As more fully described in Note 3, immediately prior to the sale of
Sequoia to Physicians by SRC, Sequoia and SRC entered into a reinsurance
treaty whereby all policy and claims liabilities of Sequoia prior to the
date of purchase by the Company are the responsibility of SRC. Payment of
these reinsurance liabilities has been unconditionally and irrevocably
guaranteed by QBE Insurance Group Limited.
The Company entered into a reinsurance treaty in 1995 with Mutual in
connection with the sale of Physicians' MPL business to Mutual. This
treaty is a 100% quota share treaty covering all claims arising from
policies issued or renewed with an effective date after July 15, 1995. At
the same time, Physicians terminated two treaties entered into in 1994
and renewed in 1995. The first of these was a claims-made agreement under
which Physicians' retention was $200,000, for both occurrence and
claims-made insurance policies. Claims are covered up to $1 million. The
second treaty reinsured claims above $1 million up to policy limits of $5
million on a true occurrence and claims-made basis, depending on the
underlying insurance policy.
In 1994, the Company entered into a retrospective reinsurance
arrangement with respect to its MPL business. As a result, Physicians
initially recorded a deferred gain on retroactive reinsurance of
$3,445,123 in 1994. Deferred gains are being amortized into income over
the expected payout of the underlying claims using the interest method.
The unamortized gain as of December 31, 1997 and 1996 was $2,168,393 and
$2,874,128, respectively.
Effective October 1, 1997, PRO and Physicians entered into a 100%
quota share reinsurance treaty wherein PRO agreed to cede and Physicians
agreed to assume all of PRO's existing claims liabilities including
allocated loss adjustment expenses, but excluding unallocated loss
adjustment expenses. Physicians is to administer the settlement of all
claims under PRO's policies issued prior to the effective date of the
100% quota share treaty for which Physicians will be reimbursed for
direct expenses incurred in adjusting PRO's claims. This 100% quota share
reinsurance treaty is secondary to all of PRO's reinsurance treaties in
effect prior to its effective date.
72
<PAGE> 273
The following is a summary of the net effect of reinsurance activity
on the consolidated financial statements for 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ---------------- ----------------
<S> <C> <C> <C>
Direct premiums written $ 46,634,157 $ 44,423,399 $ 35,788,854
Reinsurance premiums assumed 183,945 274,296 140,303
Reinsurance premiums ceded (7,125,152) (7,140,634) (12,094,692)
------------------ ---------------- ----------------
Net premiums written $ 39,692,950 $ 37,557,061 $ 23,834,465
================== ================ ================
Direct premiums earned 60,474,680 58,059,587 28,823,985
Reinsurance premiums assumed 220,564 281,019 141,496
Reinsurance premiums ceded (10,818,840) (19,579,901) (9,423,750)
------------------ ---------------- ----------------
Net premiums earned $ 49,876,404 $ 38,760,705 $ 19,541,731
================== ================ ================
Losses and loss adjustment expenses incurred:
Direct 47,890,333 35,969,535 47,057,111
Assumed 427,371 69,541 33,285
Ceded (17,045,189) (17,458,446) (27,305,248)
------------------ ---------------- ----------------
31,272,515 18,580,630 19,785,148
Effect of discounting on losses and
loss adjustment expenses (Note 13) 3,057,812 4,351,860 3,386,440
------------------ ---------------- ----------------
Net losses and loss adjustment expenses $ 34,330,327 $ 22,932,490 $ 23,171,588
================== ================ ================
</TABLE>
13. RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES:
Reserves for unpaid losses and loss adjustment expenses on MPL and
property and casualty business represent management's estimate of
ultimate losses and loss adjustment expenses and fall within an
actuarially determined range of reasonably expected ultimate unpaid
losses and loss adjustment expenses.
Reserves for unpaid losses and loss adjustment expenses are estimated
based on both company-specific and industry experience, and assumptions
and projections as to claims frequency, severity, and inflationary trends
and settlement payments. Such estimates may vary significantly from the
eventual outcome. In management's judgment, information currently
available has been appropriately considered in estimating the loss
reserves and reinsurance recoverable of the insurance subsidiaries.
Physicians and PRO prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the Ohio
Department of Insurance ("Ohio Department"). CIC, CNIC and Sequoia
prepare their statutory financial statements in accordance with
accounting practices prescribed or permitted by the California Department
of Insurance. Prescribed statutory accounting practices include
guidelines contained in various publications of the National Association
of Insurance Commissioners, as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The Ohio
Department's prescribed accounting practices do not allow for discounting
of claim liabilities. However, for the years ended December 31, 1997,
1996, and 1995, the Ohio Department permitted Physicians to discount its
losses and loss adjustment expenses related to its MPL claims to reflect
investment income. Such permission was granted due primarily to the
longer claims settlement period related to MPL business as compared to
most other types of property and casualty insurance lines of business.
Property and casualty insurance companies are permitted to discount
claims liabilities under generally accepted accounting principles to the
extent that the discounting of claims liabilities by such entities is
prescribed or permitted by statutory accounting principles.
The method of discounting utilized by Physicians is based on
historical payment patterns and assumes an interest rate at or below
Physicians' investment yield, and is the same rate used for statutory
reporting purposes. Physicians uses a discount rate of 4%. The carrying
value of MPL reserves gross as to reinsurance was approximately $108.7
million, net of discounting of $12.5 million at December 31, 1997 and
$141.8 million, net of discounting of $15.5 million at December 31, 1996.
73
<PAGE> 274
Activity in the reserve for unpaid claims and claim adjustment
expenses was as follows for each of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -------------------
<S> <C> <C> <C>
Balance at January 1 $ 252,023,546 $ 229,796,606 $ 180,691,044
Less reinsurance recoverables (89,493,139) (92,474,112) (26,335,327)
----------------- ----------------- -------------------
Net balance at January 1 162,530,407 137,322,494 154,355,717
----------------- ----------------- -------------------
Incurred loss and loss adjustment expenses
for current accident year claims 33,440,000 20,806,194 17,886,560
Incurred loss and loss adjustment expenses
for prior accident year claims (980,469) (2,609,907) (335,958)
Retroactive reinsurance (1,187,016) (2,422,308)
Provision for deferral of gain on retroactive
reinsurance (145,135) 2,115,011
Accretion of discount 3,057,812 4,881,338 5,928,283
----------------- ----------------- -------------------
Total incurred 34,330,327 22,932,490 23,171,588
----------------- ----------------- -------------------
Net balances acquired in merger 41,293,239
----------------- ----------------- -------------------
Effect of retroactive reinsurance 1,187,018 145,135 (2,115,011)
----------------- ----------------- -------------------
Payments for claims occurring during:
Current accident year (13,886,002) (6,964,436) (1,357,986)
Prior accident years (55,720,662) (32,198,515) (36,731,814)
----------------- ----------------- -------------------
Total paid (69,606,664) (39,162,951) (38,089,800)
----------------- ----------------- -------------------
Net balance at December 31 128,441,088 162,530,407 137,322,494
Plus reinsurance recoverables 67,654,430 89,493,139 92,474,112
----------------- ----------------- -------------------
Balance at December 31 $ 196,095,518 $ 252,023,546 $ 229,796,606
================= ================= ===================
</TABLE>
14. EMPLOYEE BENEFITS PLANS:
PICO maintains a 401(k) Defined Contribution Plan (the "Plan")
covering substantially all employees of PICO, Physicians, Sequoia, APL,
Summit, Vidler, NLRC, and Forbes & Walker. Matching contributions to the
Plan are based on a percentage of employee compensation, as well as
amounts contributed by employees. In addition, the Company may make a
discretionary contribution at the end of the Plan's fiscal year within
limits established by ERISA. During 1997, 1996, and 1995, expenses for
contributions made to the Plan were $365,000, $334,000, and $133,000,
respectively.
Plan assets for the defined contribution plan are held by one of the
Company's subsidiaries. Another subsidiary is responsible for management
of the Plan's assets.
15. REGULATORY MATTERS:
The regulations of the Departments of Insurance in the states where
the Company's insurance subsidiaries are domiciled generally restrict the
ability of insurance companies to pay dividends or make other
distributions. Based upon statutory financial statements filed with the
insurance departments as of December 31, 1997, $16.0 million was
available for distribution by the Company's wholly-owned insurance
subsidiaries to the parent company without the prior approval of the
Department of Insurance in the states in which the Company's insurance
subsidiaries are domiciled, through December 29, 1998. The total eligible
distributions in 1998 are approximately $29.2 million. On December 17,
1997, PRO paid a dividend of approximately $5.5 million to Physicians in
cash. A dividend payment of $13,212,593 was made on December 30, 1997
from Physicians to PICO Holdings, Inc. in the form of GEC common stock.
74
<PAGE> 275
16. COMMITMENTS AND CONTINGENCIES:
The Company leases some of its offices under noncancellable operating
leases which expire through February 2001. Total rental expense for the
years ended December 31, 1997, 1996 and 1995 was $1,470,301, $1,714,265
and $395,239, respectively. Future minimum rental payments required under
the leases are as follows:
Years Ending December 31, (in thousands)
<TABLE>
<S> <C>
1998 $1,040
1999 934
2000 816
2001 452
2002 439
-----------
$3,681
===========
</TABLE>
The Company is subject to various litigation which 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.
17. OTHER RELATED-PARTY TRANSACTIONS:
In 1994, the Company entered into a consulting agreement for a
combined annual fee of $200,000 with two of its directors for consulting
services related to the Company's investment activities, investment
banking services and analysis of operations. Effective January 1, 1995,
the Company revised the agreement with these directors to a combined
annual fee of $300,000. Effective September 11, 1995, the previous
agreements were terminated and the Company entered into consulting
arrangements with the same two Directors for a three-year period at a
combined fee of $300,000 annually for their services as officers of the
Company related to analysis of the Company's operations, investment
banking activities, and analysis and recommendation on the Company's
investment portfolio. The Company paid a combined fee of $300,000 and
$305,000 to each of these two Directors for 1996 and 1995, respectively.
In addition, the aforementioned directors were awarded a bonus of
$450,000 each in 1996. These contracts were superceded by the January
1997 contracts described below.
Summit is a Registered Investment Advisor providing investment
advisory services to managed accounts including the Company's
subsidiaries. Although dormant for several years, Summit commenced active
operations on January 1, 1995. On January 1, 1995, Summit's President and
CEO was granted an option expiring December 31, 2004 to purchase 49% of
Summit's common shares for a nominal amount, which represented the fair
value of such options on the grant date. No options have been exercised
under this agreement. Two of the Company's directors were instrumental in
establishing the operations of Summit and are entitled to receive 50% of
the first $1,000,000 of profits attributed to Physicians' ownership of
common stock. No compensation was paid to each of those directors under
this arrangement in 1997, 1996, or 1995. Effective January 1, 1996,
Summit entered into a contract to provide investment management services
to Physicians, PRO, Sequoia, APL, and Separate Accounts A and B of APL.
Summit also entered into a contract to provide investment management
services to CIC on December 1, 1996.
Effective September 11, 1995, the same two directors also entered into
consulting contracts with a subsidiary of GEC. They are to render
services in the areas of investment banking, investment portfolio
analysis, and management and operational analysis. The compensation paid
to each of those Directors under this arrangement was $150,000 and
$45,445 in 1996 and 1995, respectively. Each was to receive $150,000
annually for rendering such services through September 11, 1998. These
contracts were superseded by the January 1997 contracts described below.
On September 26, 1995, the same two directors of the Company, who are
also officers and directors of GEC, were granted options by GEC to
purchase up to 1,549,833 shares of common stock of GEC at an exercise
price of $2.50 (Cdn.) per share, which was the closing market price of
GEC shares on the Toronto Stock Exchange on the date of grant. Such
options are immediately exercisable. In addition, on October 24, 1995,
each was granted options by GEC to purchase 950,167 additional shares of
common stock of GEC at an exercise price of $2.45 (Cdn.) per share. All
of these options are exercisable.
75
<PAGE> 276
In January 1997, the consulting arrangements described above between
two of the Company's directors and the Company, SGM, and GEC were
terminated and were replaced with a single consulting arrangement between
each of the directors, a wholly-owned subsidiary of GEC and PICO. Under
the new consulting arrangement, the Company's Board of Directors
increased the annual base consulting fees for the two directors who
perform consulting services related to investment activities, investment
banking services and analysis of operations to $800,000 each beginning
January 1, 1997. In addition, each is entitled to an incentive award
based on the growth of the Company's book value during 1997, above a
threshold rate of return. PICO will be responsible for two-thirds of the
consulting fee and a wholly-owned subsidiary of GEC will be responsible
for one-third. Effective December 31, 1997, these two directors became
employees of the Company and a subsidiary of GEC; the terms of employment
were similar to the consultant arrangements described above. The
employment agreements entered into by the two directors, effective
December 31, 1997, superceded and replaced the prior consulting
agreements.
On March 6, 1996, Charles E. Bancroft, the President and Chief
Executive Officer of Sequoia, entered into an incentive agreement with
Sequoia after its acquisition by Physicians. Under the terms of this
incentive agreement, Mr. Bancroft is to receive a payment equal to ten
percent of the increase in Sequoia's value upon his retirement, removal
from office for reasons other than cause, or the sale of Sequoia to a
third party. For purposes of the incentive agreement, the increase in
Sequoia's value is to be measured from August 1, 1995, the date
Physicians acquired Sequoia. Mr. Bancroft will not be eligible to receive
any incentive payment, and no such incentive payment will be considered
to be earned, until Mr. Bancroft had been an employee of Sequoia
continuously from August 1, 1995 through August 1, 1998. On March 20,
1998 this incentive agreement was clarified to include the combined
increase in value of Sequoia and CIC. The increase in value of CIC will
be measured from January 1, 1998. The Company recorded compensation
expense of $250,000 during the year ended December 31, 1997 related to
this arrangement.
Certain of the Company's subsidiaries have stock option arrangements
with officers and other employees for stock of the respective subsidiary.
Options are granted under these arrangements at the fair value of the
subsidiary's stock. Therefore, no compensation has been recorded by the
Company related to these arrangements.
On December 30, 1996, Physicians paid a dividend of approximately
$13.2 million to its sole shareholder, PICO. On April 14, 1997,
Physicians paid a dividend of approximately $8.6 million to PICO. With
the approval of the Ohio Department, on November 19, 1997, PRO amended
its license to delete the authority to write MPL insurance and on
December 17, 1997 paid a dividend of approximately $5.5 million to its
sole shareholder, Physicians. On December 17, 1997, Physicians
contributed an additional 5.5 million to Sequoia. On December 30, 1997,
Physicians paid a dividend of approximately $13.2 million to PICO in the
form of 5,557,347 shares of GEC common stock.
In November 1996, Physicians purchased a $2.5 million convertible
debenture from PC Quote, Inc. Physicians currently owns approximately
16.8% of PC Quote, Inc. On May 5, 1997, PICO agreed to provide a line of
credit to PC Quote, Inc. The initial credit was for $1 million with
repayment due September 30, 1997. The credit has since been increased to
$2,250,000 with repayment due April 30, 1998. The Company received
warrants to purchase common shares of PC Quote, Inc. in connection with
these transactions. The value of such warrants is not material to the
Company's financial position or results of operations.
76
<PAGE> 277
18. STATUTORY INFORMATION:
The Company and its insurance subsidiaries are subject to regulation
by the insurance departments of the states of domicile and other states
in which the companies are licensed to operate and file financial
statements using statutory accounting practices prescribed or permitted
by the respective Departments of Insurance. Prescribed statutory
accounting practices include a variety of publications of the NAIC, as
well as state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting
practices not so prescribed. Physicians has received written approval
from the Ohio Department of Insurance to discount its MPL unpaid loss and
loss adjustment expense reserves, including related reinsurance
recoverables using a 4% discount rate. Statutory practices vary in
certain respects from generally accepted accounting principles. The
principal variances are as follows:
1) Certain assets are designated as "non-admitted assets" and charged
to shareholders' equity for statutory accounting purposes
(principally certain agents' balances and office furniture and
equipment).
2) Deferred policy acquisition costs are expensed for statutory
accounting purposes.
3) Deferred federal income taxes are not recognized for statutory
accounting purposes.
4) Equity in net income of subsidiaries and affiliates is credited
directly to shareholders' equity for statutory accounting
purposes.
5) Fixed maturity securities classified as available for sale are
carried at amortized cost.
6) Loss and loss adjustment expense reserves and unearned premiums
are reported net of the impact of reinsurance for statutory
accounting purposes.
The Company and its wholly owned insurance subsidiaries' net income
(loss) for the years ended December 31, 1997, 1996 and 1995 and
policyholders' surplus as of December 31, 1997, 1996, and 1995 on the
statutory accounting basis are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Physicians Insurance Company of Ohio
Statutory net income $ 28,967,115 $ 21,807,610 $ 13,212,594
Policyholders' surplus 54,790,265 69,464,034 83,380,498
The Professionals Insurance Company:
Statutory net income $ 1,167,208 $ 1,330,733 $ 403,378
Policyholders' surplus 3,922,382 7,684,701 6,024,645
American Physicians Life Insurance:
Statutory net income $ 220,968 $ 2,709,570 $ 731,813
Policyholders' surplus 12,776,934 11,809,784 9,658,540
Sequoia Insurance Company*
Statutory net income $ 1,161,670 $ (982,953) $ (3,319,089)
Policyholders' surplus 21,069,190 14,445,550 10,254,113
Citation Insurance Company**
Statutory net income $ (1,380,920) $ (3,069,661) -
Policyholders' surplus 29,112,651 25,596,903 -
</TABLE>
- - - -------------------
* Purchased August 1, 1995
** Purchased November 20, 1996
Certain insurance subsidiaries are owned by other insurance
subsidiaries. In the table above, investments in such subsidiary-owned
insurance companies are reflected in statutory surplus of both the parent
and subsidiary-owned insurance company. As a result, at December 31,
1997, 1996, and 1995, statutory surplus of approximately $37,768,506,
$38,423,146 and $25,937,298, respectively, is reflected in both the
parent and subsidiary-owned insurance companies.
77
<PAGE> 278
19. SEGMENT REPORTING:
The Company's operations are organized into five principal segments:
portfolio investing; surface, water, geothermal and mineral rights;
property & casualty insurance; MPL (Note 1) and other. As a result of the
acquisition in August 1997 of the majority ownership in GEC and
management's strategic initiatives, the surface, water, geothermal and
mineral rights activities of the Company and GEC have been disclosed as a
reportable segment in this annual report. Other operations include
Summit's investment management services and the Company's real estate
development and other activities. Portfolio investing for 1997 includes
the portfolio investing activities of GEC.
At December 31, the principal industry segments are as follows (in
thousands):
<TABLE>
<CAPTION>
Surface, Water,
Geothermal Property
Portfolio and Mineral and
Investing (A) Rights Casualty MPL Other (B) Consolidated
--------------------------------------------------------------- ------------
1997:
- - - -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 24,069 $ 2,500 $ 56,433 $ 3,896 $ 682 $87,580
Income before income taxes 17,748 12 5,556 765 (578) 23,503
Identifiable assets 116,477 74,737 158,760 78,756 1,563 430,293
Depreciation and amortization 325 34 761 53 8 1,181
Capital expenditures 271 28 634 44 8 985
1996:
- - - -----
Revenues $ 26,994 $ 35,280 $ 12,244 $ 2,218 $76,736
Income before income taxes 23,310 3,307 8,469 (1,109) 33,977
Identifiable assets 56,264 204,124 151,341 78,696 490,425
Depreciation and amortization 746 959 427 2,132
Capital expenditures 55 51 106
1995:
- - - -----
Revenues $ 8,021 $ 2,485 $ 29,049 $ 1,634 $41,189
Income before income taxes 5,313 (3,722) 6,026 (510) 7,107
Identifiable assets 57,800 100,978 193,133 69,905 421,816
Depreciation and amortization 1,972 139 4 2,115
Capital expenditures 267 720 36 1,023
</TABLE>
(A) Portfolio investing identifiable assets include certain
investments held by one of the Company's regulated insurance
subsidiaries which is no longer writing new business. Management
believes that this component of the insurance subsidiary's assets
is in excess of the amount of the subsidiary's assets that will
be required to settle its claims liabilities. The amount of the
insurance subsidiary's assets included in the portfolio investing
segment were approximately $6 million, $56 million and $58
million as of December 31, 1997, 1996, and 1995, respectively.
Investment income revenue thereon was approximately $2 million,
$27 million and $8 million, for the years ended December 31,
1997, 1996, and 1995, respectively.
(B) The life and health insurance segment was discontinued in 1997.
Included in "Other" are amounts of identifiable assets of
approximately $68,000 for both 1996 and 1995. Income statement
amounts for 1997, 1996 and 1995 are classified as discontinued
operations.
20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that fair value:
- CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: The carrying
amounts of cash and cash equivalents and short-term investments
approximate their estimated fair values.
78
<PAGE> 279
- FIXED MATURITIES AND EQUITY INVESTMENT SECURITIES: Fair values are
based upon quoted market prices, or dealer quotes for comparable
securities. In addition, the Company owns certain warrants to purchase
the common stock of a publicly traded company. The estimated fair
value of such warrants is their intrinsic value based on the quoted
market price of the underlying common stock of the investee company.
- DEPOSITS WITH REINSURERS AND REINSURANCE RECOVERABLES: The carrying
amounts of deposits with reinsurers and reinsurance recoverables with
fixed amounts due are reasonable estimates of fair value.
- INVESTMENT IN AFFILIATE: Estimated fair value of GEC for 1996 is based
upon its quoted market price on the Toronto Stock Exchange translated
at the exchange rates in effect at the balance sheet date.
- SEPARATE ACCOUNTING: Separate account assets and liabilities are
carried at market value, which is based upon quoted market prices.
- POLICYHOLDER LIABILITIES FOR ANNUITY AND OTHER POLICYHOLDER FUNDS:
Policyholder liabilities for annuity and other policyholder funds
include reserves without mortality or morbidity risks. The fair value
is estimated by discounting future payments at rates currently offered
for similar financial instruments.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents and
short-term investments $ 85,193,009 $ 85,193,009 $ 65,429,714 $ 65,429,714
Investment securities 213,255,572 213,255,572 290,413,673 290,413,673
Deposits with reinsurers and
reinsurance recoverables 7,371,146 7,371,146 5,878,483 5,878,483
Investment in affiliate 28,047,764 52,143,007
Assets held in separate accounts 5,601,828 5,601,828
Financial liabilities:
Policyholder liabilities for
investment-type insurance
contracts 44,116,065 42,362,323
Liabilities related to separate
accounts 5,601,828 5,601,828
</TABLE>
79
<PAGE> 280
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited financial data for 1997 and 1996 are shown below.
In management's opinion, the interim financial data contains all
adjustments, consisting of only normal recurring accruals, necessary for
a fair presentation of results for such interim periods. Prior period
amounts have been adjusted to conform to the current period presentation,
including reclassification for discontinued operations, and adjustment to
shares and net income (loss) per share values due to the Merger.
The Company computes earnings per common share for each quarter
independently of earnings per share for the year. The sum of the
quarterly earnings per share may not equal the earnings per share for the
year because of: (i) transactions affecting the weighted average number
of shares outstanding in each quarter; and (ii) the uneven distribution
of earnings during the year.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
1997:
- - - -----
<S> <C> <C> <C> <C>
Revenues $ 21,050,205 $ 17,180,640 $ 43,808,203 $ 5,540,716
Net Income (loss) $ 1,991,660 $ 1,823,916 $ 17,860,455 $ (2,184,410)
Basic:
Earnings (loss) per common share $ 0.06 $ 0.06 $ 0.55 $ (0.07)
Number of shares used in calculation 33,423,501 33,508,820 33,869,718 32,591,650
Diluted:
Earnings (loss) per common share $ 0.06 $ 0.05 $ 0.53 $ (0.06)
Number of shares used in calculation 33,362,680 33,512,735 33,882,821 34,053,596
1996:
- - - -----
Revenues $ 10,563,318 $ 9,426,646 $ 12,183,066 $ 44,563,250
Net Income (loss) $ 1,971,720 $ (771,762) $ 1,354,993 $ 21,765,060
Basic:
Earnings (loss) per common share $ 0.07 $ (0.03) $ 0.05 $ 0.73
Number of shares used in calculation 27,436,191 27,436,191 27,436,191 29,716,050
Diluted:
Earnings (loss) per common share $ 0.07 $ (0.03) $ 0.05 $ 0.71
Number of shares used in calculation 28,606,993 28,536,676 28,366,972 30,583,339
</TABLE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
During 1997, PICO changed its accountants as described in the
following documents: 8-K, filed June 12, 1997; 8-K/A, filed June
26, 1997; 8-K, filed July 16, 1997; 8-K/A, filed September 24,
1997; and 8-K/A2, filed September 26, 1997. All these reports were
filed with the SEC concerning the Company's change in accountants.
PART III
Certain information required by Part III is omitted from this
Report, in that PICO will file its Proxy Statement pursuant to
Regulation 14A not later than 120 days after the end of the fiscal
year covered by this Report, and certain information included
therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information relating to the directors and executive
officers of PICO will be set forth in PICO's Proxy Statement to be
used in connection with its 1998 annual meeting of shareholders,
and such information is hereby incorporated by reference.
Information with respect to delinquent filings pursuant to
Item 405 of Regulation S-K is incorporated by reference to the
Proxy Statement as set forth under the caption "Executive
Compensation and Other Matters -- Section 16(a) Beneficial
Ownership Reporting Compliance."
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<PAGE> 281
ITEM 11. EXECUTIVE COMPENSATION
The information relating to executive compensation is
incorporated by reference to the Proxy Statement under the caption
"Executive Compensation and Other Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to ownership of equity securities of
PICO by certain beneficial owners and management is incorporated
by reference to the Proxy Statement as set forth under the caption
"General Information --- Stock Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related
transactions is incorporated by reference to the Proxy Statement
under the captions "Executive Compensation and Other Matters --
Certain Transactions" and "Executive Compensation and Other
Matters -- Compensation Committee Interlocks and Insider
Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 10-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.
1. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports.................................. 46-46.2
Consolidated Balance Sheets as of December 31, 1997 and 1996... 47-48
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995................... 49
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1997, 1996, and 1995.... 50-51
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995................... 52
Notes to Consolidated Financial Statements..................... 53-80
2. FINANCIAL STATEMENT SCHEDULES.
To be filed by amendment.
Independent Auditors' Reports..........................................
Schedule II - Condensed Financial Information of Registrant............
Schedule III - Supplementary Insurance Information.....................
Schedule V - Valuation and Qualifying Accounts.........................
</TABLE>
81
<PAGE> 282
3. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
+ 2.2 Agreement and Plan of Reorganization, dated as of May 1, 1996, among PICO,
Citation Holdings, Inc. and Physicians and amendment thereto dated August 14, 1996 and
related Merger Agreement.
+++++ 2.3 Second Amendment to Agreement and Plan of Reorganization dated November 12, 1996.
# 2.4 Agreement and Debenture, dated November 14, 1996 and November 27, 1996,
respectively, by and between Physicians and PC Quote, Inc.
# 2.5 Purchase and Sale Agreement by, between and among Nevada Land and Resource Company,
LLC, GEC, Western Water Company and Western Land Joint Venture dated April 9, 1997.
+++++3.1 Amended and Restated Articles of Incorporation of PICO.
+ 3.2.2 Amended and Restated By-laws of PICO.
+++++ 4.2 First Amendment to Rights Agreement dated April 30, 1996.
+++++ 4.3 Second Amendment to Rights Agreement dated November 20, 1996.
-* 10.7 Key Officer Performance Recognition Plan.
* 10.8 Flexible Benefit Plan
-* 10.9 Amended and Restated 1983 Employee Stock Option Plan.
-**** 10.10 Salary Reduction Profit Sharing Plan as amended and restated effective January 1, 1994
and Amendments Nos. 1 and 2 thereto dated March 13, 1995 and March 15, 1995,
respectively.
-* 10.11 Employee Stock Ownership Plan and Trust Agreement.
-*** 10.11.1 Amended Employee Stock Ownership Plan and Trust Agreement.
-***** 10.11.2 Amendment to Employee Stock Ownership Plan dated October 1, 1992.
-**** 10.11.3 Amendment to Employee Stock Ownership Plan dated March 15, 1995.
* 10.16 Office Lease between CIC and North Block Partnership dated July, 1990.
*** 10.16.1 Amendments Nos. 1 and 2 to Office Lease between CIC and North Block Partnership
dated January 6, 1992 and February 5, 1992, respectively.
**** 10.16.2 Amendments Nos. 3 and 4 to Office Lease between CIC and North Block Partnership
dated December 6, 1993 and October 4, 1994, respectively.
-* 10.22 1991 Employee Stock Option Plan
-***** 10.23 PICO Severance Plan for Certain Executive Officers, Senior Management and Key
Employees of the Company and its Subsidiaries, including form of agreement.
-10.55 Consulting Agreements, effective January 1, 1997, regarding retention of Ronald
Langley and John R. Hart as consultants by Physicians and GEC.
++ 10.57 PICO 1995 Stock Option Plan
-+++ 10.58 Key Employee Severance Agreement and Amendment No. 1 thereto, each made as of
November 1, 1992, between PICO and Richard H. Sharpe and Schedule A identifying
other substantially identical Key Employee Severance Agreements between PICO and
certain of the executive officers of PICO.
+++ 10.59 Agreement for Purchase and Sale of Shares, dated May 9, 1996, among Physicians,
GPG and GEC.
++ 10.60 Agreement for the Purchase and Sale of Certain Assets, dated July 14, 1995 between
Physicians, PRO and Mutual Assurance, Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney Reinsurance
Corporation and Physicians.
++ 10.62 Letter Agreement, dated September 5, 1995, between Physicians, Christopher Ondaatje
and the South East Asia Plantation Corporation Limited.
++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of Certain Assets, dated July 30,
1996 between Physicians, PRO and Mutual Assurance, Inc.
</TABLE>
82
<PAGE> 283
<TABLE>
<S> <C>
+++++ 16.1. Letter regarding change in Certifying Accountant from Deloitte & Touche, LLP,
Independent auditors.
# 21. Subsidiaries of PICO.
23.1. Independent Auditors' Consent - Deloitte & Touche LLP.
23.2. Consent of Independent Accountants - Coopers & Lybrand L.L.P.
23.3. Accountants' Consent - KPMG
27. Financial Data Schedule.
### 28. Form S-8, Registration Statement under the Securities Act of 1933, for the
PICO Holdings, Inc. Employee's 401(k) Retirements Plan and Trust, Registration
No. 333-36881.
#### 29. Form S-8, Registration Statement under the Securities Act of 1933, for Physicians
Insurance Company of Ohio 1995 Non-Qualified Stock Option Plan and assumed by
PICO Holdings, Inc., Registration No. 333-32045.
</TABLE>
----------
* Incorporated by reference to exhibit of same number
filed with Registration Statement on Form S-1 (File
No. 33-36383).
*** Incorporated by reference to exhibit of same number
filed With 1992 Form 10-K.
**** Incorporated by reference to exhibit of same number
filed with 1994 Form 10-K.
***** Incorporated by reference to exhibit bearing the same
number filed with Registration Statement on Form S-4
(File No. 33-64328).
+ Filed as Appendix to the prospectus in Part I of
Registration Statement on Form S-4 (File No.
333-06671)
++ Incorporated by reference to exhibit filed with
Physicians' Registration Statement No. 33-99352 on
Form S-1 filed with the SEC on November 14, 1995.
+++ Incorporated by reference to exhibit filed with
Registration Statement on Form S-4 (File no.
333-06671).
++++ Incorporated by reference to exhibit filed with
Amendment No. 1 to Registration Statement No.
333-06671 on Form S-4.
+++++ Incorporated by reference to exhibit of same number
filed with Form 8-K dated December 4, 1996.
- Executive Compensation Plans and Agreements.
# Incorporated by reference to exhibit of same number
filed with Form 10-K dated April 15, 1997.
## Incorporated by reference to exhibit * of same number
filed with 10-K/A dated April 30, 1997.
### Incorporated by reference to Form S-8 filed with the
Securities and Exchange Commission (File No.
333-36881).
#### Incorporated by reference to Form S-8 filed with the
Securities and Exchange Commission (File No.
333-32045).
(b) REPORTS ON FORM 8-K.
On December 4, 1996 and December 30, 1996, PICO filed
a Form 8-K and a Form 8-K/A, respectively, with the United
States Securities and Exchange Commission. The Form 8-K
reported the consummation of the Merger, the amendment of
PICO's Articles of Incorporation and By-laws and a change in
the Company's accountants. The Form 8-K/A provided the pro
forma financial information of PICO for the quarter ended
and as of September 30, 1996 with respect to the Merger. See
also Item 9 of Part II of this report for a listing of
additional 8-K documents filed.
83
<PAGE> 284
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 31, 1998
PICO Holdings, Inc.
By: /s/ John R. Hart
-----------------------------
John R. Hart
Chief Executive Officer
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below on March 31, 1998 by the following persons in the
capacities indicated.
/s/ Ronald Langley Chairman of the Board
- - - ----------------------------------
Ronald Langley
/s/ John R. Hart Chief Executive Officer, President and
- - - ---------------------------------- Director
John R. Hart
/s/ Gary W. Burchfield Chief Financial Officer and Treasurer
- - - ---------------------------------- (Chief Accounting Officer)
Gary W. Burchfield
/s/ S. Walter Foulkrod, III, Esq. Director
- - - ----------------------------------
S. Walter Foulkrod, III, Esq.
/s/ Richard D. Ruppert, MD Director
- - - ----------------------------------
Richard D. Ruppert, MD
Director
- - - ----------------------------------
Dr. Gary H. Weiss
/s/ Dr. Marshall J. Burak Director
- - - ----------------------------------
Dr. Marshall J. Burak
/s/ Robert R. Broadbent Director
- - - ----------------------------------
Robert R. Broadbent
/s/ John D. Weil Director
- - - ----------------------------------
John D. Weil
84
<PAGE> 285
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-36881 and 333-32045 of PICO Holdings, Inc. on Form S-8 of our report dated
March 27, 1998, appearing in this Annual Report on Form 10-K of PICO Holdings,
Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
San Diego, California
March 31, 1998
85
<PAGE> 286
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements on
Form S-8 (File Nos. 333-36881 and 333-32045) of our reports dated April 7, 1997,
on our audits of the consolidated financial statements of PICO Holdings, Inc.
COOPERS & LYBRAND, L.L.P.
San Diego, California
March 30, 1998
<PAGE> 287
EXHIBIT 23.3
ACCOUNTANTS' CONSENT
The Board of Directors
PICO Holdings, Inc.
We consent to the incorporation by reference in the Registration Statements
(Nos. 333-36881 and 333-32045) on Forms S-8 of PICO Holdings, Inc. of our
report dated March 17, 1998 relating to the consolidated statement of financial
position of Global Equity Corporation as at December 31, 1997, and the related
consolidated statements of operations, deficit and changes in financial
position for the year then ended, which report appears in the annual report on
Form 10-K of PICO Holdings, Inc. dated March 31, 1998.
KPMG
Chartered Accountants
Toronto, Canada
March 31, 1998
<PAGE> 288
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-K/A
(MARK ONE)
AMENDMENT NO. 1 TO
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (619) 456-6022
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III or this Form 10-K or any amendment to this
Form 10-K. [X]
Approximate aggregate market value of the registrant's common stock held by
nonaffiliates of the registrant (based on the closing sales price of such stock
as reported in the Nasdaq National Market) on March 20, 1998 was $118,539,069.
Excludes shares of common stock held by directors, officers and each person who
holds 5% or more of the registrant's common stock.
Number of shares of common stock, $.001 par value, outstanding as of March 20,
1998 was 32,591,718. As of such date, 4,572,015 shares of common stock were held
by subsidiaries of the registrant.
- - - --------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
<PAGE> 289
PICO HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K/A
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
No.
---
<S> <C>
PART III............................................................................................................ 3
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................................... 3
Item 11. EXECUTIVE COMPENSATION................................................................................ 4
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT....................................................................................... 9
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................ 11
PART IV............................................................................................................. 12
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................................... 12
SIGNATURE........................................................................................................... 23
</TABLE>
2
<PAGE> 290
FORM 10-K/A
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items of its Annual
Report on Form 10-K for the fiscal year ended December 31, 1997 as set forth in
the pages attached hereto:
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Board of Directors is divided into three classes, with the terms of office
of each class ending in successive years.
The following table sets forth information regarding the Company's directors,
including their ages, a brief description of their business experience, certain
directorships held by each of them and the year in which each became a director
of the Company.
<TABLE>
<CAPTION>
DIRECTOR NAME BUSINESS EXPERIENCE AGE SINCE
------------- ------------------- --- -----
<S> <C> <C> <C>
DIRECTORS WITH TERMS ENDING IN 2000:
S. Walter Foulkrod, III, Esq. Attorney; owner of S. Walter Foulkrod, III & Associates, Attorneys at 56 1996
Law, Harrisburg, PA, since 1994; President and Chairman of Foulkrod,
Reynolds & Havas, PC, from 1984 to 1994; Director of Physicians
since 1988.
Richard D. Ruppert, MD Physician; President of Medical College of Ohio from 1978 to 1993; 67 1996
President of American Society of Internal Medicine from 1992 to 1993;
Director of Physicians since 1988.
Dr. Gary H. Weiss(1) Barrister and Solicitor; Executive Director of Guinness Peat Group 44 1996
plc, an international investment company, since 1992; Director of
Turnbull & Partners, Ltd., an investment bank, from 1990 to 1992;
Director of Physicians since 1993.
DIRECTORS WITH TERMS ENDING IN 1999:
John R. Hart President of Quaker Holdings Limited, an investment company, since 38 1996
1991; Partner with Detwiler, Ryan & Company, Inc., an investment
bank, from 1982 to 1991; Director of Physicians since 1993; President
and CEO of Physicians since 1995; President and CEO and Director of
Global Equity Corporation since 1995; Director of PC Quote, Inc.
Ronald Langley Director and officer of Pacific Southwest Corporation, a strategic 53 1996
investment company, from 1989 to 1992; Director of Physicians since
1993; Chairman of Physicians since 1995: Chairman and Director of
Global Equity Corporation since 1995; Chairman of Summit Global
Management, Inc. since 1994; Director of PC Quote, Inc.
John D. Weil President, Clayton Management Company, a strategic investment 57 1996
company; Director of Todd Shipyards Corporation, Cliffs Drilling
Company, CleveTrust Realty Investors, Oglebay Norton Company,
Southern Investors Service Company, Inc., Allied Health Products,
Inc., and Baldwin & Lyons, Inc.
