<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 0-18786
PICO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2723335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
(858) 456-6022
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 13,448,533 as of September 30, 1999. As of such date, 4,394,127
shares of common stock were held by the registrant and subsidiaries of the
registrant.
1
<PAGE> 2
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
September 30, 1999 and December 31, 1998 (As Restated)
Consolidated Statements of Operations 4
for the Three and Nine Months Ended September 30, 1999 and 1998 (As Restated)
Consolidated Statements of Cash Flows for 5
the Nine Months Ended September 30, 1999 and 1998 (As Restated)
Notes to Consolidated Financial Statements (As Restated) 6
Item 2: Management's Discussion and Analysis of Financial 14
Condition and Results of Operations (As Restated)
Item 3: Quantitative and Qualitative Disclosure About Market Risk 31
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 32
Item 6: Exhibits and Reports on Form 8-K 32
Signature 33
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
December 31,
September 30, 1998
1999 As Restated
-------------- -------------
<S> <C> <C>
ASSETS
Investments $ 148,679,634 $ 116,411,780
Cash and cash equivalents 44,262,483 71,654,196
Accrued investment income 1,280,869 1,295,550
Premiums and other receivables, net 17,797,670 10,414,017
Reinsurance receivables 57,631,395 55,624,830
Prepaid deposits and reinsurance premiums 1,252,986 2,187,387
Deferred policy acquisition costs 4,932,020 5,548,634
Surface, water, geothermal and mineral rights 119,639,677 116,653,211
Property and equipment, net 17,870,382 1,851,502
Inventory 19,081,924
Income taxes receivable 4,286,149 6,522,454
Other assets 12,850,250 7,011,957
------------- -------------
Total assets $ 449,565,439 $ 395,175,518
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses, net of discount $ 144,667,980 $ 155,020,696
Unearned premiums 17,556,595 20,804,432
Reinsurance balance payable 12,113,206 12,068,890
Deferred gain on retroactive reinsurance 1,800,994 1,800,994
Other liabilities 21,628,204 11,402,000
Bank and other borrowings 43,355,952 8,966,707
Deferred income taxes 5,273,686 7,185,656
Excess of fair value of net assets acquired over purchase price 4,070,562 4,496,551
------------- -------------
Total liabilities 250,467,179 221,745,926
------------- -------------
Minority interest 6,406,679
-------------
Commitments and Contingencies (Note 5)
Preferred stock, $.01 par value, authorized 2,000,000 shares, none issued Common
stock, $.001 par value; authorized 100,000,000 shares, issued and outstanding
13,448,533 at September 30, 1999 and 13,328,770 at December 31, 1998 13,449 13,329
Additional paid-in capital 186,004,827 183,154,588
Retained earnings 79,832,378 75,504,882
Accumulated other comprehensive income (loss) 4,670,562 (7,705,165)
Treasury stock, at cost (4,394,127 common shares in 1999 and 4,380,780 in 1998) (77,829,635) (77,538,042)
------------- -------------
Total shareholders' equity 192,691,581 173,429,592
------------- -------------
Total liabilities and shareholders' equity $ 449,565,439 $ 395,175,518
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
---------- ----------
As Restated
Revenues:
<S> <C> <C>
Premium income $ 8,267,910 $ 8,804,567
Net investment income 2,204,200 2,200,853
Net realized gain on investments 816,802 34,287
Other income 5,088,709 1,140,092
---------- ----------
Total revenues 16,377,621 12,179,799
---------- ----------
Expenses:
Loss and loss adjustment expenses 6,272,833 5,736,451
Insurance underwriting and other expenses 12,197,230 6,443,262
---------- ----------
Total expenses 18,470,063 12,179,713
---------- ----------
Equity in losses of unconsolidated affiliates (1,186,678) (351,661)
---------- ----------
Loss from continuing operations before
income taxes and minority interest (3,279,120) (351,575)
Benefit for federal, foreign and state income taxes (1,772,880) (1,026,381)
---------- ----------
Income (loss) from continuing operations before minority interest (1,506,240) 674,806
Minority interest in (income) loss of subsidiary 155,739 (177,769)
---------- ----------
Income (loss) from continuing operations (1,350,501) 497,037
========== ==========
Income from discontinued operations, net of income tax
benefit of $6,917 for the three months of 1998 103,306
---------- ----------
Net income (loss) before extraordinary gain (1,350,501) 600,343
========== ==========
Net income (loss) (1,350,501) $ 600,343
Net income (loss) per common share - basic:
Continuing operations $ (0.15) $ 0.09
Discontinued operations 0.02
---------- ----------
Net income (loss) per common share $ (0.15) $ 0.11
========== ==========
Weighted average shares outstanding 9,054,413 5,711,304
========== ==========
Net income (loss) per common share - diluted:
Continuing operations $ (0.15) $ 0.08
Discontinued operations 0.02
---------- ----------
Net income (loss) per common share $ (0.15) $ 0.10
========== ==========
Weighted average shares outstanding 9,054,413 6,158,606
========== ==========
<CAPTION>
Nine Months Ended September 30,
1999 1998
---------- ----------
As Restated
Revenues:
<S> <C> <C>
Premium income $25,349,818 $ 26,398,030
Net investment income 5,376,830 7,381,533
Net realized gain on investments 3,588,382 2,508,646
Other income 7,100,599 3,279,888
---------- ----------
Total revenues 41,415,629 39,568,097
---------- ----------
Expenses:
Loss and loss adjustment expenses 18,364,435 19,397,529
Insurance underwriting and other expenses 25,328,643 18,959,886
---------- ----------
Total expenses 43,693,078 38,357,415
---------- ----------
Equity in losses of unconsolidated affiliates (1,992,255) (1,354,784)
---------- ----------
Loss from continuing operations before
income taxes and minority interest (4,269,704) (144,102)
Benefit for federal, foreign and state income taxes (8,000,475) (247,265)
---------- ----------
Income from continuing operations before minority interest 3,730,771 103,163
Minority interest in loss of subsidiary 155,739 28,347
---------- ----------
Income from continuing operations 3,886,510 131,510
Income from discontinued operations, net of income tax
provision $37,562 for the nine months of 1998 257,928
---------- ----------
Net income before extraordinary gain 3,886,510 389,438
Extraordinary gain, net of income tax expense of $227,821 442,240
---------- ----------
Net income $ 4,328,750 $ 389,438
========== ==========
Net income per common share - basic:
Continuing operations $ 0.43 $ 0.02
Discontinued operations 0.05
Extraordinary gain 0.05
---------- ----------
Net income per common share $ 0.48 $ 0.07
========== ==========
Weighted average shares outstanding 9,012,879 5,916,592
========== ==========
Net income per common share - diluted:
Continuing operations $ 0.41 $ 0.02
Discontinued operations 0.04
Extraordinary gain 0.05 --
---------- ----------
Net income per common share $ 0.46 $ 0.06
========== ==========
Weighted average shares outstanding 9,513,920 6,499,778
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
As Restated
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used in operating activities $(21,846,161) $(11,517,888)
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (38,048,988) (6,847,833)
Proceeds from sale of investments 20,703,647 21,567,890
Proceeds from maturity of investments 2,315,669 25,000
Advances to affiliate (672,082) (695,099)
Purchases of surface, water and mineral rights (1,804,966) (1,204,292)
Other investing activities, net 2,655,024 (1,622,797)
Proceeds from the sale of APL 13,108,342
Proceeds from the sale of property and equipment 3,945,069
------------ ------------
Net cash provided by (used in) investing activities (14,851,696) 28,276,280
------------ ------------
FINANCING ACTIVITIES:
Proceeds from borrowings 7,020,380
Proceeds from exercise of warrants 2,850,359
Purchase of treasury stock (291,593) (1,600,000)
------------ ------------
Net cash provided by (used in) financing activities 9,579,146 (1,600,000)
------------ ------------
Effect of exchange rate changes on cash (273,002) (634,947)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27,391,713) 14,523,445
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 71,654,196 56,435,786
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 44,262,483 $ 70,959,231
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 440,000
============
Interest $ 156,000
============
Non-Cash Investing and Financing Activities:
Borrowings settled in exchange for land deed $ 5,000,000
============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE> 6
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS RESTATED
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of PICO Holdings, Inc. ("PICO") and Subsidiaries (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 September 30, 1999 and December 31, 1998 and results of
operations for the three and nine months ended September 30, 1999 and 1998,
and cash flows for the nine months ended September 30, 1999 and 1998 have
been included and are of a normal recurring nature. Operating results for
the three and nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1999.
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 for the year ended December 31, 1998 as filed with the
SEC. SEE NOTE 9, "RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL
INFORMATION."
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 investments, unpaid losses and loss adjustment
expenses, 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 September 30, 1999 and
December 31, 1998, it is reasonably possible that actual results could
differ from the estimates upon which the carrying values were based.
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 occurred on December
4, 1998. The $17 million in proceeds from the sale was received during
1998.
Because APL and its subsidiary represented 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.
Following is an unaudited summary of APL's stand alone financial
results for the three and nine months ended September 30, 1998 included in
the statements of operations as discontinued operations:
<TABLE>
<CAPTION>
Three Nine
Months Ended Months Ended
Sept. 30, 1998 Sept 30, 1998
----------------- -----------------
<S> <C> <C>
Total revenues $2,930,531 $7,290,652
Income before taxes 96,869 295,491
Net income 103,307 257,929
Net income per share - diluted $ 0.02 $ 0.05
</TABLE>
6
<PAGE> 7
3. EARNINGS (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," the new method of reporting
earnings per share ("EPS") for the year ended December 31, 1997. For the
three months ended September 30, 1999, 1 million common stock options were
excluded from the calculations because their effects were anti-dilutive.
The following is a reconciliation of basic and diluted EPS.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $(1,350,501) $ 600,343 $ 4,328,750 $ 389,438
=========== =========== =========== ===========
Basic earnings (loss) per share $ (0.15) $ 0.11 $ 0.48 $ 0.07
=========== =========== =========== ===========
Basic weighted average common shares
outstanding 9,054,413 5,711,304 9,012,879 5,916,592
Stock options 447,302 501,041 583,186
----------- ----------- ----------- -----------
Diluted weighted average common and
common equivalent shares outstanding 9,054,413 6,158,606 9,513,920 6,499,778
=========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.15) $ 0.10 $ 0.46 $ 0.06
=========== =========== =========== ===========
</TABLE>
On June 30, 1999, 119,763 PICO common stock warrants were exercised at
$23.80 per share for a total of $2.9 million. The remaining warrants
expired on June 30, 1999.
4. COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established requirements for disclosure of
comprehensive income. The Company adopted the new standard for the year
ended December 31, 1998, and has reclassified previous financial statements
to conform to the new presentation. In addition to net income,
comprehensive income includes foreign currency translation and unrealized
holding gains and losses on available for sale securities, which prior to
adoption were reported separately in shareholders' equity.
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net income (loss) $(1,350,501) $ 600,343 $ 4,328,750 $ 389,438
Net change in unrealized appreciation
(depreciation)
on available for sale investments 1,908,787 (975,250) 11,627,386 (1,543,017)
Net change in foreign currency translation (801,748) (774,710) 748,341 1,184,218
----------- ----------- ----------- -----------
Total comprehensive income (loss) $ (243,462) $(1,149,617) $16,704,477 $ 30,639
=========== =========== =========== ===========
</TABLE>
Comprehensive income (loss) is net of deferred income tax expense of
$1 million and $6.3 million for the three and nine months ended September
30, 1999, respectively, and deferred income tax benefit of $525,000 and
$831,000 for the three and nine months ended September 30, 1998,
respectively.