DIRECTORS WITH TERMS ENDING IN 1998:
Robert R. Broadbent Retail consultant since 1989; Chairman of Higbee Company from 1984 to 76 1996
1989; President, CEO, Director and Vice Chairman of the Higbee
Company from 1979 to 1984; President and Chief Executive Officer of
Liberty House - Mainland from 1976 to 1978; Chairman and CEO of
Gimbel's from 1973 to 1976; Director of Physicians from 1993 to 1995.
Dr. Marshall J. Burak Professor of Finance and Dean of the College of Business of San Jose 61 1995
State University since 1981.
</TABLE>
- - - -----
(1) Dr. Weiss resigned as a Director of PICO on April 6, 1998.
For information on the executive officers of Registrant, see Part I, Item 1.,
"Executive Officers."
3
<PAGE> 291
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who beneficially own more than 10% of
the Company's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC"). Such
persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms filed by such persons.
Based on a review of the copies of these reports received by the Company and
written representations from certain reporting persons that they have complied
with the relevant filing requirements, the Company believes that all filing
requirements have been complied with on a timely basis for the fiscal year ended
December 31, 1997.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for
fiscal year 1997 of the (i) Chief Executive Officer of the Company (ii) the
executive officers of the Company as of December 31, 1997 (Messrs. Langley,
Hart, Sharpe, Burchfield and Mosier are sometimes hereinafter referred to as
"Named Officers"). Amounts under the caption "Bonus" are amounts earned for
performance during the year including amounts paid after the end of the year.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
------------------- ------
Securities
Underlying
NAME AND PRINCIPAL POSITION Options All Other
Year Salary Bonus (Shares) Compensation
---- ------ ----- -------- ------------
<S> <C> <C> <C> <C> <C>
Chief Executive Officer:
------------------------
John R. Hart(1)(2) 1997 $800,000 -0- -0- -0-
President and Chief 1996 $300,000(3) $450,000 876,733(4) -0-
Executive Officer 1995 $197,000 -0- -0- -0-
Executive Officers(2):
----------------------
Ronald Langley(5) 1997 $800,000 -0- -0- -0-
Chairman of the 1996 $300,000(3) $450,000 876,733(4) -0-
Board of Directors 1995 $197,000 -0- -0- -0-
Richard H. Sharpe(6) 1997 $165,317 $18,340 -0- $18,743(7)
Chief Operating Officer 1996 $139,264 $28,000 300,594(4) $14,362(7)
1995 $139,376 -0- -0- $ 7,590(7)
Gary W. Burchfield(8) 1997 $135,000 $13,500 -0- $15,618(7)
Chief Financial Officer 1996 $102,170 $35,000 210,416(4) $10,506(7)
and Treasurer 1995 $ 92,084 -0- -0- $ 9,338(7)
James F. Mosier(9) 1997 $113,017 $12,570 -0- $12,796(7)
General Counsel and 1996 $ 82,835 $27,000 210,416(4) $ 8,497(7)
Corporate Secretary 1995 $ 80,952 -0- -0- $ 8,807(7)
</TABLE>
- - - -------------------------------
(1) Mr. Hart became President and CEO of Physicians on July 15, 1995. Prior
to that time he was not an officer of Physicians. He became President
and CEO of the Company on November 20, 1996.
(2) Includes compensation received from Physicians prior to the Merger, as
well as compensation received from the Company.
4
<PAGE> 292
(3) Mr. Langley and Mr. Hart were each compensated $533,328 by the Company
for consulting services in 1997 in the areas of investment banking,
investment portfolio analysis, and analysis of operations. In addition,
Mr. Langley and Mr. Hart entered into consulting agreements with a
subsidiary of Global Equity Corporation for annual compensation of
$266,672 each for consulting services in the areas of investment
banking, investment portfolio analysis, and analysis of operations. On
December 31, 1997, Mr. Langley and Mr. Hart each signed employment
agreements with the Company and a subsidiary of Global Equity
Corporation on terms substantially similar to the consulting
agreements.
(4) Options issued by Physicians prior to the November 1996 Merger under
the Physicians Insurance Company of Ohio 1995 Non-Qualified Stock
Option Plan and assumed by the Company upon the Merger. All options are
fully vested.
(5) Mr. Langley became Chairman of the Board of Directors of Physicians on
July 15, 1995. Prior to that time he was not an officer of Physicians.
He became Chairman of the Board of Directors of the Company on November
20, 1996.
(6) Mr. Sharpe became Chief Operating Officer of Physicians on June 3,
1994. He became Chief Operating Officer of the Company on November 20,
1996.
(7) Represents amounts contributed by the Company to the PICO Holdings,
Inc. Employees 401(k) Retirement Plan and Trust. This retirement plan
conforms to the requirements of the Employee Retirement Income Security
Act.
(8) Mr. Burchfield became Chief Financial Officer and Treasurer of
Physicians on November 3, 1995. He became Chief Financial Officer and
Treasurer of the Company on November 20, 1996.
(9) Mr. Mosier has been Secretary of Physicians since 1982 and General
Counsel since 1984. He became General Counsel and Secretary of the
Company on November 20, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
No grants of options to purchase the Company's Common Stock were made during the
year ended December 31, 1997 to any of the persons named in the Summary
Compensation Table.
.
OPTION EXERCISES AND FISCAL 1997 YEAR-END VALUE
The following table provides information concerning options held as of December
31, 1997 by the persons named in the Summary Compensation Table. No options were
exercised in 1997 by such individuals.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Securities Underlying Unexercised In-the-Money-Options
Options at 12/31/97 At 12/31/97(1)
------------------- --------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John R. Hart 876,733 -0- $3,285,556 -0-
Ronald Langley 876,733 -0- $3,285,556 -0-
Richard H. Sharpe 300,594 -0- $1,126,476 -0-
Gary W. Burchfield 210,416 -0- $ 788,533 -0-
James F. Mosier 210,416 -0- $ 788,533 -0-
</TABLE>
- - - ----------------------
(1) Based on the closing price of the Company's Common Stock on December
31, 1997 on the Nasdaq National Market of $6.4375 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Weil and Foulkrod, and Dr. Ruppert, serve as members of the Compensation
Committee. Mr. Langley and Mr. Hart have been directors and executive officers
of GEC since September 5, 1995.
5
<PAGE> 293
REPORT OF THE COMPENSATION COMMITTEE
This report of the Compensation Committee (the "Compensation Committee"), and
the Stock Price Performance Graph set forth below, shall not be deemed
incorporated by reference by any general statement incorporating by reference
this proxy statement into any filing under the Securities Act of 1933, as
amended (the "Securities Act") or under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under the Securities Act or the Exchange Act.
COMMITTEE MEMBERS
The three-member Compensation Committee of the Board of Directors is a standing
committee composed entirely of outside Directors. Mr. Weil is the chairman and
Mr. Foulkrod and Dr. Ruppert are the other members.
COMMITTEE FUNCTIONS
The Compensation Committee is responsible for assuring that all of the executive
compensation programs of the Company are developed, implemented, and
administered in a way that supports the Company's fundamental philosophy that a
significant proportion of executive compensation should be effectively linked to
company performance.
The Compensation Committee meets on a regularly scheduled basis. It reviews and
approves the overall executive compensation program which includes both base pay
and incentive compensation. It considers and approves individual executive
officer compensation packages based on recommendations of the Company's Chief
Executive Officer. It recommends, for the approval of the full Board, any
modification to the compensation package of the Company's Chief Executive
Officer.
EXECUTIVE COMPENSATION PHILOSOPHY
The Board of Directors of Physicians retained an independent compensation
expert, William M. Mercer, Incorporated ("Mercer"). In 1996, Mercer conducted an
analysis of marketplace executive compensation levels. The scope of Mercer's
study covered the Company's Chairman and President and Chief Executive Officer.
The objectives of Mercer's study were as follows:
o Analyze the scope, responsibilities and skill requirements of the jobs
performed by Messrs. Langley and Hart and compare and contrast to
comparable benchmark executive positions found in the marketplace.
o Develop an appropriate methodology for selecting comparable benchmark jobs,
industry categories and a peer group of companies comparable to the Company
in terms of business focus, industry classification and size; and competing
for senior executives with the skills, expertise and talent demonstrated by
the Company's top two executives.
o For the appropriate benchmark jobs, industry category and peer company
group, collect information on marketplace compensation levels and practices
from compensation surveys and peer company proxy statements. The companies
included in the peer company group are not necessarily those included in
the Nasdaq Insurance Stock Index. Determine the most relevant marketplace
compensation levels and to compare actual Company compensation levels.
o Develop alternate approaches for structuring the total compensation package
for the Company's top two executives, in terms of compensation elements to
be used, the mix of total pay and how short and long term incentive
compensation might be structured to accurately reflect performance.
Mercer's study recommended to the Compensation Committee a compensation strategy
with the following objectives:
o To provide a total compensation package that:
- is competitive with market rates for executives with similar skill,
talent and job requirements.
- is closely linked to the Company's strategy and the role of covered
executives in building shareholder value through growing the book value
and, ultimately, the market value of the Company.
6
<PAGE> 294
o To retain critical executive talent by:
- providing a reasonable and competitive level of current income
(cash flow).
- providing for loss of future incentive opportunity if an executive
terminates employment before unrealized investment gains are realized.
o To link executive rewards to shareholder interests by:
- tying incentive awards to growth in book value which ultimately
translates into increased market price per share (as investments are
liquidated for gains, and the Company grows earnings).
- granting additional stock options in the future once current options are
exercised or expire.
The Compensation Committee believes that to accomplish these goals, the
executive compensation program should be based on three distinct components:
base pay, annual incentives, and long-term incentives. The Company obtains
industry and peer group surveys, and consults with independent experts, to
evaluate the Company's executive compensation programs in comparison with those
offered by its comparable competitors.
The Compensation Committee has considered amendments to the Internal Revenue
Code denying deductions for annual compensation to certain executives in excess
of $1 million, subject to certain exceptions. The Company's compensation
structure has been such that it does not believe that it is likely that the $1
million cap will affect the Company in the near future. The Internal Revenue
Service has issued proposed regulations which, among other things, provide for a
transition period of three years for plans previously approved by shareholders.
The Company is studying the proposed regulations, but has not yet determined
what steps may be required or desirable with respect to its existing plans.
EXECUTIVE COMPENSATION PROGRAM
The features of the executive compensation program as recommended by Mercer and
approved by the Compensation Committee are:
BASE COMPENSATION. A fixed rate, to be reviewed annually. Future adjustments
will take into account movement in executive compensation levels, changes in job
responsibilities, and the size of the Company and GEC. Two-thirds of base
compensation is to be paid by the Company and one-third by GEC.
INCENTIVE AWARDS. Based on growth of book value per share in a fiscal year.
Awards are earned when a pre-determined threshold is surpassed. If book value
per share of the Company or GEC exceeds this threshold, the incentive award is
equal to 5% of the increase in book value per share multiplied by the number of
shares outstanding at the beginning of the fiscal year. The threshold for 1998
is 16%.
In addition, the Board of Directors of Physicians granted options under the
Physicians Insurance Company of Ohio 1995 Non-Qualified Stock Option Plan. The
options granted under said option plan were designed to reinforce the
relationship between the Company's future performance and the executive's
potential future financial rewards. These options were assumed by PICO Holdings,
Inc. on November 20, 1996.
GOALS OF COMPENSATION COMMITTEE
The Compensation Committee attempts to align executive compensation with the
value achieved by the executives for the Company's shareholders. The Company's
compensation program for executives emphasizes a combination of base salary,
discretionary bonuses, and stock options designed to attract, retain, and
motivate executives who will maximize shareholder value. The Compensation
Committee considers individual and Company performance, as well as compensation
paid by comparable companies.
Executives also participate in other employee benefit programs, including health
insurance, group life insurance, and the Company's 401(k) Plan.
7
<PAGE> 295
DISCUSSION OF 1997 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
As discussed above, in 1997 the Chief Executive Officer received fixed
consulting fees from Physicians Insurance Company of Ohio and a subsidiary of
GEC. No bonus was paid with respect to the Company's performance in 1997 and no
new options were granted in 1997. The Compensation Committee recommended to the
Board of Directors, and the Board of Directors accepted the recommendation, that
it was appropriate for the chief executive officer and the chairman to be
compensated as employees, rather than as consultants. Accordingly, effective
December 31, 1997, the chief executive officer and chairman entered into
employment agreements with the Company and a wholly-owned subsidiary of Global
Equity Corporation. The terms of these employment agreements are substantially
similar to the terms of the consulting agreements.
April 15, 1998 Compensation Committee
John D. Weil, Chairman
S. Walter Foulkrod, III, Esq.
Richard D. Ruppert, MD
8
<PAGE> 296
STOCK PRICE PERFORMANCE GRAPH
The graph below compares cumulative total return of the Company, the Nasdaq
Insurance Stocks Index, and the Nasdaq Stock Market (U.S. Companies) for the
period January 1, 1993 through December 31, 1997.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG PICO HOLDINGS, INC., NASDAQ MARKET-
U.S. COS. AND NASDAQ INSURANCE STOCK INDEX
<TABLE>
<CAPTION>
Fiscal year ending December 31,
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Pico Holdings, Inc. 100 130 30 50 65 99
Nasdaq Insurance Stock Index 100 110 100 145 165 235
Nasdaq Market - U.S. Con. 100 115 115 165 195 235
</TABLE>
The graph assumes $100 was invested on January 1, 1993 in the Company's Common
Stock, the Nasdaq Stock Market (U.S. Companies) Index, and the Nasdaq Insurance
Stocks Index, and that all dividends were reinvested. The performance of PICO
Holdings, Inc. stock on this graph represents the historical performance of
shares of Citation Insurance Group, which was renamed PICO Holdings, Inc. on
November 20, 1996. It does not represent the historical stock performance of
Physicians Insurance Company of Ohio.
EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
Mr. Langley and Mr. Hart each entered into employment agreements effective
December 31, 1997 with the Company and a wholly-owned subsidiary of Global
Equity Corporation. Total compensation to Mr. Langley and Mr. Hart under these
employment agreements is $800,000 each on an annual basis. These employment
agreements include a change in control clause providing that if there is a
change of control before December 31, 1999, the Company shall immediately pay
each employee a total lump sum of $2.4 million and an amount equal to three
times the highest annual bonus paid to the employee in the last three years.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of April 8, 1998, with respect to
the beneficial ownership of the Company's Common Stock entitled to vote by each
person known by the Company to be the beneficial owner of more that 5% of Common
Stock, and by each director, each Named Officer (as defined below) and all
executive officers, former chief executive officers, and directors as a group.
Except as otherwise indicated, each person has sole investment and voting power,
subject to community property laws. As of April 8, 1998, there were 32,591,718
shares of the Company issued and outstanding. 4,572,015 of these shares are held
by subsidiaries of the Company, and may therefore not be voted under California
law.
9
<PAGE> 297
<TABLE>
<CAPTION>
NUMBER OF SHARES AND NATURE PERCENTAGE OWNERSHIP OF
NAME AND ADDRESS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) VOTING SHARES
------------------------------------ --------------------------- -------------
<S> <C> <C>
Guinness Peat Group plc(2) 5,745,225 20.50%
21-26 Garlick Hill, 2nd Floor
London EC4V 2AU
England
Global Equity Corporation(3)(4) 4,258,415 15.20%
30A Hazelton Avenue, 4th Floor
Toronto, Ontario
Canada M5R 2E2
John R. Hart(5) 1,908,848 6.81%
Ronald Langley(5) 1,908,848 6.81%
Robert R. Broadbent 20,039 *
Dr. Marshall J. Burak -0- *
S. Walter Foulkrod, III, Esq. 12,524 *
Richard D. Ruppert, MD(6) 34,868 *
John D. Weil(7) 2,389,915 8.52%
Dr. Gary H. Weiss(8) 8,863 *
Richard H. Sharpe(9) 316,423 *
Gary W. Burchfield(10) 221,477 *
James F. Mosier(10) 219,574 *
Executive Officers and Directors as a Group (11 persons) 7,041,377 25.13%
*Less than one percent (1%)
</TABLE>
- - - ---------------------------
(1) Sole voting and investment power unless otherwise indicated.
(2) Guinness Peat Group plc ("GPG") has an option to purchase $1,175,000 of
newly issued shares of the Company's stock. The purchase price would be
the average of the closing bid prices for the Company's stock on Nasdaq
for the 20 trading days immediately preceding the date when GPG gives
notice of purchase. This option will expire if GPG's ownership of shares
of the Company's stock becomes less than 7.5%. The Company has a first
right to purchase any stock which GPG desires to sell, except for sales
to Ronald Langley and John R. Hart (see note 5 below). This does not
include shares beneficially owned by Dr. Weiss, who is a director of GPG.
The numbers in the above table do not include shares issuable pursuant to
the options described in this footnote.
(3) Global Equity Corporation ("GEC") has an option to purchase $825,000 of
newly issued shares of the Company's stock. The purchase price would be
the average of the closing bid prices for the Company's stock on Nasdaq
for the 20 trading days immediately preceding the date when GEC gives
notice of purchase. This option will expire if GEC's ownership of the
Company's stock becomes less than 7.5%. The Company has a first right to
purchase any stock, which GEC desires to sell. Approximately 51.2% of
GEC's outstanding shares are owned by subsidiaries of the Company and
accordingly, pursuant to California law, GEC cannot vote any of its
shares of the Company's stock. The numbers in the above table do not
include shares issuable pursuant to the options described in this
footnote.
(4) The Company and its subsidiaries own approximately 51.2% of the issued
and outstanding shares of GEC. Since September 5, 1995, Mr. Langley has
been Chairman and a Director of GEC. Mr. Hart has been President and CEO
and a Director of GEC since September 5, 1995.
10
<PAGE> 298
(5) Mr. Langley and Mr. Hart each hold currently exercisable options to
purchase up to 876,733 shares of the Company's shares under the
Physicians Insurance Company of Ohio 1995 Non-Qualified Stock Option
Plan. In addition Mr. Langley and Mr. Hart each hold currently
exercisable options to purchase up to 1,032,144 shares of the Company's
stock presently owned by GPG.
(6) Dr. Ruppert shares voting and investment power with his wife.
(7) Of these shares 2,284,708 shares are owned by a partnership which Mr.
Weil controls, and voting control 105,207 shares are held by family
members.
(8) Does not include shares held by GPG. Dr. Weiss is a Director of GPG. Dr.
Weiss resigned as a Director of PICO on April 6, 1998.
(9) Includes currently exercisable options to purchase up to 300,594 shares
of the Company's stock under the Physicians Insurance Company of Ohio
1995 Non-Qualified Stock Option Plan.
(10) Includes currently exercisable options to purchase up to 210,416 shares
of the Company's stock under the Physicians Insurance Company of Ohio
1995 Non-Qualified Stock Option Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Langley and Mr. Hart entered into employment agreements with PICO and a
wholly-owned subsidiary of Global Equity Corporation, effective December 31,
1997. See Part II, Item 8., Note 17. Mr. Langley and Mr. Hart are entitled to
receive 50% of the first $1 million of the profits of Summit Global Management,
Inc. See Part II, Item 8., Note 17.
11
<PAGE> 299
FORM 10-K/A
AMENDMENT NO. 1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.
<TABLE>
<CAPTION>
<S> <C>
1. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports.................................. *
Consolidated Balance Sheets as of December 31, 1997 and 1996... *
Consolidated Statements of Income for the Years
Ended December 31, 1997, 1996 and 1995................... *
Consolidated Statement of Changes in Shareholders' Equity
for the Years Ended December 31, 1997, 1996, and 1995.... *
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995................... *
Notes to Consolidated Financial Statements..................... *
---------------
* Filed with original Form 10-K on March 31, 1998
2. FINANCIAL STATEMENT SCHEDULES.
Independent Auditors' Reports.................................. 15-16
Schedule I - Condensed Financial Information of Registrant..... 17-18
Schedule II - Valuation and Qualifying Accounts................ 19
Schedule V - Supplementary Insurance Information............... 20-22
3. EXHIBITS
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
+ 2.2 Agreement and Plan of Reorganization, dated as of May 1, 1996, among PICO,
Citation Holdings, Inc. and Physicians and amendment thereto dated August 14, 1996
and Related Merger Agreement.
+++++ 2.3 Second Amendment to Agreement and Plan of Reorganization dated November 12, 1996.
# 2.4 Agreement and Debenture, dated November 14, 1996 and November 27, 1996,
respectively, by and between Physicians and PC Quote, Inc.
# 2.5 Purchase and Sale Agreement by, between and among Nevada Land and Resource Company,
LLC, GEC, Western Water Company And Western Land Joint Venture dated April 9, 1997.
+++++ 3.1 Amended and Restated Articles of Incorporation of PICO.
+ 3.2.2 Amended and Restated By-laws of PICO.
+++++ 4.2 First Amendment to Rights Agreement dated April 30, 1996.
+++++ 4.3 Second Amendment to Rights Agreement dated November 20, 1996.
-* 10.7 Key Officer Performance Recognition Plan.
* 10.8 Flexible Benefit Plan
-* 10.9 Amended and Restated 1983 Employee Stock Option Plan.
-**** 10.10 Salary Reduction Profit Sharing Plan as amended and restated effective January 1, 1994
and Amendments Nos. 1 and 2 thereto dated March 13, 1995 and March 15, 1995, respectively.
</TABLE>
12
<PAGE> 300
<TABLE>
<CAPTION>
<S> <C>
-* 10.11 Employee Stock Ownership Plan and Trust Agreement.
-*** 10.11.1 Amended Employee Stock Ownership Plan and Trust Agreement.
-***** 10.11.2 Amendment to Employee Stock Ownership Plan dated October 1, 1992.
-**** 10.11.3 Amendment to Employee Stock Ownership Plan dated March 15, 1995.
* 10.16 Office Lease between CIC and North Block Partnership dated July, 1990.
*** 10.16.1 Amendments Nos. 1 and 2 to Office Lease between CIC and North Block Partnership
dated January 6, 1992 and February 5, 1992, respectively.
**** 10.16.2 Amendments Nos. 3 and 4 to Office Lease between CIC and North Block Partnership
dated December 6, 1993 and October 4, 1994, respectively.
-* 10.22 1991 Employee Stock Option Plan
-***** 10.23 PICO Severance Plan for Certain Executive Officers, Senior Management and Key
Employees of the Company and its Subsidiaries, including form of agreement.
-10.55 Consulting Agreements, effective January 1, 1997, regarding retention of Ronald
Langley and John R. Hart as consultants by Physicians and GEC.
++ 10.57 PICO 1995 Stock Option Plan
-+++ 10.58 Key Employee Severance Agreement and Amendment No. 1 thereto, each made as of
November 1, 1992, between PICO and Richard H. Sharpe and Schedule A identifying
other substantially identical Key Employee Severance Agreements between PICO and
certain of the executive officers of PICO.
+++ 10.59 Agreement for Purchase and Sale of Shares, dated May 9, 1996, among Physicians,
GPG and GEC.
++ 10.60 Agreement for the Purchase and Sale of Certain Assets, dated July 14, 1995 between
Physicians, PRO and Mutual Assurance, Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney Reinsurance
Corporation and Physicians.
++ 10.62 Letter Agreement, dated September 5, 1995, between Physicians, Christopher Ondaatje
and the South East Asia Plantation Corporation Limited.
++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of Certain Assets, dated July 30,
1996 between Physicians, PRO and Mutual Assurance, Inc.
+++++ 16.1. Letter regarding change in Certifying Accountant from Deloitte & Touche LLP,
Independent auditors.
# 21. Subsidiaries of PICO.
23.1. Independent Auditors' Consent - Deloitte & Touche LLP.
23.2. Consent of Independent Accountants - Coopers & Lybrand, L.L.P.
27. Financial Data Schedule.
27.1. Restated Financial Data Schedule.
27.2. Restated Financial Data Schedule.
### 28. Form S-8, Registration Statement under the Securities Act of 1933, for the PICO
Holdings, Inc. Employees 401(k) Retirement Plan and Trust, Registration No. 333-36881.
#### 29. Form S-8, Registration Statement under the Securities Act of 1933, for the Physicians
Insurance Company of Ohio 1995 Non-Qualified Stock Option Plan and assumed by
PICO Holdings, Inc., Registration No. 333-32045.
----------
* Incorporated by reference to exhibit of same number filed with Registration Statement on Form S-1 (File
No. 33-36383).
*** Incorporated by reference to exhibit of same number filed with 1992 Form 10-K.
**** Incorporated by reference to exhibit of same number filed with 1994 Form 10-K.
***** Incorporated by reference to exhibit bearing the same number filed with Registration Statement on Form
S-4 (File No. 33-64328).
</TABLE>
13
<PAGE> 301
<TABLE>
<CAPTION>
<S> <C>
+ Filed as Appendix to the prospectus in Part I of Registration Statement on Form S-4 (File No. 333-06671)
++ Incorporated by reference to exhibit filed with Physicians' Registration Statement No. 33-99352 on
Form S-1 filed with the SEC on November 14, 1995.
+++ Incorporated by reference to exhibit filed with Registration Statement on Form S-4 (File no. 333-06671).
++++ Incorporated by reference to exhibit filed with Amendment No. 1 to Registration Statement No. 333-06671
on Form S-4.
+++++ Incorporated by reference to exhibit of same number filed with Form 8-K dated December 4, 1996.
- Executive Compensation Plans and Agreements.
# Incorporated by reference to exhibit of same number filed with Form 10-K dated April 15, 1997.
## Incorporated by reference to exhibit * of same number filed with 10-K/A dated April 30, 1997.
### Incorporated by reference to Form S-8 filed with the Securities and Exchange Commission
(File No. 333-36881).
#### Incorporated by reference to Form S-8 filed with the Securities and Exchange Commission
(File No. 333-32045).
</TABLE>
(b) REPORTS ON FORM 8-K.
None.
14
<PAGE> 302
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
PICO Holdings, Inc.:
We have audited the consolidated financial statements of PICO Holdings, Inc. and
subsidiaries (the "Company") as of December 31, 1997 and for the year ended
December 31, 1997, and have issued our report thereon dated March 27, 1998; such
report has previously been filed as part of the Company's Annual Report on Form
10-K for the year ended December 31, 1997. Our audit also included the 1997
financial statement schedules of the Company, listed in the accompanying index
at Item 14. These 1997 financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audit. We did not audit the 1997 consolidated financial statements of Global
Equity Corporation (all expressed in Canadian dollars), a 51.17% owned
consolidated subsidiary, which constitutes 42% of the Company's consolidated
total assets as of December 31, 1997. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included in the Company's financial statement schedules
for Global Equity Corporation (all expressed in Canadian dollars), is based
solely on the report of such other auditors. The consolidated financial
statements and the related financial statement schedules of the Company as of
December 31, 1996 and for the years ended December 31, 1996 and 1995 were
audited by other auditors whose reports, dated April 7, 1997, expressed an
unqualified opinion on those financial statements and schedules. In our opinion,
based on our audit and the report of the other auditors, such 1997 financial
statement schedules, when considered in relation to the basic 1997 consolidated
financial statements of the Company taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
San Diego, California
March 27, 1998
15
<PAGE> 303
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
PICO Holdings, Inc.
Our report on the consolidated financial statements of PICO Holdings, Inc. and
subsidiaries (the "Company") as of December 31, 1996 and for each of the two
years in the period ended December 31, 1996 is included on page 48 of the
Company's previously filed Form 10-K. In connection with our audits of such
financial statements, we have also audited the financial statement schedules
listed in the index on page 2 of this Form 10-K/A.
In our opinion, these financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND, L.L.P.
San Diego, California
April 7, 1997
16
<PAGE> 304
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
On November 20, 1996, Physicians Insurance Company of Ohio ("Physicians")
consummated a transaction (the "Merger") pursuant to which Citation Holdings,
Inc. ("Holdings"), a wholly owned subsidiary of Citation Insurance Group
("CIG"), merged with and into Physicians pursuant to an Agreement and Plan of
Reorganization dated as of May 1, 1996 with Physicians being the accounting
acquiror. Pursuant to the Merger, each outstanding share of the common stock of
Physicians was converted into the right to receive 5.0099 shares of CIG's common
stock. Upon the consummation of the merger, CIG changed its name to PICO
Holdings, Inc., which is the continuing registrant. The Merger was accounted for
under the purchase method of accounting. Financial results for the year ended
December 31, 1996 include the operations of CIG as if the Merger had occurred on
November 1, 1996. Financial activity for the period November 1, 1996 through
November 20, 1996 was not significant.
Due to the structure of this reverse merger transaction as described above,
there was no holding company for the accounting acquiror prior to the November
20, 1996 merger date. Accordingly the only condensed financial statements
presented herein are the condensed balance sheets as of December 31, 1997 and
1996 and the condensed statements of income and cash flows for 1997 and the
two-month period ended December 31, 1996.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31, December 31,
1997 1996
------------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 81,820 $ 12,658,537
Investments in subsidiaries 108,378,841 96,629,262
Short-term investments, at cost 3,035,002
Deferred income taxes 1,924,453 3,627,667
Other assets 1,226,566 818,836
------------- -------------
Total assets $ 114,646,682 $ 113,734,302
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expense and other liabilities $ 2,495,944 $ 3,530,722
------------- -------------
Preferred stock, $.01 par value, authorized 2,000,000 shares; none issued
Common stock, $.01 par value, authorized 100,000,000 shares: issued
32,591,718 and 32,486,718 in 1997 and 1996, respectively 32,592 32,487
Additional paid-in capital 43,147,105 42,965,063
Net unrealized appreciation (depreciation) on investments (2,717,248) 11,837,511
Cumulative foreign currency translation adjustment (2,201,093) (27,159)
Equity changes of investee company (986,361)
Retained earnings 83,718,335 64,226,714
------------- -------------
121,979,691 118,048,255
Less treasury stock, at cost (2,492,631 in 1997 and 1,940,315 in 1996) (9,828,953) (7,844,675)
------------- -------------
Total shareholders' equity 112,150,738 110,203,580
------------- -------------
Total liabilities and shareholders' equity $ 114,646,682 $ 113,734,302
============= =============
</TABLE>
This statement should be read in conjunction with the notes to the consolidated
financial statements included in the Company's 1997 Form 10-K
17
<PAGE> 305
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the Two-
For the Year Month Period
Ended Ended
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Investment income, net $ 648,229
Equity in earnings of subsidiaies 20,457,718 $ 19,596,074
------------ ------------
Total revenues 21,105,947 19,596,074
Expenses 2,874,895 928,288
------------ ------------
Income from continuing operations before income taxes 18,231,052 18,667,786
Benefit for income taxes (804,285)
------------ ------------
Income from continuing operations 19,035,337 18,667,786
Income from discontinued operations of subsidiaries, net of federal
income tax provisions of $2,201,010 in 1997 and $653,975 in 1996
and minority interest of $764,418 in 1997 456,283 3,097,307
------------ ------------
Net income $ 19,491,620 $ 21,765,093
============ ============
CONDENSED STATEMENTS OF CASH FLOWS
Cash flow from operating activities:
Net income $ 19,491,620 $ 21,765,093
Adjustments to reconcile net income to net cash used in operating
activities:
Equity in earnings of subsidiaries (20,457,718) (19,596,074)
Income from discontinued operations of subsidiaries, net of tax (456,283) (3,097,307)
Changes in assets and liabilities
Accrued expenses and other liabilities (1,040,789) 811,638
Other assets 1,295,484 (437,405)
------------ ------------
Net cash used in operating activities (1,167,686) (554,055)
------------ ------------
Cash flow from investing activities:
Dividends from subsidiary 22,152,608 13,212,592
Purchase of investments (33,561,639)
------------ ------------
Net cash (used in) provided by investing activities (11,409,031) 13,212,592
------------ ------------
Increase (decrease) in cash and cash equivalents (12,576,717) 12,658,537
Cash and cash equivalents, beginning of period 12,658,537
------------ ------------
Cash and cash equivalents, end of period $ 81,820 $ 12,658,537
============ ============
</TABLE>
This statement should be read in conjunction with the notes to the consolidated
financial statements included in the Company's 1997 Form 10-K
18
<PAGE> 306
SCHEDULE II
PICO HOLDINGS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
------------------------------
(1) (2)
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
----------- ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year-end December 31, 1997
Allowance for Doubtful Accounts, net $ 116,917 $ 142,789 $ (140,682) $ 119,024
Valuation Allowance for
Deferred Federal Income Taxes $ 6,664,000 $ 136,000 $6,800,000
Year-end December 31, 1996
Allowance for Doubtful Accounts, net $ 78,000 $ (117,470) $ 156,387 $ 116,917
Valuation Allowance for
Deferred Federal Income Taxes $ 6,664,000 $6,664,000
Year-end December 31, 1995
Allowance for Doubtful Accounts, net $ 196,000 $ (11,385) $ (106,615) $ 78,000
Valuation Allowance for
Deferred Federal Income Taxes $10,772,320 $ (8,922,371) $(1,849,949)
</TABLE>
(1) Increases and decreases in provisions for the allowance for doubtful
accounts are charged to expense accounts. Changes in the allowance for
deferred federal income taxes are charged to provision (benefit) for
federal, foreign and state income taxes except for amounts relating to
unrealized investment gains and losses.
(2) Changes in the valuation allowance relating to unrealized investment gains
and losses are netted against the net unrealized appreciation
(depreciation) on investments account. The change in the valuation
allowance recorded in 1996 occurred prior to the Merger and was acquired in
the Merger.
19
<PAGE> 307
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 1995
<TABLE>
<CAPTION>
Future
Policy
Benefits, Amortization
Deferred Losses, Losses of Deferred
Policy Claims Net and Policy Other
Acquisition and Loss Unearned Premium Investment Loss Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
----- -------- -------- ------- ------ -------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medical
professional
liability $ 272 $168,485 $ 12,985 $17,120 $ 5,928 $21,247 $ 723 $ 1,053 $13,079
Other property
and casualty 510 61,312 17,702 2,421 170 1,925 4,282 10,755
------ -------- -------- ------- ------- ------- ----- ------- -------
Total medical
professional
liability and
property and
casualty 782 229,797 30,687 19,541 6,098 23,172 723 5,335 23,834
Other operations 5,980 5,110 9,916
------ -------- -------- ------- ------- ------- ----- ------- -------
Total continuing
operations 782 229,797 30,687 $25,521 $11,208 $23,172 $ 723 $15,251 $23,834
======= ======= ======= ===== ======= =======
Discontinued life
and health * 2,113 47,553 171
------ -------- --------
Total $2,895 $277,350 $ 30,858
====== ======== ========
</TABLE>
* Amounts needed to reconcile to balance sheet accounts from
discontinued life and health insurance segment not reclassified for
1995. In 1997, the Company entered into a definitive agreement to sell
its indirectly wholly-owned life and health insurance subsidiary,
American Physicians Life Insurance Company and its wholly-owned
subsidiary. The Company's 1997 life and health insurance operations
have been classified as discontinued operations in accordance with
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business." Net income for 1996 and 1995 has also been reclassified for
comparative purposes to reflect the discontinued operations. See Note 6
to the Consolidated Financial Statements, "Discontinued Operations."
20
<PAGE> 308
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 1996
<TABLE>
<CAPTION>
Future
Policy
Benefits, Amortization
Deferred Losses, Losses of Deferred
Policy Claims Net and Policy Other
Acquisition and Loss Unearned Premium Investment Loss Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
----- -------- -------- ------- ------ -------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medical
professional
liability $142,965 $ 7,362 $4,881 $ 2,605 $ 272 $ 1,010 $ 28
Other Property
and Casualty $5,421 109,058 $34,808 31,399 2,540 20,328 1,603 10,100 37,529
------ -------- ------- ------- ------ ------- ------ ------- -------
Total medical
professional
liability and
property and
casualty 5,421 252,023 34,808 38,761 7,421 22,933 1,875 11,110 37,557
Other operations 665 7,855
------- -------- ------- ------- ------ ------- ------ ------- -------
Total continuing
operations 5,421 252,023 34,808 $38,761 $8,086 $22,933 $1,875 $18,965 $37,557
======= ====== ======= ====== ======== =======
Discontinued life
and health* 2,501 45,516 489
====== ======== =======
$7,922 $297,539 $35,297
======= ======== =======
</TABLE>
* Amounts needed to reconcile to balance sheet accounts from
discontinued life and health insurance segment not reclassified
for 1996. In 1997, the Company entered into a definitive agreement
to sell its indirectly wholly-owned life and health insurance
subsidiary, American Physicians Life Insurance Company and its
wholly-owned subsidiary. The Company's 1997 life and health
insurance operations have been classified as discontinued operations
in accordance with Accounting Principles Board Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business." Net income for 1996 and 1995
has also been reclassified for comparative purposes to reflect the
discontinued operations. See Note 6 to the Consolidated Financial
Statements, "Discontinued Operations."
21
<PAGE> 309
SCHEDULE V
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(In thousands)
December 31, 1997
<TABLE>
<CAPTION>
Amortization
Deferred Losses, Losses of Deferred
Policy Claims Net and Policy Other
Acquisition and Loss Unearned Premium Investment Loss Acquisition Operating Premiums
Costs Expenses Premiums Revenue Income Expenses Costs Expenses Written
---------- -------- -------- ------- ---------- -------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Medical
professional
liability $108,926 $ 239 $ 4,867 $ 1,244 $ 1,887 $ 240
Other Property
and Casualty $5,321 87,170 $21,635 49,637 5,614 33,086 $10,069 7,959 39,453
------ -------- ------- ------- ------- ------- ------- ------- -------
Total medical
professional
liability and
property and
casualty 5,321 196,096 21,635 49,876 10,481 34,330 10,069 9,846 39,693
Other operations 1,205 9,831
------ -------- ------- ------- ------- ------- ------- ------- -------
Total $5,321 $196,096 $21,635 $49,876 $11,686 $34,330 $10,069 $19,677 $39,693
====== ======== ======= ======= ======= ======= ======= ======= =======
</TABLE>
In 1997, the Company entered into a definitive agreement to sell its
indirectly wholly-owned life and health insurance subsidiary, American
Physicians Life Insurance Company and its wholly-owned subsidiary. The
Company's 1997 life and health insurance operations have been
classified as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a
Business." Net income for 1996 and 1995 has also been reclassified for
comparative purposes to reflect the discontinued operations. See Note 6
to the Consolidated Financial Statements, "Discontinued Operations."
22
<PAGE> 310
FORM 10-K/A
AMENDMENT NO. 1
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
PICO HOLDINGS, INC.
By: /s/ Gary W. Burchfield
---------------------------------------
Gary W. Burchfield,
Chief Financial Officer and Treasurer
Date: April 30, 1998
23
<PAGE> 311
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-36881 and 333-32045 of PICO Holdings, Inc. on Form S-8 of our reports dated
March 27, 1998, appearing in this Annual Report on Form 10-K/A of PICO Holdings,
Inc. for the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
San Diego, California
April 30, 1998
24
<PAGE> 312
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements on
Form S-8 (File Nos. 333-36881 and 333-32045) of our reports dated April 7, 1997
on our audits of the consolidated financial statements and consolidated
financial statement schedules of PICO Holdings, Inc.
COOPERS & LYBRAND, L.L.P.
San Diego, California
April 29, 1998
25
<PAGE> 313
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 June 30, 1998
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
(619) 456-6022
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 32,591,718 as of June 30, 1998. As of such date, 4,572,015 shares of
common stock were held by subsidiaries of the registrant.
1
<PAGE> 314
PICO HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of 3
June 30, 1998 and December 31, 1997
Consolidated Statements of Income 4
for the Three and Six Months Ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for 5
the Six Months Ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 27
Item 6: Exhibits and Reports on Form 8-K 27
Signature 28
</TABLE>
2
<PAGE> 315
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
<TABLE>
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
<CAPTION>
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
ASSETS
Investments $142,828 $160,297
Cash and cash equivalents 54,433 56,436
Accrued investment income 1,825 1,722
Premiums and other receivables, net 8,897 20,682
Reinsurance receivables 70,960 75,026
Prepaid deposits and reinsurance premiums 11,083 2,235
Deferred policy acquisition costs 5,300 5,321
Surface, water, geothermal and mineral rights 75,573 75,177
Property and equipment, net 8,235 8,551
Deferred income taxes 7,977 2,965
Other assets 4,852 5,931
Net assets of discontinued operations 16,191 15,950
-------- --------
Total Assets $408,154 $430,293
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Loss and loss adjustment expense, net of discount $175,037 $196,096
Unearned premiums 29,697 21,635
Reinsurance balance payable 9,133 8,076
Deferred gain on retroactive reinsurance 1,876 2,168
Integration liability 355 546
Other liabilities 12,912 15,381
Taxes payable 968
Excess of fair value of net assets aquired over purchase price 4,781 5,065
-------- --------
Total Liabilities 233,791 249,935
-------- --------
MINORITY INTEREST 62,767 68,207
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 7 AND 9)
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 2,000,000 shares, none issued
Common stock, $.001 par value; authorized 100,000,000 shares,
issued 32,591,718 in 1998 and 1997 33 33
Additional paid-in capital 43,147 43,147
Retained earnings 83,873 83,718
Accumulated other comprehensive loss (5,628) (4,918)
Treasury stock, at cost (common shares 2,492,631) (9,829) (9,829)
-------- --------
Total Stockholders' Equity 111,596 112,151
-------- --------
Total Liabilities and Stockholders' Equity $408,154 $430,293
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 316
<TABLE>
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands, except per share data)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Premium income $ 8,455 $13,976 $17,593 $28,478
Investment income, net 1,805 2,728 5,181 6,102
Net realized gains on investments 1,970 111 2,474 2,945
Other income 1,424 366 2,140 706
------- ------- ------- -------
Total revenues 13,654 17,181 27,388 38,231
------- ------- ------- -------
EXPENSES:
Loss and loss adjustment expenses 5,666 10,019 13,661 21,538
Insurance underwriting and other expenses 6,522 4,719 12,516 11,484
------- ------- ------- -------
Total expenses 12,188 14,738 26,177 33,022
------- ------- ------- -------
Equity in earnings (losses) of investee (284) 164 (487) 172
------- ------- ------- -------
Income from continuing operations before income taxes
and minority interest 1,182 2,607 724 5,381
Provision (benefit) for federal, foreign and state income taxes (296) 725 930 1,659
------- ------- ------- -------
Income (loss) from continuing operations before
minority interest 1,478 1,882 (206) 3,722
Minority interest in loss (income) of subsidiary (499) 206
------- ------- ------- -------
Income from continuing operations 979 1,882 3,722
Income (loss) from discontinued operations, net of federal
income tax provision (benefit) of $35 and $(24) for the three
months and $44 and $20 for the six months in 1998 and 1997,
respectively 103 (58) 155 94
------- ------- ------- -------
Net income $ 1,082 $ 1,824 $ 155 $ 3,816
======= ======= ======= =======
Net income per common share (basic):
Continuing operations $ 0.03 $ 0.06 $ 0.00 $ 0.12
Discontinued operations 0.00 0.00 0.00 0.00
------- ------- ------- -------
Net income per common share $ 0.03 $ 0.06 $ 0.00 $ 0.12
======= ======= ======= =======
Weighted average shares outstanding 32,592 32,543 32,592 32,515
======= ======= ======= =======
Net income per common share (diluted):
Continuing operations $ 0.03 $ 0.05 $ 0.00 $ 0.11
Discontinued operations 0.00 0.00 0.00 0.00
------- ------- ------- -------
Net income per common share $ 0.03 $ 0.05 $ 0.00 $ 0.11
======= ======= ======= =======
Weighted average shares outstanding 33,765 33,513 33,877 33,430
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 317
<TABLE>
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used in operating activities $ (2,964) $ (23,757)
-------- ---------
INVESTING ACTIVITIES:
Investments purchased (9,176) (285,395)
Investments sold 14,409 118,373
Investments matured 25 188,506
Net sales of real estate 92 19
Proceeds from sale of property and equipment 11
Purchases of property and equipment (302) (528)
Investment in surface, water, geothermal and mineral rights (934)
Investment in affiliate (477)
Other (2,231)
-------- ---------
Net cash provided by investing activities 1,417 20,975
-------- ---------
FINANCING ACTIVITIES:
Issuance of common stock 274
Proceeds from sale of business (2,964)
Purchase of treasury stock (163)
-------- ---------
Net cash used in financing activities (2,853)
-------- ---------
Effect of exchange rate changes on cash (456) (1)
-------- ---------
NET DECREASE IN CASH (2,003) (5,636)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 56,436 54,916
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 54,433 $ 49,280
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 440 $ 12,650
======== =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 318
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of PICO Holdings, Inc. ("PICO") and Subsidiaries (collectively, the
"Company") have been prepared in accordance with the interim reporting
requirements of Form 10-Q, pursuant to the rules and regulations of the
United States Securities and Exchange Commission (the "SEC"). Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of financial
position as of June 30, 1998 and December 31, 1997 and results of
operations for the three and six months ended June 30, 1998 and 1997, and
changes in financial position for the six months ended June 30, 1998 and
1997, have been included and are of a normal recurring nature. Operating
results for the three and six months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Risks and Uncertainties contained in the Company's Annual
Reports on Form 10-K and Form 10-K/A for the year ended December 31, 1997
and Form 10-Q for the quarter ended March 31, 1998 as filed with the SEC.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses for
each reporting period. The significant estimates made in the preparation
of the Company's consolidated financial statements relate to the
assessment of the carrying value of unpaid losses and loss adjustment
expenses, future policy benefits, deferred policy acquisition costs,
deferred income taxes and contingent liabilities. While management
believes that the carrying value of such assets and liabilities are
appropriate as of June 30, 1998 and December 31, 1997, it is reasonably
possible that actual results could differ from the estimates upon which
the carrying values were based.
Global Equity Corporation ("GEC") is included in the consolidated
balances of the Company as of December 31, 1997 and June 30, 1998 and for
the three and six months ended June 30, 1998 based on PICO's increased
ownership in GEC to 51.17% on August 19, 1997. PICO accounted for GEC
under the equity method of accounting for the three and six months ended
June 30, 1997. See also Note 7, "Proposed Business Combination."
2. DISCONTINUED OPERATIONS
On June 16, 1997, PICO announced the signing of a definitive agreement
to sell the Company's life and health insurance subsidiary, American
Physicians Life Insurance Company ("APL") and its wholly-owned subsidiary,
Living Benefit Administrators Agency, Inc. The closing is subject to
certain closing conditions, including regulatory approval which is still
pending. The expected purchase price is approximately $17 million less any
dividend distributed by APL to its sole shareholder, The Physicians
Investment Company ("PIC"), prior to closing. See Note 9, "Subsequent
Events." The purchase price is expected to be paid in cash.
Because APL and its subsidiary represent a major segment of the
Company's business, in accordance with Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business," APL's operations have been
classified as discontinued operations. The net assets of APL have been
shown as a single line item in the accompanying balance sheets as "Net
assets of discontinued operations." The book value assigned to such net
assets at December 31, 1997 of $15,949,989 and $16,191,263 as of June 30,
1998 was based upon the net book value of APL as of those dates as
determined on the basis of generally accepted accounting principles. The
consolidated statements of income for the three and six months ended June
30, 1998 and 1997 and consolidated statements of cash flow for the six
months ended June 30, 1998 and 1997 reflect the discontinued operations.
The primary remaining assets and liabilities of APL as of those dates were
investments, cash and cash equivalents, and accident and health insurance
reserves. The Company expects to realize a small gain on the sale.
6
<PAGE> 319
Following is an unaudited summary of APL's stand alone financial
results for the periods included in the statements of income as
discontinued operations in the accompanying financial statements:
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------ ------------ ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues $2,197 $1,204 $4,360 $2,779
Income (loss) before taxes 137 (122) 199 42
Net income (loss) 102 (98) 154 21
Net income per share-Basic and Diluted $ 0.00 $ 0.00 $ 0.00 $ 0.00
</TABLE>
3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share," effective for financial statements issued after
December 15, 1997. SFAS No. 128 requires dual presentation of "Basic" and
"Diluted" earnings per share ("EPS") by entities with complex capital
structures, replacing "Primary" and "Fully Diluted" EPS under Accounting
Principles Board ("APB") Opinion No. 15. Basic EPS excludes dilution from
common stock equivalents and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
from common stock equivalents, similar to fully diluted EPS, but uses only
the average stock price during the period as part of the computation. The
Company adopted the new method of reporting EPS for the year ended
December 31, 1997, and the June 30, 1997 financial statements have been
restated to reflect the change.
Reconciliation of the basic and diluted EPS is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income $ 1,082 $ 1,824 $ 155 $ 3,816
======= ======= ======= =======
Basic earnings per share $ 0.03 $ 0.06 $ 0.00 $ 0.12
======= ======= ======= =======
Basic weighted average common shares outstanding 32,592 32,543 32,592 32,515
Options 1,173 970 1,285 915
------- ------- ------- -------
Diluted weighted average common and
common equivalent shares outstanding 33,765 33,513 33,877 33,430
======= ======= ======= =======
Diluted earnings per share $ 0.03 $ 0.05 $ 0.00 $ 0.11
======= ======= ======= =======
</TABLE>
7
<PAGE> 320
4. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established requirements for disclosure of
comprehensive income and is effective for the Company for the year ending
December 31, 1998. Comprehensive income includes such items as foreign
currency translation adjustments, unrealized holding gains and losses on
available for sale securities, and equity changes of investee company that
had only been presented by the Company as a component of stockholders'
equity.
Reconciliation of net income as reported in the consolidated statements
of income to consolidated comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------ ------ ------- ------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net income $1,082 $1,824 $ 155 $3,816
Net unrealized appreciation (depreciation)
on available for sale investments 454 (608) 324 (946)
Net change in cumulative foreign
currency adjustments (835) (332) (1,033) (330)
------ ------ ------- ------
Total comprehensive income (loss) $ 701 $ 884 $ (554) $2,540
====== ====== ======= ======
</TABLE>
The income tax effects of items relating to other comprehensive income
(loss) were deferred income tax expenses of $244 and $174 for the three
and six months ended June 30, 1998, respectively, and deferred tax
benefits of $327 and $509 for the three and six months ended June 30,
1997, respectively.
5. COMMITMENTS AND CONTINGENCIES
The Company is subject to various litigation which 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 Company's consolidated financial
position, results of operations, or cash flows.
In connection with the sale of PICO's interests in Nevada Land and
Resource Company, LLC ("NLRC") by the former members, a limited
partnership agreed to act as consultant to NLRC in connection with the
maximization of the development, sales, leasing, royalties or other
disposition of land, water, mineral and oil and gas rights with respect to
the Nevada property. In exchange for these services, the partnership will
receive from NLRC a consulting fee calculated as 50% of any net proceeds
that NLRC actually receives from the sale, leasing or other disposition of
all or any portion of the Nevada property or refinancing of the Nevada
property provided that NLRC has received such net proceeds in a threshold
amount equal to the aggregate of: (i) the capital investment by GEC and
the Company in the Nevada property (ii) a 20% cumulative return on such
capital investment, and (iii) a sum sufficient to pay the United States
federal income tax liability, if any, of NLRC in connection with such
capital investment. Either party may terminate this consulting agreement
in April 2002 if the partnership has not received or become entitled to
receive by that time any amount of the consulting fee. No payments have
been made under this agreement through December 31, 1997. By letter dated
March 13, 1998, NLRC gave notice of termination of the consulting
agreement based on NLRC's determination of a default by the partnership
under the terms of the agreement. By letter dated March 20, 1998, legal
counsel for the partnership wrote to NLRC and stated that the partnership
was not in default under the terms of the consulting agreement. No other
substantive activity has occurred.
6. RECENT ACCOUNTING PRONOUNCEMENT
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 established
standards for disclosure about operating segments in annual statements and
selected information in
8
<PAGE> 321
interim financial reports. It also established standards for related
disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise." The new standard is effective for the
Company for the year ending December 31, 1998, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company does not expect this
pronouncement to materially change the Company's current reporting and
disclosures.
7. PROPOSED BUSINESS COMBINATION
On May 8, 1998, PICO and GEC jointly announced their consideration of a
proposal pursuant to which GEC would become a wholly-owned subsidiary of
PICO. This would be accomplished through a "Plan of Arrangement" whereby
current GEC shareholders would exchange their shares for a direct interest
in the common stock of PICO. GEC's board of directors established a
special committee of directors who are independent of PICO to consider any
proposed transaction from the perspective of GEC's public minority
shareholders.
On June 19, 1998, PICO and GEC jointly announced their intentions to
proceed with the Plan of Arrangement, the terms and conditions, and the
exchange ratio of .4628 of a share of PICO for each share of GEC.
Completion of the Plan of Arrangement is subject to regulatory and
shareholder approval.
8. REGISTRATION OF COMMON STOCK HELD BY SUBSIDIARIES
On May 11, 1998, PICO filed a Form S-3 with the SEC to register
4,572,015 shares of PICO common stock held by its subsidiaries. On May 29,
1998, PICO and GEC jointly announced their decision to withdraw those
shares as available for sale.
9. SUBSEQUENT EVENTS
On July 30, 1998, PICO announced the sale by Guinness Peat Group plc
("GPG") of 3,362,585 shares of PICO common stock to several institutional
investors at a price of $4.375 per share. Prior to this sale, GPC owned
approximately 17.6% of the Company. This sale accounts for nearly all of
GPG's holdings in PICO. In addition, PICO acquired 2,064,229 of its own
shares from GPG at a cost of $1.6 million. In return, PICO agreed to assume
GPG's obligations under call option agreements covering 2,064,229 shares of
PICO common stock having an aggregate exercise price of $1.6 million. These
call options expire on November 23, 2003.
These shares are held in treasury by PICO.
On July 31, 1998, APL paid a cash dividend to its sole shareholder,
PIC, in the amount of $8 million. This amount will be subtracted from the
expected purchase price paid for APL. See Note 2, "Discontinued
Operations."
9
<PAGE> 322
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section of the Report contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Discussion containing such forward-looking statements may be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the captions "Results of Operations -Three and Six Months Ended
June 30, 1998 and 1997," "Liquidity and Capital Resources," and "Risk Factors
and Uncertainties." Actual results for future periods could differ materially
from those discussed in this section as a result of the various risks and
uncertainties discussed herein. A comprehensive summary of such risks and
uncertainties can be found in the Company's registration statement on Form S-4
(File No. 333-06671), which was declared effective on October 3, 1996.
INTRODUCTION
- - - ------------
The Company's objective is to use its resources and those of its
subsidiaries and affiliates to increase shareholder value through investments in
businesses that the Company believes are undervalued and through the profitable
operation of its operating subsidiaries. The Company's acquisition philosophy is
to make selective investments, predominantly in public companies, for the
purpose of enhancing and realizing additional value by means of appropriate
levels of shareholder influence and control. This could involve the
restructuring of the financing or management of the companies in which the
Company invests. It may also encompass initiating and facilitating mergers and
acquisitions within the relevant industry to achieve constructive
rationalization. This business strategy was adopted in late 1994, but was not
fully implemented until 1996. There can be no assurance that sufficient
opportunities will be found or that this business strategy will be successful.
This strategy may negatively impact the business and financial condition and
results of the Company.
On November 20, 1996, Citation Holdings, Inc., an Ohio corporation ("Sub"),
merged with and into Physicians Insurance Company of Ohio ("Physicians"), (the
"Merger") pursuant to an Agreement and Plan of Reorganization (the "Merger
Agreement") dated as of May 1, 1996, as amended by and among Citation Insurance
Group, Physicians and Sub. Pursuant to the Merger, each outstanding share of
Class A Common Stock of Physicians (the "Physicians Stock") was converted into
the right to receive 5.0099 shares of PICO's common stock. As a result, (i) the
former shareholders of Physicians owned approximately 80% of the outstanding
common stock of PICO immediately after the Merger and controlled the Board of
Directors of PICO and (ii) Physicians became a wholly owned subsidiary of PICO.
Pursuant to the Merger Agreement, PICO also assumed all outstanding options to
acquire Physicians Stock.
As a result of the Merger, the business and operations of Physicians and its
subsidiaries became a substantial majority of the business and operations of the
Company.
Effective upon the Merger, PICO's name, which was previously "Citation
Insurance Group," was changed to "PICO Holdings, Inc." and the Nasdaq symbol for
the Company's stock was changed from "CITN" to "PICO."
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
SUMMARY
- - - -------
PICO reported net income of $1.1 million, or $0.03 per share, for the second
quarter of 1998, compared with net income of $1.8 million, or $0.06 per share,
during the same 1997 period. Per share amounts are expressed as basic earnings
per share. Net income for the first six months of 1998 was $0.2 million, or
$0.00 per share, versus $3.8 million, or $0.12 per share, during 1997. Net
income for the second quarters of 1998 and 1997 included income of $0.1 million
and a loss of $0.1 million, respectively, from discontinued operations, net of
taxes. Income from discontinued operations included in net income for the first
six months of 1998 and 1997, net of taxes, was $0.2 million and $0.1 million,
respectively. Discontinued operations include the results of the Company's life
and health insurance subsidiary, APL. See Note 2 of Notes to Consolidated
Financial Statements, "Discontinued Operations," for additional information.
Most of the decline in income for both the second quarter and first half of
1998 as compared to 1997 can be attributed to (1) reduced levels of investment
income as a result of a smaller portfolio of interest- and dividend-paying
securities and (2) reduced income from property and casualty ("P&C") insurance
operations which has seen declining premium levels and increased expense
10
<PAGE> 323
ratios resulting from increasing competition and tighter underwriting scrutiny
of Citation Insurance Company's ("CIC") business. Management is continually
looking for ways to realize synergies and to leverage or reduce P&C insurance
loss and loss adjustment expense and underwriting expense ratios, including
expansion into additional states and lines of business. Net income included $0.5
million in income from GEC for the second quarter, and a loss of $0.2 million
for the first six months of 1998. Although not consolidated with PICO until
third quarter 1997, GEC added $0.2 million to PICO's income during both the
second quarter and first half of 1997. Income before taxes and minority interest
are analyzed in the sections that follow.
Shareholders' equity increased $0.7 million during the second quarter to
$111.6 million at June 30, 1998. This $0.7 million increase over March 31, 1998
resulted from second quarter net income of $1.1 million and unrealized
appreciation of investments held for sale of $0.5 million, partially offset by a
$0.8 million decline in the Company's foreign currency translation adjustment
which goes directly through shareholders' equity rather than going through the
income statement. Shareholders' equity was down $0.6 million for the first six
months of 1998 from $112.2 million at December 31, 1997. This decline
principally resulted from a $1.0 million decline in the foreign currency
translation adjustment, partially offset by $0.3 million of unrealized
appreciation of investments held for sale and net income of $0.2 million for the
first half of 1998. Shareholders' equity per share calculated on an undiluted
basis at June 30, 1998 was $3.71 compared to $3.73 at December 31, 1997.
During the first half of 1998, assets decreased approximately $22.1 million
to $408.2 million. Most of this decline resulted from the payment of claims by
Physicians and was reflected in investments and cash and cash equivalent
balances which were decreased by approximately $19.5 million during the six
months. At the same time, loss and loss adjustment expense reserves dropped by
more than $21.0 million. Assets included $16.2 million in net assets from APL
classified as "net assets of discontinued operations" at June 30, 1998 and $16.0
million at December 31, 1997.
Revenues from continuing operations of $13.7 million for the second quarter
of 1998 equaled those of the prior 1998 quarter but were $3.5 million less than
in the second quarter of 1997. Revenues for the first half of 1998 were $27.4
million, down $10.8 million from the previous year. Premium income was down $5.5
million for the second quarter and $10.9 million for the first half of 1998
compared to the same 1997 periods. As discussed in the property and casualty
section below, several factors have contributed to the reduced property and
casualty insurance revenues, including more selective underwriting of CIC's
risks to reduce exposure to claims and increasing competition for commercial
business in California. Investment income, net of expenses, was down $0.9
million for the quarter and for the six months as a result of the decreasing
level of interest- and dividend-paying investments and a $0.3 million prior
period adjustment to investment income. Realized investment gains, which tend to
fluctuate widely from period to period, were $1.9 million above those of the
second quarter of 1997 and $0.5 million less than those of the first half of
1997. Nearly $2.0 million in investment gains were realized by GEC during the
second quarter of 1998 and $2.5 million during the six months. Revenues by
business segment are shown in the sections that follow.
The Company's ongoing operations are organized into five segments: portfolio
investing; surface, water, geothermal and mineral rights; property and casualty
insurance; medical professional liability insurance, and other operations. GEC's
portfolio investing results are shown separately below for consistency of
presentation and to simplify analysis since GEC's results were not consolidated
with those of PICO during the first half of 1997. Life and health insurance
operations are shown as discontinued operations based upon the pending sale of
those operations. See Note 2 of Notes to Consolidated Financial Statements,
"Discontinued Operations," for additional information.
11
<PAGE> 324
Revenues and income (loss) before taxes and minority interests from
CONTINUING OPERATIONS, by business segment, are shown in the schedules that
follow.
Operating Revenues--Continuing Operations:
- - - ------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Portfolio Investing $(0.4) $ 0.6 $ 0.5 $ 3.8
Portfolio Investing--Global Equity Corporation 2.3 3.3
Surface, Water, Geothermal and Mineral Rights 0.4 0.6
Property and Casualty Insurance 10.4 15.1 21.1 31.7
Medical Professional Liability Insurance 0.5 1.4 1.2 2.4
Other 0.5 0.1 0.7 0.3
----- ----- ----- -----
Total Revenues-Continuing Operations $13.7 $17.2 $27.4 $38.2
===== ===== ===== =====
</TABLE>
Income (Loss) Before Taxes and Minority Interest--Continuing Operations:
- - - ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
<S> <C> <C> <C>
Portfolio Investing $(1.1) $(0.6) $ 2.8
Portfolio Investing--Global Equity Corporation 1.5 1.5
Surface, Water, Geothermal and Mineral Rights (0.3) (0.7)
Property and Casualty Insurance 1.4 $2.0 1.0 2.9
Medical Professional Liability Insurance (0.3) 0.9 (0.4) 0.2
Other -- (0.3) (0.1) (0.5)
----- ---- ----- -----
Income Before Tax and Minority Interest $ 1.2 $2.6 $ 0.7 $ 5.4
===== ==== ===== =====
</TABLE>
PORTFOLIO INVESTING
- - - -------------------
Portfolio investing operations are principally conducted by PICO, Physicians
and GEC. GEC's portfolio investing results are shown separately in the section
following this one. Investment revenues and realized investment gains or losses
generated by Physicians are first allocated to the medical professional
liability ("MPL") insurance segment equal to the amount of loss reserve discount
accretion recorded during the period. The remainder is shown as portfolio
investing revenue.
Physicians and The Professionals Insurance Company ("PRO") ceased writing
MPL business in 1995. For a number of reasons, including the existence of an
experienced claims adjustment staff and Physicians' success in managing invested
assets, it was decided that it would be more advantageous to manage the assets
remaining at the cessation of writing the MPL insurance business than to sell
off or fully reinsure the reserves. As a result, assets are managed for the
maximum overall return, within prudent safety guidelines. Assets are not
designated on an individual security basis as either MPL or portfolio investing.
As a result, Physicians' invested assets
12
<PAGE> 325
produce income in both MPL and portfolio investing segments.
Revenues and income or losses generated by PICO through its own portfolio
are assigned entirely to portfolio investing. GEC's portfolio investing
operations exclude the results attributable to the surface, water, geothermal
and mineral rights segment.
Portfolio investing revenues for the first six months of 1998 excluding GEC,
which is stated separately below, amounted to approximately $0.5 million
compared to $3.8 million during the first six months of 1997. Excluding realized
investment gains, investment income from portfolio investing decreased $0.5
million during the first half of 1998 compared to the same 1997 period. This
decrease was due to reduced portfolio levels of interest- and dividend-paying
securities and a $0.3 million prior period adjustment of investment income
recorded in the second quarter, partially offset by an approximate $0.8 million
increase in investment income during the first quarter of 1998 relating to the
take down of a capitalized interest asset no longer needed. A realized
investment loss of $0.1 million was recorded during the first half of 1998
versus realized investment gains of $2.7 million during 1997, which included
more than $1.9 million in realized gains from the sale of the Company's
investment in Amvestors Financial Corporation. Additional revenues from realized
investment gains of $2.5 million and $2.0 million were recorded during the first
half and the second quarter of 1998, respectively, and are included in the
"Portfolio Investing--Global Equity Corporation" segment following.
During the second quarter of 1998, portfolio investing revenues declined
$1.0 million compared to the 1997 second quarter amount of $0.6 million. As
previously discussed, reduced portfolio levels and a $0.3 million reversal of
previously recorded interest income were primarily responsible for this decline.
Portfolio investing revenues (charges) are summarized below:
<TABLE>
PORTFOLIO INVESTING
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Portfolio Investing Revenues (Charges):
- - - ---------------------------------------
Realized Investment Gains (Losses) $ -- $0.1 $(0.1) $2.7
Investment Income (Charges) (0.4) 0.5 0.6 1.1
----- ---- ----- ----
Portfolio Investing Revenues (Charges) $(0.4) $0.6 $ 0.5 $3.8
===== ==== ===== ====
</TABLE>
As shown in the following comparison, portfolio investing operations,
excluding those of GEC, contributed a loss of $0.6 million to pre-tax operating
income during the first six months of 1998 compared to income of $2.8 million
during the same 1997 period. As shown above, realized investment gains accounted
for approximately $2.8 million of this $3.4 million swing. Declining levels of
interest- and dividend-paying securities partially offset by the
previously-discussed $0.8 million reversal of a no longer needed capitalized
interest asset account made up the remaining difference.
Portfolio investing produced a pre-tax loss for the second quarter of 1998
of $1.1 million compared to a break even during the second quarter of 1997. Of
this $1.1 million variance between years, $0.3 million resulted from the
previously-discussed reversal of prior period interest income by Physicians. The
remaining $0.8 million decline in portfolio investing pre-tax income resulted
from the reduced portfolio of interest- and dividend-paying securities.
Investment income varies significantly from period to period, influenced
greatly by the timing of the realization of investment gains and losses.
Consequently, future results cannot and should not be predicted based upon past
performance alone.
13
<PAGE> 326
The breakdown of pre-tax operating income or loss from portfolio investing
operations follows:
<TABLE>
PORTFOLIO INVESTING
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Portfolio Investing Income (Loss) Before Tax:
- - - ---------------------------------------------
PICO and Physicians $(1.1) $(0.2) $(0.6) $2.6
Equity in Unconsolidated Subsidiaries 0.2 0.2
----- ----- ----- ----
Portfolio Investing Pre-Tax Income (Loss) $(1.1) $ -- $(0.6) $2.8
===== ===== ===== ====
</TABLE>
PORTFOLIO INVESTING--GLOBAL EQUITY CORPORATION
- - - ----------------------------------------------
GEC is an international operating and investment company with offices in
Toronto, Ontario, Canada and in La Jolla, California. GEC holds a portfolio of
equity securities and convertible instruments in North American, Asian and
European companies, as well as operating ownership of a number of interests in
surface, water, geothermal and mineral rights in the western United States. Such
operations are reported below in a separate segment entitled "Surface, Water,
Geothermal and Mineral Rights," and are excluded from this discussion of GEC's
portfolio investments.
Following is a breakdown of GEC's portfolio investing revenues and pre-tax
income for the periods shown:
<TABLE>
PORTFOLIO INVESTING--GLOBAL EQUITY CORPORATION
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1998 1998
------------ ----------
(in millions)
<S> <C> <C>
Global Equity Corporation-Revenues:
- - - -----------------------------------
Realized Investment Gains $ 2.0 $ 2.5
Investment Income 0.3 0.6
Other Income 0.2
----- -----
Global Equity Corporation Revenues $ 2.3 $ 3.3
===== =====
GEC Income (Loss) Before Tax and Minority Interest:
- - - ---------------------------------------------------
Global Equity Corporation $ 1.8 $ 2.0
Equity in Unconsolidated Affiliates (0.3) (0.5)
----- -----
Income Before Tax and Minority Interest $ 1.5 $ 1.5
===== =====
</TABLE>
As shown above, GEC added $3.3 million and $2.3 million to 1998 first half
and second quarter revenues, respectively, including realized investment gains
of $2.5 million for the six months and $2.0 million for the quarter. As
discussed in the following section, GEC's subsidiaries engaged in surface,
water, geothermal and mineral rights activities contributed additional revenues
to the Company
14
<PAGE> 327
and an additional loss before tax and minority interest. As of June 30, 1998, on
a stand-alone basis, approximately 47% of GEC's assets consisted of investments
in debt and equity instruments and cash and cash equivalents. An additional 37%
represents surface, water, geothermal and mineral rights operations.
GEC's portfolio investing operations contributed $1.5 million in income to
both the first six months and the second quarter of 1998. As previously
discussed, these amounts included realized investment gains of $2.5 million and
$2.0 million for the first six months and second quarter, respectively.
SURFACE, WATER, GEOTHERMAL AND MINERAL RIGHTS
- - - ---------------------------------------------
Effective November 14, 1995, a wholly-owned subsidiary of GEC acquired all
the outstanding common stock of Vidler Water Company, Inc. ("Vidler"), a
Colorado corporation engaged in the water marketing and transfer business.
Vidler's business plan calls for Vidler to identify areas where water supplies
are in the greatest demand; to facilitate the transfer of water rights from
current ownership to Vidler; to develop water storage facilities; to reallocate
water to areas where needed through various distribution means; and to sell and
lease water supplies to municipalities, developers and others. Since its
acquisition, Vidler and its immediate parent company have purchased water rights
and related assets in Colorado, Nevada and Arizona. On April 23, 1997, GEC
acquired 74.77% of the common stock of NLRC and PICO acquired the remaining
25.23%. NLRC owns approximately 1.365 million acres of deeded land located in
northern Nevada, together with appurtenant water, geothermal and mineral rights.
NLRC is actively engaged in maximizing the property's value in relation to water
rights, mineral rights, geothermal resources, and land development.
As these subsidiaries of the Company were not part of the consolidated group
until GEC joined the consolidation in the third quarter of 1997, prior years'
results are not included with those of the Company. Revenues from continuing
operations included in the consolidated financial statements of the Company from
surface, water, geothermal and mineral rights generated by Vidler and NLRC were
approximately $0.6 million and $0.4 million during the first half and second
quarter of 1998, respectively. Revenues include land sales; lease of land,
principally for grazing purposes; water sales and leasing and other income.
Operating expenses exceeded revenues for both periods producing losses from
continuing operations before taxes and minority interests of $0.7 million and
$0.3 million for the six months and second quarter, respectively.
PROPERTY AND CASUALTY INSURANCE
- - - -------------------------------
Sequoia Insurance Company ("Sequoia") and CIC account for all of the ongoing
P&C insurance revenues. These companies write predominately light commercial and
multiple peril insurance coverage in central and northern California.
Sequoia and CIC are continually seeking ways to realize savings and take
advantage of synergies and to combine operations, wherever possible. To this
end, Sequoia and CIC consolidated their home office operations in Monterey,
California in July 1997.
As shown below, earned premiums made up most of the P&C revenues. Premiums
are earned pro-rata throughout the year according to the coverage dates of the
underlying policies.
15
<PAGE> 328
Revenues and pre-tax income from property and casualty operations for the
periods shown were as follows:
<TABLE>
PROPERTY AND CASUALTY INSURANCE
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
P & C Revenues: (in millions)
- - - ---------------
Earned Premiums - Sequoia $ 4.4 $ 8.0 $ 9.0 $15.3
Earned Premiums - Citation 4.3 5.7 8.8 12.9
Investment Income 1.4 1.2 2.8 2.9
Realized Investment Gains 0.1 0.1 0.2
Other 0.2 0.2 0.4 0.4
----- ----- ----- -----
Total P&C Revenues $10.4 $15.1 $21.1 $31.7
===== ===== ===== =====
P & C Income Before Taxes:
- - - --------------------------
Sequoia Insurance Company $ 0.7 $ 1.5 $ 0.4 $ 2.0
Citation Insurance Company 0.7 0.5 0.6 0.9
----- ----- ----- -----
Total P&C Income Before Tax $ 1.4 $ 2.0 $ 1.0 $ 2.9
===== ===== ===== =====
</TABLE>
Total P&C insurance revenues for the first six months of 1998 were $21.1
million, down $10.6 million from the first half of 1997. As shown above,
declining earned premiums accounted for $10.4 million of this decrease.
Principally as a result of continuing increased underwriting selectivity of
CIC's business and aggressive competition for commercial multiple peril business
in California, Sequoia's and CIC's earned premiums for the first six months of
1998 were down $6.3 and $4.1 million, respectively, from those of the same 1997
period. Much of the decline in Sequoia's earned premiums resulted from a
reinsurance pooling agreement effective January 1, 1998 which provides for the
pooling of all insurance premiums, losses, loss adjustment expenses ("LAE") and
administrative and other insurance operating expenses between Sequoia and CIC.
The reinsurance pooling agreement calls for these items to be split equally
between the two companies. All new P&C insurance applications and policies
coming up for renewal are now being processed through Sequoia and subjected to
Sequoia's underwriting standards which are much tighter than those previously
employed by CIC. As a result, a significant portion of CIC's prior book of
business has not been renewed.
As compared to the second quarter of 1997, second quarter 1998 P&C revenues
of $10.4 million declined $4.7 million. This $4.7 million decline included a
$5.0 million reduction in earned premiums and a partially offsetting $0.3
million increase in investment income and realized investment gains. As
discussed above, all of CIC's business is now being processed through Sequoia
and is subjected to much tighter underwriting standards resulting in fewer new
policies and fewer renewals than written in the past by CIC. In addition,
competition within California for commercial P&C insurance business continues at
a heightened level.
P&C insurance operations provided $1.0 million in income before taxes for
the first six months of 1998 compared to $2.9 million during the first half of
1997. As shown above, $1.6 million of this $1.9 million decline was attributable
to Sequoia and $0.3 million arose from CIC. Income before taxes for the first
six months of 1997 was greater than during the first half of 1998 due to the
higher level of 1997 earned premiums, lower loss and LAE and expense ratios (see
industry ratios below), and approximately $0.5 million more in realized
investment gains. The recent "El Nino" phenomenon also had a significant impact
on the first six months of 1998. Sequoia and CIC management estimates the cost
of storm losses incurred by the companies as a result of the 1998 El Nino
phenomenon to be approximately $1.0 million.
P&C insurance pre-tax income for the second quarter of 1998 of $1.4 million
was approximately $0.6 million less than the $2.0 million recorded during the
second quarter of 1997. As previously discussed, P&C insurance premiums earned
during the second quarter of 1998 were down $5.0 million from those of the same
1997quarter, while corresponding losses and LAE declined by $4.1 million,
accounting for $0.9 million of the $0.6 million change in pre-tax income between
the two quarters. Partially offsetting this net $0.9 million decline, investment
income and realized investment gains increased approximately $0.3 million. As
shown above, Sequoia's pre-tax income decreased approximately $0.8 million
during the 1998 second quarter as compared to the 1997 second quarter, while
CIC's increased $0.2 million. Much of CIC's improvement resulted from the
reinsurance pooling agreement previously discussed, producing a corresponding
decline in Sequoia's individual company results.
16
<PAGE> 329
Industry ratios as determined on the basis of generally accepted accounting
principles ("GAAP") for CIC for the periods shown were as follows:
CIC'S GAAP INDUSTRY RATIOS
--------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Loss and LAE Ratio 64.4% 95.4% 75.0% 83.8%
Underwriting Expense Ratio 43.6% 13.9% 40.5% 26.0%
----- ----- ----- -----
Combined Ratio 108.0% 109.3% 115.5% 109.8%
===== ===== ===== =====
Industry ratios as determined on a GAAP basis for Sequoia for the periods
shown were as follows:
SEQUOIA'S GAAP INDUSTRY RATIOS
------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Loss and LAE Ratio 51.9% 46.7% 67.8% 58.9%
Underwriting Expense Ratio 47.1% 39.7% 44.1% 37.9%
---- ---- ----- ----
Combined Ratio 99.0% 86.4% 111.9% 96.8%
==== ==== ===== ====
Loss and LAE Ratios, Underwriting Expense Ratios and Combined Ratios are
calculated using net earned premiums as a denominator. Theoretically, a combined
ratio of less than 100% indicates that the insurance company is making a profit
on its base insurance business before consideration of investment income,
realized investment gains or losses, extraordinary items, taxes and other
non-insurance items.
The resulting increase in storm losses from the recent "El Nino" phenomenon
was the principal cause of the increase in the loss and LAE ratios for Sequoia
during the first six months of 1998 as compared to 1997. The improvement in
CIC's loss and LAE ratios during the second quarter and first six months of 1998
was due to the reinsurance pooling agreement with Sequoia effective January 1,
1998 (Sequoia's loss and LAE ratios were much better than those of CIC prior to
the reinsurance pooling agreement) and an improvement in CIC's own book of
business resulting from subjecting CIC's business to the more stringent risk
selection standards of Sequoia beginning in 1997. The increase in the
underwriting expense ratios of both Sequoia and CIC during the second quarter
and first six months of 1998 as compared to those of the same 1997 periods
principally resulted from fixed overhead expenses being spread over a smaller
1998 premium base. The increase in Sequoia's loss and LAE ratio for the three
months ended June 30, 1998, as compared to 1997 was principally a result of
fixed claims overhead expenses being divided by a smaller premium base.