7
<PAGE> 8
The components of accumulated comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Accumulated other comprehensive income (loss):
Unrealized appreciation (depreciation)
on available for sale investments $ 9,115,599 $(2,511,787)
Foreign currency translation (4,445,037) (5,193,378)
----------- -----------
Accumulated other comprehensive income (loss) $ 4,670,562 $(7,705,165)
=========== ===========
</TABLE>
The components of accumulated comprehensive income (loss) are net of
deferred income tax expense of $4.7 million at September 30, 1999 and a
deferred income tax benefit of $1.3 million at December 31, 1998.
5. COMMITMENTS AND CONTINGENCIES
In November 1998, Vidler Water Company, Inc. ("Vidler") entered into an
operating lease to acquire 185,000 acre-feet of underground water storage
privileges and associated rights to recharge and recover water located near
the California Aqueduct northwest of Bakersfield. The agreement requires
Vidler to pay for these privileges and rights a minimum of $2.4 million per
year for 10 years beginning October 1998. The agreement calls for the lease
payments to be adjusted annually by the engineering price index. On October
7, 1998, PICO signed an agreement guaranteeing payment of Vidler's
obligations under the agreement. The maximum obligation under this
guarantee is $3.2 million, adjusted annually by the engineering price
index. The guarantee expires October 7, 2008.
The Company is subject to various litigation which arise 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.
On January 10, 1997, Global Equity Corporation ("GEC"), a wholly-owned
subsidiary, commenced an action in British Columbia against MKG Enterprises
Corp. ("MKG"), Vignoble Wines Agency Inc. ("Vignoble") to enforce repayment
of a $5 million loan made by GEC to MKG. On the same day, the Supreme Court
of British Columbia granted an order preventing MKG from disposing of
certain assets pending resolution of the action. GEC subsequently brought a
motion to have a receiver-manager appointed for MKG and Vignoble, which
motion has been adjourned. In addition, in March 1999 GEC filed an action
in the Supreme Court of British Columbia against a third party. This action
states the third party had fraudulently entered into loan agreements with
MKG. Accordingly, under this action GEC is claiming damages from the third
party and seeking an order restraining the third party from taking any
further action in connection with MKG's assets.
In connection with the sale of their 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 certain property
owned in Nevada. In exchange for these services, the partnership was to
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 could terminate this consulting agreement
in April 2002 if the partnership had 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 September 30, 1999. By letter dated
March 13, 1998, NLRC gave notice of termination of the consulting agreement
based on NLRC's determination of default by the partnership under the terms
of the agreement. In November 1998, the partnership sued NLRC for wrongful
termination of the consulting contract. On March 12, 1999, NLRC filed a
cross-complaint against the partnership for breach of written contract,
breach of fiduciary duty and seeking declaratory relief.
Effective September 1, 1999, the parties entered into a settlement
agreement wherein they agreed that the lawsuit would be dismissed without
prejudice, and that NLRC would deliver a report on or before June 30, 2002
to the limited partnership of the amount of the consulting fee which would
be owed by NLRC to the limited partnership if the consulting agreement were
in effect.
8
<PAGE> 9
Global Equity SA, a Swiss wholly-owned subsidiary, entered into two
loan agreements with Swiss banks to partially finance the purchase of
additional shares of Jungfraubahn Holding AG. The loans are collateralized
by a portion of the shares held in custody at the banks.
Guizhou Jonyang Machinery Industry Ltd. (the "joint venture") a 60%
owned joint venture of Conex Continental Inc. ("Conex") has bank debt, a
portion of which, is collateralized by various assets of the joint venture
and has no recourse to PICO.
6. RECENT ACCOUNTING PRONOUNCEMENTS AND TAX LEGISLATION
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including instruments
embedded in other contracts and for hedging activities. It requires
recognition of all derivatives as either assets or liabilities in the
consolidated balance sheet, and measures those instruments at fair value.
The new standard becomes effective for fiscal years beginning after June
15, 1999. Management has not completely assessed the impact this standard
will have on the Company's consolidated financial statements.
During June 1999, the Internal Revenue Service issued final legislative
regulations that allow the Company to use net operating loss carryforwards
of an acquired company to offset the taxable income arising in any company
within the consolidated tax returns of the PICO Holdings group. These loss
carryforwards were previously restricted for use against taxable income of
the specific entity in which the losses arose. Due to the uncertainty
surrounding the realization of these deferred tax assets, the Company had
recorded a valuation allowance. As a result of the issuance of these
regulations, the Company has reevaluated the future recovery of this asset
and has determined that the valuation allowance is no longer required.
Consequently, the Company reversed the valuation allowance and as a result
recorded a deferred income tax benefit of $6.5 million in the statement of
operations.
In the quarter ended September 30, 1999, the Company determined that
the income tax benefit resulting from these tax regulations should have
been reflected in the period of enactment. Accordingly, the Company has
restated the results for the three months ended June 30, 1999 included in
the results of operations for the nine months ended September 30, 1999.
7. SEGMENT REPORTING
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 Company
adopted this new accounting standard beginning with the December 31, 1998
financial statements.
The Company is a diversified holding company engaged in five major
operating segments: Investment Operations; Surface, Water and Mineral
Rights Operations; Property and Casualty Insurance Operations; Medical
Professional Liability ("MPL") Insurance Operations and Other Operations.
The accounting policies of the reportable segments are the same as
those described in the Company's 1998 annual report on Form 10-K. Segment
performance is measured by revenues and segment profit before tax in
addition to changes in shareholders' equity. This information provides the
basis for calculation of return on shareholders' equity, which is the main
performance measurement used in analyzing segment performance. In addition,
assets identifiable with segments are disclosed as well as capital
expenditures, and depreciation and amortization. The Company has operations
and investments in the U.S. and abroad.
9
<PAGE> 10
The following is a detail of revenues by segment from continuing
operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Operations $ 1,221,384 $ 466,793 $ 3,879,230 $ 4,298,020
Surface, Water and Mineral Rights 2,439,736 394,987 3,681,520 963,616
Property and Casualty Insurance 9,672,878 10,419,662 29,338,357 31,527,222
Medical Professional Liability Insurance 597,452 687,798 1,780,017 1,877,415
Other Operations 2,446,171 210,559 2,736,505 901,824
----------- ----------- ----------- -----------
Total Revenues-Continuing Operations $16,377,621 $12,179,799 $41,415,629 $39,568,097
=========== =========== =========== ===========
</TABLE>
The following is the detail of segment income (loss) from continuing
operations before taxes and minority interest:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Operations $(2,336,923) $(1,204,121) $(2,707,946) $ (821,644)
Surface, Water and Mineral Rights (696,096) (357,760) (1,818,626) (1,085,647)
Property and Casualty Insurance 388,489 1,435,379 1,734,490 2,446,134
Medical Professional Liability Insurance (222,322) (209,833) (916,308) (636,027)
Other Operations (412,268) (15,240) (561,314) (46,918)
----------- ----------- ----------- -----------
Loss Before Taxes and Minority Interest $(3,279,120) $ (351,575) $(4,269,704) $ (144,102)
=========== =========== =========== ===========
</TABLE>
8. SIGNIFICANT ACCOUNTING CHANGES
At August 2, 1999 the Company increased its ownership of Conex from 32%
to 66% through the redemption of preferred shares, the proceeds from which
were used to exercise warrants for common shares. The consolidated results
of operations for the nine months ended September 30, 1999 reflect the
consolidation of Conex for the period August 3 to September 30. Previous to
consolidation, the investment was accounted for using the equity method.
Consequently, the results of operations for the nine months ended September
30, 1999 include 32% of the losses in the unconsolidated affiliate for the
period January 1 to August 2, 1999. Conex's primary asset is 60% of a
Sino-American joint venture that manufactures wheeled and tracked
excavators in China. Significant additions to the balance sheet at
September 30, 1999 include $19 million in inventory, $17 million in
property and equipment, and approximately $32 million in borrowings and
accrued expenses. The borrowings are serviced by operating cash flows of
the joint venture and are collateralized by various assets of the joint
venture including $2 million of cash held as security and have no recourse
to PICO or Conex. Below is a summary of the impact of Conex on PICO's
results of operations as if the consolidation had occurred at the beginning
of the year:
10
<PAGE> 11
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
<S> <C>
Revenues $ 11,365,376
Cost of sales 8,548,997
---------------
2,816,379
Expenses 4,721,276
---------------
Loss from operations (1,904,897)
Minority interest 1,060,944
---------------
Net loss $ (843,953)
===============
</TABLE>
9. RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION
In response to a review by the staff of the Securities and Exchange
Commission in connection with the Company's Form S-3 registration statement
which has yet to be completed, the Company will amend its 1998 Form 10-K
and 1999 Form 10-Q filings for the quarterly periods ended March 31, 1999
and June 30, 1999, and restate previously reported financial statements.
Specifically, and as discussed in detail below, the consolidated financial
statements as of and for the three years ended December 31, 1998 and as of
and for the three and six months ended March 31, 1999 and June 30, 1999
will be restated to reflect (1) the adoption of equity accounting for
PICO's investment in HyperFeed Technologies, Inc. ("Hyperfeed"), (2) the
value of Hyperfeed common stock warrants at estimated fair value and (3) to
record the carrying value of Hyperfeed, formerly PC Quote, Inc., common
stock warrants and associated interest income. Consequently, the
investment, results of operations (current and prior periods), and retained
earnings have been adjusted retroactively.
Included in the results of operations is equity in losses of Hyperfeed
of $1.3 million and $684,000 for the nine months ended September 30, 1999
and 1998, respectively and losses of $1.2 million, and $168,000 for the
three months ended September 30, 1999 and 1998, respectively. Presented in
the table below are the effects of the retroactive adjustments on
previously reported information as of and for the three and nine months
ended September 30 1998.
Included within the equity in loss of unconsolidated affiliate is
PICO's share of the losses of Hyperfeed. It also includes charges for
amortization of goodwill totaling $161,000, $482,000, $53,000 and $127,000
for the three and nine months ended September 30, 1999 and 1998,
respectively. In addition, the results of operations for the three and nine
months ended September 30, 1999 and 1998 include dilution gains of
$149,000, $1.3 million, $47,000 and $144,000, respectively.
11
<PAGE> 12
<TABLE>
<CAPTION>
As Reported As Restated As Reported As Restated
Nine Months Ended Nine Months Ended Three Months Ended Three Months Ended
September 30, 1998 September 30, 1998 September 30, 1998 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Total revenues $ 39,568,097 $ 39,568,097 $ 12,179,799 $ 12,179,799
Total expenses 38,357,415 38,357,415 12,179,713 12,179,713
Equity in losses of unconsolidated (670,692) (1,354,784) (183,871) (351,661)
affiliates
------------------ ------------------ ------------------ ------------------
Income before minority interest 539,990 (144,102) (183,785) (351,575)
Income tax benefit (57,871) (247,265) (987,509) (1,026,381)
------------------ ------------------ ------------------ ------------------
597,861 103,163 803,724 674,806
Minority interest 28,347 28,347 (177,769) (177,769)
------------------ ------------------ ------------------ ------------------
Income from continuing operations 626,208 131,510 625,955 497,037
Discontinued operations 257,928 257,928 103,306 103,306
------------------ ------------------ ------------------ ------------------
Net income $ 884,136 $ 389,438 $ 729,261 $ 600,343
================== ================== ================== ==================
Net income per share - basis $ 0.15 $ 0.07 $ 0.13 $ 0.11
Net income per share - diluted $ 0.14 $ 0.06 $ 0.12 $ 0.10
</TABLE>
<TABLE>
<CAPTION>
As Reported As Restated
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Investments $ 131,769,107 $ 130,293,302
Deferred tax asset 9,562,365 9,903,073
Total assets 405,942,275 404,807,176
Total liabilities 236,120,476 236,120,476
Unrealized gain, net of tax (3,916,639) (4,054,804)
Accumulated foreign currency, net of tax (4,009,160) (4,009,160)
Retained earnings 84,602,471 83,605,538
Shareholders' equity 108,427,416 107,292,318
</TABLE>
As of September 30, 1999, the investment in Hyperfeed consists of a 12%
common stock voting stock interest and a 24% voting interest from preferred
stock holdings. An additional 4.1 million common stock warrants, which convert
one-for-one into common stock represent an additional 17% voting interest, if
converted. The common and preferred stock are accounted for using the equity
method and have a carrying value of $3.6 million at September 30, 1999, while
the common stock warrants are carried at estimated fair value in accordance with
Statement of Financial Accounting Standards No. 115. The difference between the
carrying value of the investment and the underlying equity in the net assets of
Hyperfeed is considered goodwill and is being amortized over 10 years on a
straight line basis. The market value of the common shares and preferred shares
based on the September 30, 1999 closing price of Hyperfeed common stock is
approximately $19.1 million, and $38.3 million, respectively. The estimated fair
value of the warrants using the Black Scholes option-pricing model is
approximately $28.7 million.