Sequoia and CIC continue to identify and take advantage of synergies and
other cost savings and to lessen the companies' exposure to undue risk. However,
there can be no assurance that Sequoia and CIC will be successful in reducing
their policies with higher loss ratios or that their loss ratios and/or expense
ratios will improve in the future.
MEDICAL PROFESSIONAL LIABILITY OPERATIONS
- - - -----------------------------------------
Physicians' and PRO's MPL insurance business was sold to Mutual Assurance
Inc. ("Mutual") on August 28, 1995. All new and renewal MPL insurance business
written between July 16 and December 31, 1995 was 100% reinsured by Mutual.
Physicians and PRO ceased writing new and renewal MPL insurance policies
effective January 1, 1996. Physicians continues to administer and adjust the
remaining claims and LAE reserves. Based upon careful analysis of various
alternative scenarios for handling the runoff of the remaining claims reserves,
management determined that the best option was to process the existing claims
internally with existing staff, rather than through a third party administrator
or through an outright sale of the claims and LAE reserves. In addition, it is
17
<PAGE> 330
expected that shareholders' equity may be better served by retaining the
investments necessary to fund the payment of these claims and LAE reserves,
managing them along with the rest of the Company's investment holdings, as
opposed to selling or fully reinsuring these reserves and giving up the
corresponding funds. However, there can be no assurance that funds generated by
such retained investments will exceed claims. Accordingly, although the
companies effectively ceased writing MPL insurance in 1995, MPL is treated as a
separate business segment of continuing operations due to the continued
management of claims and associated investments.
Revenues and pre-tax income or loss from MPL operations included the
following:
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
MPL Revenues:
- - - -------------
Earned Premiums $(0.2) $0.3 $(0.2) $0.3
Investment Income, Net of Expenses 0.7 1.1 1.4 2.1
----- ---- ----- ----
MPL Revenues $ 0.5 $1.4 $ 1.2 $2.4
===== ==== ===== ====
MPL Income (Loss) Before Tax: $(0.3) $0.9 $(0.4) $0.2
- - - ----------------------------- ===== ==== ===== ====
Since the withdrawal of Physicians and PRO from their personal automobile
and homeowners lines of business in the late 1980's, MPL has, for all intents
and purposes, been these two companies' only sources of insurance premiums.
MPL insurance revenues amounted to $1.2 million for the first six months of
1998, just half of the $2.4 million recorded during the first six months of
1997. As shown above, approximately $0.5 million of this $1.2 million swing
resulted from adjustments to premiums earned on policies written in prior years.
The remaining $0.7 million decline was attributable to investment income.
Investment income decreased compared to 1997 principally as a result of the
reduced level of MPL claims and the associated reduced level of invested assets
allocated to the MPL insurance business segment. MPL revenues for the second
quarter of 1998 were $0.5 million compared to $1.4 million during the same 1997
quarter.
MPL operations produced a pre-tax loss of approximately $0.4 million during
the first six months of 1998 compared to $0.2 million in income during the same
1997 period. Premium adjustments as shown above accounted for $0.5 million of
this $0.6 million swing between years. The second quarter of 1998 resulted in a
pre-tax loss of $0.3 million compared to $0.9 million in income from the same
1997 quarter. Premium adjustments and reduced investment income as shown above
accounted for $0.9 million of this difference. Increased expenses provided the
remainder of this $1.2 million swing. Although second quarter MPL expenses were
in line with expenses from previous quarters, second quarter 1997 expenses were
abnormally low due to a prior period expense reversal recorded during that
period.
Physicians' claims department staff continues to process the runoff of the
remaining MPL loss and loss adjustment expense claims which is progressing
routinely. At June 30, 1998, MPL reserves totaled approximately $ 64.3 million,
net of reinsurance and discount. This compares to $77.5 million at December 31,
1997. MPL loss and LAE reserves continue to decline as a result the disposition
of claims.
MPL INSURANCE -- LOSS AND LAE RESERVES
June 30, December 31,
1998 1997
-------- ------------
(in millions)
Direct Reserves $106.1 $121.4
Ceded Reserves (33.9) (34.8)
Discount of Net Reserves (7.9) (9.1)
------ ------
Net MPL Reserves $ 64.3 $ 77.5
====== ======
18
<PAGE> 331
Although MPL reserves are certified annually by two independent actuaries,
as required by Ohio insurance regulations, significant fluctuations in reserve
levels can occur based upon a number of variables used in actuarial projections
of ultimate incurred losses and LAE.
OTHER OPERATIONS
- - - ----------------
Other operations consist principally of the operations of PICO's subsidiary,
Summit Global Management, Inc. ("Summit"). Also included are the activities of
Raven Development Company ("Raven"), a real estate development subsidiary which
is winding down its operations, and CLM Agency, Inc ("CLM"), an independent
California insurance agency with minimal activity.
Revenues and pre-tax income (loss) from other operations are summarized
below for the periods shown:
<TABLE>
OTHER OPERATIONS
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
(in millions)
<S> <C> <C> <C> <C>
Revenues from Other Operations:
- - - -------------------------------
Investment Management Services $ 0.3 $ 0.3 $ 0.6 $ 0.6
Less: Intercompany Portfolio Mgmt. Charges (0.1) (0.3) (0.2) (0.4)
Other 0.3 0.1 0.3 0.1
----- ----- ----- -----
Revenue from Other Operations $ 0.5 $ 0.1 $ 0.7 $ 0.3
===== ===== ===== =====
Other Operations-Income (Loss) Before Tax:
- - - ------------------------------------------
Investment Management Services $ 0.1 $ 0.2
Less: Intercompany Portfolio Mgmt. Charges $(0.1) (0.3) $(0.2) (0.3)
Other 0.1 (0.1) 0.1 (0.4)
----- ----- ----- -----
Other Operations-Income (Loss) Before Tax $ -- $(0.3) $(0.1) $(0.5)
===== ===== ===== =====
</TABLE>
Revenues from other operations increased $0.4 million for the first six
months of 1998 to $0.7 million compared to $0.3 million during the same 1997
period. These revenues for 1998 included approximately $0.4 million in Summit's
investment management fees, excluding those billed to related parties, compared
to $0.2 million during the first half of 1997. In addition, revenues included
$0.1 million in real estate sales generated by Raven during the first six months
of both 1998 and 1997. The first six months of 1998 also included $0.2 million
in commission income from prior periods recorded by CLM in the second quarter.
Revenues from other operations for the second quarter of 1998 of $0.5 million
increased $0.4 million over the second quarter of 1997 due to increased
investment management fees and the CLM commission income. No commission income
was recorded by CLM during the comparable 1997 periods.
Pre-tax, other operations showed a $0.1 million loss for the first six
months and broke even for the second quarter of 1998 compared to a $0.5 million
loss during the first half of 1997 and a $0.3 million loss during the second
quarter of 1997. The improvement in the performance of other operations during
the first six months of 1998 compared to 1997 was attributable to approximately
$0.1 million in income from CLM in 1998 versus none in 1997 and a small amount
of income from Stonebridge Partners AG (a Swiss affiliate which was deactivated
in 1997) compared to a $0.3 million loss during the first six months of 1997.
Income from Summit declined slightly during the first six months of 1998 due to
increased operating expenses. The improvement in second quarter 1998 operations
as compared to 1997 of $0.4 million was due to approximately $0.1 million in
income from CLM in 1998 compared to none in 1997, an approximate $0.1 million
decrease in Summit's income due to increased expenses in 1998, and a $0.4
million improvement in income from other activities, including Raven and
Stonebridge Partners AG.
DISCONTINUED OPERATIONS
- - - -----------------------
Discontinued operations consist of the operations of APL. APL, Physicians'
wholly-owned life insurance subsidiary, produced
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revenues of $4.4 million and pre-tax income of approximately $0.2 million during
the first half of 1998. This compares to $2.8 million in revenues and pre-tax
income of $0.1 million in 1997. Second quarter 1998 revenues were $2.2 million
versus $1.2 million in 1997. Pre-tax income for the second quarter of 1998 was
$0.1 million compared to a $0.1 million loss in 1997.
APL has been concentrating its efforts on its unique critical illness
product "Survivor Key" during the past several years. This life insurance
product combines the benefits of a lump sum cash payout upon the diagnosis of
certain critical illnesses with a death benefit. Gross written premiums for
Survivor Key continually increased from 1994 through 1997.
On June 16, 1997, Physicians announced the signing of a binding agreement to
sell APL subject to certain closing conditions including regulatory approval,
which is still pending. See Note 2 to Consolidated Financial Statements,
"Discontinued Operations," regarding the pending sale of APL and its wholly
owned subsidiary.
The net assets of discontinued operations are shown as one line on the
balance sheets as net assets of discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES --JUNE 30, 1998 AND 1997
PICO is a holding company whose assets principally consist of the stock of
its subsidiaries. The Company continually evaluates its existing operations and
searches for new opportunities in order to maximize shareholder value. Because
of this business strategy, the Company's cash needs and those of its
subsidiaries vary considerably from period to period. At times cash may not be
readily available when an opportunity arises requiring the liquidation of
securities, advances from subsidiaries, direct purchases of investments by
subsidiaries, or the borrowing of funds. It may also become necessary and/or
advantageous for the Company to offer stock or debt through public offerings
from time to time. At times the Company may come to possess cash balances in
excess of cash needs. Such cash is invested to provide maximum returns within
the constraint of remaining liquid enough to meet expected future cash
requirements. The Company's principal sources of funds are its available cash
resources, liquidation of assets, bank borrowings, public financings, management
and other fees, and borrowings.
Each company within the group is expected to be able to stand on its own
and cover its own cash flow needs without the need for long-term borrowing or
additional capital infusions from within the Company, with the possible
exceptions of additional capital requirements of Sequoia and CIC to maintain or
improve their Best ratings or to meet minimum capital requirements. Physicians
contributed an additional $5.5 million to Sequoia in 1997 for this purpose.
Nevertheless, from time to time funds may be needed to cover short-term
operating shortfalls (i.e. timing differences) or to expand the Company's
operations (principally through investments and/or acquisitions) both at the
subsidiary level and at the parent company level. Additional funding may be
generated through, among other things, disposition or transfer of existing
assets, issuance of additional capital stock through stock offerings, or through
a public debt offering or other borrowing.
Insurance has always been and continues to be a major source of funds for
the Company. Physicians initially provided virtually all the funding necessary
for the Company to execute its revised business strategy. Since the acquisition
of Sequoia in 1995, management has made significant strides in improving
Sequoia's operating performance. Management has taken a number of steps to
improve CIC's profitability and cash flow since its acquisition in November
1996, including the sale of its workers' compensation business and its
subsidiary, Citation National Insurance Company, in June 1997. Physicians' cash
flows have had the greatest impact on the consolidated group during the past
several years and should continue to do so for the foreseeable future, due to
the wind down of the MPL business. Physicians, Sequoia and Citation had cash and
cash equivalent balances at June 30, 1998 of $ 40.5 million. This compares to
$46.5 million at December 31, 1997. A large portion of Sequoia's and Citation's
investments is kept in the form of cash and cash equivalents to pay claims and
expenses, due to the relatively short lag period between the receipt of premiums
and payment of claims in the commercial property and casualty insurance business
lines written by those companies.
As a result of ceasing to write MPL insurance, Physicians' operating cash
flows have become negative and should continue to be negative for the
foreseeable future. Positive cash flows from other sources within Physicians,
primarily reinsurance recoveries, and the sale of invested assets may partially
or fully offset such uses of cash. Major cash outflows most likely will include
the funding of claims and loss adjustment expenses, investment purchases, and
operating costs.
As of December 31, 1995, when Physicians and PRO ceased writing MPL,
Physicians and PRO reported discounted unpaid loss and loss adjustment expense
reserves of approximately $136.2 million, net of reinsurance. Based upon
projections from past actuarial information, more than 75%, or $102 million, of
these reserves is expected to be settled by the end of the year 2000. Past
experience
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indicates that funding requirements should be greatest in the first through
third years (1996 through 1998), accounting for more than 60% of the total
eventual reserve and loss adjustment expense payments. As expected, loss and LAE
reserves at December 31, 1996 declined more than 17.1% to $112.9 million after
payment of more than $30 million in claims and LAE. During 1997, MPL reserves
decreased $35.4 million, or 31.4%, to $77.5 million as of December 31, 1997
after payment of more than $38 million in losses and LAE. MPL reserves declined
$13.2 million during the first six months of 1998 to $64.3 million. This
represents more than a 50% decline in net discounted loss and LAE reserves since
December 31, 1995.
The Company's insurance subsidiaries attempt to structure the duration of
invested assets to match the cash flows required to settle the related unpaid
claims liabilities. Invested assets provide adequate liquidity to fund projected
claims and LAE payments for the coming years. The Ohio and California Insurance
Departments monitor and set guidelines for the insurance companies' investments.
The Ohio and California Insurance Departments also set minimum levels of
policyholder capital and surplus and monitor these levels through various means.
To the extent that funds necessary for settling claims and paying operating
expenses are not provided by existing cash and cash equivalents, investment
income, reinsurance recoveries, and rental and other income, then invested
assets will be liquidated. Short term and fixed maturity investments are managed
to mature according to projected cash flow needs. Equity securities will be
converted to cash as additional funds are required, with an anticipated maximum
liquidation lead-time of approximately six months.
At June 30, 1998, Physicians' and PRO's investment portfolios on a
stand-alone basis contained invested assets of approximately $122.7 million,
plus cash and cash equivalents of $4.3 million. These invested assets are in
excess of the present value of expected future payouts of losses and loss
adjustment expenses (discounted at 4%) of approximately $64.3 million.
Physicians is in the process of selling APL, its life and health insurance
subsidiary. When sold, the proceeds from this sale will provide additional
available cash.
Management hopes to maximize the return on all assets, including those
needed to fund the eventual wrap-up of the MPL reserves through, among other
things, value investing and managing the invested assets internally rather than
liquidating assets to pay a third party to oversee the runoff of the existing
claims. Management also elected to handle the runoff of the MPL claims
internally to continue to maintain a high standard of claims handling and to
maximize shareholder values. While management expects that certain of the
Company's current and future investments may increase in value, offsetting some
of the decline in assets during the period of runoff, the impact of future
market fluctuations on the value of the Company's invested assets cannot be
accurately predicted. Although assets will be managed to mature or liquidate
according to expected payout projections, at times, in response to abnormal
funding demands, some invested assets may need to be sold at inopportune times
during periods of decline in the stock market or declines in the market values
of the individual securities. Such forced sales are expected to occur
infrequently and only under extreme circumstances; however, this cannot be
guaranteed.
The Company's active P&C insurance subsidiaries, Sequoia and CIC, should
provide positive cash flows from operations once industry combined ratios (See
the discussion of industry ratios under "Property and Casualty Insurance.")
stabilize below 100% and premium writings remain at a constant or increasing
level. At times it may be necessary to liquidate invested assets to provide the
additional funds necessary to cover operating cash needs. Summit has been
producing positive cash flows from operations and is expected to continue to do
so in the future by producing investment management fees in excess of operating
costs.
A significant portion of the Company's assets (approximately 18.5% as of
June 30, 1998) consist of surface, water, geothermal and mineral rights. Since
the acquisitions of Vidler and NLRC by GEC and PICO, administrative and
operating expenses have exceeded their on-going revenues. The Company
anticipates that Vidler and NLRC will continue to incur operating losses from
their operations until such time as they are able to receive significant
revenues from development of projects, including water storage and supply
programs, leases, royalties, and property sales. In addition to cash necessary
to fund operating activities, Vidler and NLRC are expected to require additional
funding for growth through acquisitions of additional surface, water, geothermal
and mineral rights and other activities. These additional cash needs may require
funding from sources outside the Company in the form of debt or equity.
As shown in the accompanying Consolidated Statements of Cash Flows,
operating activities used cash flows of $3.0 million during the first half of
1998 compared to $23.8 million used during the same 1997 period. The main
sources of negative cash flow from operating activities for the first six months
of 1998 were MPL operations and P&C operations. Physicians and PRO produced
negative cash flow from operations of approximately $6.4 million due to the
payment of claims and operating expenses in excess of investment and other
income. Sequoia and CIC, principally as a result of reduced premium levels,
experienced approximately $2.4 million in operating cash outflows during the
same period. These amounts compare to net cash outflows from operations during
the first half of 1997 of $22.9 million from Physicians and PRO and $2.6 million
from Citation and Sequoia. GEC provided positive cash
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flows from operating activities for the first half of 1998 of approximately $8
million, but was not included in the 1997 consolidated financial statements. The
principal sources of the favorable $20.8 million improvement in cash flow from
operations between the first half of 1998 and 1997 were the $8 million added by
GEC and a $12.2 million reduction in the amount of federal income taxes paid in
1998 as compared to 1997. Federal income taxes paid in the first half of 1997
principally arose from realized investment gains recorded in the fourth quarter
of 1996. Federal income tax deposits on 1997 taxable income were for the most
part paid in 1997 since the large realized investment gain from the sale of the
Company's Resource America Inc. common stock occurred in the third quarter of
1997.
Cash provided by investing activities during the first half of 1998 was $1.4
million compared to $21.0 million during the comparable 1997 period. The higher
level of cash provided by investing activities in 1997 resulted from the sales
of mature investments. Since that time, the Company has made significant
investments in surface, water, geothermal and mineral rights. These assets are
still in the process of development and, therefore, did not provide realized
investment gains or losses during the first half of 1998.
No cash was provided or used by financing activities during the first half
of 1998, compared to cash used during the first half of 1997 of $2.9 million.
On May 5, 1997, PICO agreed to provide a line of credit to PC Quote. The
initial credit was for $1 million with repayment due September 30, 1997. The
credit has since been increased to $3,250,000 with repayment due December 31,
1998.
At June 30, 1998, the Company had no significant commitment for future
capital expenditures, other than in the ordinary course of business and as
discussed herein. Vidler has committed approximately $6.3 million in deposits
and options to acquire additional surface, water, geothermal and mineral rights.
The Company has also committed to maintain Sequoia's capital and statutory
policyholder surplus level at a minimum of $7.5 million. Sequoia was well above
this level as of December 31, 1997. The Company has also committed to make every
attempt to maintain Sequoia's Best rating at or above the "B++" (Very Good)
level, which may at some time in the future require additional capital infusions
into Sequoia by the Company.
As discussed in Note 7 to Notes to Consolidated Financial Statements,
"Proposed Business Combination," PICO and GEC have announced their intent to
proceed with a "Plan of Arrangement" whereby GEC shareholders would receive
.4628 of a share of PICO for each share of GEC ("the Business Combination"). GEC
would then become a wholly-owned subsidiary of PICO. While the Plan of
Arrangement, if approved by shareholders and regulatory bodies, will
significantly increase the number of PICO shares outstanding and the number of
shares treated as treasury shares, cash resources should only be affected by the
expenses to implement the Business Combination and any cash needed by GEC to pay
dissenting shareholders for their shares.
The Company continues to address the issue of the compatibility of systems
software with the year 2000. Insurance premium, loss and statistical systems are
particularly critical to the successful operation of the insurance companies. It
is believed that the majority of these systems, which are different among the
various insurance companies, currently correctly interpret the year 2000. The
MPL insurance systems are known, however, to be incompatible. Projects are under
way to test all insurance systems and correct the logic of these systems to make
them compatible with the year 2000. Other operating systems consist of various
accounting, billing, disbursement, and tracking systems which may or may not be
compatible with the year 2000. For the most part, these systems are in the
process of being updated by their vendors. Tests will be run to ensure the
compatibility of these systems, also. Management expects these projects to be
completed by the end of 1998. In addition to resources expended in researching
and correcting systems, additional outlays may be necessary to purchase and
install new software compatible with the year 2000. The estimated costs of this
project are undetermined at this time.
CAPITAL RESOURCES
- - - -----------------
The Company's principal sources of funds are its available cash resources,
operating cash flow, liquidation of non-essential investment holdings,
borrowings, public and private debt and equity offerings, funds from
consolidated tax savings, and investment management and other fees. At June 30,
1998, the Company had $54.4 million in cash and cash equivalents compared to
$56.4 million at December 31, 1997.
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ADDITIONAL RISK FACTORS AND UNCERTAINTIES
- - - -----------------------------------------
The statements contained in this report that are not purely historical,
including statements regarding the Company's expectations, beliefs, intentions,
plans or strategies, are forward-looking statements. These forward -looking
statements are subject to risks and uncertainties, including the risks and
uncertainties discussed below. All forward-looking statements included in this
document are based upon information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. Readers are cautioned not to place undue reliance upon any such
forward-looking statements. In addition to the risks and uncertainties discussed
in the preceding sections of "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the following risk factors are also
inherent in the Company's business operations:
CHANGE IN STRATEGIC DIRECTION. In late 1994, the Company began the process
of changing its strategic direction from the operation of an MPL insurance
business to investing in businesses which management believes are undervalued or
will benefit from additional capital, restructuring of operations or management
or improved competitiveness through operational efficiencies with existing
operations. Accordingly, in January 1995, the Company reactivated its investment
advisory subsidiary, Summit; in August 1995 acquired Sequoia and entered new
lines of property and casualty insurance; in August 1995 sold its MPL insurance
business; in September 1995 purchased 38.2% of GEC, a Canadian corporation
active in international investments, agricultural services, water rights, and
other businesses; in November 1996 acquired control of Citation Insurance Group
("CIG") pursuant to the Merger; in April 1997 acquired 25.23% ownership of
Nevada Land and Resource Company which owns approximately 1,365,000 acres of
deeded land in northern Nevada; in June 1997 sold its workers' compensation
business; and in July and August 1997, increased its ownership in GEC to 51.17%.
On May 8 and June 19, 1998, the PICO and GEC jointly announced their intentions
to combine through a "Plan of Arrangement". Due to the Company's limited
experience in the operation of the businesses of each of these subsidiaries,
which currently constitute a substantial portion of the Company's operations,
there can be no assurance as to the future operating results of the Company or
acquired businesses of the Company.
The Company will continue to make selective investments for the purpose of
enhancing and realizing additional value by means of appropriate levels of
shareholder influence and control. This could involve the restructuring of the
financing or management of the entities in which the Company invests and
initiating and facilitating mergers and acquisitions. This business strategy has
been implemented gradually during the past three to four years. For this reason
and others, including but not limited to the variability of the securities
markets and the uncertainties associated with trying to predict future results
based upon past performance, PICO's historical financial statements are not
indicative of the possible future results of this new business strategy.
Shareholders are relying on the experience and judgment of the Company's
management to locate, select and develop new acquisition and investment
opportunities. There can be no assurance that sufficient opportunities will be
found or that this business strategy will be successful. Failure to successfully
implement this strategy may negatively impact the business and financial
condition and results of operations of the Company.
Application of the Company's new strategy since 1995 has resulted in a
greater concentration of equity investments held by the Company. Market values
of equity securities are subject to changes in the stock market, which will
cause the Company's shareholders' equity to fluctuate from period to period. At
times the Company may hold securities of companies for which no market exists or
which may be subject to restrictions on resale. As a result, periodically, a
portion of the Company's assets may not be readily marketable, which would
restrict the Company's ability to liquidate its interests in these entities.
PICO and GEC through NLRC and Vidler have committed a significant portion
of their assets to surface, water, geothermal and mineral rights. There can be
no assurance that the market value of these assets will increase over time. In
addition, there are a number of risks associated with the successful development
of the Company's and GEC's water rights business including, but not limited to,
water price volatility; environmental concerns; political opposition;
uncertainty of future demand / revenues; concentration of revenue sources in a
limited number of assets; and dependence on key personnel. There can be no
assurance that Vilder and NLRC will be successful in developing their surface,
water, geothermal and mineral rights assets.
DEPENDENCE ON KEY PERSONNEL. The Company has several key executive officers,
the loss of whom could have a significant adverse effect on the Company. In
particular, Ronald Langley, PICO's Chairman, and John R. Hart, PICO's President
and Chief Executive Officer, play key roles in the Company's and GEC's
investment decisions. Messrs. Langley and Hart have entered into employment
agreements with PICO and a wholly-owned subsidiary of GEC as of December 31,
1997, all for a period of four years. Messrs. Langley and Hart are key to the
implementation of the Company's new strategic focus, and the ability of the
Company
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to implement its current strategy is dependent on its ability to retain the
services of Messrs. Langley and Hart.
RISKS REGARDING PHYSICIANS; CONTINUING MPL LIABILITY. In August 1995, the
MPL insurance business and related liability insurance business of Physicians
and PRO were sold. Physicians and PRO retained all assets and liabilities
related to insurance policies written prior to the sale of the recurring book of
business. Physicians and PRO will continue to administer claims and loss
adjustment expenses under MPL insurance policies issued or renewed prior to July
16, 1995. Cash flow needed to fund the day-to-day operations and the payment of
claims and claims expenses will be provided by investment income, lease income,
and proceeds from the sale or maturity of securities.
Under the terms of the Company's MPL policies, these policies have an
extended reporting period for claims. Under Ohio law the statute of limitations
is one year after the cause of action accrues. Also, under Ohio law there is a
four-year statutory time bar; however, this has been construed judicially to be
unconstitutional in situations where the plaintiff could not have reasonably
discovered the injury in that four-year period. Claims of minors must be brought
within one year of the date of majority. As a result, some claims may be
reported a number of years following the expiration of the MPL policy period.
Physicians and PRO have established reserves to cover losses and loss adjustment
expense on claims incurred under the MPL policies issued or renewed to date
including not only those claims reported to date, but also those incurred but
not yet reported. The amounts established and to be established by Physicians
and PRO for loss and LAE reserves are estimates of future costs based on various
assumptions and, in accordance with Ohio law, have been discounted (adjusted to
reflect the time value of money). These estimates are based on actual and
industry experience and assumptions and projections as to claims frequency,
severity and inflationary trends and settlement payments. In accordance with
Ohio law, Physicians and PRO annually obtain a certification from an independent
actuary that respective reserves for losses and LAE are adequate. Physicians and
PRO also obtain a concurring actuarial opinion.
Physicians' and PRO's reserves for losses and LAE for prior years developed
favorably in 1994, and these reserves were decreased by $12.7 million in 1994.
Reserves also developed favorably in 1995; however, accretion of reserve
discount exceeded the amount of favorable development and retroactive
reinsurance, resulting in a $3.2 million increase in liabilities for prior
years' claims. As a result of continued favorable claims experience, reserves
for prior years' claims were further reduced in the first and fourth quarters of
1996. However, based upon actuarial indications from data through June 30, 1997,
Physicians' MPL claims reserves were increased by $2 million during the third
quarter of 1997 due to somewhat deteriorated claims experience during the first
six months of 1997. At the same time, favorable development of Physicians' and
PRO's discontinued personal lines reserves (automobile, homeowner, etc.) allowed
reserve reductions of $750,000 during the third quarter of 1997. Due to the
inherent uncertainties in the reserving process there is a risk that Physicians'
and PRO's reserves for losses and LAE could prove to be inadequate which could
result in a decrease in earnings and shareholders' equity. Adverse reserve
development can reduce statutory policyholders' surplus or otherwise limit the
growth of such policyholders' surplus and, correspondingly, shareholders'
equity.
LOSS RESERVE EXPERIENCE. The inherent uncertainties in estimating loss
reserves are greater for some insurance products than for others, and are
dependent on the length of the reporting tail associated with a given product,
the diversity of historical development patterns among various aggregations of
claims, the amount of historical information available during the estimation
process, the degree of impact that changing regulations and legal precedents may
have on open claims, and the consistency of reinsurance programs over time,
among other things. Because MPL and commercial casualty claims may not be fully
paid for several years or more, estimating reserves for such claims can be more
uncertain than estimating reserves in other lines of insurance. As a result,
precise reserve estimates cannot be made for several years following a current
accident year for which reserves are initially established.
There can be no assurance that the insurance subsidiaries in the group have
established reserves adequate to meet the ultimate cost of losses arising from
such claims. It has been necessary, and will over time continue to be necessary,
for the insurance companies to review and make appropriate adjustment to
reserves for estimated ultimate losses, LAE, future policy benefits, claims
payables, and annuity and other policyholder funds. To the extent reserves prove
to be inadequate, the insurance companies would have to adjust their reserves
and incur a charge to earnings, which could have a material adverse effect on
the financial results of the Company.
REINSURANCE RISKS. Prior to the June 30, 1997 sale of Citation National
Insurance Company ("CNIC"), all of CNIC's existing insurance risks and claims
liabilities, except for those insuring workers' compensation, were transferred
to CIC through reinsurance treaties in order to effect the sale of CNIC and the
Company's workers' compensation business. As with other P & C insurers, CIC's
and Sequoia's operating results and financial condition can be adversely
affected by volatile and unpredictable natural and man-made
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disasters, such as hurricanes, windstorms, earthquakes, fires, and explosions.
CIC and Sequoia generally seek to reduce their exposure to such events through
individual risk selection and the purchase of reinsurance. CIC's and Sequoia's
estimates of their exposures depend on their views of the possibility of a
catastrophic event in a given area and on the probable maximum loss to the
insurance companies should such an event occur. While CIC and Sequoia attempt to
limit their exposure to acceptable levels, it is possible that an actual
catastrophic event or multiple catastrophic events could significantly exceed
the probable maximum loss previously assumed, resulting in a material adverse
effect on the financial condition and results of operations of the Company.
The future financial results of the insurance subsidiaries could be
adversely affected by disputes with their respective reinsurers with respect to
coverage and by the solvency of such reinsurers.
RISKS REGARDING SUMMIT GLOBAL MANAGEMENT. Summit is registered as an
investment adviser in California, Florida, Kansas, Louisiana, Oregon, Virginia
and Wisconsin, as well as with the SEC. Summit must file periodic reports with
the SEC and must be available for periodic examination by the SEC. Summit is
subject to Section 206 of the Investment Advisers Act of 1940, which prohibits
material misrepresentations and fraudulent practices in connection with the
rendering of investment advice, and to the general prohibitions of Section 208
of such Act. If Summit were to violate the Investment Advisers Act prohibitions,
it would risk criminal prosecution, SEC injunctive actions and the imposition of
sanctions ranging from censure to revocation of registration in an
administrative hearing.
The investment adviser business is highly competitive. There are several
thousand investment advisers registered in the states in which Summit does
business, many of which are larger and have greater financial resources than
Summit. There can be no assurance that Summit will be able to compete
effectively in the markets that it serves.
GLOBAL INVESTMENT VOLATILITY. As a result of global diversification,
investment decisions already made and which may be made in the future,
particularly with regard to GEC, the Company's revenues may be adversely
affected by economic, political and governmental conditions in countries where
it maintains investments or operations, such as volatile interest rates or
inflation, the imposition of exchange controls which could restrict the
Company's ability to withdraw funds, political instability and fluctuations in
currency exchange rates.
FLUCTUATIONS IN HISTORICAL OPERATING RESULTS, P & C RESERVES. PICO's
operating results over the past five years have been volatile. During the past
several years, the levels of the reserves for PICO's insurance subsidiaries have
been very volatile. As a result of its claims experience and the level of
existing reserves with respect to its P & C insurance business, CIC has had to
significantly increase these reserves in a number of the past several years.
There can be no assurance that significant increases with respect to the
reserves for the P & C business will not be necessary in the future, that the
level of reserves for PICO's insurance subsidiaries will not be volatile in the
future, or that any such increases or volatility will not have an adverse effect
on PICO's operating results and financial condition.
COMPETITION. There are several hundred P & C insurers licensed in
California, many of which are larger and have greater financial resources than
CIC, and Sequoia; offer more diversified types of insurance coverage; have
greater financial resources and have greater distribution capabilities than the
insurance companies of the group. The presence of these competitors or
competitive developments in the future could adversely affect the Company's
business and results of operations.
A.M. BEST RATINGS. A.M. Best ("Best") has assigned Sequoia a rating of B++
(Very Good) and APL has had a Best rating of B+ (Very Good) since 1983. CIC was
recently upgraded from a B- (Adequate) to a B+ (Very Good) by Best. Physicians
and PRO are currently rated, and have been for a number of years, NR-3 (rating
procedure inapplicable). Best's ratings reflect the assessment of A.M. Best and
Company of the insurer's financial condition, as well as the expertise and
experience of management. Therefore, Best ratings are important to
policyholders. Best ratings are subject to review and change over time. Failure
to maintain or improve their Best ratings could have a material adverse effect
on the ability of the insurance companies to write new insurance policies, as
well as potentially reduce their ability to maintain or increase market share.
Management believes that many potential customers will not insure with an
insurer that carries a Best rating of less than B+, and that customers who do so
will demand lower rate structures. There can be no assurance that any of the
insurance companies' ratings will be maintained or increased, and a downgrade
would likely adversely affect the Company's business and results of operations.
CYCLICAL NATURE OF THE P&C INDUSTRY. The P & C insurance industry has been
highly cyclical, and the industry has
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been in a cyclical downturn over the last several years due primarily to
competitive pressures on pricing, which has resulted in lower profitability.
Pricing is a function of many factors, including the capacity of the P&C
industry as a whole to write business, which varies according to the level of an
individual company's policyholders' surplus and policyholders' surplus of the
P&C industry and returns on the investment portfolio. The level of surplus in
the industry varies with returns on invested capital and regulatory barriers to
withdrawal of surplus. Increases in surplus have generally been accompanied by
increased price competition among P & C insurers. The cyclical trends in the
industry and the industry's profitability can also be affected significantly by
volatile and unpredictable developments, including natural disasters,
fluctuations in interest rates, and other changes in the investment environment
which affect market prices of insurance companies' investments and the income
from those investments. Inflationary pressures affect the size of losses and
judicial decisions affect insurers' liabilities. These trends may adversely
affect the Company's business, financial condition and results of operations.
INSURANCE COMPANY CAPITAL AND SURPLUS TESTING. In the past few years, the
NAIC has developed risk-based capital ("RBC") measurements for both property and
casualty and life and health insurers. The measures provide the various state
regulators with varying levels of authority based on the adequacy of an
insurer's RBC. The insurance companies' RBC results are reported annually in
their statutory Annual Statements to the insurance departments. Failure to meet
one or more RBC level may result in state regulators requiring the insurance
company to submit a business plan demonstrating attainment of the required RBC
level. This may entail the addition of capital, a restructuring of assets and
liabilities, or changes in operations. At or below certain lower RBC levels,
state regulators may supervise the operation of the insurance company and/or
require the liquidation of the insurance company. Failing to meet RBC levels
could adversely affect the Company's business, financial condition and results
of operations.
INTEGRATION OF CERTAIN OPERATIONS. CIG and Physicians completed the Merger
with the expectation that the Merger would result in certain benefits for the
combined company. Achieving the anticipated benefits of the Merger will depend
in part upon whether certain of the two companies' business operations can be
integrated in an efficient and effective manner. There can be no assurance that
this will occur or that cost savings in operations will be achieved. The
successful combination of the two companies will require, among other things,
integration of the companies' respective product offerings, medical management
of health care claims and management information systems enhancements. The
difficulties of such integration may be increased by the necessity of
coordinating geographically separated organizations. The integration of certain
operations following the Merger will require the dedication of management
resources which may temporarily distract attention from the day-to-day business
of the combined companies. There can be no assurance that integration will be
accomplished smoothly or successfully. Failure to effectively accomplish the
integration of the two companies' operations could have an adverse effect on the
Company's results of operations and financial condition following the Merger.
RISKS ASSOCIATED WITH FAILURE TO MANAGE GROWTH. The Company's growth
internally and through its numerous acquisitions has placed, and further
expansion would continue to place, significant strain on its limited personnel,
management and other resources. The Company's ability to manage any future
growth may require it to attract, train, motivate and manage new employees
successfully, to integrate new employees effectively into its operations and to
continue to improve its operational, financial, management and information
systems and controls. The failure to manage any further growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.
FAILURE TO QUALIFY FOR EXEMPTION UNDER INVESTMENT COMPANY ACT. The Company
at all times intends to conduct its business so as not to become regulated as an
investment company under the Investment Company Act. However, if the company
fails to qualify for exemption from registration as an investment company, its
ability to use leverage would be substantially reduced, and it would be subject
to significant additional disclosure obligations and restrictions on its
operational activities.
26
<PAGE> 339
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders:
None.
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
Form Date Filed Description
- - - ------ -------------- ---------------------------------------------------
8-K May 20, 1998 Initial announcement that PICO is considering a
proposal in which PICO would combine with Global
Equity Corporation through a Plan of Arrangement.
8-K July 21, 1998 Announcement of favorable response by Global Equity
Corporation's independent committee of directors
regarding Plan of Arrangement. Disclosure of share
exchange ratio.
27
<PAGE> 340
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: August 12, 1998 By: /s/ Gary W. Burchfield
--------------------------------
Gary W. Burchfield
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
28
<PAGE> 341
EXHIBITS INDEX
--------------
EXHIBIT NUMBER DESCRIPTION
- - - -------------- -----------
+ 2.2 Agreement and Plan of Reorganization, dated as of May 1,
1996 among PICO, Citation Holdings, Inc., and Physicians
and amendment thereto dated August 14, 1996 and related
Merger Agreement.
+++++ 2.3 Second Amendment to Agreement and Plan of Reorganization
dated November 12, 1996.
# 2.4 Agreement and Debenture, dated November 14, 1996 and
November 27, 1996, respectively, by and between Physicians
and PC Quote, Inc.
## 2.5 Purchase and Sale Agreement by, between and among Nevada
Land and Resource Company, LLC, GEC, Western Water Company
and Western Land Joint Venture dated April 9, 1997.
+++++ 3.1 Amended and Restated Articles of Incorporation of PICO.
+ 3.2.2 Amended and Restated Bylaws of PICO.
++++ 4.2 First Amendment to Rights Agreement dated April 30, 1996.
+++++ 4.3 Second Amendment to Rights Agreement dated November 20,
1996.
-* 10.7 Key Officer Performance Recognition Plan.
* 10.8 Flexible Benefit Plan.
-* 10.9 Amended and Restated 1983 Employee Stock Option Plan.
-**** 10.10 Salary Reduction Profit Sharing Plan as amended and
restated effective January 1, 1994 and Amendments Nos. 1
and 2 thereto dated March 13, 1995 and March 15, 1995,
respectively.
-* 10.11 Employee Stock Ownership Plan and Trust Agreement.
-*** 10.11.1 Amended Employee Stock Ownership Plan and Trust Agreement.
- - - -***** 10.11.2 Amendment to Employee Stock Ownership Plan dated October
1, 1992.
-**** 10.11.3 Amendment to Employee Stock Ownership Plan dated March 15,
1995.
* 10.16 Office Lease between CIC and North Block Partnership dated
July, 1990.
*** 10.16.1 Amendments Nos. 1 and 2 to Office Lease between CIC and
North Block Partnership dated January 6, 1992 and February
5, 1992, respectively.
**** 10.16.2 Amendments Nos. 3 and 4 to Office Lease between CIC and
North Block Partnership dated December 6, 1993 and October
4, 1994, respectively.
-* 10.22 1991 Employee Stock Option Plan.
- - - -***** 10.23 PICO Severance Plan for Certain Executive Officers, Senior
Management and Key Employees of the Company and its
Subsidiaries, including form of agreement.
-# 10.55 Consulting Agreements, effective January 1, 1997,
regarding retention of Ronald Langley and John R. Hart as
consultants by Physicians and GEC.
++ 10.57 PICO 1995 Stock Option Plan.
-+++ 10.58 Key Employee Severance Agreement and Amendment No. 1
thereto, each made as of November 1, 1992, between PICO
and Richard H. Sharpe and Schedule A identifying other
substantially identical Key Employee Severance Agreements
between PICO and certain of the executive officers of
PICO.
+++ 10.59 Agreement for Purchase and Sale of Shares, dated May 9,
1996, among Physicians, GPG and GEC.
++ 10.60 Agreement for Purchase and Sale of Certain Assets, dated
July 14, 1995 between Physicians, PRO and Mutual
Assurance, Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between
Sydney Reinsurance Corporation and Physicians.
++ 10.62 Letter Agreement, dated September 5, 1995 between
Physicians, Christopher Ondaatje and the South East Asia
Plantation Corporation Limited.
++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of
Certain Assets, dated July 30, 1996 between Physicians,
PRO and Mutual Assurance, Inc.
+++++ 16.1 Letter regarding change in Certifying Accountant from
Deloitte & Touche LLP, independent auditors.
# 21 Subsidiaries of PICO.
27 Financial Data Schedule.
### 99. Announcement of PICO's consideration of proposed
combination with GEC through a Plan of Arrangement.
#### 99. Announcement of GEC's independent committee of directors
favorable response to the proposed Plan of Arrangement.
Disclosure of share exchange ratio.
- - - -------------------
* Incorporated by reference to exhibit of same number filed
with Registration Statement on Form S-1 (File No.
33-36383).
*** Incorporated by reference to exhibit of same number filed
with 1992 Form 10-K.
**** Incorporated by reference to exhibit of same number filed
with 1994 Form 10-K.
29
<PAGE> 342
***** Incorporated by reference to exhibit bearing the same
number filed with Registration Statement on Form S-4 (File
No. 33-64328).
+ Filed as Appendix to the prospectus in Part I of
Registration Statement on Form S-4 (File No. 333-06671).
++ Incorporated by reference to exhibit filed with
Physicians' Registration Statement No. 33-99352 on Form
S-1 filed with the SEC on November 4, 1995
+++ Incorporated by reference to exhibit filed with
Registration Statement on Form S-4 (File No. 333-06671).
++++ Incorporated by reference to exhibit filed with Amendment
No. 1 to Registration Statement No. 333-06671 on Form S-4.
+++++ Incorporated by reference to exhibit of same number filed
with Form 8-K dated December 4, 1996.
# Incorporated by reference to exhibit of same number filed
with Form 10-K dated April 15, 1997.
## Incorporated by reference to exhibit of same number filed
with Form 10-K/A dated April 30, 1997.
### Incorporated by reference to exhibit of same number filed
with Form 8-K dated May 20, 1998.
#### Incorporated by reference to exhibit of same number filed
with Form 8-K dated July 21, 1998.
- Executive Compensation Plans and Agreements.
30
<PAGE> 343
ANNEX F
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated statements of financial position of Global
Equity Corporation as at December 31, 1997 and 1996 and the consolidated
statements of operations, deficit and changes in financial position for the
years ended December 31, 1997 and 1996 and the nine month period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1997
and 1996 and the results of its operations and the changes in its financial
position for the years ended December 31, 1997 and 1996 and nine months period
ended December 31, 1995, in accordance with generally accepted accounting
principles in Canada.
Accounting principles generally accepted in Canada vary in certain significant
respects from accounting principles generally accepted in the United States in
the Company's circumstances, as described in note 14.
KPMG
Chartered Accountants
Toronto, Canada
March 17, 1998
<PAGE> 344
GLOBAL EQUITY CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
------------- ------------- -------------
ASSETS (unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and short term investments $ 12,865 $ 15,865 $ 44,773
Receivables 906 16,440 14,624
-------- -------- --------
13,771 32,305 59,397
Fixed assets 4,181 4,294 12,089
Other assets 1,946 496 7,894
Investments 84,527 88,149 66,296
Surface, water, geothermal and mineral rights 101,218 97,084 22,724
-------- -------- --------
$205,643 $222,328 $168,400
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 3,913 $ 6,084 $ 12,415
Income taxes payable 2,670 2,696 3,364
Notes payable, current portion 14,575 2,784
-------- -------- --------
6,583 23,355 18,563
Notes payable 7,942 8,813 1,164
Minority interest 13,667 16,504 30,708
SHAREHOLDERS' EQUITY:
Capital stock 198,064 198,064 135,065
Contributed surplus 789 789 967
Deficit (27,735) (28,664) (14,574)
Foreign currency translation adjustment 6,333 3,467 (3,493)
-------- -------- --------
177,451 173,656 117,965
-------- -------- --------
$205,643 $222,328 $168,400
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
On behalf of the Board:
___________________________Director
___________________________Director
<PAGE> 345
GLOBAL EQUITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF CANADIAN DOLLARS, EXCEPT FOR EARNINGS (LOSS) PER SHARE)
<TABLE>
<CAPTION>
Nine months
Six months ended Year ended ended
June 30, December 31, December 31,
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue $5,551 $ 815 $ 5,546 $4,854 $ 3,798
Expenses:
Operating general and administration 3,150 1,982 5,604 2,063 7,928
Interest 558 2,842
Amortization 358 617 715 69 246
------ ------- -------- ------ -------
4,066 2,599 9,161 2,132 8,174
Write-down of investment 11,096
Equity in loss of affiliate (700)
------ ------- -------- ------ -------
Earnings (loss) from continuing operations
before minority interest and income taxes 785 (1,784) (14,711) 2,722 (4,376)
Income taxes 7 67 998
Minority interest (144) 153 (5)
------ ------- -------- ------ -------
Net earnings (loss) from continuing operations 929 (1,784) (14,871) 2,660 (5,374)
Discontinued operations:
Earnings (loss) from discontinued operations,
net of taxes 913 1,003 953 (4,470)
Gain on sale of discontinued operations,
net of taxes 3,001
Accumulated foreign currency translation
adjustment realized (3,223)
------ ------- -------- ------ -------
Net earnings (loss) for the period $ 929 $ (871) $(14,090) $3,613 $(9,844)
====== ======= ======== ====== =======
Earnings (loss) from continuing operations $ 0.01 $ (0.03) $ (0.22) $ 0.04 $ (0.09)
Earnings (loss) from discontinued operations 0.01 0.01 0.02 (0.08)
------ ------- -------- ------ -------
Earnings (loss) per share $ 0.01 $ (0.02) $ (0.21) $ 0.06 $ (0.17)
====== ======= ======== ====== =======
</TABLE>
<PAGE> 346
GLOBAL EQUITY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(IN THOUSANDS OF CANADIAN DOLLARS)
<TABLE>
<CAPTION>
Nine months
Six months ended Year ended ended
June 30, December 31, December 31,
CASH PROVIDED BY (USED FOR): 1998 1997 1997 1996 1995
------------ ----------- ------------ ----------- -------------
OPERATING ACTIVITIES: (unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings (loss) from continuing operations $ 929 $ (1,784) $(14,871) $ 2,660 $ (5,374)
Add items not involving cash:
Amortization 358 617 715 69 246
Write-down of investment 11,096
Minority interest (144) 153 (5)
Equity in loss of affiliate 700 112
Gain on sale of land (901)
Gain on sale of investment (3,509)
Net change in other non cash operating items and other
assets 11,745 (7,643) 5,498 (801) 15,093
-------- -------- -------- -------- --------
Cash flows from continuing operations 10,079 (8,810) 1,802 1,923 9,965
-------- -------- -------- -------- --------
FINANCING ACTIVITIES:
Issue of convertible debenture 34,500 34,500
Repayment of convertible debenture (34,500)
Net proceeds from public offering 62,999
Net change in notes payable (14,406) 8,743 10,751
Issue of debentures in subsidiary 1,164
Proceeds from securities issued to minority shareholders
of subsidiary 2,872
Repurchase of shares pursuant to normal course issuer bid (1,987)
-------- -------- -------- -------- --------
(14,406) 43,243 76,622 1,164 (1,987)
-------- -------- -------- -------- --------
INVESTING ACTIVITIES:
Increase in investments (1,898) (6,003) (24,709) (63,469)
Proceeds on sale of investments 8,580
Additions to surface, water, geothermal and mineral rights (1,372) (3,162) (2,769) (6,677) (12,680)
Acquisition of Nevada Land & Resource Company, LLC (50,218) (50,218)
Cash included upon acquisition of Nevada Land & Resource 1,554 1,554
Sale of land, net of costs of disposition 1,788
Net change in capital assets 92 392 3,256 (176)
Net change in other investments (1,464)
Dilution of interest in subsidiary (2,570)
Loan receivable 6,300
-------- -------- -------- -------- --------
1,276 (57,737) (73,962) (66,890) (6,556)
Effect of foreign exchange rate changes on cash 51 (32) (34) (382) (186)
Net change in cash from continuing operations (3,000) (23,336) 4,428 (64,185) 1,236
Discontinued operations 19,316 2,973 35,690 31,373
Cash and short term investments, beginning of period 15,865 8,464 8,464 73,268 72,523
-------- -------- -------- -------- --------
Cash and short term investments, end of period $ 12,865 $ 4,444 $ 15,865 $ 44,773 $105,132
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 347
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
Global Equity Corporation (the "Corporation") operates primarily as an
international investment corporation.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of consolidation:
These consolidated financial statements include the accounts
of the Corporation and its subsidiaries since dates of
acquisition. All significant intercompany balances and
transactions have been eliminated on consolidation.
Investments subject to significant influence are accounted for
on the equity basis.
(b) Securities transactions:
Securities transactions are recorded on a trade date basis.
(c) Fixed assets:
Fixed assets are carried at cost less accumulated
amortization. Amortization on furniture and equipment is
calculated using the declining balance method at rates ranging
from 20% to 30%. Other fixed assets are amortized on a
straight-line basis over their useful lives.
(d) Investments:
Portfolio investments are carried at cost. Provision is made
for any diminution in value that is considered to be other
than temporary.
(e) Surface, water, geothermal and mineral rights:
Water rights consist of various water interests acquired
independently or in conjunction with the acquisition of real
estate properties. Water rights are stated at cost and, when
applicable, consist of an allocation of the original purchase
price between water rights and other assets acquired based on
their relative fair values. In addition, costs directly
related to the acquisition and development of water rights are
capitalized. Surface, geothermal and mineral rights and land
improvements are carried at cost. This cost includes, when
applicable, the allocation of the original purchase price,
costs directly related to acquisition, and interest and other
costs directly related to developing land for its intended
use. Amortization of land improvements is computed on the
straight-line method over
<PAGE> 348
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
SURFACE, WATER, GEOTHERMAL AND MINERAL RIGHTS (CONTINUED):
the estimated useful lives of the improvements ranging from 5
to 15 years. Provision is made for any diminution in value
that is considered to be other than temporary.
(f) Translation of foreign currency:
Revenues and expenses of self-sustaining foreign operations
are translated at average rates of exchange in effect during
the year. Assets and liabilities are translated at the
exchange rates in effect at the balance sheet date. Unrealized
exchange gains or losses arising on translation are deferred
and included in shareholders' equity.
The foreign currency translation adjustment at December 31,
1996 relating to the Sri Lankan investments, which was shown
as a component of shareholders' equity, has been included in
the statement of operations for the year ended December 31,
1997 because of the disposition of the Sri Lankan investments
in 1997. The balance at December 31, 1997, arises due to
changes in the value of the Canadian dollar in comparison to
the United States dollar. In 1996, changes were caused by
fluctuations in the Sri Lankan rupee.
Monetary assets and liabilities of domestic operations
denominated in foreign currencies are translated at the
exchange rate in effect at the balance sheet date. Revenue and
expense items are translated at the average exchange rate for
the year. Translation gains and losses are reflected in
earnings in the period in which they arise except for gains
and losses relating to non-current monetary items. Translation
gains and losses relating to these items are deferred and
amortized on a straight-line basis over the remaining life of
the respective item.
(g) Estimates and assumptions:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
period. Actual results could materially differ from these
estimates.
<PAGE> 349
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(h) Unaudited interim statements:
The financial statements as at June 30, 1998 and for the six
months ended June 30, 1998 and 1997 are unaudited. In the
opinion of management, such financial statements reflect all
adjustments necessary for a fair presentation of the interim
period.
2. CASH AND SHORT-TERM INVESTMENTS:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
------------ ------------- -------------
(unaudited)
<S> <C> <C> <C>
Cash $ 8,960 $ 8,399 $ 2,633
Securities issued by the Canadian
government with a maturity of less than one
year, denominated in:
Canadian dollars 3,916
United States dollars 3,905 7,466 25,585
Accrued interest thereon 86
Effective interest rate 5.2% 5.3% 4.6%
Securities issued by the Sri Lankan
government with a maturity of less than one
year, denominated in:
Sri Lanka rupees 12,343
Accrued interest thereon 210
Effective interest rate 15.1%
------- ------- -------
$12,865 $15,865 $44,773
======= ======= =======
</TABLE>
<PAGE> 350
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
3. RECEIVABLES:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
----------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
Proceeds due on sale of Sri Lankan subsidiaries
(note 6) $ - $14,783 $ -
Due from clients and brokers 6,952
Trade receivables 4,214
Other accounts receivable 906 1,657 3,458
---- ------- -------
$906 $16,440 $14,624
==== ======= =======
</TABLE>
The proceeds due on sale of the Sri Lankan subsidiaries were received
subsequent to December 31, 1997.
4. FIXED ASSETS:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
----------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
Furniture and fixtures $ 473 $ 473 $ 2,493
Property, plant and equipment 4,577 4,577 11,871
------ ------ -------
5,050 5,050 14,364
Less accumulated amortization (869) (756) (2,275)
------ ------ -------
$4,181 $4,294 $12,089
====== ====== =======
</TABLE>
5. OTHER ASSETS:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
----------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
Loan receivable $ 620 $ - $6,820
Inventories 1,074
Deferred costs 1,326 496
------ ---- ------
$1,946 $496 $7,894
====== ==== ======
</TABLE>
The deferred costs at June 30, 1998 of $1,326,000, (December 31, 1997
$496,000), relate to costs incurred by subsidiaries for deposits on the
purchase of surface, water, geothermal, mineral rights, and for legal,
financial and other professional fees incurred
<PAGE> 351
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
in connection with proposed transactions. Upon completion of the
transactions, the costs will be charged directly to the project.
The loan receivable at December 31, 1996, relates to a trade advance.
The loan is for U.S. $5,000,000 and is due over five years to December
31, 2001 and bears interest at 5%. The loan and inventories were held
by the Sri Lankan subsidiaries which were disposed of during 1997 (note
6).
6. INVESTMENTS:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
--------------------------- ------------------------- -------------------------------
(unaudited)
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
<S> <C> <C> <C> <C> <C> <C>
Portfolio investments in
public companies:
PICO Holdings, Inc. $20,948 $26,968 $20,948 $39,237 $20,948 $24,058
European equities 22,950 26,004 25,481 27,727 9,737 10,317
Sri Lankan equities 10,248 7,158 10,248 8,423 1,895 1,750
Korean equities 495 337 1,146 1,146 12,295 10,784
United States equities 1,400 2,231 1,400 1,480 1,143 1,143
------- ------- -------
56,041 59,223 46,018
Equity accounted investments 9,735 11,442 9,734 16,387 6,757 6,757
Convertible loan 10,932 10,932 10,932 10,932 10,932 10,932
Other 7,819 8,260 2,589
------- ------- -------
$84,527 $88,149 $66,296
======= ======= =======
</TABLE>
Carrying values of portfolio investments in public companies are
reflected at cost. Any diminution in value that is considered to be
other than temporary is written down against the value of the
investment. Fair value is determined by quoted market prices for same
or similar investments and relevant period end foreign exchange spot
rates. At December 31, 1997, the Corporation wrote down the Korean
equities to the December 31, 1997 fair value.
Carrying values of equity accounted investments are reflected at cost
adjusted for the appropriate share of results of operations since
acquisition. Fair value for publicly traded shares is determined by
quoted market prices for same or similar investments. Fair value for
unlisted shares is considered by management to be approximated by their
carrying value.
<PAGE> 352
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
The convertible loan includes accrued interest to December 31, 1996,
calculated at 10%. The Corporation elected not to convert the loan into
equity of the company provided as security by the borrower. The debt is
currently in default and the Corporation has initiated proceedings to
recover the amounts owing. The debt is secured by a charge on the
assets of the borrower. The carrying value is the value of funds
advanced plus accrued interest amounting to $932,217.
Securities denominated in foreign currencies are subject to risks
arising from fluctuations in their underlying currency relative to the
Canadian dollar.
DISPOSITION OF SRI LANKAN INVESTMENTS:
In November and December 1997, the Corporation disposed of its
investments in Sri Lanka, specifically its 51% interest in Forbes
Ceylon Limited and 100% interest in Forbes & Walker Limited to Vanik
Incorporation, Inc. ("Vanik"), a Sri Lankan public company which trades
on the Colombo Stock Exchange for $32,800,000. The carrying value of
the investments was $28,000,000, thereby resulting in a net gain of
$3,000,000 after taxes of $1,800,000. Proceeds received were in the
form of cash of $22,500,000, debentures in Vanik of $6,700,000, and
equities of $3,600,000. Of the cash proceeds, $14,800,000 was received
subsequent to December 31, 1997, and is included in accounts
receivable.
<PAGE> 353
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
Results of operations for 1997, 1996, and 1995 are reflected as
discontinued operations. The 1996 and 1995 Statement of Operations and
Statement of Changes in Financial Position have been restated to
reflect the results previously consolidated as earnings and cash flows
from discontinued operations.
(a) RESULTS OF DISCONTINUED OPERATIONS:
<TABLE>
<CAPTION>
Six months ended Year ended Nine months
June 30, December 31, Ended December 31,
1997 1997 1996 1995
---------------- ------------ ----------- ------------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues $12,027 $17,205 $25,175 $13,967
Earnings (loss) before tax and
minority interest 2,560 3,012 3,672 (3,407)
Minority interest 755 675 1,312 575
Income tax 892 1,334 1,407 488
------- ------- ------- -------
Net earnings (loss) $ 913 $ 1,003 $ 953 $(4,470)
======= ======= ======= =======
</TABLE>
<PAGE> 354
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(b) CASH FLOW FROM DISCONTINUED OPERATIONS:
<TABLE>
<CAPTION>
Six months ended Year ended Nine months ended
June 30, December 31, December 31,
1997 1997 1996 1995
---------------- -------------- --------------- -----------------
(unaudited)
<S> <C> <C> <C> <C>
Cash provided by (used for):
Operating activities:
Cash flows from discontinued
operations $(10,372) $ 1,307 $ (491) $(2,268)
-------- -------- ------- -------
Financing activities:
Common shares held by Forbes
Ceylon Limited 2,109
-------- -------- ------- -------
Investing activities:
Net change in investments (6,002) 1,745
Net change in capital assets 3,063
Purchase of shares in Forbes Ceylon (454)
Proceeds from sale of Sri
Lankan investment, net of tax 31,005
Less: Proceeds received in 1998 (14,783)
Proceeds received in
the form of portfolio
investments (10,248)
Cash in Sri Lanka at
date of disposition (39,998)
-------- -------- ------- -------
(6,002) (34,024) 4,808 (454)
-------- -------- ------- -------
Cash beginning of period from
discontinued operations 35,690 35,690 31,373 31,986
-------- -------- ------- -------
Net cash from discontinued
operations $ 19,316 $ 2,973 $35,690 $31,373
======== ======== ======= =======
</TABLE>
<PAGE> 355
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
7. SURFACE, WATER, GEOTHERMAL AND MINERAL RIGHTS:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
----------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Surface, water, geothermal and mineral rights
portfolio $101,218 $97,084 $22,724
======== ======= =======
</TABLE>
(a) VIDLER WATER COMPANY, INC.
Effective November 14, 1995, the Corporation, through a wholly
owned subsidiary, acquired all of the outstanding common stock
of the Vidler Water Company, Inc. ("Vidler") for $7,498,778 in
cash. The acquisition was accounted for by the purchase method
with the fair value of net assets acquired at their assigned
values amounting to $7,498,778 including costs of acquisition.
The values of assets acquired are as follows:
Land improvements $ 366
Water rights 7,042
Working capital 91
======
$7,499
======
(b) CLINE RANCH
In November 1995, Vidler acquired an interest in the Cline
Ranch water rights in Colorado for $2,488,250.
On December 18, 1997, Vidler entered into an Option Agreement
for the sale of the Cline Ranch water rights. The option,
exercisable through April 17, 1998, allows the option holder
to purchase such rights for US$5,000 per acre foot for a total
of US$3,060,000. If exercised, the purchase price would be
paid 10% in cash with the remainder payable pursuant to a nine
year promissory note, bearing interest at 6% per annum.
(c) MBT RANCH
In November 1996, Vidler acquired the MBT Ranch in Arizona for
$3,851,731, consisting of land of $1,985,434, land
improvements of $1,849,205 and other assets of $17,092.
<PAGE> 356
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(d) HARQUAHALLA SURFACE AND WATER RIGHTS
In 1997, the Corporation, through a wholly owned subsidiary,
acquired various parcels of land and water rights in Arizona
for $1,286,741.
(e) BIG SPRINGS PARTNERSHIP
Effective January 1, 1996, a wholly owned subsidiary of
Vidler, BSND, Inc., entered into the Big Springs Associates
Partnership (the "Partnership") to acquire, develop, lease,
hold for production of income and otherwise dispose of real
estate near West Wendover, Nevada known as Big Springs Ranch.
BSND is the general partner for the Partnership.
The Partnership acquired the land for $5,834,493. The
acquisition was funded by a note payable to the Corporation by
the Partnership in the amount of $2,726,413, cash of $410,880,
and a note payable to the seller of $2,697,200.
In addition, the Corporation, through BSND, was required to
make additional capital contributions of up to US$ 1,662,000
for working capital requirements and to provide funding to
repay the note to the seller. At June 30, 1998, BSND has made
capital contributions totaling $8,792,554.
(f) NEVADA LAND AND RESOURCE COMPANY, LLC
On April 23, 1997, the Corporation, through a wholly owned
subsidiary, purchased a 74.77% interest in Nevada Land and
Resource Company, LLC ("NLRC") for $50,218,158 in cash. NLRC's
principal asset is approximately 1.365 million acres of deeded
land located in Northern Nevada together with appurtenant
water, geothermal and mineral rights. PICO Holdings, Inc. owns
the remaining interest in NLRC.
The acquisition was accounted for by the purchase method of
accounting, with the fair value of net assets acquired at
their assigned values amounting to $50,218,158, including
costs of acquisition. The values of assets acquired and
liabilities assumed are as follows:
Surface, water, geothermal,
and mineral rights $ 69,424
Working capital 1,036
Other assets 317
Note payable (6,900)
Minority interest (13,659)
========
$ 50,218
========
<PAGE> 357
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
8. NOTES PAYABLE:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997 1996
------------ ------------- -----------
(unaudited)
<S> <C> <C> <C>
Note payable to Physicians Insurance
Company of Ohio ("PICO") including
accrued interest of $108,310 (a) $ - $ 2,956 $ -
Note payable to Physicians Investment
Company including accrued interest of
$168,936 (b) 11,619
Geothermal Note Payable (c) 7,343 7,157
Note payable to Seller of Big Springs
Ranch (d) 2,784
Note payable - acquisition of Harquahalla
surface and water rights (e) 599 565
Debentures (f) 1,091 1,164
------ -------- -------
7,942 23,388 3,948
Less: current portion (14,575) (2,784)
------ -------- -------
$7,942 $ 8,813 $ 1,164
====== ======== =======
</TABLE>
(a) The note payable to PICO, was entered into on October 1997 in
the amount of US$8.3 million, bears interest at 7% per annum,
and is evidenced by a promissory note. Repayments totaling
US$6.5 million were made during the year. The outstanding
balance was repaid subsequent to December 31, 1997. Fair value
of the note is approximated by the carrying value.
(b) The note payable to Physicians Investment Company, was made in
October 1997 in the amount of US$8 million, bears interest at
7% per annum, and is evidenced by a promissory note. The
outstanding balance was repaid subsequent to December 31,
1997. Fair value of the note is approximated by the carrying
value.
(c) As partial consideration of the acquisition of NLRC (see note
7(f)), the Corporation assumed a US$5 million promissory note
maturing on October 1, 2000, to the Atchison and Topeka
Railway Company. Interest is paid monthly at a rate of 9% per
annum to the extent that payment is received on four
geothermal leases associated with the acquired land. Fair
value of the note is approximated by the carrying value.
<PAGE> 358
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(d) As partial consideration for the acquisition of the Big
Springs Ranch (see note 7(e)), the Partnership assumed a US$2
million note from the Seller which bore interest at 9.5%. The
note was repaid in 1997.
(e) As partial consideration for the acquisition of 480 acres of
surface and water rights in the Harquahalla area (see note
7(d)), the Corporation assumed a US$408,000 note bearing
interest at 8% maturing on December 9, 1999. The note is
secured by a First Trust Deed on the land. Fair value of the
note is approximated by the carrying value.
(f) The debentures were issued March 31, 1996, at an interest rate
with a maximum of 10% with a ceiling of the cash flow received
from the industrial property backing the investment in a
unitized interest in Canadian real estate. The debentures
mature on March 31, 2006, and are secured on a non-recourse
basis by a unitized interest in Canadian real estate. Fair
value is not determinable. In 1998, the subsidiary which
issued these debentures issued additional shares to third
parties such that the subsidiary is no longer controlled by
the Corporation and accordingly is no longer consolidated.
9. CAPITAL STOCK:
(a) Authorized:
Unlimited number of common shares. Unlimited number of
preferred shares, issuable in one or more series.
(b) Issued and outstanding:
<TABLE>
<CAPTION>
Common Shares
Number Amount
-----------------------------
<S> <C> <C>
Balance, March 31, 1995 57,051,228 $136,196
Shares repurchased (1,157,306) (2,776)
Shares sold by Forbes Ceylon Ltd. 814,100 1,645
-----------------------------
Balance December 31, 1995 and 1996 56,708,022 135,065
Shared issued in public offering 25,145,054 62,999
-----------------------------
Balance December 31, 1997 and
June 30, 1998 (unaudited) 81,853,076 $198,064
=============================
</TABLE>
<PAGE> 359
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
The Corporation completed a public offering on August 19,
1997, for the issuance of 25,145,054 common shares at a
subscription price of $2.59 per share. Net proceeds of
$63,000,000 were raised after deducting costs of issuance of
$2,100,000.
(c) Common stock options:
At December 31, 1995, common shares were available for issue
under the Employee and Director Incentive Stock Option Plan
(1993) (as amended) (the "Plan") to a maximum of 5,783,000
shares. At December 31, 1995, 3,179,666 options at an exercise
price ranging from $2.45 to $2.50 per share were issued and
outstanding. During the year ended December 31, 1996,
shareholder approval for an additional 1,417,000 common shares
available for issue under the Plan was received and a further
3,260,184 options were issued at exercise prices ranging from
$2.45 to $3.325 per share. During the year ended December 31,
1997, a further 127,750 options were issued at an exercise
price of $3.25. All outstanding options are fully vested and
expire September 26, 2000 through to December 5, 2001.
(d) Common share purchase warrants:
Common share purchase warrants exercisable on a one-for-one
basis into 2,411,263 common shares at a price of $3.25 per
share, are outstanding at June 30, 1998, December 31, 1997 and
1996. The warrants expire on October 21, 1998.
<PAGE> 360
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
10. RETAINED EARNINGS:
Dividends paid out of the retained earnings of foreign subsidiaries are
subject to withholding taxes at a rate of 19.25%, for which provision
has not been made, due to the Company's intention not to repatriate
these retained earnings. The foreign subsidiaries' portion of total
retained earnings at December 31, 1997 is $8,471,345 (1996 -
$8,596,607).
11. INCOME TAXES:
The Company's income taxes are made up as follows:
<TABLE>
<CAPTION>
Year ended Nine months ended
June 30, December 31, December 31,
1998 1997 1997 1996 1995
----------- ----------- ------------ ----------- -----------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Combined basic Canadian federal and provincial
taxes at the statutory rate of 44.6% $ 414 $(796) $(6,561) $1,214 $(1,952)
Prior year's overprovisions (420) (916)
Losses and timing differences not tax effected (370) 796 6,568 2,602
Lower income tax rates of foreign subsidiaries (374)
Non-deductible items and other items 376 143 348
----- ----- ------- ------ -------
$ - $ - $ 7 $ 67 $ 998
===== ===== ======= ====== =======
</TABLE>
<PAGE> 361
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
12. SEGMENTED INFORMATION:
Geographic information is as follows:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, December 31,
1997 1996 1995
-------------- -------------- -----------------
<S> <C> <C> <C>
Revenue:
North America $ 5,306 $ 4,575 $ 3,675
Europe 240 279 123
Asia
-------- -------- --------
$ 5,546 $ 4,854 $ 3,798
======== ======== ========
Segment profit (loss) after direct costs:
North America $ (489) $ 2,704 (5,263)
Europe (125) (39) (111)
Asia (14,104)
-------- -------- --------
Segment profit (loss) (14,718) 2,665 (5,374)
Minority interest 153 (5)
-------- -------- --------
Earnings (loss) from continuing operations $(14,871) $ 2,660 $ (5,374)
======== ======== ========
Identifiable assets:
North America $183,009 $ 99,675 $103,595
Europe 27,925 12,422 8,243
Asia 11,394 56,303 48,808
-------- -------- --------
$222,328 $168,400 $160,646
======== ======== ========
</TABLE>
13. RELATED PARTY TRANSACTIONS:
(a) INVESTMENT IN PICO HOLDINGS INC.
Included in investments is the Corporation's holding of
4,258,415 shares in PICO Holdings, Inc. ("PICO Holdings"),
representing 13% of the issued and outstanding shares. As of
June 30, 1998, PICO Holdings directly and through its
subsidiaries owned 51.17% of the issued and outstanding shares
of the Corporation.
<PAGE> 362
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(b) CONVERTIBLE DEBENTURE
The Corporation assumed a convertible debenture from PICO
Holdings in the principal amount of $34,500,000. The funds
were utilized as partial consideration for the acquisition of
NLRC (see note 7(f)). The Corporation assigned $27,600,000 of
the debenture to PICO. The debenture bore interest at 7% with
interest due and payable upon maturity. Maturity of the
debenture occurred on the day of the closing of the secondary
public offering (see note 9(b)). Interest of $774,125 was
incurred on the debenture. At the closing of the public
offering, PICO and PICO Holdings subscribed for a total of
13,586,143 shares, representing the principal amount of the
debenture plus interest incurred of $688,111 at the offering
price. The remainder of the interest was repaid from the
proceeds of the public offering.
(c) NOTE PAYABLE
The Corporation assumed a note payable to PICO Holdings in the
principal amount of US $5,000,000. The funds were utilized as
partial consideration for the acquisition of NLRC (see note
6(f)). The note bore interest at 10% and was evidenced by a
promissory note. The principal amount of the note and all
accrued interest thereon were due and payable on the earlier
of December 31, 1997, and the date on which the Corporation
completed a public offering in Canada. The note payable plus
accrued interest of US $160,274, less withholding taxes, was
repaid in full from proceeds of the public offering (see note
9(b)).
(d) ACCOUNTS RECEIVABLE
Included in accounts receivable at December 31, 1997, is an
amount of $133,850 due from PICO Holdings, representing
withholding taxes paid by the Corporation on behalf of PICO
Holdings for interest on the note payable and convertible
debenture.
(e) ADMINISTRATIVE SERVICES
PICO provides payroll services for the United States based
employees of the Corporation commencing October 1, 1997. The
Corporation is invoiced by PICO for the monthly salary,
benefits and pension contributions made on its behalf. During
the year, $96,182 in charges were incurred and invoiced to the
Corporation. At December 31, 1997, there are no charges
outstanding.
<PAGE> 363
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
14. RECONCILIATION BETWEEN CANADIAN GAAP AND U.S. GAAP:
Reconciliations of net earnings (loss) determined in accordance with
Canadian GAAP to net income (loss) determined under U.S. GAAP and
presentation of U.S. GAAP weighted average common shares and earnings
(loss) per common share are as follows:
<TABLE>
<CAPTION>
Nine months
Six months ended Year ended ended
June 30, December 31, December 31,
1998 1997 1997 1996 1995
------------ ------------ ----------- ---------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net earnings (loss) for the year, as reported $ 929 $ (871) $(14,090) $ 3,613 $ (9,844)
Income tax (expense) benefit (a) (261) 3,687 308
-------- -------- -------- -------- --------
Net income (loss) for the year in
accordance with U.S. GAAP $ 668 $ (871) $(10,403) $ 3,613 $ (9,536)
======== ======== ======== ======== ========
Net income per common share - Basic
Continuing operations $ 0.01 $ (0.02) $ (0.17) $ 0.05 $ (0.09)
Discontinued operations 0.01 0.01 (0.08)
-------- -------- -------- -------- --------
Net income (loss) per common share $ 0.01 $ (0.02) $ (0.16) $ 0.06 $ (0.17)
======== ======== ======== ======== ========
Weighted average shares outstanding (c) 81,853 56,708 66,137 56,708 56,880
======== ======== ======== ======== ========
Net income per common share - Diluted
Continuing operations $ 0.01 $ (0.02) $ (0.17) $ 0.05 $ (0.09)
Discontinued operations 0.01 0.01 (0.08)
-------- -------- -------- -------- --------
Net income (loss) per common share $ 0.01 $ (0.02) $ (0.16) $ 0.06 $ (0.17)
======== ======== ======== ======== ========
Weighted average shares outstanding (c) 82,646 56,708 66,137 57,811 56,880
======== ======== ======== ======== ========
The cumulative effect of adjustments
on the consolidated shareholders' equity of
the Corporation is as follows:
Shareholders equity, as reported $177,451 $117,063 $173,656 $117,965 $115,262
Income taxes (a) 4,960 1,534 5,221 1,534 1,534
Carrying value of securities (b) 7,630 445 15,058 1,133 (830)
-------- -------- -------- -------- --------
Shareholders' equity, U.S. GAAP $190,041 $119,042 $193,935 $120,632 $115,966
======== ======== ======== ======== ========
</TABLE>
<PAGE> 364
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
The cumulative effect of the application of U.S. GAAP as described in (a)
through (c) below, on the consolidated balance sheet of the Corporation as at
June 30, 1998, would be to increase investments by $10,899,405 (December 31,
1997 increase - $22,542,469, December 31, 1996 - $2,034,000), increase goodwill
by $nil (December 31, 1997 $nil, December 31, 1996 - $2,814,087), increase
surface, water, geothermal and mineral rights by $2,863,575 (December 31, 1997 -
increase $5,919,995, December 31, 1996 - increase $2,535,120), increase deferred
tax asset by $5,336,568 (December 31, 1997 - increase $5,597,571 December 31,
1996 - increase $1,534,225), increase deferred tax liability by $7,786,513
(December 31, 1997 - increase $15,644,683, December 31, 1996 - increase
$6,250,269), and to increase shareholders' equity by $12,590,000 (December 31,
1997 - increase by $18,415,352, December 31, 1996 - increase $2,667,163).
Under Canadian GAAP, the issuance of certain debentures on acquisition of a
unitized interest in a real estate property during 1996 has been reflected in
the statement of changes in financial position as financing and investing
activities. Under U.S. GAAP, this non-cash transaction in the amount of
$1,164,000 would be excluded from financing and investing activities.
Accordingly, under U.S. GAAP, cash flows would be reported as follows in the
statement of changes in financial position:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, December 31,
1997 1996 1995
------------- ------------ -----------------
<S> <C> <C> <C>
Net cash provided by operating activities from
continuing operations $ 1,802 $ 1,923 $ 9,965
Net cash used in investing activities from
continuing operations (73,962) (66,890) (6,556)
Net cash provided by financing activities from
continuing operations 76,622 1,164 (1,987)
Effect of exchange rate changes on cash (34) (382) (186)
Discontinued operations 2,973 35,690 31,373
</TABLE>
Under U.S. GAAP, taxes paid of $1,786,000 on the disposal of the Sri Lankan
investments in 1997 would be classified as an operating activity from the
discontinued operations, rather than as an investing activity under Canadian
GAAP. Net cash flow from discontinued operations would be unchanged.
There would be no differences in net cash flow for the six months ended June 30,
1998 and 1997 under U.S. GAAP.
<PAGE> 365
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(a) ACCOUNTING FOR INCOME TAXES:
Effective April 1, 1993, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("FAS 109"), for its financial statements presented
under U.S. GAAP. The adoption of FAS 109 changes the Corporation's
method of accounting for income taxes from the deferred method, as
recorded under Canadian GAAP, to an asset and liability approach.
Under the asset and liability method of FAS 109, deferred tax assets
and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. The resultant deferred tax assets, net of applicable valuation
allowances, and deferred tax liabilities are valued annually using
the applicable tax rate for the current year. Changes in deferred
taxes are charged to net earnings or directly to shareholders' equity
in accordance with the underlying temporary difference giving rise to
the deferred tax.
At June 30, 1998, the main impacts of FAS 109 in Corporation's
financial statements were to increase surface, water, geothermal and
mineral rights and the deferred tax liability by $2,863,575. At
December 31, 1997, the main impacts of FAS 109 in the Corporation's
financial statements were to increase surface, water, geothermal and
mineral rights and the deferred tax liability by $5,919,995 and to
increase current earnings and the deferred tax asset by $3,686,574.
At December 31, 1996, the main impacts of FAS 109 were to increase
goodwill and water rights by $2,814,037 and $2,535,120 respectively,
as well as the deferred tax liability. The increase to earnings for
the year ended December 31, 1997 resulted from recording deferred
taxes on the write down of certain investments by the Corporation.