Included in the years ended December 31, 1998, 1997 and 1996 is the
equity in losses of Hyperfeed of $751,000, $1.6 million and $1 million,
respectively. Present in the table below are the effects of the retroactive
adjustments on previously reported net income (loss) and shareholders' equity as
of and for the years ended December 31.
For the years ended December 31, 1998, 1997 and 1996, equity in loss of
unconsolidated affiliates includes charges for goodwill amortization of
$176,000, $147,000 and $143,000, dilution gains of $404,000, $1 million, and
$50,000 respectively, and PICO's share of the losses of $979,000, $2.4 million
and $910,000, respectively. The year 1997 has been restated to include $1.8
million in interest income associated with common stock warrants.
12
<PAGE> 13
<TABLE>
<CAPTION>
As Reported As Restated As Reported As Restated
Year Ended Year Ended Year Ended Year Ended
December 31, 1998 December 31, 1998 December 31, 1997 December 31, 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Total revenues $ 48,220,276 $ 48,220,276 $ 88,185,342 $ 90,019,377
Total expenses 58,449,781 58,449,781 64,682,337 64,682,337
Equity in losses of unconsolidated (771,117) (1,522,480) (1,577,879)
affiliates
----------------- ----------------- ----------------- -----------------
Income before minority interest (11,000,622) (11,751,985) 23,503,005 23,759,161
Income tax expense 1,762,395 1,566,889 7,670,128 7,807,262
----------------- ----------------- ----------------- -----------------
(12,763,017) (13,318,874) 15,832,877 15,951,899
Minority interest 4,532,632 4,532,632 3,202,461 3,202,461
----------------- ----------------- ----------------- -----------------
Income from continuing operations (8,230,385) (8,786,242) 19,035,338 19,154,360
Discontinued operations 1,075,024 1,075,024 456,283 456,283
----------------- ----------------- ----------------- -----------------
Net income (loss) $ (7,155,361) $ (7,711,218) $ 19,491,621 $ 19,610,643
================= ================= ================= =================
Income (loss) per share - basic $ (1.20) $ (1.29) $ 3.09 $ 3.11
Income (loss) per share - diluted $ (1.20) $ (1.29) $ 2.98 $ 3.00
</TABLE>
<TABLE>
<CAPTION>
As Reported As Restated
December 31, 1998 December 31, 1998
----------------- -----------------
<S> <C> <C>
Investments $ 117,150,365 $ 116,411,780
Total assets 395,914,103 395,175,518
Deferred tax liabilities 7,258,949 7,185,656
Total liabilities 221,819,219 221,745,926
Unrealized loss, net of tax (2,904,587) (2,511,787)
Accumulated foreign currency, net of tax (5,193,378) (5,193,378)
Retained earnings 76,562,974 75,504,882
Shareholders' equity 174,094,884 173,429,592
</TABLE>
<TABLE>
<CAPTION>
As Reported As Restated
Year Ended Year Ended
December 31, 1996 December 31, 1996
----------------- -----------------
<S> <C> <C>
Total revenue $76,736,280 $76,736,280
Total expenses 43,773,072 43,773,072
Equity in income of unconsolidated affiliates 1,013,385 10,539
Income before minority interest 33,976,593 32,973,747
Income tax expense 12,957,811 12,665,389
21,018,782 20,308,358
Minority interest 3,301,229 3,301,229
Net income $24,320,011 $23,609,587
=========== ===========
Net income per share - basic $ 4.39 $ 4.26
Net income per share - diluted $ 4.23 $ 4.11
</TABLE>
13
<PAGE> 14
The common and preferred stock has a carrying value of $4.9 million at
December 31, 1998, and the common stock warrants estimated using the Black
Scholes option-pricing model are carried at a fair value of $6.1 million. The
market value of the common shares and preferred shares based on the December 31,
1998 closing price of Hyperfeed common stock is approximately $4.4 million, and
$10.2 million, respectively.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (AS RESTATED)
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 Nine Months
Ended September 30, 1999 and 1998," "Liquidity and Capital Resources," and "Risk
Factors." 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 1998 Form 10-K.
RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION
IN RESPONSE TO A REVIEW BY THE STAFF OF THE SECURITIES AND EXCHANGE
COMMISSION IN CONNECTION WITH THE COMPANY'S FORM S-3 REGISTRATION STATEMENT
WHICH HAS YET TO BE COMPLETED, THE COMPANY WILL AMEND ITS 1998 FORM 10-K AND
1999 FORM 10-Q FILINGS FOR THE QUARTERLY PERIODS ENDED MARCH 31, 1999 AND JUNE
30, 1999, AND RESTATE PREVIOUSLY REPORTED FINANCIAL STATEMENTS. SPECIFICALLY,
AND AS DISCUSSED IN DETAIL IN NOTE 9 OF NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS, "RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION", THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE YEARS ENDED DECEMBER
31, 1998 AND AS OF AND FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND
JUNE 30, 1999 WILL BE RESTATED TO (1) REFLECT THE ADOPTION OF EQUITY ACCOUNTING
FOR PICO'S INVESTMENT IN HYPERFEED TECHNOLOGIES, INC. ("HYPERFEED"), (2) REFLECT
THE VALUE OF HYPERFEED COMMON STOCK WARRANTS AT ESTIMATED FAIR VALUE AND (3)
RECORD THE CARRYING VALUE OF HYPERFEED COMMON STOCK WARRANTS AND ASSOCIATED
INTEREST INCOME. CONSEQUENTLY, THE INVESTMENT IN HYPERFEED, RESULTS OF
OPERATIONS (CURRENT AND PRIOR PERIODS), COMPREHENSIVE INCOME AND RETAINED
EARNINGS HAVE BEEN RESTATED RETROACTIVELY. THOSE ADJUSTMENTS ARE REFLECTED IN
THIS FORM 10-Q, AS THEY PERTAIN TO CURRENT AND PRIOR PERIOD FINANCIAL
INFORMATION CONTAINED IN THESE CONSOLIDATED FINANCIAL STATEMENTS AND
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (AS RESTATED). IN LIGHT OF THESE RESTATEMENTS, AND INPLEMENTATION OF
DIFFERENT ACCOUNTING PRINCIPLES, PICO'S FUTURE INCOME STATEMENTS AND
SHAREHOLDER'S EQUITY MAY BE SUBJECT TO UPWARD AND DOWNWARD SWINGS WHICH MAY BE
INCONSISTENT WITH PAST VARIATION BASED UPON PREVIOUS REPORTED FINANCIAL
INFORMATION.
RESULTS OF OPERATIONS -- THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(AS RESTATED)
SUMMARY
PICO Holdings, Inc. and consolidated subsidiaries reported a net loss of
$1.4 million, or $0.15 per share, for the quarter ended September 30, 1999,
compared to income of $600,000, or $0.11 per share, during the third quarter of
1998. For the nine month period ended September 30, 1999, PICO reported net
income of $4.3 million, or $0.48 per share, compared to income of $389,000, or
$0.07 per share, during the first nine months of 1998.
Per share amounts are stated as "basic" earnings per share.
Shareholders' equity at September 30, 1999 was $192.7 million, up $19.3
million, or 11.1%, over the $173.4 million of December 31, 1998, as adjusted.
Book value per share calculated on an undiluted basis as of September 30, 1999
was $21.28 per share, compared to $19.38 per share as of December 31, 1998.
These increases in shareholders' equity and book value per share resulted
primarily from (1) an $11.6 million improvement in unrealized appreciation of
investments, net of income tax, (2) $4.3 million in net income, (3) a $748,000
improvement in the Company's foreign currency translation adjustment in
shareholders' equity, and (3) nearly $2.9 million in paid-in capital from the
exercise by warrant holders of approximately 120,000 PICO common stock warrants
at $23.80 per share. These increases were partially offset by $292,000 in costs
from the purchase of treasury stock.
The Company's ongoing operations are organized into five segments:
INVESTMENT OPERATIONS; SURFACE, WATER, AND MINERAL RIGHTS; PROPERTY AND CASUALTY
INSURANCE; MEDICAL PROFESSIONAL LIABILITY INSURANCE and OTHER OPERATIONS. Net
income (loss) by business segment for the three and nine months ended September
30, 1999 and 1998 was as follows:
14
<PAGE> 15
NET INCOME (LOSS) BY BUSINESS SEGMENT:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------------------ -----------------
<S> <C> <C> <C> <C>
(in millions) (in millions)
Continuing Operations:
Investment Operations $(0.5) $ 1.1 $ 5.6 $(0.4)
Surface, Water and Mineral Rights (0.7) (0.4) (1.8) (1.1)
Property and Casualty Insurance 0.3 1.0 1.2 1.8
MPL Insurance (0.2) (0.9) (0.7) (0.1)
Other (0.3) (0.3) (0.4) (0.1)
----- ----- ----- -----
Net Income (loss) from Continuing Operations (1.4) 0.5 3.9 0.1
Discontinued Operations, Net of Tax 0.1 0.3
Extraordinary Gain, Net of Tax 0.4
----- ----- ----- -----
Net income (loss) $(1.4) $ 0.6 $ 4.3 $ 0.4
===== ===== ===== =====
</TABLE>
As shown above, the third quarter net loss from continuing operations of
$1.4 million decreased $1.9 million from the $500,000 in income recorded for the
third quarter of 1998. The principal contributor to this decline was INVESTMENT
OPERATIONS as a result of an after-tax $800,000 loss from PICO's equity in
Hyperfeed and a $300,000 loss from Conex. SEE NOTE 8, "SIGNIFICANT ACCOUNTING
CHANGES." The SURFACE, WATER AND MINERAL RIGHTS segment, which includes the
operations of Vidler and NLRC, contributed a $696,000 net loss to the 1999 third
quarter, compared to a $358,000 net loss in the third quarter of 1998. Increased
water rights project costs and non-capitalizable interest expense were
principally responsible for these additional losses. PROPERTY AND CASUALTY
INSURANCE and MPL INSURANCE produced offsetting $700,000 variances between the
1999 and 1998 third quarters, principally relating to reserve strengthening
differences between the two periods.