The other changes result from recording deferred taxes on the excess
of assigned book values over tax values of net assets acquired on a
purchase transaction under the application of FAS 109. Similar
treatment does not occur under Canadian GAAP.
(b) CARRYING VALUE OF SECURITIES:
Effective April 1, 1994, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("FAS 115") for
its financial statements presented under U.S. GAAP.
Under FAS 115, securities are classified in three categories and
accounted for as follows:
<PAGE> 366
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(i) Held-to-maturity securities:
When the enterprise has the positive ability and intent to hold
debt securities to maturity, such securities are carried at
amortized cost.
(ii) Trading:
When debt or equity securities are bought and held principally
for the purpose of selling them in the near term, such securities
are carried at fair value with unrealized gains and losses
reported in earnings.
(iii) Available for sale:
Debt and equity securities not classified as either
held-to-maturity or trading securities are classified as
available for sale and reported at fair value, with unrealized
gains and losses excluded from income and reported in a separate
component of shareholders' equity.
At June 30, 1998, the impact of FAS 115 on the Corporation's
financial statements was to reflect investments as available for sale
securities, and accordingly, to increase investments by $10,899,405,
increase deferred tax liability by $3,269,822, and to increase
shareholders' equity by $7,629,583.
At December 31, 1997, the impact of FAS 115 on the Corporation's
financial statements was to reflect investments as available for sale
securities, and accordingly, to increase investments by $22,542,469,
increase the deferred tax liability by $7,484,100, and to increase
shareholders' equity by $15,058,369.
At December 31, 1996, the impact of FAS 115 on the Corporation's
financial statements was to increase investments by $2,034,000,
increase the deferred tax liability by $901,000, and increase
shareholders' equity by $1,133,000.
(c) INCOME (LOSS) PER SHARE:
The Corporation has adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 requires dual presentation of "Basic" and "Diluted" earnings per
share by entities with complex capital structures. The Company
adopted the new method of reporting earnings per share for the year
ended December 31, 1997, and restated previous U.S. GAAP financial
statements to reflect the change.
<PAGE> 367
GLOBAL EQUITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR YEARS ENDED DECEMBER 31, 1997
AND 1996, AND THE NINE MONTHS ENDED DECEMBER 31, 1995 (INFORMATION RELATED TO
JUNE 30, 1998 AND 1997 IS UNAUDITED).
(TABULAR AMOUNTS IN THOUSANDS OF CANADIAN DOLLARS)
(d) STOCK COMPENSATION COSTS:
The Corporation has adopted the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") for 1997 and 1996. There are no material differences
between APB 25 and the relevant provisions of Canadian GAAP.
Option grants for the six months ended June 30, 1997 do not have a
material impact on reported U.S. GAAP income. There were no option
grants during the six months ended June 30, 1998.
(e) COMPREHENSIVE INCOME:
In June 1997 the FASB issued statement No. 130 "Reporting
Comprehensive Income". This statement establishes standards for
reporting and display of comprehensive income and its components.
Comprehensive income includes such items as foreign currency
translation adjustments and unrealized holdings gains and losses on
available for sale securities. Reconciliation of U.S. GAAP net income
(loss) to comprehensive income (loss) is as follows:
<TABLE>
<CAPTION>
Nine months
ended
Six months ended June 30, Year ended December 31, December 31,
1998 1997 1997 1996 1995
------------- ----------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net income (loss) U.S. GAAP $ 668 $ (871) $(10,403) $3,613 $(9,536)
Other comprehensive income (loss),
net of tax:
Change in unrealized holding gain
(loss) (7,428) (688) 13,925 1,963 (830)
Change in foreign currency
translation adjustment 2,866 (28) 6,960 (910) (3,081)
------- ------- -------- ------ --------
Other comprehensive income (loss) (4,562) (716) 20,885 1,053 (3,911)
------- ------- -------- ------ --------
Comprehensive income (loss) U.S. GAAP $(3,894) $(1,587) $ 10,482 $4,666 $(13,447)
======= ======= ======== ====== ========
</TABLE>
<PAGE> 368
GLOBAL EQUITY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Management's discussion and analysis of financial condition and results of
operations relates to the year ended December 31, 1997 ("fiscal 1997"). The
corresponding period relates to the year ended December 31, 1996 ("fiscal
1996").
CHANGES IN FINANCIAL CONDITION
CASH RESOURCES
Cash resources at December 31, 1997 amounted to $15,865,000 compared with
$44,773,000 at December 31, 1996. Of the $44,773,000 at December 31, 1996,
$35,689,000 was attributable to the Sri Lankan operations that were disposed of
in fiscal 1997. Cash resources increased by $6,781,000 in fiscal 1997.
The following table illustrates how the net increase of the investment portfolio
was financed by the Corporation by the significant cash and non cash components
(all amounts in thousands of Canadian dollars):
NET INCREASE IN INVESTMENT PORTFOLIO $ 96,213
--------
REPRESENTED BY:
Cash inflows (outflows):
Net proceeds from public offering 62,999
Borrowings 22,557
Repayment of debt (11,806)
Cash acquired in investment 1,554
Operating cash flow 1,182
Cash proceeds from land sales 1,788
Cash proceeds from disposal of Sri Lankan operations 5,994
Other:
Debt acquired in investment 6,900
Minority interest 13,660
Equity proceeds from disposal of Sri Lankan operations 10,248
Write down of Korean investments (11,096)
Other net changes (986)
--------
INCREASE IN CASH RESOURCES DURING 1997 $ 6,781
========
<PAGE> 369
CASH RESOURCES (CONTINUED)
Cash resources at December 31, 1996 amounted to $44,773,000 compared to
$105,132,000 at December 31, 1995. The total use of $60,359,000 of cash
resources in fiscal 1996 was represented by acquisitions of investments of
$70,146,000 less $9,787,000 of sundry cash inflows.
WORKING CAPITAL
Working capital at December 31, 1997 was $8,950,000 compared with $40,834,000 at
December 31, 1996. The decrease of $31,884,000 is attributable to the net of the
increase in cash resources from continuing operations, as disclosed above, and
the decrease in cash and other working capital items as a result of the disposal
of the Sri Lankan operations in fiscal 1997, but which were consolidated into
the Corporation's financial statements at December 31, 1996.
Working capital at December 31, 1996 declined by $65,559,000 compared to working
capital of $106,393,000 at December 31, 1995. The largest component of the
decrease in total working capital was the decline in cash resources of
$60,359,000, as disclosed above, and utilized for investment acquisitions.
BORROWINGS (SEE ALSO NOTE 8 TO THE FINANCIAL STATEMENTS)
At December 31, 1997, the Corporation had $23,388,000 of borrowings. This is
largely represented by $14,575,000 due to affiliates of the Corporation's parent
company, PICO Holdings, with interest due at 7% per annum, and repaid subsequent
to December 31, 1997, a note payable of $7,157,000 assumed by the Corporation on
the acquisition of Nevada Land & Resource Company LLC ("NLRC") (see Investment
Portfolio section), maturing on October 1, 2000 with interest due to the extent
that payment is received on four geothermal leases associated with the acquired
lands, and debentures of $1,091,000 issued by a subsidiary of the Corporation,
Phoenix Capital, Inc. ("Phoenix") maturing on March 31, 2006. The Phoenix
debentures have a maximum interest rate of 10% with a ceiling of the cash flow
received from the property backing the investment in unitized interest in
Canadian real estate.
The Corporation arranged borrowings during fiscal 1997 of $34,500,000, as
financing for the acquisition of NLRC from PICO Holdings in the form of a
convertible debenture with a coupon of 7%. The debenture plus all accrued
interest was repaid from the proceeds of the Corporation's public offering (see
note 9 to the financial statements). In connection with the acquisition of NLRC,
the Corporation also incurred a note payable for $7,000,000 to PICO Holdings
with a coupon rate of 10% per annum and a note payable to a third party for
$1,700,000 with a coupon rate of 6% per annum during fiscal 1997. Both notes
payable were repaid from the proceeds of the Corporation's public offering. In
addition, during fiscal 1997, the Corporation also repaid $2,784,000 of debt
that existed at December 31, 1996.
At December 31, 1996 the Corporation had $3,948,000 of borrowings represented by
$1,164,000 of the Phoenix debentures and $2,784,000 of vendor financing at 9.5%
per annum in connection with the Big Springs Ranch acquisition (see Investment
Portfolio section below). This vendor financing was repaid entirely in fiscal
1997.
At December 31, 1995 the Corporation had no long term debt and none outstanding
through the nine months ended December 31, 1995.
<PAGE> 370
SHAREHOLDERS' EQUITY
Shareholders' equity at December 31, 1997 was $173,656,000, compared with
$117,965,000 at December 31, 1996. The increase of $55,691,000 was the net of
proceeds received from a public offering of $62,999,000, a net loss of
$14,090,000 for the year ended December 31, 1997, a decline of $178,000 in
contributed surplus, and a $6,960,000 movement in foreign currency reserve. This
movement is as a result of the Corporation's non-portfolio investment holdings
being denominated in US dollars, which strengthened against the Canadian dollar
during fiscal 1997, amounting to $3,737,000 and a charge of $3,223,000 in the
statement of operations due to the realization of the foreign currency
translation adjustment on the disposition of the Sri Lankan operations.
Shareholders' equity at December 31, 1996 was $117,965,000 compared with
$115,262,000 at December 31, 1995. The increase of $2,703,000 was the net of the
Corporation's net earnings for the year ended December 31, 1996 of $3,613,000
and the adjustment to the foreign currency reserve of $910,000. This latter
adjustment primarily reflected the Corporation's share of net assets resident in
Sri Lanka and denominated in Sri Lankan rupees that devalued against the
Canadian dollar in fiscal 1996.
OPERATING RESULTS
REVENUE
Revenue for the year ended December 31, 1997 amounted to $5,546,000, compared to
$4,854,000 for the year ended December 31, 1996. The increase of $692,000 in
fiscal 1997 compared to fiscal 1996 is primarily represented by the net of the
increase in operating revenues and land sales of approximately $3,100,000 due to
the acquisition of NLRC in fiscal 1997, and approximately $2,500,000 of interest
foregone in fiscal 1997 as cash balances were lower throughout fiscal 1997
compared to fiscal 1996 and which have, to date, not been replaced by an
equivalent income return on the investments acquired. Management believes the
investment performance should be measured over the long-term through unrealized
appreciation of assets and growth in shareholders' equity as well as operating
income and realized profits.
The comparison of revenues for the year ended December 31, 1996 is not
comparable with the revenues for the nine months ended December 31, 1995. In
addition to the shortened fiscal period for 1995, the results for 1995 include
results of the Sri Lankan operations that have been separately disclosed as
discontinued operations in fiscal 1997 and 1996.
EXPENSES
Total expenses incurred by the Corporation for the year ended December 31, 1997
were $9,161,000 compared with $2,132,000 in the year ended December 31, 1996.
The increase of $7,029,000 is due to several reasons: Interest incurred on
borrowings in fiscal 1997 amounted to $2,842,000 (fiscal 1996:nil), operating
expenses and cost of land sales amounting to approximately $2,500,000 incurred
by NLRC which was acquired by the Corporation in fiscal 1997, and for which
there is no corresponding amount in fiscal 1996, an increase in Vidler Water
Company, Inc. ("Vidler") expenses of approximately $600,000 due to increasing
growth of operations in fiscal 1997 (see Investment Portfolio section below),
and an increase of approximately $1,100,000 in overhead incurred as the
Corporation increased in size during fiscal 1997. The overhead expense relates
primarily to consulting fees in connection with the management of the
Corporation, employees remuneration, legal, tax and audit fees, travel and rent.
<PAGE> 371
EXPENSES (CONTINUED)
The comparison of expenses for the year ended December 31, 1996, is not
comparable with the expenses for the nine months ended December 31, 1995, as
discussed in the Revenue section above.
WRITE DOWN OF INVESTMENT
The Corporation incurred a charge to earnings in fiscal 1997 of $11,096,000
(1996: nil) due to the write down of the Corporation's investments in Korean
equities to market value at December 31, 1997 (see Investment Portfolio section
below). The write down represents the difference between the Corporation's cost
of the Korean equities of $12,242,000 and the market value of the Korean
equities, at December 31, 1997, of $1,146,000.
DISCONTINUED OPERATIONS
The Corporation earned net income of $1,003,000 in fiscal 1997 from its Sri
Lankan operations prior to their disposal by the Corporation in November and
December 1997, compared to $953,000 in fiscal 1996. In addition, the Corporation
realized a capital gain in fiscal 1997 of $3,001,000 net of taxes payable of
$1,786,000 on the disposition of the Sri Lankan operations. As well, the foreign
currency translation adjustment relating to the discontinued Sri Lankan
operations of $3,223,000 and reflected in the total foreign currency adjustment
reserve shown as a component of shareholders' equity at December 31, 1996, was
charged in the statement of operations for the year ended December 31, 1997 as
this currency adjustment was realized upon the disposition of the Sri Lankan
operations.
INCOME TAXES
Income taxes for fiscal 1997 were $7,000 compared to $67,000 for fiscal 1996.
The losses realized by the Corporation have not been tax affected, resulting in
capital and non-capital losses available for carry-forward that may be applied
to future profits generated by the Corporation.
INVESTMENT PORTFOLIO
As disclosed above, the Corporation increased the net carrying value of the
investment portfolio by $96,213,000. The Corporation utilized $107,309,000 in
fiscal 1997 to acquire certain new investments and to add further assets or
equities to the investment portfolio that existed at December 31, 1996, and also
wrote off $11,096,000 from the value of its Korean investments in order to bring
the carrying value of the Korean investments to the market value at December 31,
1997. The Corporation's investment portfolio at December 31, 1997 and at
December 31, 1996 was as follows (all amounts in thousands of dollars):
<PAGE> 372
<TABLE>
<CAPTION>
INVESTMENTS 1997 1996
-----------------------------------
<S> <C> <C>
Surface, water, geothermal and mineral rights
portfolio $ 97,084 $22,724
Portfolio investment in public companies 59,223 46,018
Strategic investment in preferred and common stock of
North American public corporations 11,105 8,128
Convertible loan 10,932 10,932
Oil & gas lease portfolio 5,675 -
Real estate units in Canada 1,214 1,218
-----------------------------------
$185,233 $89,020
===================================
</TABLE>
SURFACE, WATER, GEOTHERMAL AND MINERAL RIGHTS
The Corporation's surface, water, geothermal and mineral rights portfolio
consists of its investments in NLRC and Vidler.
NEVADA LAND & RESOURCE COMPANY, LLC
In April, 1997, the Corporation paid $50.2 million for a 74.77% membership
interest in NLRC. At December 31, 1997, the net investment in NLRC is carried on
the Corporation's books as investment in surface, water, geothermal and mineral
rights of $70.7 million, minority interest of $13.7 million, and note payable of
$7.2 million. The minority interest was acquired by PICO Holdings, Inc., the
Corporation's ultimate parent company.
NLRC's principal asset consists of 1.365 million acres of land located in
northern Nevada. Public ownership of lands in Nevada approach 85% of total land
and other lands are set aside by agencies and environmental groups, making
private lands a scarce commodity in this, the fastest growing state in the
United States. NLRC is the largest private land owner in the state and,
accordingly, is able to take advantage of the growth in Nevada from the mining
and gambling industries and associated developments.
For the eight month period to December 31, 1997 that NLRC has been under the
control of the Corporation, NLRC returned an annualized gross yield of 7.3%, net
1.4 %, on existing leases, fees, royalties and land sales. Since the acquisition
of NLRC by the Corporation, both the Corporation's and Vidler's management have
worked closely with NLRC to further develop the various resources present on the
NLRC property. NLRC's business plan contemplates the following to realize the
inherent value of the asset:
o Land exchanges with governmental agencies, private landholders and
promoters;
o Land development of prime residential and commercial land in and around
the fast growing towns of Elko and Winnemucca;
o Land parcel sales;
o Conversion of grazing land to agricultural production;
<PAGE> 373
NEVADA LAND & RESOURCE COMPANY, LLC (CONTINUED)
o Development of NLRC's existing water rights which amount to approximately
13,000 acre feet. The principal water supply for the Reno metropolitan
area comes from the Truckee River which is currently over-appropriated.
Accordingly, a municipality such as Fernly, Nevada will be required to
locate additional sources of water to provide for their continuing growth.
In addition, other fast growing municipalities located on or around the
NLRC property, such as Elko and Winnemucca, have nearly exhausted their
current water supplies.
o Development of water rights that straddle the NLRC property. It is
estimated that there is somewhere between 300,000 to 600,000 acre feet of
water in hydrological basins that exist on NLRC property. NLRC anticipates
that this water could be actively marketed to industrial or mining users
or for long-distance trading. However, it will take a number of months to
analyze the Company's position and to work with the authorities to see
whether this asset can be developed for the benefit of all concerned; and
o Development or sale of geothermal interests.
In addition to the above business plan, NLRC is actively involved in maximizing
the property's mineral rights potential. A preliminary review of the mineral
exploration potential of the property performed by an experienced reserve audit
firm concluded that there was "excellent potential for the discovery of a
significant gold deposit". To this end, shortly after the acquisition of NLRC by
the Corporation, NLRC appointed a full time geologist. The geologist's
responsibilities not only include taking and analyzing samples taken from
potential mineral deposits on the property, but also providing assurance that
any sales or development of other components of the asset do not have an adverse
impact on the mineral right potential of the entire asset.
VIDLER
Vidler is an important operator in the water marketing and transfer business.
The business plan calls for Vidler to identify areas where water supplies are
needed in the southwestern United States and then facilitate the transfer from
current ownership to Vidler, to municipalities, water districts, developers and
others. This process requires uncommon knowledge and skills in the
identification, certification, upgrading, managing, transfer, marketing and
financing of water projects. Vidler has created opportunity through its ability
to aggregate supplies from disparate owners and locations, re-directing the
water to its highest and best use. Although regulatory bodies have fallen behind
in the quest to have water assets freely marketed and reallocated, Vidler has
found that the gap between supply and demand can be alleviated by its
proprietary methods.
As a comprehensive provider of water services, Vidler performs the following
functions:
o Water asset acquisitions; purchasing appropriative water rights, upgrading
the priority and functionality wherever possible, and marketing the
product to the end-user; and
o Development and operation of water recharge (storage) facilities directed
to municipalities and water districts in the southwest United States;
storage provides flexibility-surplus supplies can be stored inexpensively
and can be sold and delivered to meet peak demands.
<PAGE> 374
VIDLER (CONTINUED)
Vidler strengthened its management team in fiscal 1997 considerably and
appointed a Chief Operating Officer and a Chief Financial Officer. Both
individuals bring a wealth of experience and knowledge of the water business
from a public sector perspective.
At December 31, 1996, the Corporation's investment in Vidler, a wholly owned
subsidiary, had a carrying value, at cost, of $22.7 million. In pursuit of its
water marketing and transfer strategy, Vidler continued to acquire and develop
surface and water rights in Arizona, Colorado and Nevada by means of capital
contributions from the Corporation throughout fiscal 1997. As at December 31,
1997, the carrying value at cost of the Corporation's investment in Vidler was
$26.4 million. $1.3 million of the value in this investment was, at December 31,
1997, held by Vidler's immediate parent company, Forbes & Walker (USA), Inc.
("Forbes & Walker"). It is the Corporation's intention to have Forbes & Walker
contribute these assets, at cost, to Vidler in 1998 as capital contributed.
As at December 31, 1997 the Vidler portfolio consisted of the following assets
(including the Forbes & Walker assets):
o VIDLER TUNNEL
The Vidler Tunnel in Colorado and its associated absolute senior and
junior water rights are producing an average of approximately 1,106
acre feet of water per year and conditional junior rights are producing
approximately 1,000 acre feet of water per year. While most of the
population resides on the eastern slope of the Front Range of the Rocky
Mountains, an area running from 120 miles north of Fort Collins south
to Colorado Springs, the majority of the state's water resources are
located on the western slope of the Front Range. The Vidler Tunnel is a
7,500 foot water collection and delivery system that traverses the
Continental Divide and allows water to be diverted from the western
slope for use in the Denver metropolitan area. Vidler generates
revenues from the lease of part of its water rights to municipalities
and developers on both the eastern and western slopes and is actively
marketing the remainder of the water rights to other municipalities in
these areas that have effectively exhausted their current water supply.
Typically, the lease agreements of these water rights are perpetual
(i.e. 99 years) and have annual CPI adjustments;
o MBT RANCH
Comprises 1,420 acres of deeded, historically irrigated land, with
4,260 acre feet of transferable water rights, 1,080 acres of desert
land, 2,004 acres of leased state land and an estimated 480,000 acre
foot recharge facility, all located near Phoenix, Arizona: Vidler has
entered into agreements to provide up to 10,380 acre feet of water
under perpetual leases with annual CPI adjustments, to a developer in
the Phoenix/Scottsdale area, subject to the adoption of a wheeling
policy by the Central Arizona Water Conservancy District;
<PAGE> 375
o BIG SPRINGS RANCH
Comprises 110,000 acres of deeded land, 150,000 acres of leased land
with grazing rights and 17,950 acre feet per year of water rights in
northern Nevada. The partnership which manages Big Springs Ranch (in
which Vidler has a 100% interest until it receives all of its invested
capital plus an annual compounded 20% preferential return and
thereafter becomes a 50% interest), is in the process of completing a
land exchange with the Bureau for Land Management. The proposed
exchange will mean that the partnership will acquire approximately
6,000 acres in and around the city of West Wendover, Nevada (located by
the state border with Utah and in the fast growing Interstate 80
corridor) in exchange for giving up approximately 70,000 acres of
deeded ranch land, but not the appurtenant water rights. The proposed
exchange will enable West Wendover to expand and to meet pent-up demand
for residential and commercial property and attendant water demand. On
completion of the proposed exchange, the partnership will also actively
market the Big Springs Ranch water rights to the cities of West
Wendover and Wendover, Utah, both of which have practically exhausted
their current water supply;
o CLINE RANCH
Since November 1995, Vidler has identified and acquired 612 acre feet
of senior water rights near South Park, Colorado. In December, 1997,
Vidler entered into an option agreement with a third party to sell the
Cline Ranch water rights for US$5,000 per acre foot. Vidler's purchase
cost was approximately US$3,000 per acre foot.
Since the acquisition of Vidler by the Corporation in November, 1995,
Vidler has and continues to identify and acquire water rights with
intrinsic values based upon their initial acquisition price and not
predicated solely on a transfer of the rights to an alternate use. As
the Vidler investment is carried at the cost of the assets acquired,
the portfolio does not reflect management's expectation of value. In
December, 1997, Vidler received a letter of intent from Western Water
Company ("Western Water"), a public water marketing company listed on
the Nasdaq National Market, to purchase Vidler for US $100 million in
the form of newly issued Western Water stock. However, the Corporation
and Western Water terminated negotiations thereafter. Management
believes this indicates that Vidler, and its underlying assets, has
potential additional value in excess of the Corporation's carrying
value.
PORTFOLIO INVESTMENTS IN PUBLIC COMPANIES
o The Corporation increased its portfolio of investments in public companies
by $24.3 million in fiscal 1997, before the write down of the Korean
equity portfolio of $11.1 million. The acquisitions are largely
represented by further accumulation of European value stocks held in the
portfolio at December 31, 1996 and investments in Vanik Incorporation
Limited ("Vanik"), a Sri Lankan public corporation, acquired as part
consideration on the disposition of the Corporation's Sri Lankan
operations, Forbes Ceylon Limited and Forbes & Walker Limited.
<PAGE> 376
o INVESTMENT IN PICO HOLDINGS, INC.
The Corporation owns 4,258,415 shares in PICO Holdings, Inc. with a
carrying value, at cost, of $20.9 million (1996: $20.9 million). At
December 31, 1997, the market value of these shares was $39.2 million
(1996: $24.1 million), representing an unrealized gain of $18.3
million, including an unrealized foreign exchange gain of $1.8 million.
o EUROPEAN EQUITIES
The Corporation invested a further $15.7 million in European value
stocks during fiscal 1997, taking the total European portfolio to $25.5
million, at cost, as at December 31, 1997 (1996: $9.7 million). Marked
to market at December 31, 1997, the Corporation has an unrealized gain
of $2.2 million, net of foreign exchange losses (1996: $0.6 million).
The stocks the Corporation holds are classic value stocks: significant
discounts present in the companies' market capitalization to the
underlying net tangible assets or intrinsic business value, positive
cash flows from operations and low debt to equity ratios. It is
management's intention to actively assist in narrowing the discount
that exists between the intrinsic value and the current market
capitalization.
o SRI LANKAN EQUITIES AND DEBENTURES
In November and December 1997, the Corporation disposed of its
interests in Forbes Ceylon Limited and Forbes & Walker Limited
respectively to Vanik. At the date of the disposals, the Corporation
carried these investments at approximately $28.0 million, including
earnings of approximately $1.0 million generated in fiscal 1997 prior
to the dates of disposals. As a result of the disposals, the
Corporation received gross proceeds of $22.5 million, before cash taxes
of $1.8 million, plus 15% debentures in Vanik with a face value of $6.7
million and equity in Vanik with a carrying value of $3.6 million. The
Corporation, therefore, realized a gain, net of taxes, of $3.0 million
on the disposition of its non-core Sri Lankan subsidiaries.
Both the Vanik debentures and equity are freely tradable on the Colombo
Stock Exchange. Marked to market at December 31, 1997, the Corporation
has an unrealized loss on the Vanik equity of $1.6 million.
o KOREAN EQUITIES
The Korean equities owned by the Corporation have not been immune to
the financial meltdown that occurred in Korea, and other parts of Asia,
at the end of fiscal 1997, and which continued into 1998. The
Corporation's carrying value, at December 31, 1997 for these equities
was $1.1 million (1996: $12.3 million). The Corporation has written
down the value of the portfolio to the December 31, 1997 market value.
The total unrealized loss reflected in the Corporation's statement of
operations of $11.1 million includes an unrealized foreign exchange
loss of $5.3 million due to the devaluation of the Korean won to the
Canadian dollar (1996: unrealized loss not reflected in the statement
of operations; $1.5 million).
<PAGE> 377
KOREAN EQUITIES (CONTINUED)
As there is uncertainty with respect to the ultimate realization of
value of the Corporation's Korean portfolio, management has elected to
fully provide for the unrealized loss on these investments at December
31, 1997. In management's opinion, using its best estimates based on
assumptions that reflect the most probable set of economic conditions
in Korea and the underlying operations of the companies invested in,
the long term value of these investments should approach their original
cost of acquisition. However, the timetable for economic turnaround is
uncertain. Therefore, management has taken a conservative stance and,
accordingly, has taken a full write down in the Korean portfolio.
Management's assumptions in analyzing the long term value of the Korean
portfolio are partly based on the response by the Korean government and
the international financial community to the crisis that enveloped
Korea in late 1997 and early 1998. Short term loans have been extended
and regulation of foreign investment in Korean companies further
relaxed. This has had the effect of increasing foreign currency inflow
and restoring Korea's balance sheet. Further, in February 1998,
Standard & Poor upgraded Korea's sovereign rating from B to BB,
reflecting the country's progress in implementing economic reforms.
o US EQUITIES
The Corporation also has a small portfolio of US value stocks with a
carrying value, at December 31, 1997 at cost, of $1.4 million (1996:
$1.1 million). Marked to market, the investments have a value of $1.5
million at December 31, 1997 (1996: $1.1 million).
STRATEGIC INVESTMENTS IN PREFERRED AND COMMON STOCK OF NORTH AMERICAN PUBLIC
CORPORATIONS
o CONEX CONTINENTAL INC.
The Corporation has a total carrying value at December 31, 1997, at
cost adjusted for the appropriate share of results of operations since
acquisition, of $9.7 million (1996: $6.7 million) in Conex Continental,
Inc. (Canadian OTC market: CONX). This is in the form of a redeemable
7% preferred stock due August 1999, with a face value of $6.7 million;
22,195,043 common shares at an aggregate cost of $1.2 million;
66,901,845 warrants for one common share per warrant exercisable at
5.66 cents per warrant; and loans receivable of $1.8 million. On a
fully diluted basis, the Corporation's investment represents
approximately 60% of Conex's common stock.
Conex's main asset is a 60% interest in a sino-foreign joint venture.
The joint venture is a successor organization to Guiyang Mining
Machinery Works ("GMM"). GMM primarily manufactured and sold wheeled
and tracked hydraulic excavators in the Chinese domestic market. For
the ten years prior to the formation of the joint venture, GMM was a
significant excavator manufacturer in China as measured by unit sales
and profitability. GMM contributed to the joint venture all of its
productive assets, including plant, building and equipment, valued at
US$10 million to obtain a 40% interest in the joint venture. At
December 31, 1997, Conex has contributed US$10 million of its US$15
million obligation for its 60% interest in the joint venture. The final
US$5 million is due to the joint venture at the end of 1998. The
Corporation actively assisted Conex in raising the second tranche of
financing of US$6 million due to the joint venture in October, 1997. In
this regard, an investor group based in Connecticut invested US$5
million in Conex for Cdn. 25 cents per share.
<PAGE> 378
CONEX CONTINENTAL INC. (CONTINUED)
The Chairman of the joint venture, and the CEO of Conex, is a North
American who is based full-time in Guiyang, and is an extremely
experienced manufacturing operator. In fiscal 1997, the joint venture
sold approximately 300 units. The management of Conex believes that the
joint venture has much scope to grow based on the operating leverage
the joint venture possesses due to the capacity available at the plant
(1,300 units annually), the joint venture's price competitiveness, and
the recent proclamation by the Chinese government to spend US$1
trillion on construction projects in the next three years to maintain
China's economic growth.
o SISCOM, INC.
The Corporation has a carrying value at December 31, 1997, at cost, of
$1.4 million (1996: $1.4 million) in 4,000,000 7% convertible
preference shares of SISCOM, Inc. (OTC Bulletin Board: SATI). The
preference shares are convertible into common stock of SISCOM in a
ratio of one to one at any time within three years from September 1996.
Conversion would result in the Corporation owning approximately
one-third of SISCOM's fully diluted common stock.
SISCOM is a provider of multimedia software solutions to the electronic
media, Internet providers, and sports industries. For example, SISCOM
supplies eight teams in the National Basketball Association with its
Coaching Decision Support System ("CDSS"). By combining advanced data
mining software with digital video hardware, CDSS brings large
quantities of statistical and video information into a useful coaching
tool. An interface with the NBA's courtside logging database, allows
coaches to display pertinent game statistics in a variety of
customized, graphical formats. SISCOM is actively marketing this
product and other related logging and retrieval products to the college
markets. In addition, SISCOM has numerous installations worldwide and
apart from the NBA and NBA franchises, has the National Hockey League,
a NHL franchise, ESPN and FOX Sports among its customers.
SISCOM's gross revenues for the year ended June 30, 1997 were
approximately US$840,000. SISCOM's revenues did not grow significantly
during the year ended June 30, 1997 as SISCOM's management dropped some
non-core products in order to focus more clearly on their current
product line. Gross revenues for the six months ended December 31, 1997
were approximately US$ 845,000. SISCOM's management believes the
breadth and depth of SISCOM's products and their applicability in
various markets gives SISCOM a solid platform from which to experience
rapid growth.
CONVERTIBLE LOAN
The Corporation, having obtained an injunction on the assets providing security
for the Corporation's loan and accrued interest, spent the most part of fiscal
1997 trying to reach agreement with the management of the borrower. These
discussions were not fruitful and as a result, the Corporation has initiated
proceedings for a Court appointed receiver in British Columbia to realize on the
Corporation's security. Internal analysis and third party valuations provide
evidence that the total value of the security is in excess of the total
principal plus accrued interest.
<PAGE> 379
OIL AND GAS LEASE PORTFOLIO
The Corporation has a carrying value at December 31, 1997, at cost, of $5.6
million, (1996: nil) in a wholly owned subsidiary, Global Oil & Gas Corporation
("GOG").
GOG is a General Partner for an Oklahoma Partnership formed in May 1997 called
TPC Exploration ("TPC"). TPC was formed for the purpose of acquiring leasehold
interests in oil and gas producing and non-producing properties that are suited
to precision horizontal drilling. Under the provisions of the partnership
agreement, GOG is entitled to preferential rights for the return of its capital
account plus a 20% annual return on capital; thereafter, GOG has a 45% economic
interest in the partnership.
TPC's managing partners are highly experienced operators in the oil and gas
industry and have a particular expertise in precision horizontal drilling.
Precision horizontal drilling is a relatively recent technological advance in
the oil and gas industry and it is now possible, for example, to drill a
5,000-foot lateral hole within a 2 to 4 foot pay zone resulting in a 500% or
greater increase in flow rates, reserves and return on investment from that
found in a vertical well in the same zone.
The partnership has at December 31, 1997, acquired a prospect of over 120,000
acres of oil and gas leases with a weighted average of 86.75% net revenue
interest, in the Williston Basin in North Dakota for a total consideration of
approximately US$5 million. The partnership considers the prospect to be
analogous to the Red River B reservoir in the Williston Basin, where, to date,
200 horizontal wells have been completed.
The partnership is in the process of marketing this prospect to oil and gas
exploration companies.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has financed additions of $107,309,000 in its investment
portfolio in fiscal 1997 by a mixture of equity, borrowings, minority interests,
operating cash flow and disposition of non-core assets. The Corporation
continues to source and identify potential value-based investments. Liquid
resources available to the Corporation at December 31, 1997 are $32,305,000
before current liabilities of $23,355,000. While management can give no
assurance to the timing or extent of realized gains from the existing investment
portfolio, management believes that such realized gains will provide sources of
capital for further value based investments and provide for the future growth of
the Corporation.
RISKS AND UNCERTAINTIES
There are risks inherent in the nature of the Corporation's business as an
investment corporation. The investment in companies which management regards as
undervalued involves significant risk that even a combination of careful
evaluation, experience and knowledge may not eliminate. Potential investors must
rely on the ability of the Corporation's management and board of directors to
identify and take advantage of business opportunities, provide advisory
services, facilitate financings and make investments in appropriate businesses.
Risk is currently mitigated by the diversification of the investment portfolio
both by sector and geographically.
The Corporation's ability to achieve an acceptable rate of return on any
particular investment is subject to a number of risk factors which are beyond
its control, including increased competition and loss of market share, quality
of management, cyclical or uneven financial results, technological obsolescence,
foreign currency risks and regulatory delays.
<PAGE> 380
RISKS AND UNCERTAINTIES (CONTINUED)
There is no assurance that the Corporation's existing or future investments will
achieve acceptable rates of return or that the Corporation will realize the
value of the funds invested; accordingly, these investments may have to be
written down or sold at their then-prevailing market values. Investment risk is
managed by the Corporation through value investing, which is risk-averse by
nature. Investments are structured to protect from downside risk through
particular emphasis on acquisition price, securitization and conversion rights.
Investments in both private and public companies may prove illiquid or
realizable only at a discount. Investments in private companies are not as
marketable as investments in public companies. Investments in public companies
are subject to prices determined in the public market and therefore, values can
vary dramatically. In particular, the ability of the public markets to absorb a
large block of shares offered for sale can affect the Corporation's ability to
dispose of an investment in a public company.
FOREIGN CURRENCY
Risk arises from the relative value of the currency of foreign denominated
investments in relation to the Canadian dollar, the Corporation's reporting
currency. The Corporation has not set up specific hedges for currency risk.
However, in the analysis process, the risk of foreign exchange devaluation or
revaluation is taken into consideration in the pricing decision. In assessing
value, management reviews the underlying currency of the investment.
FOREIGN INVESTMENTS AND OPERATIONS
As a result of the global diversification of the investment portfolio, the
Corporation's revenues may be adversely affected by economic, political and
governmental conditions in countries where it maintains investments or
operations, such as volatile interest rates or inflation, the imposition of
exchange controls which could restrict the Corporation's ability to withdraw
funds, political instability and the currency risks discussed above.
RELIANCE ON KEY PERSONNEL
The success of the Corporation depends to a large extent on its ability to
retain the services of its senior management, in particular Messrs. Langley and
Hart and, to a certain extent, upon the management of companies in which the
Corporation has an investment. The inability to retain the services of these
persons could potentially affect the Corporation's operations and profitability.
YEAR 2000 DISCLOSURE
The "Year 2000 issue" refers to the business implications of the arrival of the
new millennium. Implications arise largely because, until recently, it had been
normal practice in the computer industry to use only two digits rather than four
to record year information in databases. If corrective action is not taken,
computer systems could fail completely or create erroneous data, based on
incorrect data based calculations.
<PAGE> 381
YEAR 2000 DISCLOSURE (CONTINUED)
The Corporation is currently reviewing the impact that the Year 2000 issue will
have on its operations, if any, and expects that review to be completed by the
end of 1998. As part of this review, the Corporation will seek assurances from
each of its significant investees, outside service providers, and intermediaries
that their respective Year 2000 issues have been properly addressed. Management
is still ascertaining the costs to resolve this issue, if any, and expects to
have an estimate of these costs upon the completion of its review.
<PAGE> 382
GLOBAL EQUITY CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEAR ENDED DECEMBER 31, 1996
Management's discussion and analysis of financial condition and results
of operations relates to the year ended December 31, 1996 ("fiscal
1996"). The corresponding period relates to the nine month period ended
December 31, 1995 ("fiscal 1995") as the Corporation's year-end was
changed to December 31 from March 31 for fiscal 1995.
CHANGES IN FINANCIAL CONDITION
Cash resources at December 31, 1996 amounted to $44,154,000 compared
with $105,132,000 at December 31, 1995. The decline in cash resources
of $60,978,000 is represented by the following acquisitions (all of
which are discussed in more detail under the Investment Portfolio
section), disposals, issue of debentures and operating cash flow of the
Corporation in 1996.
All amounts in thousands of dollars:
Public equities in North America, Europe and Korea (23,175)
Investment in PICO Holdings, Inc. (20,948)
Convertible loan (10,000)
Preferred shares in North American public corporations (8,128)
Additional acquisitions of water rights (6,677)
Unitized interest in real estate (1,218)
-------
TOTAL ACQUISITIONS IN THE YEAR (70,146)
Sale proceeds of London property 2,192
Sale proceeds on disposal of Sri Lankan assets 1,064
Operating cash flow 5,925
Deferred costs (795)
Issue of debentures in subsidiary 1,164
Effect of foreign exchange on cash resources (382)
-------
TOTAL USE OF CASH RESOURCES IN FISCAL 1996 (60,978)
=======
Cash resources at December 31, 1995 amounted to $105,132,000 compared
with $115,378,000 at March 31, 1995. The major component of the
$10,246,000 decline was the expenditure of $12,715,000 on the
acquisition of water rights and options (see "Investment Portfolio -
Water Rights Portfolio"). Working capital at December 31, 1996 was
$45,728,000 compared with $106,393,000 at December 31, 1995. The
largest individual component of the net decrease of $60,665,000, as
discussed above, is the decline in cash resources for the year. Working
capital at December 31, 1995 declined by $29,250,000 to $106,393,000
from $135,643,000 at March 31, 1995. The net decrease in this
nine-month period was largely accounted for by the acquisition of water
rights and the non-cash portion of the period's losses that arose from
provisions and accruals related to the Corporation's business risks.
<PAGE> 383
At December 31, 1996, the Corporation had $1,164,000 in long-term debt,
represented by ten-year debentures issued by a Canadian public
subsidiary of the Corporation, Phoenix Capital Inc. ("Phoenix"). The
debentures carry a maximum coupon of 10% per annum with a ceiling of
the cash flow received from the real estate units acquired by the issue
of the debentures and stock in Phoenix. The debentures' sole recourse
is against the properties acquired. At December 31 and March 31, 1995
the Corporation had no long term debt and none outstanding through the
nine months ended December 31, 1995 and the year ended March 31, 1995.
Shareholders' equity at December 31, 1996 was $117,965,000 compared
with $115,262,000 at December 31, 1995. The increase of $2,703,000 was
the net result of the Corporation's net income after income taxes and
minority interest for the year of $3,613,000 less the adjustment to the
foreign exchange translation account of $910,000. This latter
adjustment primarily reflects the Corporation's share of net assets
resident in Sri Lanka that have devalued against the Canadian dollar
during the year.
Shareholders' equity at December 31, 1995 was $115,262,000 compared
with $128,351,000 at March 31, 1995. The decrease was the result of
losses totaling $9,844,000 for the nine-month period together with a
foreign exchange adjustment of $3,081,000 relating to the investment in
Sri Lanka. The prior period losses included a number of non-recurring
items including the write-down of goodwill also relating to the Sri
Lanka operations.
OPERATING RESULTS
REVENUE
Revenue for the year ended December 31, 1996 is not comparable with the
revenue for the nine months ended December 31, 1995. In addition to the
shortened fiscal period for 1995, the Corporation changed its
consolidation policies to include the operations in Sri Lanka on a
lagged basis. The net effect for fiscal 1995 was to include revenue for
six months to September 30, 1995 with respect to the Sri Lankan
operations. For fiscal 1996, while the Sri Lankan operations are still
recorded on a lagged basis, the Corporation's total revenue included
revenue for the twelve months ended September 30, 1996 from the Sri
Lankan operations. This lagged recording of operations was made in
order to include more accurate financial information which was not
obtainable on a timely basis and is expected to continue indefinitely
as it does not materially affect operating results or financial
position.
Revenue for the year ended December 31, 1996 amounted to $30,029,000
compared with $43,267,000 for the year ended March 31, 1995, the
Corporation's most recent twelve-month reporting period prior to fiscal
1996. The reduction in revenue is primarily due to the sale of revenue
generating but loss making operations in Sri Lanka during fiscal 1995
and 1996 and partly due to the loss of interest as cash resources have
declined which have not been replaced by an equivalent income return on
the investments acquired. The investment rationale of the Corporation
is described in more detail under the Investment Portfolio section
below. Performance is measured over the long-term through unrealized
appreciation of assets and growth in shareholders' equity as well as
operating income and realized profits.
<PAGE> 384
EXPENSES
Total expenses reported for the year ended December 31, 1996 are
$23,637,000 compared with $23,861,000 for the nine months ended
December 31, 1995 and $33,600,000 for the year ended March 31, 1995.
The major components of the decrease, despite the comparison to a nine
month period, are the reduction in remuneration and severance costs to
directors and officers of the Corporation in North America as a result
of the change in control of the Corporation in September, 1995 and the
reduction in costs due to the disposal of loss making Sri Lankan
operations in the last quarter of fiscal 1995 and the first quarter of
fiscal 1996.
There were no unusual costs in fiscal 1996. In the nine months ended
December 31, 1995, a provision related to the investment in Sri Lanka
and the associated reduction in goodwill amounting to $1,689,000 was
accrued.
Income taxes for fiscal 1996 were $1,473,000 compared to $1,486,000 in
fiscal 1995. The effective tax rate for the Corporation is
approximately 23%. The reduction from the combined basic Canadian
federal and provincial taxes of 44.6% is due to prior year
overprovisions and the lower rate of income tax rates on certain
foreign subsidiaries. The income tax charges in fiscal 1996 and fiscal
1995 are similar notwithstanding the reported loss of $9,844,000 in
fiscal 1995, as there were a number of non-deductible items for tax
purposes in fiscal 1995.
INVESTMENT PORTFOLIO
As disclosed above, the Corporation utilized $70,146,000 of its liquid
assets in fiscal 1996 to acquire certain investments. The Corporation's
investment portfolio at December 31, 1996 is as follows (all amounts in
thousands of dollars):
Public equities 23,175
Investment in PICO Holdings, Inc. 20,948
Water rights portfolio 18,935
Convertible loan 10,000
Preferred shares in North American public corporations 8,128
Real estate units in Canada 1,218
Portfolio investments in Sri Lanka 1,895
------
INVESTMENT PORTFOLIO AT DECEMBER 31, 1996 84,299
======
The investment portfolio at December 31, 1996 is carried at cost with
adjustment made for any diminution in value that is determined to be
other than temporary.
Management primarily acquires an investment if analysis leads to the
conclusion that assets can be purchased for less than their intrinsic
value. The profile desired is to be a low risk high return investor.
This is usually created by thorough research, unique insights or the
structure created by management.
Management continues to be alert to investment opportunities that meet
the value investment criteria and to diligently and patiently realize
the inherent value in the Corporation's existing portfolio.
<PAGE> 385
PUBLIC EQUITIES
The Corporation has invested, and, in some cases, is continuing to
accumulate significant stakes in a number of publicly traded equities
on recognized stock exchanges in North America, Europe and Korea. Our
model investment normally exhibits the characteristics of value stocks:
significant discounts present in the companies' market capitalization
to the underlying net tangible assets or intrinsic business value,
positive cash flows from operations and low debt to market value of
equity ratios. Management expects that, in time, the discounts of these
stocks will narrow as the true underlying business value of the stocks
are realized.
In the Korean market, management believes that the catalyst to
realizing the underlying value in certain public equities is the
continuing liberalization of the economy. This liberalization has
manifested itself already in the increase in foreign ownership of
public companies, to be further raised to 23% on May 1, 1997 and
incrementally increased until there is no foreign ownership limit from
the year 2000, and in the relaxation of the Korean mergers and
acquisition regulations. However, the Korean economy still has
structural problems, most notably in the finance sector, despite
Korea's impressive annual growth in GDP achieved in recent years.
Management believes, therefore, that the realization of value in its
Korean equity portfolio should be viewed as a long-term proposition.
The catalyst for realizing value in the Corporation's North American
and European stocks will, in some cases, be the direct involvement by
the Corporation through financial and/or management assistance,
constructive representation on boards of directors, or special insights
from independent research or experience.
PICO HOLDINGS, INC.
The Corporation originally acquired 850,000 shares of Physicians
Insurance Company of Ohio ("PICO") at an average cost of US$18.05 per
share. Under the terms of the merger agreement between PICO and
Citation Insurance Group ("Citation"), shareholders in PICO acquired
5.0099 shares in Citation for every PICO share. Citation's name was
subsequently changed to PICO Holdings, Inc. ("PICO Holdings"). The
Corporation's average cost for the 4,258,415 shares in PICO Holdings is
US$3.60 per share. At March 31, 1997 the market value of PICO Holdings
stock was US$3.875 which represents an unrealized gain of approximately
C$1.6 million.
WATER RIGHTS PORTFOLIO
The water rights portfolio at December 31, 1996 is held by a wholly
owned subsidiary of the Corporation, Vidler Water Company, Inc.
("Vidler"). Vidler has a portfolio of properties with appurtenant water
rights in Colorado, Nevada and Arizona.
Vidler has a 100% interest in the general partner of a joint venture
that owns Big Springs Ranch, a property located near West Wendover,
Nevada. The general partner is entitled to a 20% compounded preferred
return on its capital contribution and a return of its capital after
tax prior to an equal sharing of profits from Big Springs Ranch with
the managing partner. Big Springs Ranch consists of 110,000 acres of
deeded land and 150,000 acres of grazing rights and appurtenant water
and mineral rights. The entire property has almost 18,000 acre feet of
water.
<PAGE> 386
Further, Vidler also has an interest in a property called MBT Ranch
located near Scottsdale, Arizona. The seller of MBT Ranch to Vidler
will be entitled to a residual interest of net proceeds arising from
MBT Ranch's operations after the return of Vidler's invested capital.
The residual interest by the seller in MBT Ranch can range from a
maximum of 50% to a minimum of 10% depending upon the timing of the
return of Vidler's invested capital. MBT Ranch comprises 480 acres and
1,440 acre feet of water.
Vidler also owns 100% of Cline Ranch, a property in Como, Colorado.
Cline Ranch comprises 594 acre feet of water.
Vidler also owns 100% of Vidler Tunnel Company, a water provider in the
central Colorado mountains. Vidler Tunnel Company's assets are the
Vidler Tunnel, and over 2,000 acre feet of water. The Vidler Tunnel,
which transports water from the west slope to the east slope of the
Continental Divide, allows for increased access to markets for Vidler
Tunnel Company's water.
The Corporation believes that the main source of revenue from these
assets will be through water leasing arrangements to end users such as
municipalities, developers and agricultural organizations and that
further revenues will be generated by water sales, providing water
storage facilities and outright sales of land, without disposing of the
appurtenant water rights.
In addition, Vidler's management plans to acquire further water rights
and add value to some of the existing rights by converting such rights
into more senior rights. For example, by developing storage facilities
a junior water right can be converted into a storage water right with
an attendant increase in value of the water right. This process of
adding value requires specialized expertise, patience and diligence.
The water rights portfolio is carried at the cost of assets acquired.
The cost of the portfolio does not reflect management's expectation of
its value.
CONVERTIBLE LOAN
After much analysis, management elected not to convert the $10 million,
10% coupon, convertible note into the underlying shares in a French
public company, Diffusion Internationale des Vins Bourgogne, ("DIVB").
Subsequently, as of February 6, 1997, the secured loan went into
default under the terms and conditions of the loan agreement. The
Corporation's security over the loan has been established as being in
excess of the amount outstanding and the Corporation is undertaking all
the necessary steps to realize on the security.
PREFERRED SHARES IN NORTH AMERICAN PUBLIC CORPORATIONS
During fiscal 1996, the Corporation made two investments in preferred
stock of two publicly traded corporations: Conex Continental Inc.,
which trades on the Canadian Dealer Network, and SISCOM, Inc., which
trades on the OTC electronic bulletin board.
<PAGE> 387
CONEX CONTINENTAL INC.
The Corporation paid $6.75 million for 6,750,000 7% three year
redeemable, preference shares of Conex plus 89 million separate and
detachable warrants which are exercisable within three years at 5.66
cents into 1 common share of Conex per warrant. As at March 31, 1997
the common shares of Conex are trading at $0.40. Conex has used these
funds for the first tranche of financing for a 60% interest in a
sino-foreign joint venture. Conex is currently in the process of
raising the second tranche financing through the capital markets.
The joint venture is a successor organization to Guiyang Mining
Machinery Works ("GMM"). GMM principally manufactured and sold wheeled
and tracked hydraulic excavators in the Chinese domestic market. For
the past ten years, GMM was a significant excavator manufacturer in
China as measured by unit sales and profitability. GMM contributed to
the joint venture all of its production assets, including plant,
building and equipment, valued at $13.5 million to obtain a 40%
interest in the joint venture. Management believes the valuation is
conservative as the entire complex totals over 4 million square feet
and the facilities are well equipped.
The joint venture possesses significant operating leverage due to
excess capacity available at the joint venture's plant. Sales for the
most recent three years have been on average approximately 400 units
per year and the plant has capacity to produce 1,300 units annually.
The business plan of the joint venture, therefore, is highly focused on
the expansion of production and marketing capability in order to
increase the joint venture's share of international and domestic
markets. Given the stated requirements to improve domestic
infrastructure by the People's Republic of China, there is scope to
increase volumes of excavators, which are an essential component in any
heavy construction project, in the domestic market alone.
Since the completion of the first tranche financing, Conex's management
has spent considerable time at the joint venture's plant in Guiyang in
order to implement this broad business plan. To date, extensive work
has been completed on improving quality assurance, incentivising
dealers, introducing effective control systems and initiating a
focussed marketing plan.
SISCOM, INC.
The Corporation invested US $1 million in 4,000,000 7% convertible
preference shares. The preference shares are convertible into common
stock of the company in a ratio of one to one at any time within three
years from September, 1996. Conversion would result in the Corporation
owning approximately one third of SISCOM's common stock.
SISCOM provides technological solutions for utilizing video information
to the electronic media and sports industries. SISCOM's customers
include news broadcasters and cable operators in Australia, Canada and
the United States as well as the National Basketball Association. The
increase in the number of cable channels combined with greater access
to information through the Internet has led to a significant increase
in the demand for video content. Management believes that SISCOM's
software products should enable SISCOM to participate in the growth of
increased production of video content, quickly and inexpensively.
<PAGE> 388
REAL ESTATE
The business plan of the Corporation's Canadian subsidiary, Phoenix
Capital Inc. ("Phoenix"), whose shares are quoted on the Canadian
Dealing Network, is to identify viable real estate projects which are
owned by limited partnerships or syndicates and provide liquidity for
the existing owners. To date, Phoenix has acquired interests in two
commercial properties in Edmonton, Alberta.
PORTFOLIO INVESTMENTS IN SRI LANKA
The Corporation owns a diversified portfolio of publicly traded
equities on the Colombo Stock Exchange which are held through the
Corporation's 51% owned subsidiary, Forbes Ceylon Limited. The
portfolio was written down by $1.7 million as a permanent diminution in
value adjustment during fiscal 1995 in Forbes Ceylon, reflecting the
continuing depressed state of the Colombo Stock Exchange. The carrying
value of the portfolio at December 31, 1996, before minority interest,
is $1,895,000.
SRI LANKAN SUBSIDIARIES
Management does not regard its interests in Sri Lanka as core
operations or long-term investments.
The Corporation owns two Sri Lankan subsidiaries: Forbes & Walker
Limited, a private company that is 100% owned, and Forbes Ceylon
Limited, a publicly traded company on the Colombo Stock Exchange, that
is 51% owned. These two companies are consolidated into the accounts of
the Corporation.
Forbes & Walker's operations are tea and stock broking. The tea
industry in Sri Lanka has enjoyed sustained high prices during fiscal
1996 and consequently the tea broking operations have been profitable.
Conversely, the stock broking operations experienced further losses as
the depressed conditions on the Colombo Stock Exchange continued
throughout fiscal 1996. Forbes & Walker implemented a major
restructuring program within the stock broking operations in fiscal
1996 to permanently reduce overhead. The stock broking operations are
now approaching break even levels.
Forbes Ceylon is a holding company with significant cash resources and
a number of operating businesses. At December 31, 1996 net assets of
the Sri Lankan companies were approximately $63 million, of which $35
million is represented by cash and short-term investments. Of this $35
million, $23 million is held outside Sri Lanka in US dollar
instruments. This offshore element provides the Corporation and other
foreign investors in Forbes Ceylon with an effective hedge of the
devaluation of the Sri Lankan rupee. Such a cash rich corporate vehicle
is attractive to many investors with a commitment to that region.
Consequently, the Corporation has been approached by a number of
interested parties with a view to acquiring all of the Corporation's
Sri Lankan assets and the Corporation is currently in an advanced stage
of negotiations with a potential purchaser for Forbes Ceylon Limited
and Forbes & Walker Limited. Any such transaction is, however,
dependent on obtaining Sri Lankan regulatory approval.
<PAGE> 389
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has utilized a net $60,665,000 in liquid assets in
fiscal 1996 on acquiring a number of separate investments. The
Corporation's cash and short-term investments have declined to
$44,154,000 at December 31, 1996 from $105,132,000 at December 31,
1995. Of the $44,154,000 cash and short-term investments, $35,000,000
is represented by the consolidation of the group's Sri Lankan assets.
The Corporation continues to source and identify potential value based
investments. It is anticipated that as the Corporation approaches full
investment of liquid capital, the Corporation will look to the capital
markets as a source for raising new capital.
On April 23, 1997 the Company finalized an agreement to purchase
approximately 75% of Nevada Land and Resource Company LLC ("Nevada Land
& Resource") for approximately US$40 million. The other 25% of Nevada
Land & Resource was purchased by PICO Holdings. Nevada Land &
Resource's principal asset is 1.365 million acres of deeded land in
northern Nevada. The acquisition was financed through internal
resources, non-recourse debt, and a convertible debenture issued to
PICO Holdings for $34.5 million.
RISKS AND UNCERTAINTIES
NATURE OF THE BUSINESS
There are risks inherent in the nature of the Corporation's business as
an investment company. The investment in companies which management
regards as undervalued involves significant risk that even a
combination of careful evaluation, experience and knowledge may not
eliminate. Potential investors must rely on the ability of the
Corporation's management and board of directors to identify and take
advantage of business opportunities, provide advisory services,
facilitate financings and make investments in appropriate businesses.
Risk is currently mitigated by the diversification of the investment
portfolio both by sector and geographically.
The Corporation's ability to achieve an acceptable rate of return on
any particular investment is subject to a number of risk factors which
are beyond its control, including increased competition and loss of
market share, quality of management, cyclical or uneven financial
results, technological obsolescence, foreign currency risks and
regulatory delays. There is no assurance that the Corporation's
existing or future investments will achieve acceptable rates of return
or that the Corporation will realize the value of the funds invested;
accordingly, these investments may have to be written down or sold at
their then-prevailing market values. Investment risk is managed by the
Corporation through value investing, which is risk-averse by nature.
Investments are structured to protect from downside risk through
particular emphasis on acquisition price, securitization and conversion
rights.
Investments in both private and public companies may prove illiquid or
realizable only at a discount. Investments in private companies are not
as marketable as investments in public companies. Investments in public
companies are subject to prices determined in the public market and,
therefore, values can vary dramatically. In particular, the ability of
the public markets to absorb a large block of shares offered for sale
can affect the Corporation's ability to dispose of an investment in a
public company.
<PAGE> 390
FOREIGN CURRENCY
Risk arises from the relative value of the currency of foreign
denominated investments in relation to the Canadian dollar, the
Corporation's reporting currency. The Corporation has not set up
specific hedges for currency risk. However, in the analysis process,
the risk of foreign exchange devaluation or revaluation is taken into
consideration in the pricing decision. With respect to the Sri Lankan
investment specifically, approximately 40% of the net assets are
denominated in United States currency. This provides a significant
measure of protection against the Sri Lankan currency devaluation. In
assessing value, management reviews the underlying currency of the
investment.
FOREIGN INVESTMENTS AND OPERATIONS
As a result of the global diversification of the investment portfolio,
the Corporation's revenues may be adversely affected by economic,
political and governmental conditions in countries where it maintains
investments or operations, such as volatile interest rates or
inflation, the imposition of exchange controls which could restrict the
Corporation's ability to withdraw funds, political instability and the
currency risks discussed above.
RELIANCE ON KEY PERSONNEL
The success of the Corporation depends to a large extent on its ability
to retain the services of its senior management, in particular Messrs.
Langley and Hart and, to a certain extent, upon the management of
companies in which the Corporation has an investment. The inability to
retain the services of these persons could potentially affect the
Corporation's operations and profitability.
<PAGE> 391
GLOBAL EQUITY CORPORATION
Interim Report to the Shareholders
June 30, 1998 and 1997
(unaudited)
INVESTMENT ACTIVITY
o EUROPEAN VALUE STOCKS
The Corporation, as previously disclosed, invested in the
first quarter of 1998 a further $1.9 million in European value
stocks. In the three months ended June 30, 1998, the
Corporation disposed of a part of the portfolio realizing a
gain of $2.7 million on sale proceeds of $7.2 million. At June
30, 1998, the Corporation's European value stock portfolio had
a carrying value, at cost, of $22.9 million and a market value
of $26.0 million. Subsequent to June 30, 1998, the Corporation
made further disposals of the European equity portfolio
realizing, to date, sale proceeds of $3.5 million and gains
totaling $1.6 million. Accordingly, to date, the Corporation
has realized a total return on the European equity investments
of approximately 67% in less than two years.
The remaining European equity portfolio consists of small to
medium sized companies that possess unique or strategic assets
that the Corporation believes are still extremely undervalued.
The Corporation is exploring ways to assist some of these
companies narrow the discount between their market
capitalization and intrinsic value.
o SURFACE, WATER, GEOTHERMAL AND MINERAL RIGHTS
The Corporation's holdings of surface, water, geothermal and mineral rights
consists of the investments in Vidler Water Company, Inc. ("Vidler"), a
wholly owned subsidiary of the Corporation, and Nevada Land and Resource
Company, LLC ("NLRC"), in which the Corporation has a 74.77% membership
interest.
In the six months ended June 30, 1998, Vidler invested
approximately $600,000 on acquiring further water rights and
developing existing water rights in the Southwestern United
States. In addition, during this period Vidler obtained a
groundwater recharge pilot program permit for water storage in
an aquifer at its property in Arizona. Vidler estimates that
the total storage capacity of the aquifer, a portion of which
underlies the Vidler property, is in excess of 4,000,000 acre
feet and the "put" and "take" capacity of the
recharge/recovery facility to be approximately 100,000
acre-feet per year.
Vidler's Arizona property is ideally suited to be the site of
a groundwater storage facility due to its natural
hydrogeological barriers limiting underground water migration
and its proximity to the Central Arizona Project which carries
Colorado River water to Arizona users. In response to the
current over allocation of the Colorado River, the concept of
interstate water exchanges is being supported by the federal
government.
Accordingly, as Vidler's full-scale recharge and storage
facility is being approved, Vidler is currently marketing its
capacity to political subdivisions of Nevada, California,
Arizona and the federal government with the intention of
entering into water banking contracts.
<PAGE> 392
In the six months ended June 30, 1998, NLRC acquired 51,000
acre-feet of water applications for $750,000 located in
east/central Nevada. NLRC anticipates marketing this water to
end users in the region.
NLRC is actively involved in a number of projects for the exchange or sale
of some of its land. The Company is currently in advanced negotiations on
one potential project under a joint venture with a local real estate
developer in which there is a plan to develop prime residential and
commercial land in the urbanizing area of Winnemucca in Northern Nevada. In
addition, NLRC is commencing negotiations for the sale of approximately
2,800 acre feet of water and 488 acres of land in the Olinghouse area in
Washoe County to adjacent landowners who occupy contiguous lands.
o CONEX CONTINENTAL, INC.
The Corporation owns approximately 32% of the outstanding
common stock of Conex Continental, Inc. ("Conex") and, if all
the Conex warrants for common stock held by the Corporation
were exercised, approximately 60% on a fully diluted basis.
Conex's principal asset is a 60% interest in a Chinese Joint Venture
("Jonyang"). Jonyang manufactures wheeled and tracked excavators for the
Chinese and export markets. While the Chinese economy as a whole is
currently not growing as fast as expected, the Chinese government have
repeatedly stated that the infrastructure sector is to be targeted as the
prime engine to reflate the Chinese economy. As such, Jonyang is confident
that anticipated growth of the excavator market in general, and Jonyang's
products in particular, can be achieved. There is a high degree of
operating leverage available within Jonyang as the Joint Venture currently
operates at about 20% to 25% of production capacity.
In January, 1998 Jonyang executed a Memorandum of Understanding with
Samsung Heavy Industries (in May, 1998, 90% of the assets of the
construction equipment business of Samsung Heavy Industries were acquired
by Volvo Construction Equipment) for long-term cooperation for managerial
and technical assistance, co-manufacturing, co-marketing, and parts
sourcing. Recent discussions between Jonyang and Volvo indicate that an
agreement will be completed in the near future.
FINANCING ACTIVITY
The Corporation repaid notes payable to the PICO Holdings group of $14,406,000
in the six months ended June 30, 1998. The repayment was funded from the balance
of proceeds received in March, 1998 due from the disposition of the
Corporation's Sri Lankan subsidiaries in fiscal 1997.
REVENUES AND NET EARNINGS
The Corporation generated net earnings of $929,000 in the six months ended June
30, 1998 ("the current period") as compared to a net loss of $871,000 in the six
months ended June 30, 1997 (the "comparable period").
The major components of net earnings in the current period were: gains on
disposal of equities in Europe and Korea of $3,509,000; operating losses in the
surface, water, geothermal and mineral rights operations of $920,000; equity in
losses of Conex amounting to $700,000; interest and other income of $1,210,000
and corporate overhead and interest expense of $2,170,000.
<PAGE> 393
In the comparable period there were no gains on disposal of equities. The
results for the comparable period also include earnings of $913,000 from the Sri
Lankin subsidiaries that were disposed of in fiscal 1997. Accordingly, there are
no corresponding earnings in the current period.
Revenues, in the current period were $5,551,000 compared to $815,000 in the
comparable period. Revenues in the current period largely arise form the gains
on disposal of equities and operating revenue from the surface, water,
geothermal and mineral rights operations. There were no corresponding revenues
for gains on disposal of equities in the comparable period. In addition, the
comparable period only includes operating revenue from NLRC from April 23, 1997,
the date a 74.77% membership interest in NLRC was acquired by the Corporation.
Expenses in the current period were $4,066,000 compared to $2,599,000 in the
corresponding period in fiscal 1997. The increase in expenses is largely due to
the full six month charge of NLRC expenses in the current period compared to
approximately two months charge in the comparable period (as noted above) and
the increase in overheads incurred in Vidler in the current period as Vidler
continues to grow and identify new business opportunities.
PROPOSED COMBINATION WITH PICO HOLDINGS, INC.
On June 19, 1998, the Corporation jointly announced with PICO Holdings that the
independent committee of the Corporation's board of directors had favorably
received a proposal from PICO Holdings to combine the two companies.
The proposal for PICO Holdings to acquire the approximate 49% of the
Corporation's outstanding common stock not already owned by PICO Holdings in
exchange for PICO common stock was on the basis of 0.4628 of a PICO share for
each Global Equity share. The proposed exchange ratio was calculated based on
net asset valuations, prepared by First Marathon Securities Limited, of Cdn.
$3.83 per share for Global Equity and US $5.61 per share for PICO Holdings.
The Corporation and PICO Holdings are in the process of preparing the required
Registration Statement for the proposed business combination which is
anticipated to be filed with the U.S. Securities and Exchange Commission ("SEC")
in the next few weeks. On receipt of SEC approval, the joint proxy circulars
will be mailed to both the Corporation's and PICO Holding's shareholders. The
Corporation and PICO expect to hold special shareholders' meetings to vote on
the proposed business combination in late November 1998.
August 12, 1998
<PAGE> 394
ANNEX "G"
<PAGE> 395
ANNEX "G"
SECTION 185 OF THE BUSINESS CORPORATIONS ACT (ONTARIO)
185. (1) RIGHTS OF DISSENTING SHAREHOLDERS. - Subject to subsection (3) and to
sections 186 and 248, if a corporation resolves to,
(a) amend its articles under section 168 to add, remove or change
restrictions on the issue, transfer or ownership of shares of a
class or series of the shares of the corporation;
(b) amend its articles under section 168 to add, remove or change any
restriction upon the business or businesses that the corporation
may carry on or upon the powers that the corporation may exercise;
(c) amalgamate with another corporation under sections 175 and 176;
(d) be continued under the laws of another jurisdiction under section
181; or
(e) sell, lease or exchange all or substantially all its property
under subsection 184(3), a holder of shares of any class or series
entitled to vote on the resolution may dissent.
(2) IDEM. - If a corporation resolves to amend its articles in a manner
referred to in subsection 170(1), a holder of shares of any class or series
entitled to vote on the amendment under section 168 or 170 may dissent, except
in respect of an amendment referred to in,
(a) clause 170(1)(a), (b) or (e) where the articles provide that the
holders of shares of such class or series are not entitled to
dissent; or
(b) subsection 170(5) or (6).
(3) EXCEPTION. - A shareholder of a corporation incorporated before the
29th day of July, 1983 is not entitled to dissent under this section in respect
of an amendment of the articles of the corporation to the extent that the
amendment,
(a) amends the express terms of any provision of the articles of the
corporation to conform to the terms of the provision as deemed to
be amended by section 277; or
(b) deletes from the articles of the corporation all of the objects of
the corporation set out in its articles, provided that the
deletion is made by the 29th day of July, 1986.
(4) SHAREHOLDER'S RIGHT TO BE PAID FAIR VALUE. - In addition to any other
right the shareholder may have, but subject to subsection (30), a shareholder
who complied with this section is entitled, when the action approved by the
resolution from which the shareholder dissents becomes effective, to be paid by
the corporation the fair value of the shares held by the shareholder in respect
of which the shareholder dissents, determined as of the close of business on the
day before the resolution was adopted.
(5) NO PARTIAL DISSENT. - A dissenting shareholder may only claim under
this section with respect to all the shares of a class held by the dissenting
shareholder on behalf of any one beneficial owner and registered in the name of
the dissenting shareholder.
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<PAGE> 396
(6) OBJECTION. - A dissenting shareholder shall send to the corporation,
at or before any meeting of shareholders at which a resolution referred to in
subsection (1) or (2) is to vote on, a written objection to the resolution,
unless the corporation did not give notice to the shareholder of the purpose of
the meeting or of the shareholder's right to dissent.
(7) IDEM. - The execution or exercise of a proxy does not constitute a
written objection for purposes of subsection (6).
(8) NOTICE OF ADOPTION OF RESOLUTION. - The corporation shall, within ten
days after the shareholders adopt the resolution, send to each shareholder who
has filed the objection referred to in subsection (6) notice that the resolution
has been adopted, but such notice is not required to be sent to any shareholder
who voted for the resolution or who has withdrawn the objection.
(9) IDEM. - A notice sent under subsection (8) shall set out the rights
of the dissenting shareholder and the procedures to be followed to exercise
those rights.
(10) DEMAND FOR PAYMENT OF FAIR VALUE. - A dissenting shareholder
entitled to receive notice under subsection (8) shall, within twenty days after
receiving such notice, or, if the shareholder does not receive any such notice,
within twenty days after learning that the resolution has been adopted, send to
the corporation a written notice containing,
(a) the shareholder's name and address;
(b) the number and class of shares in respect of which the shareholder
dissents; and
(c) a demand for payment of the fair market value of such shares.
(11) CERTIFICATES TO BE SEND IN. - Not later than the thirtieth day after
the sending of a notice under subsection (10), a dissenting shareholder shall
send the certificates representing the shares in respect of which the
shareholder dissents to the corporation or its transfer agent.
(12) IDEM. - A dissenting shareholder who fails to comply with
subsections (6), (10) and (11) has no right to make a claim under this section.
(13) ENDORSEMENT ON CERTIFICATE. - A corporation or its transfer agent
shall endorse on any share certificate received under subsection (11) a notice
that the holder is a dissenting shareholder under this section and shall return
forthwith the share certificates to the dissenting shareholder.
(14) RIGHTS OF DISSENTING SHAREHOLDER. - On sending a notice under
subsection (10), a dissenting shareholder ceases to have any rights as a
shareholder other than the right to be paid the fair value of the shares as
determined under this section except where,
(a) the dissenting shareholder withdraws notice before the corporation
makes an offer under subsection (15);
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<PAGE> 397
(b) the corporation fails to make an offer in accordance with
subsection (15) and the dissenting shareholder withdraws notice;
or
(c) the directors revoke a resolution to amend the articles under
subsection 168(3), terminate an amalgamation agreement under
subsection 176(5) or an application for continuance under
subsection 181(5), or abandon a sale, lease or exchange under
subsection 184(8),
in which case the dissenting shareholder's rights are reinstated as of the date
of the dissenting shareholder sent the notice referred to in subsection (10),
and the dissenting shareholder is entitled, upon presentation the shares that
have been endorsed in accordance with subsection (13), to be issued a new
certificate representing the same number of shares as the certificate so
presented, without payment of any fee.
(15) OFFER TO PAY. - A corporation shall, not later than seven days after
the later of the day on which the action approved by the resolution is effective
or the day the corporation received the notice referred to in subsection (10),
send to each dissenting shareholder who has sent such notice,
(a) a written offer to pay for the dissenting shareholder's shares in
an amount considered by the directors of the corporation to be the
fair value thereof, accompanied by a statement showing how the
fair value was determined; or
(b) if subsection (30) applies, a notification that it is unable
lawfully to pay dissenting shareholders for their shares.
(16) IDEM. - Every offer made under subsection (15) for shares of the
same class or series shall be on the same terms.
(17) IDEM. - Subject to subsection (30), a corporation shall pay for the
shares of a dissenting shareholder within ten days after an offer made under
subsection (15) has been accepted, but any such offer lapses if the corporation
does not receive an acceptance thereof within thirty days after the offer has
been made.
(18) APPLICATION TO COURT TO FIX FAIR VALUE. - Where a corporation fails
to make an offer under subsection (15) or if a dissenting shareholder fails to
accept an offer, the corporation may, within fifty days after the action
approved by the resolution is effective or within such further period as the
court may allow, apply to the court to fix a fair value for the shares of any
dissenting shareholder.
(19) IDEM. - If a corporation fails to apply to the court under
subsection (18), dissenting shareholder may apply to court for the same purpose
within a further period of twenty period as the court may allow.
(20) IDEM. - A dissenting shareholder is not required to give security
for costs in an application made under subsection (18) or (19).
(21) COSTS. - If a corporation fails to comply with subsection (15), then
the costs of a shareholder application under subsection (19) are to be borne by
the corporation unless the court otherwise orders.
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<PAGE> 398
(22) NOTICE TO SHAREHOLDERS. - Before making application to the court
under subsection (18) or not later than seven days after receiving notice of an
application to the court under subsection (19), as the case may be, a
corporation shall give notice to each dissenting shareholder who, at the date on
which the notice is given,
(a) has sent to the corporation the notice referred to in subsection
(10); and
(b) has not accepted an offer made by the corporation under subsection
915), if such an offer was made,
of the date, place and consequences of the application and of the dissenting
shareholder's right to appear and be heard in person or by counsel, and a
similar notice shall be given to each dissenting shareholder who, after the date
of such first mentioned notice and before termination of the proceedings
commenced by the application, satisfies the conditions set out in clauses (a)
and (b) within three days after the dissenting shareholder satisfies such
conditions.
(23) PARTIES JOINED. - All dissenting shareholders who satisfy the
conditions set out in clauses 22(a) and (b) shall be deemed to be joined as
parties to an application under subsection (18) or (19) on the later of the date
upon which the application is brought and the date upon which they satisfy the
conditions, and shall be bound by the decision rendered by the court in the
proceedings commenced by the application.
(24) IDEM. - Upon an application to the court under subsection (18) or
(19), the court may determine whether any other person is a dissenting
shareholder who should be joined as a party, and the court to fix a fair value
for the shares of all dissenting shareholders.
(25) APPRAISERS. - The court may in its discretion appoint one or more
appraisers to assist the court to fix a fair value for the shares of the
dissenting shareholders.
(26) FINAL ORDER. - The final order of the court in the proceedings
commenced by an application under subsection (18) or (19) shall be rendered
against the corporation and in favour of each dissenting shareholder who,
whether before or after the date of the order, complies with the conditions set
out in clauses 22(a) and (b).
(27) INTEREST. - The court may in its discretion allow a reasonable rate
of interest on the amount payable to each dissenting shareholder from the date
the action approved by the resolution is effective until the date of payment.
(28) WHERE CORPORATION UNDER TO PAY. - Where subsection (30) applies, the
corporation shall, within ten days after the pronouncement of an order under
subsection (26), notify each dissenting shareholder that is unable lawfully to
pay dissenting shareholders for their shares.
(29) IDEM. - Where subsection (30) applies, a dissenting shareholder, by
written notice sent to the corporation within thirty days after receiving a
notice under subsection (28), may,
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(a) withdraw a notice of dissent, in which case the corporation is
deemed to consent to the withdrawal and the shareholder's full
right are reinstated; or
(b) retain a status as a claimant against the corporation, to be paid
as soon as the corporation is lawfully able to do so or, in a
liquidation, to be ranked subordinate to the rights of creditors
of the corporation but in priority to its shareholders.
(30) IDEM. - A corporation shall not make a payment to the dissenting
shareholder under this section if there are reasonable grounds for believing
that,
(a) the corporation is or, after the payment, would be unable to pay
its liabilities as they become due; or
(b) the realizable value of the corporation's assets would thereby
less than the aggregate of its liabilities.
(31) COURT ORDER. - Upon application by a corporation that proposes to
take any of the actions referred to in subsection (1) or (2), the court may, if
satisfied that the proposed action is not in all the circumstances one that
should give rise to the rights arising under subsection (4), by order declare
that those rights will not arise upon the taking of the proposed action, and the
order may be subject to compliance upon such terms and conditions as the court
thinks fit and, if the corporation is an offering corporation, notice of any
such application and a copy of any order made by the court upon such application
shall be served upon the Commission.
(32) COMMISSION MAY APPEAR. - The Commission may appoint counsel to
assist the court upon the hearing of an application under subsection (31), if
the corporation is an offering corporation.
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ANNEX H
<PAGE> 401
CALIFORNIA GENERAL CORPORATION LAW -
CHAPTER 13 DISSENTERS' RIGHTS
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
SEC. 1300 REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
a. If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
b. As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities
exchange certified by the Commissioner of Corporations under
subdivision (o) of Section 25100 or (B) listed on the list of OTC
margin stocks issued by the Board of Governors of the Federal Reserve
System, and the notice of meeting of shareholders to act upon the
reorganization summarizes this section and Sections 1301, 1302, 1303
and 1304; provided, however, that this provision does not apply to any
shares with respect to which there exists any restriction on transfer
imposed by the corporation or by any law or regulation; and provided,
further, that this provision does not apply to any class of shares
described in subparagraph (A) or (B) if demands for payment are filed
with respect to 5 percent or more of the outstanding shares of that
class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not
voted in favor of the reorganization or, (B) if described in
subparagraph (A) or (B) of paragraph (1) (without regard to the
provisos in that paragraph), were voted against the reorganization, or
which were held of record on the effective date of a short-form
merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of
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<PAGE> 402
this paragraph applies in any case where the approval required by
Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
c. As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SEC. 1301 NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND
FOR PURCHASE; TIME; CONTENTS
a. If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
b. Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
c. The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
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<PAGE> 403
SEC. 1302 SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFIED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SEC. 1303 PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR
MARKET VALUE; FILING; TIME OF PAYMENT
a. If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
b. Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SEC. 1304 ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION
OF ISSUES; APPOINTMENT OF APPRAISERS
a. If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
3
<PAGE> 404
b. Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
c. On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SEC. 1305 REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS
a. If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
b. If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
c. Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
d. Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
e. The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
4
<PAGE> 405
SEC. 1306 PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SEC. 1307 DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SEC. 1308 RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL
OF DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
SEC. 1309 TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
a. The corporation abandons the reorganization. Upon abandonment
of the reorganization, the corporation shall pay on demand to any
dissenting shareholder who has initiated proceedings in good faith
under this chapter all necessary expenses incurred in such
proceedings and reasonable attorneys' fees.
b. The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the
articles.
c. The dissenting shareholder and the corporation do not agree
upon the status of the shares as dissenting shares or upon the
purchase price of the shares, and neither files a complaint or
intervenes in a pending action as provided in Section 1304, within
six months after the date on which notice of the approval by the
outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
5
<PAGE> 406
d. The dissenting shareholder, with the consent of the
corporation, withdraws the shareholder's demand for purchase of
the dissenting shares.