The $3.9 million income from continuing operations recorded during the first
nine months of 1999 increased $3.8 million over the $100,000 recorded during the
1998 period. The principal contributors of this improvement for the nine months
were $2.8 million realized investment gains from international securites and a
$6.5 million income tax benefit due to recent changes in tax legislation (SEE
NOTE 6, "RECENT ACCOUNTING PRONOUNCEMENTS AND TAX LEGISLATION."). Included in
net income for the first nine months of 1999 was a $442,000 extraordinary gain
from settlement of debt in exchange for land. Realized investment gains for the
nine months were $3.6 million compared to $2.5 million in 1998.
Third quarter 1999 revenues were $16.4 million, compared to $12.2 million
during the third quarter of 1998. Revenues for the nine months ended September
30, 1999 and 1998 were $41.4 million and $39.6 million, respectively. Increased
revenues principally relate to the consolidation of Conex into PICO's financial
statements beginning in August 1999. Conex revenues included in the third
quarter and nine months were $2.3 million. Revenues for the third quarter and
first nine months of 1999 included $1.4 million and $1.8 million, respectively,
from the sale of NLRC land, compared to $79,000 and $133,000 for the same 1998
periods, respectively.
Expenses for the third quarter and first nine months of 1999 were $18.5
million and $43.7 million, respectively. These amounts compare to $12.2 million
and $38.4 million, respectively, during the same periods of 1998. These expense
increases included $2.6 million in additional expenses in the third quarter and
nine months of 1999 due to the consolidation of Conex, which was not
consolidated in the comparable 1998 periods. Operating and overhead expenses of
Vidler and NLRC increased $ 2.4 million for the quarter and $3.5 million for the
nine months as compared to 1998, much of which was related to increased land
sales plus increased project costs and interest expense. PROPERTY AND CASUALTY
INSURANCE ("P&C") expenses included strengthening of reserves of approximately
$553,000 and $1.2 million for the third quarter and the first nine months of
1999, respectively, based upon claims experience in the artisan-contractor
insurance coverage previously provided by Citation, net of reinsurance.
Total assets at September 30, 1999 were $449.6 million, compared to $395.2
million at December 31, 1998, as restated, an increase of $54.4 million.
Liabilities increased $28.7 million. The consolidation of Conex added $49.6
million in assets and $42.3 million in liabilities to the balance sheet. Claims
reserves decreased $10.4 million during the nine months, principally due to the
payment of claims in winding down PICO's medical professional liability
insurance operations.
15
<PAGE> 16
Prior period per share amounts have been adjusted to reflect PICO's December
16, 1998 1-for-5 reverse stock split.
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>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----- ----- ----- -----
(in millions) (in millions)
<S> <C> <C> <C> <C>
Investment Operations $ 3.5 $ 0.5 $ 6.2 $ 4.3
Surface, Water and Mineral Rights 2.4 0.4 3.7 1.0
Property and Casualty Insurance 9.7 10.4 29.3 31.5
Medical Professional Liability Insurance 0.6 0.7 1.8 1.9
Other Operations 0.2 0.2 0.4 0.9
----- ----- ----- -----
Total Revenues-Continuing Operations $16.4 $12.2 $41.4 $39.6
===== ===== ===== =====
</TABLE>
Income (Loss) Before Taxes and Minority Interest--Continuing Operations:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
(in millions) (in millions)
Investment Operations $(2.6) $(1.2) $(3.0) $(0.8)
Surface, Water and Mineral Rights
(0.7) (0.4) (1.8) (1.1)
Property and Casualty Insurance
0.4 1.4 1.7 2.4
Medical Professional Liability Insurance
(0.2) (0.2) (0.9) (0.6)
Other Operations
(0.2) (0.3)
----- ----- ----- -----
Loss Before Taxes and Minority Interest $(3.3) $(0.4) $(4.3) $(0.1)
===== ===== ===== =====
</TABLE>
INVESTMENT OPERATIONS
INVESTMENT OPERATIONS are conducted primarily by PICO, Physicians Insurance
Company of Ohio ("Physicians"), GEC and Physicians Investment Company, all
wholly-owned subsidiaries. The Company holds a number of investments in both
publicly and privately held corporations. These investments may be passive or
they may represent positions where the Company is able to exert significant
influence over the operating, financing and management strategies and decisions
of the corporation. The Company invests in businesses that it believes to be
undervalued or may benefit from additional capital, restructuring of operations
or management or improved competitiveness through operational efficiencies with
existing Company operations. However, not all investment activities are included
within the INVESTMENT OPERATIONS business segment. For example, investment
revenues and investment income generated by Physicians are first allocated to
the MEDICAL PROFESSIONAL LIABILITY INSURANCE segment based upon the amount of
invested assets needed to support Physicians' outstanding insurance reserves.
The remainder is classified as part of the INVESTMENT OPERATIONS business
segment. (See the MEDICAL PROFESSIONAL LIABILITY INSURANCE segment below.) In
addition, investment revenues and investment income generated by Sequoia and
Citation are included in the PROPERTY AND CASUALTY INSURANCE business segment
and those from The Professionals Insurance Company ("PRO"), in the MEDICAL
PROFESSIONAL LIABILITY INSURANCE segment, and not in the INVESTMENT OPERATIONS
business segment. SEE NOTE 7, "SEGMENT REPORTING."
INVESTMENT OPERATIONS revenues were $6.2 million for the first nine months
of 1999 compared to $4.3 million during the first nine months of 1998, an
increase of $1.9 million. As shown below, this improvement was due to (1) a $1.5
million increase in realized
16
<PAGE> 17
investment gains, (2) a $1.4 million decrease in investment income and (3) a
$1.8 million increase in other income. The increase in realized investment gains
principally is a result of gains from the sale of certain of the Company's
international investments. The decrease in investment income assigned to
INVESTMENT OPERATIONS resulted from a number of factors. First, the 1998
nine-month total included a one-time $800,000 addition to investment revenues
from the write down of capitalized interest related to real estate development
projects that were closed out. In addition, approximately $600,000 in interest
income generated by PICO and its subsidiaries through transactions within the
consolidated group during 1999 ($300,000 in 1998) has been eliminated as a
result of consolidation. Most of the remainder of the investment income decline
arose as a result of reduced levels of fixed income securities and invested cash
and reduced interest rates. The increase in revenues from other income primarily
resulted from the third quarter 1999 inclusion of Conex in PICO's consolidated
financial statements, which added $2.3 million to revenues. SEE NOTE 8,
"SIGNIFICANT ACCOUNTING CHANGES." Prior to the third quarter of 1999, Conex's
revenues were not included with PICO's based upon equity accounting. Prior to
consolidation, PICO recorded its equity in Conex's losses on one line of PICO's
financial statements as "Equity in losses of unconsolidated affiliates." Conex
principally manufactures wheeled and tracked hydraulic excavation equipment
through a 60% interest in a Sino-American joint venture.
Third quarter revenues were $3.5 million compared to $500,000 in the third
quarter of 1998. Realized investment gains and other income accounted for $2.8
million of this $3 million improvement. PICO recorded $800,000 of realized
investment gains in the third quarter of 1999 from the sale of international
investments, compared to a $100,000 loss in the 1998 third quarter. Other income
amounted to $2.3 million during the third quarter of 1999, an increase of $1.9
million over the third quarter of 1998, principally attributable to the
inclusion of Conex.
Revenues (charges) from INVESTMENT OPERATIONS are summarized below:
INVESTMENT OPERATIONS REVENUES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(in millions) (in millions)
Investment Operations Revenues (Charges):
Realized Investment Gains $ 0.8 $ (0.1) $ 3.8 $ 2.3
Investment Income 0.4 0.2 -- 1.4
Other Income 2.3 0.4 2.4 0.6
------ ------ ------ ------
Investment Operations Revenues $ 3.5 $ 0.5 $ 6.2 $ 4.3
====== ====== ====== ======
</TABLE>
INVESTMENT OPERATIONS produced a $3 million loss before taxes during the
first nine months of 1999 compared to an $800,000 loss during the first nine
months of 1998. As shown below, this $2.2 million decrease consisted of (1) a
$1.6 million decrease in investment operations income and (2) a $600,000
decrease from the equity in losses of unconsolidated subsidiaries. In addition
to a general decline in investment income due to a reduced level of
income-producing securities compared to 1998, the $1.6 million decrease in
investment operations income compared to 1998 partially resulted from the 1998
inclusion of a one-time $800,000 increase in income from the write-down of
capitalized interest on discontinued real estate projects and a $300,000 loss
from Conex's operations. The $600,000 decrease in income before taxes from the
equity in losses of unconsolidated subsidiaries resulted from a $1.3 million
loss from PICO's equity in Hyperfeed, compared to a $700,000 loss in the first
nine months of 1998.
During the third quarter of 1999, INVESTMENT OPERATIONS produced a $2.6
million pre-tax loss, compared to a $1.2 million loss during the same 1998
quarter. This $1.4 million decrease in pre-tax income consisted of a $300,000
decrease in investment operations income, and a $1.1 million decrease due to
PICO's equity in the losses of Hyperfeed.
The Company's INVESTMENT OPERATIONS income can fluctuate greatly from
period to period. A number of factors contribute to these fluctuations,
including, among other things, the mix of the Company's portfolio, timing of the
Company's realization of capital
17
<PAGE> 18
gains, the volume of trading and demand for individual securities the Company
owns and fluctuations in the U.S. and world stock and bond markets in general.
Therefore, future results cannot and should not be predicted based upon past
performance alone. See "RISK FACTORS."
Income (loss) before tax from INVESTMENT OPERATIONS for the three and nine
months ended September 30, 1999 and 1998 included the following:
INVESTMENT OPERATIONS INCOME (LOSS) BEFORE TAX
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(in millions) (in millions)
Investment Operations Income (Loss) Before Tax:
Investment Operations Income (Loss) $ (1.1) $ (0.8) $ (1.0) $ 0.6
Equity in Loss of Investee (1.5) (0.4) (2.0) (1.4)
------ ------ ------ ------
Investment Operations Loss Before Tax $ (2.6) $ (1.2) $ (3.0) $ (0.8)
====== ====== ====== ======
</TABLE>
SURFACE, WATER, AND MINERAL RIGHTS
Two subsidiaries comprise the surface, water and mineral rights segment
operations: Vidler and NLRC. Vidler engages 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 to acquire and
aggregate agricultural water supplies and develop them for the use of
municipalities, water districts, developers and others. In addition, Vidler
develops and manages water storage to facilitate more efficient use of water,
primarily for use by others. Vidler has purchased or leased water rights and
related assets in Colorado, Nevada, Arizona and California.
NLRC, a limited liability company, was acquired in 1997. NLRC owns
approximately 1.3 million acres of deeded land, fee-simple, located in northern
Nevada, together with appurtenant surface, water and mineral rights. NLRC is
actively engaged in activities it believes will maximize the property's value in
relation to water rights, mineral rights and land development.
Following is a breakdown of revenue and pre-tax income (loss) before
minority interest from SURFACE, WATER, AND MINERAL RIGHTS operations for the
periods shown:
SURFACE, WATER, AND MINERAL RIGHTS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(in millions) (in millions)
Revenues - Surface, Water and Mineral Rights:
VIDLER:
Operating Revenues $ 0.1 $ 0.1 $ 0.5 $ 0.3
NLRC:
Land Sales 1.4 1.8
Other Operating Revenues 0.9 $ 0.3 1.4 $ 0.7
------ ------ ------ ------
Segment Total Revenues $ 2.4 $ 0.4 $ 3.7 $ 1.0
====== ====== ====== ======
Income (Loss) Before Tax and Minority Interest:
Vidler Water Company, Inc. $ (0.7) $ (0.4) $ (1.9) $ (0.7)
Nevada Land and Resources Company LLC -- -- 0.1 (0.4)
------ ------ ------ ------
Loss Before Tax and Minority Interest $ (0.7) $ (0.4) $ (1.8) $ (1.1)
====== ====== ====== ======
</TABLE>
18
<PAGE> 19
Operating revenues include land leases, principally for grazing,
agricultural, communications and easement purposes; water sales and leasing and
other income. A portion of the lease revenue Vidler receives is from leases
under a perpetual agreement. Payments for these leases are indexed to the
consumer price index ("CPI"), with a 3% minimum increase per year. Currently,
approximately 28% of Vidler's total revenue is subject to this type of lease.