SEC. 1310 SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SEC. 1311 EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SEC. 1312 RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION;
CONDITIONS
a. No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
b. If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
6
<PAGE> 407
c. If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more as to a reorganization shall
have the burden of proving that the transaction is just and reasonable as to the
shareholders of any party so controlled.
7
<PAGE> 408
PICO HOLDINGS, INC.
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints John R. Hart and James F. Mosier, and each of
them, with full power of substitution to represent the undersigned and to vote
all of the shares of stock of PICO Holdings, Inc. (the "Company") which the
undersigned is entitled to vote at the Annual Meeting of Shareholders of the
Company to be held at the [[site]] at [[address]] on [[date and time]], and at
any adjournment thereof (i) as hereinafter specified upon the proposals listed
on the reverse side and as more particularly described in the Joint Management
Information Circular and Proxy Statement, receipt of which is hereby
acknowledged, and (ii) in their discretion upon such other matters as may
properly come before the meeting.
THE SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO SPECIFICATION
IS MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- - - --------------------------------------------------------------------------------
<PAGE> 409
<TABLE>
<S> <C>
A vote FOR the following proposals is 4. To approve a one-for-five reverse stock split of the
recommended by the Board of Directors: Company's Common Stock (to be effected immediately
following consummation of the Transaction).
(to be effected immediately following
consummation of the Transaction).
1. To approve the arrangement involving the Company and
Global Equity Corporation ("GEC"), all as more FOR AGAINST ABSTAIN
particularly described in the accompanying Joint [ ] [ ] [ ]
Management Information Circular and Proxy Statement.
Even if you are planning to attend the meeting in
FOR AGAINST ABSTAIN person, you are urged to sign and mail this Proxy in
[ ] [ ] [ ] the return envelope so that your stock may be
represented at the meeting.
Sign exactly as your name(s) appears on your stock
certificates. If shares of stock stand on record
in the names of two or more persons or in the name
2. ELECTION OF DIRECTORS of husband and wife, whether as joint tenants or
otherwise, both or all of such persons should sign
this Proxy. If shares of stock are held of record by
FOR WITHHELD a corporation, the Proxy should be executed by the
President or Vice President and the Secretary or
Assistant Secretary, and the corporate seal should be
Nominee: Robert R. Broadbent [ ] [ ] affixed thereto. Executors or administrators or
other fiduciaries who execute this Proxy for a deceased
stockholder should give their title. Please date this
FOR WITHHELD Proxy
Nominee: Carlos C. Campbell [ ] [ ]
FOR WITHHELD
Nominee: David A. Williams [ ] [ ]
3. To approve the selection of Deloitte & Touche LLP as Proxy the Company's
independent auditors.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>
Signature(s) Date
------------------------------ -----------------
-------------------------------
- - - ------------------------------------------------------------------------------
<PAGE> 410
GLOBAL EQUITY CORPORATION
PROXY
SOLICITED BY MANAGEMENT FOR THE SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD NOVEMBER ?, 1998
The undersigned holder of common shares ("GEC Common Shares") of Global
Equity Corporation ("GEC"), hereby appoints John Hart, President and Chief
Executive Officer of GEC, or failing him, Ronald Langley, Chairman of GEC, or
instead of them as proxy for the undersigned in respect of the GEC
Common Shares registered in the name of the undersigned, with full power of
substitution, to attend, vote for and on behalf of and otherwise act for the
undersigned at the special meeting of shareholders of GEC (the "Meeting") to be
held November ?, 1998, and at any adjournment or postponement thereof, in the
same manner, to the same extent and with the same powers as if the
undersigned were present at such meeting or any adjournment or postponement
thereof and, without limiting the general authorization and powers hereby
given, the person(s) named as proxy are specifically directed as follows:
to vote FOR [ ] or AGAINST [ ] the special resolution (the
"Arrangement Resolution") approving
the arrangement involving GEC and
PICO Holdings, Inc. ("PICO"), all as
more particularly described in the
accompanying joint management
information circular and proxy
statement (the "Joint Proxy
Statement") of GEC and PICO dated
October ? , 1998, which resolution
is attached as Annex "A" to the
Joint Proxy Statement.
The undersigned hereby revokes all prior proxies given by the holder.
DATED this ___ day of ______, 1998.
----------------------------------
(Signature of Shareholder, or
attorney authorized in writing)
-----------------------------------
(Name of Shareholder - please print)
(See Notes and Instructions on reverse)
<PAGE> 411
Notes:
1. To vote GEC Common Shares at the Meeting, holders can use this form of
proxy or another proper form of proxy. IN EITHER CASE, TO BE VALID, THE
COMPLETED, SIGNED AND DATED PROXY MUST BE (A) RECEIVED BY EQUITY
TRANSFER SERVICES INC. AT THE ADDRESS SET OUT BELOW NO LATER THAN 5:00
P.M. (TORONTO TIME) ON NOVEMBER ?, 1998 OR, IF THE MEETING IS ADJOURNED
OR POSTPONED, 48 HOURS (EXCLUDING SATURDAYS, SUNDAYS AND HOLIDAYS)
BEFORE THE TIME OF THE ADJOURNED OR POSTPONED MEETING, OR (B) DEPOSITED
WITH THE CHAIRMAN OF THE MEETING ON THE DAY, AND BEFORE THE
COMMENCEMENT, OF THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT
THEREOF.
COMPLETED PROXIES SHOULD BE DELIVERED BY MAIL, HAND OR BY COURIER
(IN THE ENVELOPE PROVIDED) TO
EQUITY TRANSFER SERVICES INC.
SUITE 4200, 120 ADELAIDE STREET WEST
TORONTO, ONTARIO
M5H 4C3
ATTENTION: STOCK TRANSFER DEPARTMENT
TELEPHONE: (416) 361-0152
TELECOPIER: (416) 361-0470
2. HOLDERS OF GEC COMMON SHARES HAVE THE RIGHT TO APPOINT AS THEIR
PROXYHOLDER A PERSON (WHO NEED NOT BE A GEC SHAREHOLDER) TO ATTEND AND
TO ACT ON THEIR BEHALF AT THE MEETING OTHER THAN THOSE PERSONS
DESIGNATED ABOVE BY INSERTING THE NAME OF SUCH OTHER PERSON IN THE
BLANK SPACE PROVIDED ABOVE OR BY COMPLETING ANOTHER PROPER FORM OF
PROXY AND, IN EITHER CASE, BY DELIVERING THE COMPLETED FORM OF PROXY IN
ACCORDANCE WITH THESE INSTRUCTIONS.
3. This proxy confers authority for the above named person(s) to vote in
their discretion with respect to amendments or variations to matters
identified in the Notice of Special Meeting accompanying this proxy or
other matters which may properly come before the Meeting or any
adjournments or postponements thereof.
4. The GEC Common Shares represented by this proxy will be voted for or
against any resolution on any ballot that may be called for in
accordance with the foregoing instructions. IF NO CHOICE IS SPECIFIED,
THE GEC COMMON SHARES REPRESENTED BY THIS PROXY WILL BE VOTED FOR THE
ARRANGEMENT RESOLUTION.
5. This form of proxy must be dated and signed by the holder of GEC Common
Shares or by such holder's duly authorized attorney or, if the holder
is a corporation, a duly authorized director, officer or attorney.
Where this form is executed by a person on behalf of an administrator,
association, corporation, executor, guardian, partnership or trustee,
or is executed by any other person acting in a representative capacity,
this form of proxy must be accompanied by evidence satisfactory to GEC
of such authority to act.
<PAGE> 412
THIS LETTER OF TRANSMITTAL IS ONLY FOR USE IN CONJUNCTION WITH THE PLAN OF
ARRANGEMENT REFLECTED IN THE ARRANGEMENT AGREEMENT DATED SEPTEMBER_?, 1998
ENTERED INTO BETWEEN GLOBAL EQUITY CORPORATION AND PICO HOLDINGS, INC.
THIS IS NOT A FORM OF PROXY FOR THE PURPOSES OF THE SPECIAL MEETING OF
SHAREHOLDERS OF GLOBAL EQUITY CORPORATION CALLED TO CONSIDER THE PLAN OF
ARRANGEMENT. A FORM OF PROXY (ON_? PAPER) HAS BEEN DISTRIBUTED BY GLOBAL EQUITY
CORPORATION FOR USE IN CONNECTION WITH SUCH MEETING AND MUST BE COMPLETED FOR
THE COMMON SHARES REPRESENTED BY THIS LETTER OF TRANSMITTAL TO BE VOTED AT THE
SPECIAL MEETING.
The Instructions accompanying this Letter of Transmittal
should be read carefully before this Letter of Transmittal
is completed.
LETTER OF TRANSMITTAL
TO TRANSMIT COMMON SHARES
OF
GLOBAL EQUITY CORPORATION
IN CONNECTION WITH THE PLAN OF ARRANGEMENT WITH PICO HOLDINGS, INC.
The Depositary (see below for addresses and telephone numbers) or your
broker or other financial advisor will assist you in completing this Letter of
Transmittal.
This Letter of Transmittal, properly completed and signed in accordance with
the instructions and rules set out below, together with the certificate(s) for
common shares ("GEC Common Shares") of Global Equity Corporation ("GEC") covered
hereby, should be delivered in person or sent to and received by the Depositary
at the address set forth on the back page hereof.
Terms used with initial capitals, unless otherwise defined, shall have the
meanings ascribed to them in the Joint Management Information Circular and Proxy
Statement (the "Joint Proxy Statement") of GEC and PICO dated October_?, 1998.
<TABLE>
<CAPTION>
===========================================================================================================================
NUMBER OF GEC COMMON SHARES
CERTIFICATE NUMBER(S) NAME IN WHICH REGISTERED TRANSMITTED
- - - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- - - ---------------------------------------------------------------------------------------------------------------------------
- - - ---------------------------------------------------------------------------------------------------------------------------
- - - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Attach list in the above form, if additional space is required.)
<PAGE> 413
To: Global Equity Corporation c/o Equity Transfer Services Inc.
And To: PICO Holdings, Inc.
The undersigned hereby represents and warrants that the undersigned is the
owner of the GEC Common Shares represented by the certificate(s) described above
and has good title to such shares free and clear of all adverse interests,
charges, encumbrances and liens. The certificate(s) described above are
enclosed.
The undersigned transmits the certificate(s) described above representing
GEC Common Shares to be dealt with upon the Arrangement becoming effective in
accordance with the Plan of Arrangement and this Letter of Transmittal. The
undersigned acknowledges that upon the date (the "Effective Date") that the
Arrangement becomes effective, the following steps will occur and will be deemed
to occur in the following order:
1. all GEC Common Shares (other that GEC Common Shares held by PICO or
as to which dissent rights have been duly exercised) shall be
assigned and transferred to PICO to be incorporated and organized
by PICO under the OBCA prior to the Effective Date) in
consideration of PICO Shares on the basis of 0.4628 of a PICO Share
for each GEC Common Share;
2. upon the exchange referred to in paragraph 1 above, each GEC
Shareholder whose GEC Common Shares have been so exchanged shall
cease to be a holder of GEC Common Shares, shall have its name
removed from the register of GEC Common Shares, and shall become a
holder of a number of fully-paid PICO Shares to which he is
entitled as described above, and such holder's name shall be added
to the register of holders of PICO Shares;
3. all GEC Warrants (each of which entitled the holder to purchase
prior to the Effective Date one GEC Common Share for Cdn.$3.25)
shall be assigned and transferred to PICO for PICO Warrants (each
of which will entitle the holder to purchase from and after the
Effective Date one PICO Share for U.S.$4.76, being the U.S. Dollar
Equivalent on the date upon which the Exchange Ratio was agreed of
the Cdn.$3.25 exercise price of a GEC Warrant, divided by the
Exchange Ratio) on the basis of 0.4628 of a PICO Warrant for each
GEC Warrant; and
4. all GEC Common Shares as to which dissent rights have been duly
exercised shall, if the holder is ultimately entitled to be paid
the fair value thereof, be deemed to be transferred to GEC for
cancellation at the Effective Time;
all as more particularly provided for in the Plan of Arrangement.
No fractional PICO Shares will be issued. All PICO Shares to be so issued
shall be rounded to the next lowest whole number if the first decimal place is
less than five and rounded to the next highest whole number if the first decimal
place is five or greater, without compensation therefor to the holders of such
shares.
The undersigned represents and warrants that the undersigned has full power
and sufficient authority to deposit, sell and transfer the GEC Common Shares
represented by the enclosed certificate(s) (the "Deposited Shares") and that
when the Deposited Shares are exchanged for PICO Shares pursuant to the Plan of
Arrangement, PICO will acquire good title to the Deposited Shares free and clear
of all charges, claims, encumbrances, equities, liens and restrictions.
The undersigned covenants and agrees to execute all such documents,
transfers and other assurances as may be necessary or desirable to convey the
Deposited Shares to PICO in accordance with the Plan of Arrangement.
The authority conferred or agreed to be conferred by the undersigned in this
Letter of Transmittal may be exercised during any subsequent legal incapacity of
the undersigned and all obligations of the undersigned in this Letter of
Transmittal shall be binding upon the assigns, heirs, personal representatives
and successors of the undersigned. The deposit of GEC Common Shares pursuant to
this Letter of Transmittal may be withdrawn by the undersigned at any time prior
to the Effective Date.
2
<PAGE> 414
It is understood that upon receipt of this Letter of Transmittal and the
certificate(s) described above, and following the Effective Date, the Depositary
will, as soon as practicable thereafter but, in any event, not later than ten
days after the Effective Date, if the Letter of Transmittal and certificate(s)
are received prior to the Effective Date, or if received after the Effective
Date, not later than ten days after receipt, send to each former GEC Shareholder
a certificate for the number of PICO Shares (and a cheque in lieu of fraction
PICO Shares as a result of the Reverse Split, if applicable) to which such
former GEC Shareholder is entitled.
The undersigned instructs the Depositary to mail the share certificates
representing the PICO Shares to which the undersigned is entitled by first class
mail, postage prepaid, or to hold such share certificates for pick-up, in
accordance with the instructions given below. The undersigned recognizes that
PICO has no obligation pursuant to the Special Issue Instructions to transfer
any PICO Shares from the name of the registered holder thereof if the
Arrangement is not proceeded with. In the event the Arrangement is not
completed, certificate(s) representing GEC Common Shares will be returned
forthwith to the holders thereof, without charge.
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------- --------------------------------------------------------
SPECIAL ISSUE, SPECIAL DELIVERY INSTRUCTIONS
PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 5 AND 6)
(SEE INSTRUCTIONS 5 AND 6)
<S> <C>
To be completed ONLY if the certificate for PICO To be completed ONLY if the certificates (and cheque,
Shares (and cheque, if applicable) are to be issued in the if applicable) for PICO Shares are to be sent to someone
name of someone other than the undersigned. other than the undersigned or to the undersigned at
an address other than that appearing below under
"Sign Here" or are to be held by the Depositary
Register certificates and issue certificates (if for pick-up by the undersigned or any person designed
applicable) in the name of and mail to: by the undersigned in writing.
Name:
-----------------------------------------------
(Please Print)
Address: Mail certificates (and cheque, if applicable) to:
---------------------------------------------
Name:
--------------------------------------------------
- - - ------------------------------------------------------ (Please Print)
- - - ------------------------------------------------------ Address:
(Include Postal or Zip Code) ------------------------------------------------
- - - ----------------------------------------------------------- --------------------------------------------------------
(Include Postal or Zip Code)
Hold certificates (and cheque, if applicable) for
pick-up at the Depositary
(specify office )
--------------------------------------
--------------------------------------------------------
</TABLE>
3
<PAGE> 415
- - - ------------------------------------------------------------------------------
SIGN HERE
- - - ------------------------------------------------------------------------------
- - - ------------------------------------------------------------------------------
Signature of Owner(s)
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on GEC
Common Share certificate(s) or on a security position listing or by person(s)
authorized to become registered holder(s) by certificates and documents
transmitted herewith. If signature is by an administrator, agent,
attorney-in-fact, executor, guardian, officer of a corporation, trustee or any
other person acting in a fiduciary or representative capacity, please provide
the following information. See Instruction 4.)
Name(s)
------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------
(Please Print)
Capacity (full title)
----------------------------------------------------------
Address
------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
(Include Postal or Zip Code)
Area Code and Tel. No.
---------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 4)
- - - -------------------------------------------------------------------------------
(Authorized Signature)
- - - -------------------------------------------------------------------------------
(Name)
- - - -------------------------------------------------------------------------------
(Name of Firm)
- - - -------------------------------------------------------------------------------
(Address, including Postal or Zip Code)
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
(Telephone Number, including Area Code)
Dated: , 1998
-----------------------------------------------------------------
- - - -------------------------------------------------------------------------------
INSTRUCTIONS
1 GUARANTEE OF SIGNATURES. No signature guarantee on the Letter of Transmittal
is required if (1) this Letter of Transmittal is signed by the registered holder
of the GEC Common Shares transmitted hereby, unless such holder has
4
<PAGE> 416
completed either the box entitled "Special Delivery Instructions" or the box
entitled "Special Issue Instructions" or (2) such GEC Common Shares are
transmitted for the account of a Canadian chartered bank or trust company, by
any other commercial bank or trust company having an office or correspondent in
the United States, or by a member of a recognized stock exchange in Canada, the
Investment Dealers' Association of Canada, a registered national securities
exchange in the United States or the National Association of Securities Dealers,
Inc. (collectively, the "Eligible Institutions" and each individually an
"Eligible Institution"). In all other cases all signatures on this Letter of
Transmittal must be guaranteed by an Eligible Institution. See Instruction 4.
2 DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. This Letter of Transmittal
is to be completed by the holders of certificates representing GEC Common Shares
to be submitted herewith. Certificates for all physically delivered GEC Common
Shares, as well as a properly completed and duly executed Letter of Transmittal
or facsimile thereof in the appropriate form, should be received by the
Depositary at one of the offices set forth below.
THE METHOD OF DELIVERY OF CERTIFICATES REPRESENTING GEC COMMON SHARES IS AT
THE OPTION AND RISK OF THE PERSON TRANSMITTING SUCH CERTIFICATES. GEC AND PICO
RECOMMEND THAT SUCH DOCUMENTS BE DELIVERED BY HAND TO THE DEPOSITARY AND A
RECEIPT BE OBTAINED THEREFOR OR, IF MAILED, THAT REGISTERED MAIL, PROPERLY
INSURED, BE USED WITH AND ACKNOWLEDGEMENT OF RECEIPT REQUESTED.
3 INADEQUATE SPACE. If the space provided herein is inadequate, the certificate
number(s) or the number of GEC Common Shares should be listed on a separate
signed list attached hereto.
4 SIGNATURES ON LETTER OF TRANSMITTAL, POWERS AND ENDORSEMENTS. If the Letter of
Transmittal is signed by the registered holder(s) of the GEC Common Shares
transmitted hereby, the signature(s) must correspond with the name(s) as written
on the face(s) of the certificate(s) without alteration, enlargement or any
change whatsoever.
If any of the GEC Common Shares transmitted hereby are held of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If any transmitted GEC Common Shares are registered in different names on
several certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal as there are different registrations or
certificates.
If this Letter of Transmittal or any certificates or powers are signed by an
administrator, agent, attorney-if-fact, executor, guardian, officer of a
corporation, trustee or any other person acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and proper evidence
satisfactory to PICO of their authority so to act should be submitted.
If this Letter of Transmittal is signed by the registered holder(s) of the
GEC Common Shares evidenced by certificates listed and submitted herewith, no
endorsement of certificates or separate powers are required unless certificates
for PICO Shares are to be issued to person other than the registered holder(s).
If certificates for PICO Shares are to be issued to person(s) other than the
registered holder(s), signatures on such certificates or powers must be
guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the GEC Common Shares evidenced by certificates listed
and submitted hereby, the certificates must be endorsed or accompanied by
appropriate share transfer or stock transfer powers, in either case signed
exactly as the name or names of the registered holder or holders appears on the
certificates. Signatures on such certificates or powers must be guaranteed by an
Eligible Institution.
5 STOCK TRANSFER TAXES. If payment certificates for PICO Shares are to be
registered in the name of any person other than the registered holder, of if
certificate(s) for transmitted GEC Common Shares are registered in the name of
any person other than the person(s) signing this Letter of Transmittal,
satisfactory evidence of the payment of such taxes (whether imposed on the
registered holder or such other person) or exemption therefrom must be
submitted. EXCEPT AS PROVIDED IN THIS INSTRUCTION 5, IT WILL NOT BE NECESSARY
FOR TRANSFER TAX STAMPS TO BE AFFIXED ON THE CERTIFICATE(S) LISTED IN THIS
LETTER OF TRANSMITTAL.
5
<PAGE> 417
6 SPECIAL ISSUE, PAYMENT AND DELIVERY INSTRUCTIONS. If the certificates for PICO
Shares (and cheques, if applicable) are to be issued in the name of a person
other than the signer of this Letter of Transmittal or if the cheque is to be
sent and/or such certificates are to be sent to someone other than the person
signing this Letter of Transmittal or an address other than that shown above,
the appropriate boxes on this Letter of Transmittal should be completed. In the
absence of such instructions, certificates for PICO Shares (and cheques, if
applicable) will be issued in the name of the registered holder of the deposited
GEC Shares and will be sent to the address specified above under "SIGN HERE"
(or, if no such address is specified, to the address of such holder in the
register of holders of GEC Shares maintained by GEC's transfer agent).
7 LOST CERTIFICATES. GEC Shareholders who have lost the certificate(s)
representing their GEC Common Shares should contact the Depositary at the
address below.
8 REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance may be directed to the Depositary and additional copies of this
Letter of Transmittal may be obtained without charge on request from the
Depositary at the telephone numbers and addresses set forth in this Letter of
Transmittal. GEC Shareholders may also contact their local broker, commercial
bank, Canadian chartered bank, trust company or other nominee for assistance.
(DO NOT WRITE IN THE SPACE BELOW)
Date Received
--------------------------------------
Accepted by
---------------------------------------
Checked by
---------------------------------------
6
<PAGE> 418
The Depositary is:
Equity Transfer Services Inc.
Suite 4200, 120 Adelaide Street West
Toronto, Ontario
M5H 4C3
Attention: Stock Transfer Department
Telephone: (416) 361-0152
Telecopier: (416) 361-0470
7
<PAGE> 419
THIS WARRANTHOLDERS LETTER OF TRANSMITTAL IS ONLY FOR USE IN CONJUNCTION WITH
THE PLAN OF ARRANGEMENT REFLECTED IN THE ARRANGEMENT AGREEMENT DATED SEPTEMBER
?, 1998 ENTERED INTO BETWEEN GLOBAL EQUITY CORPORATION AND PICO HOLDINGS, INC.
THIS IS NOT A FORM OF PROXY FOR THE PURPOSES OF THE SPECIAL MEETING OF
SHAREHOLDERS OF GLOBAL EQUITY CORPORATION CALLED TO CONSIDER THE PLAN OF
ARRANGEMENT. WARRANTHOLDERS ARE NOT ENTITLED TO VOTE AT SUCH MEETING.
The Instructions accompanying this Warrantholders Letter
of Transmittal should be read carefully before this
Warrantholders Letter of Transmittal is completed.
WARRANTHOLDERS LETTER OF TRANSMITTAL
TO TRANSMIT WARRANTS
OF
GLOBAL EQUITY CORPORATION
IN CONNECTION WITH THE PLAN OF ARRANGEMENT WITH PICO HOLDINGS, INC.
The Depositary (see below for addresses and telephone numbers) or your
broker or other financial advisor will assist you in completing this
Warrantholders Letter of Transmittal.
This Warrantholders Letter of Transmittal, properly completed and signed in
accordance with the instructions and rules set out below, together with the
certificate(s) for warrants ("GEC Warrants") of Global Equity Corporation
("GEC") covered hereby, should be delivered in person or sent to and received by
the Depositary at the address set forth on the back page hereof.
Terms used with initial capitals, unless otherwise defined, shall have the
meanings ascribed to them in the Joint Management Information Circular and Proxy
Statement (the "Joint Proxy Statement") of GEC and PICO dated October ?, 1998.
<TABLE>
<CAPTION>
===========================================================================================================================
NUMBER OF GEC WARRANTS
CERTIFICATE NUMBER(S) NAME IN WHICH REGISTERED TRANSMITTED
- - - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- - - ---------------------------------------------------------------------------------------------------------------------------
- - - ---------------------------------------------------------------------------------------------------------------------------
===========================================================================================================================
</TABLE>
(Attach list in the above form, if additional space is required.)
<PAGE> 420
To: Global Equity Corporation c/o Equity Transfer Services Inc.
And To: PICO Holdings, Inc.
The undersigned hereby represents and warrants that the undersigned is the
owner of the GEC Warrants represented by the certificate(s) described above and
has good title to such shares free and clear of all adverse interests, charges,
encumbrances and liens. The certificate(s) described above are enclosed.
The undersigned transmits the certificate(s) described above representing
GEC Warrants to be dealt with upon the Arrangement becoming effective in
accordance with the Plan of Arrangement and this Warrantholders Letter of
Transmittal. The undersigned acknowledges that upon the date (the "Effective
Date") that the Arrangement becomes effective, the following steps will occur
and will be deemed to occur in the following order:
1. all GEC Common Shares (other that GEC Common Shares held by PICO or
as to which dissent rights have been duly exercised) shall be
assigned and transferred to PICO to be incorporated and organized
by PICO under the OBCA prior to the Effective Date) in
consideration of PICO Shares on the basis of 0.4628 of a PICO Share
for each GEC Common Share;
2. upon the exchange referred to in paragraph 1 above, each GEC
Shareholder whose GEC Common Shares have been so exchanged shall
cease to be a holder of GEC Common Shares, shall have its name
removed from the register of GEC Common Shares, and shall become a
holder of a number of fully-paid PICO Shares to which he is
entitled as described above, and such holder's name shall be added
to the register of holders of PICO Shares;
3. all GEC Warrants (each of which entitled the holder to purchase
prior to the Effective Date one GEC Common Share for Cdn.$3.25)
shall be assigned and transferred to PICO in consideration for PICO
Warrants (each of which will entitle the holder to purchase from
and after the Effective Date one PICO Share for U.S.$4.76, being
the U.S. Dollar Equivalent on the date upon which the Exchange
Ratio was agreed of the Cdn.$3.25 exercise price of a GEC Warrant,
divided by the Exchange Ratio) on the basis of 0.4628 of a PICO
Warrant for each GEC Warrant; and
4. all GEC Common Shares as to which dissent rights have been duly
exercised shall, if the holder is ultimately entitled to be paid
the fair value thereof, be deemed to be transferred to GEC for
cancellation at the Effective Time;
all as more particularly provided for in the Plan of Arrangement.
No fractional PICO Warrants will be issued. All PICO Warrants to be so
issued shall be rounded to the next lowest whole number if the first decimal
place is less than five and rounded to the next highest whole number if the
first decimal place is five or greater, without compensation therefor to the
holders of such warrants.
Under the terms of the PICO Warrant Indenture, each whole PICO Warrant,
which when issued entitles the holder thereof to purchase one pre-Reverse Split
PICO Share for U.S.$4.76, will be adjusted (without any action on the part of
PICO or the holder) such that, immediately following the Reverse Split, each
whole PICO Warrant will entitle the holder to purchase one post-Reverse Split
PICO Share for U.S.$23.80.
The undersigned represents and warrants that the undersigned has full power
and sufficient authority to deposit, sell and transfer the GEC Warrants
represented by the enclosed certificate(s) (the "Deposited Warrants") and that
when the Deposited Warrants are exchanged for PICO Warrants pursuant to the Plan
of Arrangement, PICO will acquire good title to the Deposited Warrants free and
clear of all charges, claims, encumbrances, equities, liens and restrictions.
The undersigned covenants and agrees to execute all such documents,
transfers and other assurances as may be necessary or desirable to convey the
Deposited Warrants to PICO in accordance with the Plan of Arrangement.
2
<PAGE> 421
The authority conferred or agreed to be conferred by the undersigned in this
Warrantholders Letter of Transmittal may be exercised during any subsequent
legal incapacity of the undersigned and all obligations of the undersigned in
this Warrantholders Letter of Transmittal shall be binding upon the assigns,
heirs, personal representatives and successors of the undersigned. The deposit
of GEC Warrants pursuant to this Warrantholders Letter of Transmittal may be
withdrawn by the undersigned at any time prior to the Effective Date.
It is understood that upon receipt of this Warrantholders Letter of
Transmittal and the certificate(s) described above, and following the Effective
Date, the Depositary will, as soon as practicable thereafter but, in any event,
not later than ten days after the Effective Date, if the Warrantholders Letter
of Transmittal and certificate(s) are received prior to the Effective Date, or
if received after the Effective Date, not later than ten days after receipt,
send to each former GEC Warrantholder certificates for the number of PICO
Warrants to which such former GEC Warrantholder is entitled.
The undersigned instructs the Depositary to mail the certificates
representing the PICO Warrants to which the undersigned is entitled by first
class mail, postage prepaid, or to hold such certificates for pick-up, in
accordance with the instructions given below. The undersigned recognizes that
PICO has no obligation pursuant to the Special Issue Instructions to transfer
any GEC Warrants from the name of the registered holder thereof if the
Arrangement is not proceeded with. In the event the Arrangement is not
completed, certificate(s) representing GEC Warrants will be returned forthwith
to the holders thereof, without charge.
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------- --------------------------------------------------------
SPECIAL ISSUE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6) (SEE INSTRUCTIONS 5 AND 6)
<S> <C>
To be completed ONLY if the certificates for PICO To be completed ONLY if the certificates for PICO
Warrants are to be issued in the name of someone other Warrants are to be sent to someone other than the
than the undersigned. undersigned or to the undersigned at an address other
than that appearing below under "Sign Here" or are to
Register certificates in the name of: be held by the Depositary for pick-up by the
undersigned or any person designed by the undersigned
Name: in writing.
---------------------------------------------
(Please Print)
Address: Mail certificates to:
------------------------------------------- Name:
-----------------------------------------
(Please Print)
---------------------------------------------------
Address:
---------------------------------------------------- -------------------------------------
(Include Postal or Zip Code)
- - - ----------------------------------------------------------- -----------------------------------------------
-----------------------------------------------
(Include Postal or Zip Code)
Hold certificates for pick-up at the Depositary
(specify office )
--------------------------------------
--------------------------------------------------------
</TABLE>
3
<PAGE> 422
- - - ------------------------------------------------------------------------------
SIGN HERE
- - - ------------------------------------------------------------------------------
- - - ------------------------------------------------------------------------------
Signature of Owner(s)
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on GEC
Warrants certificate(s) or on a security position listing or by person(s)
authorized to become registered holder(s) by certificates and documents
transmitted herewith. If signature is by an administrator, agent,
attorney-in-fact, executor, guardian, officer of a corporation, trustee or any
other person acting in a fiduciary or representative capacity, please provide
the following information. See Instruction 4.)
Name(s)
------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
(Please Print)
Capacity (full title)
----------------------------------------------------------
Address
------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
(Include Postal or Zip Code)
Area Code and Tel. No.
---------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 4)
- - - -------------------------------------------------------------------------------
(Authorized Signature)
- - - -------------------------------------------------------------------------------
(Name)
- - - -------------------------------------------------------------------------------
(Name of Firm)
- - - -------------------------------------------------------------------------------
(Address, including Postal or Zip Code)
- - - -------------------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
(Telephone Number, including Area Code)
Dated: , 1998
-----------------------------------------------------------------------
- - - -------------------------------------------------------------------------------
4
<PAGE> 423
INSTRUCTIONS
1 GUARANTEE OF SIGNATURES. No signature guarantee on the Warrantholders Letter
of Transmittal is required if (1) this Warrantholders Letter of Transmittal is
signed by the registered holder of the GEC Warrants transmitted hereby, unless
such holder has completed either the box entitled "Special Delivery
Instructions" or the box entitled "Special Issue Instructions" or (2) such GEC
Warrants are transmitted for the account of a Canadian chartered bank or trust
company, by any other commercial bank or trust company having an office or
correspondent in the United States, or by a member of a recognized stock
exchange in Canada, the Investment Dealers' Association of Canada, a registered
national securities exchange in the United States or the National Association of
Securities Dealers, Inc. (collectively, the "Eligible Institutions" and each
individually an "Eligible Institution"). In all other cases all signatures on
this Warrantholders Letter of Transmittal must be guaranteed by an Eligible
Institution. See Instruction 4.
2 DELIVERY OF WARRANTHOLDERS LETTER OF TRANSMITTAL AND CERTIFICATES. This
Warrantholders Letter of Transmittal is to be completed by the holders of
certificates representing GEC Warrants to be submitted herewith. Certificates
for all physically delivered GEC Warrants, as well as a properly completed and
duly executed Warrantholders Letter of Transmittal or facsimile thereof in the
appropriate form, should be received by the Depositary at one of the offices set
forth below.
THE METHOD OF DELIVERY OF CERTIFICATES REPRESENTING GEC WARRANTS IS AT THE
OPTION AND RISK OF THE PERSON TRANSMITTING SUCH CERTIFICATES. GEC AND PICO
RECOMMEND THAT SUCH DOCUMENTS BE DELIVERED BY HAND TO THE DEPOSITARY AND A
RECEIPT BE OBTAINED THEREFOR OR, IF MAILED, THAT REGISTERED MAIL, PROPERLY
INSURED, BE USED WITH AND ACKNOWLEDGEMENT OF RECEIPT REQUESTED.
3 INADEQUATE SPACE. If the space provided herein is inadequate, the certificate
number(s) or the number of GEC Warrants should be listed on a separate signed
list attached hereto.
4 SIGNATURES ON WARRANTHOLDERS LETTER OF TRANSMITTAL, POWERS AND ENDORSEMENTS.
If the Warrantholders Letter of Transmittal is signed by the registered
holder(s) of the GEC Warrants transmitted hereby, the signature(s) must
correspond with the name(s) as written on the face(s) of the certificate(s)
without alteration, enlargement or any change whatsoever.
If any of the GEC Warrants transmitted hereby are held of record by two or
more joint owners, all such owners must sign this Warrantholders Letter of
Transmittal.
If any transmitted GEC Warrants are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal as there are different registrations or certificates.
If this Warrantholders Letter of Transmittal or any certificates or powers
are signed by an administrator, agent, attorney-if-fact, executor, guardian,
officer of a corporation, trustee or any other person acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and
proper evidence satisfactory to PICO of their authority so to act should be
submitted.
If this Warrantholders Letter of Transmittal is signed by the registered
holder(s) of the GEC Warrants evidenced by certificates listed and submitted
herewith, no endorsement of certificates or separate powers are required unless
certificates for PICO Warrants are to be issued to person(s) other than the
registered holder(s). If certificates for PICO Warrants are to be issued to
person(s) other than the registered holder(s), signatures on such certificates
or powers must be guaranteed by an Eligible Institution.
If this Warrantholders Letter of Transmittal is signed by a person other
than the registered holder(s) of the GEC Warrants evidenced by certificates
listed and submitted hereby, the certificates must be endorsed or accompanied by
appropriate share transfer or stock transfer powers, in either case signed
exactly as the name or names of the registered holder or holders appears on the
certificates. Signatures on such certificates or powers must be guaranteed by an
Eligible Institution.
5
<PAGE> 424
5 STOCK TRANSFER TAXES. If the certificates for PICO Warrants are to be
registered in the name of any person other than the registered holder, of if
certificate(s) for transmitted GEC Warrants are registered in the name of any
person other than the person(s) signing this Warrantholders Letter of
Transmittal, satisfactory evidence of the payment of such taxes (whether imposed
on the registered holder or such other person) or exemption therefrom must be
submitted. EXCEPT AS PROVIDED IN THIS INSTRUCTION 5, IT WILL NOT BE NECESSARY
FOR TRANSFER TAX STAMPS TO BE AFFIXED ON THE CERTIFICATE(S) LISTED IN THIS
WARRANTHOLDERS LETTER OF TRANSMITTAL.
6 SPECIAL ISSUE AND DELIVERY INSTRUCTIONS. If the certificates for PICO Warrants
are to be issued in the name of a person other than the signer of this
Warrantholders Letter of Transmittal or if such certificates are to be sent to
someone other than the person signing this Warrantholders Letter of Transmittal
or an address other than that shown above, the appropriate boxes on this
Warrantholders Letter of Transmittal should be completed. In the absence of such
instructions, certificates for PICO Warrants will be issued in the name of the
registered holder of the deposited GEC Warrants and will be sent to the address
specified above under "SIGN HERE" (or, if not such address is specified, to the
address of such holder in the register of holders of GEC Warrants maintained by
the GEC Warrant Agent).
7 LOST CERTIFICATES. GEC Warrantholders who have lost the certificate(s)
representing their GEC Warrants should contact the Depositary at the address
below.
8 REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance may be directed to the Depositary and additional copies of this
Warrantholders Letter of Transmittal may be obtained without charge on request
from the Depositary at the telephone numbers and addresses set forth in this
Warrantholders Letter of Transmittal. GEC Warrantholders may also contact their
local broker, commercial bank, Canadian chartered bank, trust company or other
nominee for assistance.
(DO NOT WRITE IN THE SPACE BELOW)
Date Received
----------------------
Accepted by
----------------------
Checked by
----------------------
6
<PAGE> 425
The Depositary is:
Equity Transfer Services Inc.
Suite 4200, 120 Adelaide Street West
Toronto, Ontario
M5H 4C3
Attention: Stock Transfer Department
Telephone: (416) 361-0152
Telecopier: (416) 361-0470
7