Once water rights or assets are leased in perpetuity, they cannot be leased
again unless the lease is cancelled, if cancelable. Consequently, future revenue
growth beyond the limits of these CPI escalators is dependent upon growth in
leases not subject to perpetual agreements, development of existing assets, and
acquisition of additional water rights and water related assets for subsequent
lease or sale. The sale of water rights or assets reduces future revenue streams
from water rights and assets until those assets can be replaced.
Revenues from SURFACE, WATER, AND MINERAL RIGHTS operations for the nine
months ended September 30, 1999 were $3.7 million, compared to $1.0 million
during the first nine months of 1998. As shown above, $1.8 million of this $2.7
million increase resulted from NLRC land sales and the remaining $0.9 million
increase resulted from increases in other operating revenues, such as water
rights, lease and rental income, royalties and interest income. For the third
quarter of 1999, revenues were $2.4 million, $2 million increase over the third
quarter of 1998. Land sales accounted for $1.4 million of this increase, with
other operating income making up the remainder.
SURFACE, WATER, AND MINERAL RIGHTS operations for the first nine months of
1999 resulted in a $1.8 million loss before taxes and minority interest,
compared to a $1.1 million loss during the comparable 1998 period. Operating and
overhead expenses in excess of Vidler's revenues resulted in losses of $1.9
million and $0.7 million for the nine months and third quarter of 1999,
respectively. This compares to losses of $0.7 million and $0.4 million,
respectively, for the comparable 1998 periods. Most of the increase in overhead
expenses relates to increased interest expense, salaries and benefits related to
the acquisition of additional assets.
NLRC produced a $100,000 profit before taxes for the first nine months of
1999 compared to a $400,000 loss during the same 1998 period. No income or loss
was recorded by NLRC for the third quarters of 1999 and 1998. As evidenced by
the revenues from land sales shown above, NLRC continues to actively market
selected non-strategic parcels of land.
In the second quarter of 1999, NLRC settled $5 million of outstanding
borrowings and accrued interest by exchanging the particular land deed that was
collateral for the note. In the nine-month results, the resulting gain has been
reclassified from ordinary income to an extraordinary gain of $442,000.
PROPERTY AND CASUALTY INSURANCE
Sequoia and Citation account for all of the ongoing revenues of the PROPERTY
AND CASUALTY ("P&C") INSURANCE business segment. These companies write
predominately light commercial and multiple peril insurance coverage in central
and northern California and Nevada. Sequoia and Citation are continually seeking
ways to realize savings and take advantage of synergies and to combine
operations, wherever possible.
As shown below, earned premiums made up most of the PROPERTY AND CASUALTY
INSURANCE segment revenues. Premiums are earned pro-rata throughout the year
according to the coverage dates of the underlying policies:
19
<PAGE> 20
PROPERTY AND CASUALTY INSURANCE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
P & C Insurance Revenues (Charges): (in millions) (in millions)
Earned Premiums - Sequoia $ 4.1 $ 4.4 $ 12.7 $ 13.4
Earned Premiums - Citation 4.1 4.4 12.7 13.2
Investment Income 1.3 1.4 3.6 4.1
Realized Investment Gains (Losses) (0.2) 0.2
Other 0.2 0.2 0.5 0.6
------ ------ ------ ------
Total P&C Insurance Revenues $ 9.7 $ 10.4 $ 29.3 $ 31.5
====== ====== ====== ======
P & C Insurance Income Before Taxes:
Sequoia Insurance Company $ 0.6 $ 0.9 $ 1.3 $ 1.3
Citation Insurance Company (0.2) 0.5 0.4 1.1
------ ------ ------ ------
Total P&C insurance Income Before Taxes $ 0.4 $ 1.4 $ 1.7 $ 2.4
====== ====== ====== ======
</TABLE>
PROPERTY AND CASUALTY INSURANCE revenues for the first nine months of 1999
were $29.3 million compared to $31.5 million during the first nine months of
1998. Declining earned premiums accounted for approximately $1.2 million of this
$2.2 million , or 7%, decrease between years, principally as a result of
continuing increased underwriting selectivity applied to Citation's business and
aggressive competition for commercial multiple peril business within the state
of California. Total PROPERTY AND CASUALTY INSURANCE earned premiums for the
nine months of 1999 were $25.4 million compared to $26.6 million in 1998.
Practically all new P&C insurance applications and policies scheduled to renew
are now being processed through Sequoia and subjected to Sequoia's underwriting
standards which are much more stringent than those previously employed by
Citation prior to its change in control. As a result, a significant portion of
Citation's prior book of business has not been renewed over the past two-plus
years. As previously mentioned, increased competition within the state of
California for commercial insurance has also decreased earned premiums.
Accounting for most of the remaining difference between years was investment
income, down $500,000 or 12.2%. The decline in investment income principally
resulted from a reduction in invested assets during 1998 and 1999 resulting from
cash utilization in operating activities due to the decline in premium revenue.
Investment losses realized during the first nine months of 1999 amounted to
$200,000, compared to $200,000 in realized investment gains during the first
nine months of 1999.
For the quarters ended September 30, 1999 and 1998, PROPERTY AND CASUALTY
INSURANCE operations produced revenues of $9.7 million and $10.4 million,
respectively. Earned premiums were $8.2 million and $8.8 million, respectively,
for the two periods. Investment income for the third quarter of 1999 was $1.3
million compared to $1.4 million during the same 1998 quarter.
Sequoia and Citation entered into 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 Citation and a 50/50 retrocession between
the companies. The reinsurance pooling agreement calls for these items to be
split equally between the two companies. Since the inception of the reinsurance
pooling agreement, Sequoia's retained net written and earned premiums have been
significantly reduced by the premium cessions to Citation. However, the decline
in Sequoia's retained net written and earned premiums due to the reinsurance
pooling agreement produced a corresponding increase in Citation's net written
and earned premiums.
PROPERTY AND CASUALTY INSURANCE operations produced $1.7 million in income
before taxes during the first nine months of 1999, down $700,000 from the $2.4
million recorded during the same 1998 period. The 1997-98 "El Nino" phenomenon
had a significant impact on the 1998 results.
As shown below, Citation's 1999 loss and LAE ratios for the first nine
months deteriorated 2.1 percentage points over the first nine months of 1998.
Citation's loss and LAE ratio for the third quarter of 1999 was 18 percentage
points higher during the third quarter of 1998. The principal reason for this
difference was loss experience from the artisan-contractor coverage no longer
written by Citation. Citation strengthened loss and LAE reserves, net of
reinsurance reserve savings, $1.2 million during the first nine months
20
<PAGE> 21
of 1999, or $553,000 during the third quarter.
Sequoia's loss and LAE ratio for the first nine months of 1999 of 57.7%
improved 3.9 percentage points below the 61.6% ratio of the same 1998 period.
For the third quarter, Sequoia's 53.8% ratio was 4.7 percentage points over that
of the third quarter of 1998.
Citation's nine-month expense ratio of 42.4% compares to 41.9% in the same
1998 period. For the third quarter, Citation's expense ratio improved by 1.9
percentage points. Sequoia's 44.2% expense ratios for both the nine months and
the third quarter represent improvements over the comparable 1998 periods of
0.1 and 0.6 percentage points, respectively. Improvements principally relate to
reduced overhead expenses, which were sufficient to more than offset the
negative effects of the reduced premium volume. SEE RATIOS BELOW. THESE RATIOS
ARE CALCULATED AS LOSSES, LAE AND INSURANCE OPERATING EXPENSES CALCULATED ON THE
BASIS OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP), DIVIDED BY NET EARNED
PREMIUM.
The following schedule shows Citation's losses, LAE and insurance operating
expenses as percentages of earned premiums:
CITATION INSURANCE COMPANY
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(GAAP Basis) (GAAP Basis)
Loss and LAE Ratio 84.7% 66.7% 74.3% 72.2%
Expense Ratio 42.7% 44.6% 42.4% 41.9%
------ ------ ------ ------
Loss and Expense Ratio 127.4% 111.3% 116.7% 114.1%
====== ====== ====== ======
</TABLE>
The following schedule shows Sequoia's losses, LAE and insurance operating
expenses as percentages of earned premiums:
SEQUOIA INSURANCE COMPANY
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(GAAP Basis) (GAAP Basis)
Loss and LAE Ratio 53.8% 49.1% 57.7% 61.6%
Expense Ratio 44.2% 44.8% 44.2% 44.3%
------ ------ ------ ------
Loss and Expense Ratio 98.0% 93.9% 101.9% 105.9%
====== ====== ====== ======
</TABLE>
Loss and LAE ratios, insurance operating expense ratios and combined ratios
were calculated using net earned premiums as a denominator. Theoretically, a
combined loss and expense 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.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Physicians' and PRO's medical professional liability insurance business was
sold to Mutual Assurance Inc. ("Mutual") on August 28, 1995. All new and renewal
MPL insurance policies written between July 16 and December 31, 1995 were 100%
reinsured by Mutual. Physicians and PRO ceased writing new and renewal MPL
insurance policies effective January 1, 1996. Physicians continues
21
<PAGE> 22
to administer and adjust the remaining claims and LAE reserves. Accordingly,
although Physicians and PRO effectively ceased writing MPL insurance in 1995,
MEDICAL PROFESSIONAL LIABILITY INSURANCE is treated as a separate business
segment of continuing operations due to the continued management of claims and
the active management of invested assets.
Physicians' assets are not designated on an individual security basis as
belonging either to the MEDICAL PROFESSIONAL LIABILITY INSURANCE or the
INVESTMENT OPERATIONS business segment. Consequently, Physicians' invested
assets produce income in both the MEDICAL PROFESSIONAL LIABILITY INSURANCE and
INVESTMENT OPERATIONS segments. All of PRO's operating revenues and pre-tax
income are assigned to the MEDICAL PROFESSIONAL LIABILITY INSURANCE segment. All
investment income and realized investment gains generated by Physicians from
assets in excess of those needed to support the MPL claims are allocated to the
Investment Operations segment. SEE NOTE 7, "SEGMENT REPORTING."
Revenues (charges) and pre-tax loss from MEDICAL PROFESSIONAL LIABILITY
INSURANCE operations were as follows for the periods shown:
MEDICAL PROFESSIONAL LIABILITY INSURANCE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(in millions) (in millions)
MPL Revenues (Charges):
Investment Income, Net of Expenses $ 0.6 $ 0.7 $ 1.8 $ 2.1
Premiums -- (0.2)
------ ------ ------ ------
MPL Revenues $ 0.6 $ 0.7 $ 1.8 $ 1.9
====== ====== ====== ======
MPL Loss Before Tax: $ (0.2) $ (0.2) $ (0.9) $ (0.6)
====== ====== ====== ======
</TABLE>
Since the withdrawal of Physicians and PRO from their personal automobile
and homeowners lines of business in the late 1980's, MPL has been these two
companies' only sources of insurance premiums. Investment income revenues will
continue to accrue to the MPL runoff.
MEDICAL PROFESSIONAL LIABILITY INSURANCE revenues were $1.8 million during
the first nine months of 1999, a decrease of $0.1 million from the same 1998
period. Investment income accounted for all of the 1999 revenues, but was
approximately $300,000 or 14% less than during the same 1998 period. For the
1999 third quarter, revenues, which consisted entirely of investment income,
were $600,000, compared to $700,000 during the third quarter of 1998. The 1999
decline in investment income principally is a result of the reduced level of MPL
claims and, correspondingly, the resultant reduced level of invested assets
allocated to the MEDICAL PROFESSIONAL LIABILITY INSURANCE business segment.
MPL operations produced a pre-tax loss of approximately $900,000 during the
first nine months of 1999, compared to a $600,000 loss during the same 1998
period. The 1999 third quarter loss of $200,000 equaled that of the third
quarter of 1998.
Physicians' claims department staff continues to process the runoff of the
remaining MPL loss and loss adjustment expense claims which is progressing
routinely. At September 30, 1999, MPL reserves totaled $50.4 million, net of
reinsurance and discount. This compares to $60.9 million at December 31, 1998.
MPL loss and LAE reserves continue to decline as a result of the disposition of
claims.
MPL INSURANCE -- LOSS AND LAE RESERVES
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
(in millions)
Direct Reserves $ 84.3 $ 97.1
Ceded Reserves (26.9) (27.7)
Discount of Net Reserves (7.0) (8.5)
------ ------
Net MPL Reserves $ 50.4 $ 60.9
====== ======
</TABLE>
22
<PAGE> 23
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 Global Management's (Summit)
investment management operations.
Revenues (charges) and pre-tax losses from other operations are summarized
below:
OTHER OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
(in millions) (in millions)
Revenues (Charges) from Other Operations:
Investment Management Services $ 0.2 $ 0.3 $ 0.6 $ 0.9
Less: Intercompany Portfolio Mgmt. Charges
(0.1) (0.1) (0.3)
Other
-- (0.1) 0.3
------ ------ ------ ------
Revenues from Other Operations $ 0.2 $ 0.2 $ 0.4 $ 0.9
====== ====== ====== ======
------ ------ ------ ------
Other Operations-Loss Before Tax $ (0.2) $ -- $ (0.3) $ --
====== ====== ====== ======
</TABLE>
Revenues from OTHER OPERATIONS for the first nine months of 1999 were
approximately $400,000 compared to $900,000 during the first nine months of
1998. Summit's revenues, after the elimination of intercompany charges, provided
approximately $100,000 of this decline. A decline of $400,000 in revenues from
miscellaneous other sources accounted for the remainder of the total decline in
revenues. The 1998 period included $200,000 in commission income from a now
inactive insurance agency, CLM Insurance Agency, owned by Sequoia and $100,000
in real estate sales by Raven Development Company, a deactivated real estate
development agency owned by Physicians. Third quarter revenues were $200,000 in
1999 and 1998, consisting principally of Summit's investment management services
revenues.
OTHER OPERATIONS recorded approximately $300,000 in losses before taxes for
the first nine months of 1999 compared to no income or loss during the same 1998
period. A $200,000 loss in the third quarter of 1999 compares to a break even in
the third quarter of 1998.
DISCONTINUED OPERATIONS
The Company completed its disposal of all interests in the operations of
American Physicians Life Insurance Company ("APL"), the Company's former life
and health insurance subsidiary on December 4, 1998. During the first nine
months of 1998, discontinued operations reported revenues of $7.3 million and
pre-tax income of approximately $300,000. For the 1998 third quarter, revenues
and pre-tax income were $2.9 million and $100,000, respectively. SEE NOTE 2,
"DISCONTINUED OPERATIONS."
LIQUIDITY AND CAPITAL RESOURCES - NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED
TO SEPTEMBER 30, 1998
Operating activities used $21.8 million of cash during the nine months ended
1999 compared to cash used of $11 million during the same period of 1998. The
increase in cash used by operations was caused primarily by operating expenses,
claims and LAE payments (both property and casualty and MPL) and reductions in
premiums received. Although insurance premiums earned
23
<PAGE> 24
continued to decline slightly in 1999, reinsurance receivables increased $2
million during the first nine months of 1999. This increase primarily resulted
from increases in P&C insurance reinsurance reserves, rather than increases in
reinsurance balances receivable from reinsurers. As loss reserves are paid at
later dates, corresponding reinsurance reserves will be billed and due from
reinsurers at that time. Actual balances due from reinsurers at September 30,
1999 were $317,000 compared to $1.1 million at December 31, 1998. This decrease
resulted from the receipt of reinsurance proceeds, and the payment of claims
during the period that exceeded reinsurance retention limits. All of the
Company's reinsurers are highly rated (at least "A", "Excellent") by A. M. Best
Company, except for one company, which is not rated due to its withdrawal from
the reinsurance business in 1995. PICO has very little business reinsured with
this reinsurer and its balance is current. A. M. Best Company's ratings reflect
A. M. Best Company's assessment of the reinsurer's financial condition, as well
as the expertise and experience of its management.
Cash flow from investing activities used $14.9 million during the first nine
months of 1999 compared to $28.3 million of cash provided during 1998. During
1999, the Company purchased an additional 6.2 million shares of Australian Oil
and Gas for $6.6 million, increasing its ownership to approximately 15.4%. In
addition, 75,300 shares of Jungfraubahn Holding AG were purchased for $11.6
million. This acquisition was financed with $4.5 million in cash and $7.1
million of borrowings denominated in Swiss Francs. On the statement of cash
flows for the nine months ended September 30, 1999, the borrowings translated at
average rates in effect during the period amounted to $7 million. The sale and
maturity of investments provided $23 million during 1999. Cash provided by
investing activities during 1998 primarily included proceeds from the sale of
investments of $21.6 million offset by purchases of investments of $6.8 million.
Financing activities during 1999 provided cash of $2.9 million from the
exercise of 120,000 common stock warrants. In addition cash proceeds from the
warrants $7 million in borrowings were obtained to purchase additional shares of
Jungfraubahn Holding AG. The loans are collateralized by a portion of the shares
held by the bank. The purchase of treasury shares used funds of $292,000 in 1999
and $1.6 million in 1998. There were no other financing activities that provided
or used cash during the same period in 1998.
The inclusion of Conex in the consolidated financial sheets of the Company
at September 30, 1999 has increased bank debt by approximately $21 million due
to the bank borrowings of the joint venture. The debt is collateralized by
various assets of the joint venture including $2 million of restricted cash and
is serviced by the operating cash flows of the joint venture and has no recourse
to PICO.
Vidler is committed to funding its obligation with Semitropic for water
storage. (SEE NOTE 5, "COMMITMENTS AND CONTINGENCIES".). The $2.4 million
payment, due in November is required annually through the year 2008. In
addition, the Company is committed to maintaining Sequoia's capital and
statutory policyholder surplus at a minimum of $7.5 million. At September 30,
1999, Sequoia's statutory policyholder surplus was approximately $26 million.
The Company is also committed to maintaining 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.
At September 30, 1999, the Company had no other significant commitments for
capital expenditures, other than in the ordinary course of business.
CAPITAL RESOURCES
The Company's primary source of funds are its available cash resources of
$44.3 million at September 30, 1999, operating cash flows, liquidation of
non-essential investment holdings, borrowings, public and private debt
offerings, policy premiums and other fees.
THE COMPANY'S STATE OF READINESS FOR THE YEAR 2000
The Company continues to progress in its efforts to define the scope and
magnitude of the Year 2000 ("Y2K") problem and to execute its plans to bring
information technology and non-information technology systems into Y2K
compliance.
The initial phase of planning, inventorying and evaluating all information
technology systems, and non-information technology systems and their components,
for Y2K compliance is complete. The evaluation did not disclose any significant
Y2K processing difficulties or concerns. The focus has primarily been on the
insurance operations of the Company because of the custom applications software
used to process insurance policies, policy claims, and insurance underwriting.
Fortunately, the majority of the non-insurance information and non-information
technology systems are Y2K compliant and do not require any significant
alterations. The focus of remediation is on the insurance specific applications.
24
<PAGE> 25
The second phase of the project, which primarily includes implementing
corrections to remedy Y2K deficiencies, is approximately 95% complete. As noted
above, the insurance systems software has been the primary focus of the efforts.
To bring the insurance systems into Y2K compliance, the Company's internal
information systems staff is re-writing lines of existing code to function with
a four-digit date field. The Company also replaced existing DOS software with a
current Y2K compliant version.
Phase three pertains to testing and validation of each system. As hardware
and software changes are made to the systems, they are tested for compliance.
This phase will continue as each insurance application is reprogrammed. Despite
the best efforts by management, problems will arise requiring the Company to
quickly respond while there is still time. Phase four, when completed, will set
forth contingency plans addressing potential business interruption and failure,
is expected to be finalized during the last quarter of 1999.
THIRD PARTY RELATIONSHIPS
The Company has relationships with several banks and other financial
institutions and service providers that provide business information on a
regular basis. In addition, the Company reports financial results on a regular
basis to state and federal agencies. While these relationships are important to
the Company's business, should any third parties be adversely affected by the
Y2K problem, the resulting risk of business interruption should not be
significant to the Company. The Company, however, has no means of ensuring that
these parties will be Year 2000 ready. The inability of those parties to
complete their Y2K readiness process could materially impact the Company.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The financial impact of making the required systems changes has not been
material, nor is it expected to be material, to the Company's consolidated
financial position, results of operations or cash flows. The Company has
incurred approximately $100,000 for hardware and computer programming. The
Company expects to incur another $10,000 to $20,000 to complete the project.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND CONTINGENCY PLANS
A reasonably, most likely worst case scenario of the Y2K impact would be a
slow down in internal and external reporting, and insurance related processing
of policies, claims and underwriting functions. It is unlikely the Company would
experience any material business cessation or significant business disruption.
The Company is completing its specific plans to continue operations in case
of unexpected delays in completing remediation or if Y2K problems impact the
Company in unforeseen ways. It appears many business systems could function
manually for a limited amount of time. The Company anticipates completing its
contingency plan during the last half of 1999. Overall, the Company has
completed the significant aspects of its plan to prepare for Y2K.
Pursuant to the "Year 2000 Information and Readiness Disclosure Act," the
foregoing discussion initially made on September 30, 1998 is designated a Year
2000 readiness disclosure.
RISK FACTORS
In addition to the other information in this Form 10-Q, the following risk
factors should be considered carefully in evaluating PICO and our business. This
Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The statements contained in this Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Exchange Act, including statements regarding our expectations, beliefs,
intentions, plans or strategies regarding the future. All forward looking
statements included in this document are based on information available to us on
the date thereof, and we assume no obligation to update any such forward-looking
statements.
IF WE DO NOT SUCCESSFULLY LOCATE, SELECT AND MANAGE INVESTMENTS AND ACQUISITIONS
OR IF OUR INVESTMENTS OR ACQUISITIONS OTHERWISE FAIL OR DECLINE IN VALUE, OUR
FINANCIAL CONDITION COULD SUFFER
We invest in businesses that we believe are undervalued or that will benefit
from additional capital, restructuring of operations or improved competitiveness
through operational efficiencies.
25
<PAGE> 26
Failures and/or declines in the market values of businesses we invest in or
acquire, as well as our failure to successfully locate, select and manage
investment and acquisition opportunities, could have a material adverse effect
on our business, financial condition, results of operations and cash flows. Such
business failures, declines in market values, and/or failure to successfully
locate, select and manage investments and acquisitions could result in inferior
investment returns compared to those which may have been attained had we
successfully located, selected and managed new investments and acquisition
opportunities, or had our investments or acquisitions not failed or declined in
value. We could also lose part or all of our investments in these businesses and
experience reductions in our net income, cash flows, assets and shareholders'
equity.
We will continue to make selective investments, and endeavor to enhance and
realize additional value to these acquired companies through our influence and
control. This could involve the restructuring of the financing or management of
the entities in which we invest and initiating and facilitating mergers and
acquisitions. Any acquisition could result in the use of a significant portion
of our available cash, significant dilution to you, and significant acquisition
related charges. Acquisitions may also result in the assumption of liabilities,
including liabilities that are unknown or not fully known at the time of the
acquisition, which could have a material adverse effect on us.
We do not know of any reliable statistical data that would enable us to
predict the probability of success or failure of our investments or to predict
the availability of suitable investments at the time we have available cash. You
will be relying on the experience and judgment of management to locate, select
and develop new acquisition and investment opportunities. Sufficient
opportunities may not be found and this business strategy may not be successful.
We reported net realized investment gains in 1997 of $27.1 million and in 1996
of $21.4 million; however, we reported a net realized investment loss of $4.4
million for 1998. Our financial statements indicate net unrealized investment
gains, before taxes, of $16.8 million at December 31, 1996, as adjusted, $6.6
million at December 31, 1997, as adjusted, and net unrealized investment losses
of $4.9 million at December 31, 1998, as adjusted.
Our ability to achieve an acceptable rate of return on any particular
investment is subject to a number of factors which are beyond our 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.
Our investments may not achieve acceptable rates of return and we may not
realize the value of the funds invested; accordingly, these investments may have
to be written down or sold at their then-prevailing market values.
We may not be able to sell our investments in both private and public
companies when it appears to be advantageous to do so and we may have to sell
these investments 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 our ability to
dispose of an investment in a public company.
To successfully manage newly acquired companies, we must, among other
things, continue to attract and retain key management and other personnel. The
diversion of the attention of management from the day-to-day operations, or
difficulties encountered in the integration process, could have a material
adverse effect on our business, financial condition, results of operations and
cash flows.
WE MAY MAKE INVESTMENTS AND ACQUISITIONS THAT MAY YIELD LOW OR NEGATIVE RETURNS
FOR AN EXTENDED PERIOD OF TIME, WHICH COULD TEMPORARILY OR PERMANENTLY DEPRESS
OUR RETURN ON INVESTMENTS
We generally make strategic investments and acquisitions that tend to be
long term in nature. We invest in businesses that we believe to be undervalued
or may benefit from additional capital, restructuring of operations or
management or improved competitiveness through operational efficiencies with our
existing operations. We may not be able to develop acceptable revenue streams
and investment returns. We may lose part or all of our investment in these
assets. The negative impacts on cash flows, income, assets and shareholders'
equity may be temporary or permanent. We make investments for the purpose of
enhancing and realizing additional value by means of appropriate levels of
shareholder influence and control. This may involve restructuring of the
financing or management of the entities in which we invest and initiating or
facilitating mergers and acquisitions. These processes can consume considerable
amounts of time and resources. Consequently, costs incurred as a result of these
investments and acquisitions may exceed their revenues and/or increases in their
values for an extended period of time until we are able to develop the potential
of these investments and acquisitions and increase the revenues, profits and/or
values of these investments. Ultimately,
26
<PAGE> 27
however, we may not be able to develop the potential of these assets that we
anticipated.
IF MEDICAL MALPRACTICE INSURANCE CLAIMS TURN OUT TO BE GREATER THAN THE RESERVES
WE ESTABLISH TO PAY THEM, WE MAY NEED TO LIQUIDATE CERTAIN INVESTMENTS IN ORDER
TO SATISFY OUR RESERVE REQUIREMENTS
Under the terms of our medical malpractice liability policies, there is 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 a person
must make a claim within four years; however, the courts have determined that
the period may be longer in situations where the insured 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 medical
malpractice liability policy period.
Physicians Insurance Company of Ohio and The Professionals Insurance Company
have established reserves to cover losses on claims incurred under the medical
malpractice liability policies including not only those claims reported to date,
but also those that may have been incurred but not yet reported. The reserves
for losses are estimates based on various assumptions and, in accordance with
Ohio law, have been discounted 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 Insurance Company
of Ohio and The Professionals Insurance Company annually obtain a certification
from an independent actuary that their respective reserves for losses are
adequate. They also obtain a concurring actuarial opinion. Due to the inherent
uncertainties in the reserving process, there is a risk that Physicians
Insurance Company of Ohio's and The Professionals Insurance Company's reserves
for losses could prove to be inadequate. This could result in a decrease in
income and shareholders' equity. If we underestimate our reserves, they could
reach levels which are lower than required by law.
Reserves are money that we set aside to pay insurance claims. We strive to
establish a balance between maintaining adequate reserves to pay claims while at
the same time using our cash resources to invest in new companies.
IF WE UNDERESTIMATE THE AMOUNT OF INSURANCE CLAIMS, OUR FINANCIAL CONDITION
COULD BE MATERIALLY MISSTATED AND OUR FINANCIAL CONDITION COULD SUFFER
Our insurance subsidiaries may not have established reserves adequate to
meet the ultimate cost of losses arising from claims. It has been, and will
continue to be, necessary for our insurance subsidiaries to review and make
appropriate adjustments to reserves for claims and expenses for settling claims.
Inadequate reserves could have a material adverse effect on our business,
financial condition, results of operations and cash flows. Inadequate reserves
could cause our financial condition to fluctuate from period to period and cause
our financial condition to appear to be better than it actually is for periods
in which insurance claims reserves are understated. In subsequent periods when
we discover the underestimation and pay the additional claims, our cash needs
will be greater than expected and our financial results of operations for that
period will be worse than they would have been had our reserves been accurately
estimated originally.
The inherent uncertainties in estimating loss reserves are greater for some
insurance products than for others, and are dependent on:
- - the length of time in reporting claims;
- - the diversity of historical losses among 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.
Because medical malpractice liability and commercial casualty claims may not
be completely paid off for several years, estimating reserves for these types of
claims can be more uncertain than estimating reserves for other types of
insurance. As a result, precise reserve estimates cannot be made for several
years following the year for which reserves were initially established.
During the past several years, the levels of the reserves for our insurance
subsidiaries have been very volatile. As a result of our claims experience, we
have had to significantly increase these reserves in the past several years.
Significant increases in the reserves may be necessary in the future, and
the level of reserves for our insurance subsidiaries may be volatile in the
future. These increases or volatility may have an adverse effect on our
business, financial condition, results of operations and cash flows.
27
<PAGE> 28
THERE HAS BEEN A DOWNTURN IN THE PROPERTY & CASUALTY INSURANCE BUSINESS WHICH,
IN THE SHORT TERM, HINDERS OUR ABILITY TO PROFIT FROM THIS INDUSTRY
The property and casualty insurance industry has been highly cyclical, and
the industry has been in a cyclical downturn over the last several years. This
is due primarily to competitive pressures on pricing, which has resulted in
lower profitability for us. Pricing is a function of many factors, including the
capacity of the property and casualty industry as a whole to underwrite
business, create policyholders' surplus and generate positive returns on their
investment portfolios. The level of surplus in the industry varies with returns
on invested capital and regulatory barriers to withdrawal of surplus. Price
competition among property and casualty insurers is influenced by many factors,
including returns on investment portfolios and the relationship between the
industry's premium volume and policyholder's surplus.
The cyclical trends in the industry and the industry's profitability can
also be affected by volatile and unpredictable developments, including natural
disasters, fluctuations in interest rates, and other changes in the investment
environment which affect market prices of investments and the income generated
from those investments. Inflationary pressures affect the size of losses and
court decisions affect insurers' liabilities. These trends may adversely affect
our business, financial condition, results of operations and cash flows by
reducing revenues and profit margins, by increasing ratios of claims and
expenses to premiums, and by decreasing cash receipts. Capital invested in our
insurance companies may produce inferior investment returns during periods of
downturns in the insurance cycle due to reduced profitability.
STATE REGULATORS COULD REQUIRE CHANGES TO THE OPERATIONS OF OUR INSURANCE
SUBSIDIARIES AND/OR TAKE THEM OVER IF WE FAIL TO MAINTAIN ADEQUATE RESERVE
LEVELS
In the past few years, the National Association of Insurance Commissioners
has developed risk-based capital measurements for both property and casualty and
life and health insurers. These measurements prescribe the reserve levels that
insurance companies must maintain. The Commissioners have delegated to the state
regulators varying levels of authority based on the adequacy of an insurer's
reserves. The insurance companies' reserve levels are reported annually in their
statutory annual statements to the insurance departments.
Failure to meet one or more reserve levels may result in state regulators
requiring the insurance company to submit a business plan demonstrating
achievement of the required reserve levels. This may include the addition of
capital, a restructuring of assets and liabilities, or changes in operations. At
or below certain lower reserve levels, state regulators may supervise the
operation of the insurance company and/or require the liquidation of the
insurance company. Such insurance department actions could adversely affect our
business, financial condition, results of operations and cash flows and decrease
the value of our investments in our insurance subsidiaries. If the insurance
departments were to require changes in the operations of our insurance
subsidiaries, we may incur additional expenses and we may lose customers. If the
insurance departments were to require additional capital in our insurance
subsidiaries or a restructuring of our assets and liabilities, our investment
returns could suffer. If the insurance departments were to place our insurance
companies under their supervision, we would lose customers, our revenues may
decrease more rapidly than our expenses, and our investment returns would
suffer. We may even lose part or all of our investments in our insurance
subsidiaries if our insurance subsidiaries are liquidated by the insurance
departments.
WE MAY BE INADEQUATELY PROTECTED AGAINST MAN MADE AND NATURAL CATASTROPHES,
WHICH COULD REDUCE THE AMOUNT OF CAPITAL SURPLUS AVAILABLE FOR INVESTMENT
OPPORTUNITIES
As with other property and casualty insurers, 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. Our insurance subsidiaries generally seek to reduce their
exposure to catastrophic events through individual risk selection and the
purchase of reinsurance. Our insurance subsidiaries' 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 created by that event. While our
insurance subsidiaries attempt to limit their exposure to acceptable levels, it
is possible that an actual catastrophic event or multiple catastrophic events
could significantly exceed the maximum loss anticipated, resulting in a material
adverse effect on our business, financial condition, results of operations and
cash flows. Such events could cause unexpected insurance claims and expenses for
settling claims well in excess of premiums, increasing cash needs, reducing
surplus and reducing assets available for investments. Capital invested in our
insurance companies may produce inferior investment returns as a result of these
additional funding requirements.
We insure ourselves against catastrophic losses by obtaining insurance
through other insurance companies known as reinsurers. The future financial
results of our insurance subsidiaries could be adversely affected by disputes
with their reinsurers with respect to coverage and by the solvency of the
reinsurers.
28
<PAGE> 29
OUR INSURANCE SUBSIDIARIES COULD BE DOWNGRADED WHICH WOULD NEGATIVELY IMPACT OUR
BUSINESS
Our insurance subsidiaries' ratings may not be maintained or increased, and
a downgrade would likely adversely affect our business, financial condition,
results of operations and cash flows. A.M. Best and Company's ("A.M. Best")
ratings reflect the assessment of A.M. Best of an insurer's financial condition,
as well as the expertise and experience of its management. Therefore, A.M. Best
ratings are important to policyholders. A.M. Best ratings are subject to review
and change overtime. Failure to maintain or improve our A.M. Best ratings could
have a material adverse effect on the ability of our insurance subsidiaries 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 an A.M. Best rating of
less than B+, and that customers who do so will demand lower rates.
Our insurance subsidiaries are currently rated as follows:
- - Sequoia Insurance Company B++ (Very Good)
- - Citation Insurance Company B+ (Very Good)
- - Physicians Insurance Company of Ohio NR-3 (rating procedure inapplicable)
- - The Professionals Insurance Company NR-3 (rating procedure inapplicable)
POLICY HOLDERS MAY NOT RENEW THEIR POLICIES, WHICH WOULD UNEXPECTEDLY REDUCE OUR
REVENUE STREAM
Insurance policy renewals have historically accounted for a significant
portion of our net revenue. We may not be able to sustain historic renewal rates
for our products in the future. A decrease in renewal rates would reduce our
revenues. It would also decrease our cash receipts and the amount of funds
available for investments and acquisitions. If we were not able to reduce
overhead expenses correspondingly, this would adversely affect our business,
financial condition, results of operations and cash flows.
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, THEN WE WILL BE SUBJECT
TO A SIGNIFICANT REGULATORY BURDEN
We at all times intend to conduct our business so as to avoid being
regulated as an investment company under the Investment Company Act of 1940.
However, if we were required to register as an investment company, our ability
to use debt would be substantially reduced, and we would be subject to
significant additional disclosure obligations and restrictions on our
operational activities. Because of the additional requirements imposed on an
investment company with regard to the distribution of earnings, operational
activities and the use of debt, in addition to increased expenditures due to
additional reporting responsibilities, our cash available for investments would
be reduced. The additional expenses would reduce income. These factors would
adversely affect our business, financial condition, results of operations and
cash flows.
SUBSTANTIAL REGULATION MAY PREVENT US FROM REALIZING A PROFIT FROM OUR WATER
RIGHTS
The water rights held by us 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, California, 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 anticipated 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 the sale or transfer of some of these water rights,
which in turn may affect their commercial value. If we were unable to transfer
or sell our water rights, we will not be able to make a profit, we will not have
enough cash receipts to cover cash needs, and we may lose some or all of our
value in our water rights investments.
WE ARE DIRECTLY IMPACTED BY INTERNATIONAL AFFAIRS, WHICH DIRECTLY EXPOSES US TO
THE ADVERSE EFFECTS OF ANY FOREIGN ECONOMIC OR GOVERNMENTAL INSTABILITY
As a result of global investment diversification, our business, financial
condition, results of operations and cash flows may be adversely affected by:
- - exposure to fluctuations in exchange rates;
- - the imposition of governmental controls;
29
<PAGE> 30
- - the need to comply with a wide variety of foreign and U.S. export laws;
- - political and economic instability;
- - trade restrictions;
- - changes in tariffs and taxes;
- - volatile interest rates;
- - changes in certain commodity prices;
- - exchange controls which may limit our ability to withdraw money;
- - the greater difficulty of administering business overseas; and
- - general economic conditions outside the United States.
Changes in any or all of these factors could result in reduced market values
of investments, loss of assets, additional expenses, reduced investment income,
reductions in shareholders' equity due to foreign currency fluctuations and a
reduction in our global diversification.
OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES
The trading price of our 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;
- - our competitors' announcements of extraordinary events; such as
- - acquisitions;
- - litigation; and
- - general economic conditions.
Our results of operations have been subject to significant fluctuations,
particularly on a quarterly basis, and our future results of operations could
fluctuate significantly from quarter to quarter and from year to year. Causes of
such fluctuations may include the inclusion or exclusion of operating earnings
from newly acquired or sold operations. At December 31, 1996, the closing price
of our common stock on the Nasdaq National Market was $20.63 per share, compared
to $13.25 at December 31, 1998. On a quarterly basis between these two dates,
closing prices have ranged from a high of $32.19 at December 31, 1997 to a low
of $13.25 at December 31, 1998. From January 1 through November 12, 1999,
closing prices have ranged from a low of $13.00 per share on January 4 to a high
of $25.31 on June 30.
Statements or changes in opinions, ratings, or earnings estimates made by
brokerage firms or industry analysts relating to the markets in which we do
business or relating to us specifically could result in an immediate and adverse
effect on the market price of our common stock.
WE MAY NOT BE ABLE TO RETAIN KEY MANAGEMENT PERSONNEL WE NEED TO SUCCEED, WHICH
COULD ADVERSELY AFFECT OURS ABILITY TO MAKE SOUND INVESTMENT DECISIONS
We have several key executive officers. If they depart, it could have a
significant adverse effect. In particular, Ronald Langley, our Chairman, and
John R. Hart, our President and Chief Executive Officer, play key roles in
investment decisions. Messrs. Langley and Hart have entered into employment
agreements with us dated as of December 31, 1997, for a period of four years.
Messrs. Langley and Hart are key to the implementation of our strategic focus,
and our ability to successfully develop our current strategy is dependent upon
our ability to retain the services of Messrs. Langley and Hart.
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER, PREVENTING YOU FROM RECEIVING A
PREMIUM ON YOUR SHARES
The Board of Directors has authority to issue up to 2 million shares of
preferred stock and to fix the rights, preference, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the shareholders. Your rights as common stock holders will be subject to, and
may be adversely affected by, the rights of the holders of the preferred stock.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock, thereby delaying, deferring
30
<PAGE> 31
or preventing a change in control of PICO. Furthermore, such preferred stock may
have other rights, including economic rights senior to the common stock, and, as
a result, the issuance thereof could have a material adverse effect on the
market value of the common stock.
WE ARE SUBJECT TO YEAR 2000 RISKS FOR WHICH WE MAY NOT BE PREPARED, WHICH COULD
CREATE INTERNAL ADMINISTRATIVE PROBLEMS REQUIRING COSTLY, INEFFICIENT REMEDIAL
MEASURES
Many currently installed computer systems and software products are not
capable of distinguishing 20th century dates from 21st century dates. As a
result, in less than one year, computer systems and/or software used by many
companies in a very wide variety of applications may experience operating
difficulties unless they are modified or upgraded to adequately process
information involving, related to or dependent upon the century change.
Significant uncertainty exists in the software and information services
industries concerning the scope and magnitude of problems associated with the
century change. In light of the potentially broad effects of the year 2000 on a
wide range of business systems, we may be affected.
We continue to progress in our efforts to define the scope and magnitude of
the Year 2000 ("Y2K") problem and to execute our plans to ensure information
technology and non-information technology systems are Y2K compliant.
The initial phase of planning, inventorying and evaluating all information
technology systems, and non-information technology systems and their components,
for Y2K compliance is complete. The evaluation has not disclosed any significant
Y2K processing difficulties or concerns. The focus has primarily been on the
insurance operations of Vista because of the custom applications software used
to process insurance policies, policy claims, and insurance underwriting.
Fortunately, the majority of the non-insurance information and non-information
technology systems are deemed Y2K compliant and do not require any significant
alterations. The focus of remediation is on the insurance specific applications.
The second phase of the project, which primarily includes implementing
corrections to remedy Y2K deficiencies, is approximately complete. As noted
above, the insurance systems software has been the primary focus of the efforts.
To renovate the insurance systems to a Y2K ready state, our internal information
systems staff is re-writing lines of existing code to function with a four-digit
date field. We have also replaced existing DOS software with a current Y2K
compliant version.
Phase three pertains to testing and validation of each system. As hardware
and software changes are made to the systems, they are tested for compliance.
This phase will continue as each insurance application is reprogrammed. Despite
the best efforts by management, problems will arise requiring us to quickly
respond while there is still time. Phase four, when completed, will set forth
contingency plans addressing potential business interruption and failure, is
expected to be finalized during the last quarter of 1999.
We have relationships with several banks and other financial institutions
and service providers that provide business information to us on a regular
basis. In addition, we report financial results on a regular basis to state and
federal agencies. While these relationships are important to our business,
should any third party be adversely affected by the Y2K problem, the resulting
risk of business interruption should not be significant to us. However, the
inability of those parties to complete their Y2K readiness process could
materially impact us in a manner that we have not foreseen.
The likely worst case scenario is a partial failure of some accounting and
reporting functions that could be corrected by manually recording and delivering
the required information.
THE FOREGOING FACTORS, INDIVIDUALLY OR IN THE AGGREGATE, COULD MATERIALLY
ADVERSELY AFFECT OUR OPERATING RESULTS AND COULD MAKE COMPARISON OF HISTORIC
OPERATING RESULTS AND BALANCES DIFFICULT OR NOT MEANINGFUL RISK FACTORS
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's balance sheets include a significant amount of assets and
liabilities whose fair value are subject to market risk. Market risk is the risk
of loss arising from adverse changes in market interest rates or prices. The
Company currently has interest rate risk as it relates to its fixed maturity
securities and mortgage loans, equity price risk as it relates to its marketable
equity securities, and foreign currency risk as it relates to investments
denominated in foreign currencies. The Company's bank debt is short-term in
nature as the Company generally secures rates for periods of approximately one
to three years and therefore approximates fair value.
31
<PAGE> 32
At September 30, 1999, the Company had $49.1 million of fixed maturity
securities and mortgage loans, $83.8 million of marketable equity securities
that were subject to market risk, and $34.6 million of investments denominated
in foreign currencies, primarily Swiss francs. The Company's investment strategy
is to manage the duration of the portfolio relative to the duration of the
liabilities while managing interest rate risk.
The Company uses two models to analyze the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities, and
mortgage loans, the Company uses duration modeling to calculate changes in fair
value. For its marketable securities the Company uses a hypothetical 20%
decrease in the fair value to analyze the sensitivity of its market risk assets
and liabilities. For investments denominated in foreign currencies the Company
uses a hypothetical 20% decrease in the local currency of that investment.
Actual results may differ from the hypothetical results assumed in this
disclosure due to possible actions taken by management to mitigate adverse
changes in fair value and because the fair value of a securities may be affected
by credit concerns of the issuer, prepayment rates, liquidity, and other general
market conditions. The sensitivity analysis duration model produced a loss in
fair value of $300,000 for a 100 basis point decline in interest rates on its
fixed securities and mortgage loans. The hypothetical 20% decrease in fair value
of the Company's marketable equity securities produced a loss in fair value of
$6 million that would impact the unrealized appreciation in shareholders'
equity. The hypothetical 20% decrease in the local currency of the Company's
foreign denominated investments produced a loss of $5.5 million that would
impact the unrealized appreciation and foreign currency translation in
shareholders' equity.
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:
None.
32
<PAGE> 33
PICO HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PICO HOLDINGS, INC.
Dated: November 15, 1999 By: /s/ Gary W. Burchfield
-----------------------------------
Gary W. Burchfield
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
33
<PAGE> 34
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 By-laws of PICO.
* 10.8 Flexible Benefit Plan
-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.
27. 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).
+ 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).
34
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME OF PICO
HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 49,058
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 83,844
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 148,680
<CASH> 44,262
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 4,932
<TOTAL-ASSETS> 449,565
<POLICY-LOSSES> 144,668
<UNEARNED-PREMIUMS> 17,557
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 13
<OTHER-SE> 192,678
<TOTAL-LIABILITY-AND-EQUITY> 449,565
25,350
<INVESTMENT-INCOME> 5,377
<INVESTMENT-GAINS> 3,588
<OTHER-INCOME> 3,549
<BENEFITS> 18,364
<UNDERWRITING-AMORTIZATION> 8,316
<UNDERWRITING-OTHER> 15,396
<INCOME-PRETAX> (4,114)
<INCOME-TAX> (8,000)
<INCOME-CONTINUING> 3,887
<DISCONTINUED> 0
<EXTRAORDINARY> 442
<CHANGES> 0
<NET-INCOME> 4,329
<EPS-BASIC> 0.48
<EPS-DILUTED> 0.46
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
