<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, 2000
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
--- ---
On September 30, 2000, the Registrant had 12,390,096 shares of Common Stock,
$0.001 par value, outstanding, excluding 4,394,127 shares of common stock held
by the registrant and its subsidiaries.
<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, 2000 and December 31, 1999
Consolidated Statements of Operations for the Three 4
and Nine Months Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows for 5
the Nine Months Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements 6
Item 2: Management's Discussion and Analysis of Financial 10
Condition and the Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk 30
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 30
Item 6: Exhibits and Reports on Form 8-K 30
Signature 31
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
<TABLE>
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Investments $153,534,024 $139,211,224
Cash and cash equivalents 37,734,626 36,738,373
Accrued investment income 1,715,398 1,236,919
Premiums and other receivables, net 15,868,134 12,030,709
Reinsurance receivables 39,592,097 45,040,368
Prepaid deposits and reinsurance premiums 1,307,442
Deferred policy acquisition costs 5,839,884 4,821,228
Land, mineral and water rights and water storage 131,219,106 123,671,842
Property and equipment, net 1,528,310 1,752,820
Income taxes receivable 1,708,896 2,196,290
Net deferred income taxes 5,989,103 3,648,577
Other assets 7,940,454 8,048,698
------------ ------------
Total assets $402,670,032 $379,704,490
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses, net of discount $129,525,313 $139,132,875
Unearned premiums 23,380,656 17,204,690
Reinsurance balance payable 6,496,551 7,712,602
Deferred gain on retroactive reinsurance 1,236,525 1,236,525
Other liabilities 13,768,430 16,879,994
Bank and other borrowings 15,254,742 15,704,507
Taxes Payable 4,857,297
Excess of fair value of net assets acquired over purchase price, net 3,502,577 3,928,566
------------ ------------
Total liabilities 193,164,794 206,657,056
------------ ------------
Commitments and Contingencies (Note 4)
Preferred stock, $.01 par value, authorized 2,000,000 shares, none issued
Common stock, $.001 par value; authorized 100,000,000 shares,
issued 16,784,223 in 2000 and 13,448,533 in 1999 16,784 13,449
Additional paid-in capital 235,835,334 186,004,827
Retained earnings 61,926,194 69,075,620
Accumulated other comprehensive loss (10,443,439) (4,216,827)
Treasury stock, at cost (4,394,127 common shares in 2000 and 1999) (77,829,635) (77,829,635)
------------ ------------
Total shareholders' equity 209,505,238 173,047,434
------------ ------------
Total liabilities and shareholders' equity $402,670,032 $379,704,490
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE> 4
<TABLE>
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Premium income $ 8,272,417 $ 8,267,910 $23,464,106 $25,349,818
Net investment income 2,498,325 2,204,200 5,999,480 5,158,895
Net realized gain (loss) on investments (7,087,578) 816,802 (7,587,928) 3,588,382
Other income 1,256,446 2,804,759 4,187,146 4,816,649
----------- ----------- ----------- -----------
Total revenues 4,939,610 14,093,671 26,062,804 38,913,744
----------- ----------- ----------- -----------
Expenses:
Loss and loss adjustment expenses 6,416,453 6,272,833 18,307,153 18,364,435
Insurance underwriting and other expenses 8,035,208 9,900,511 24,714,613 23,365,258
----------- ----------- ----------- -----------
Total expenses 14,451,661 16,173,344 43,021,766 41,729,693
----------- ----------- ----------- -----------
Equity in income of unconsolidated affiliates 1,836,508 476,443 2,220,273 114,488
----------- ----------- ----------- -----------
Loss before income taxes and minority interest (7,675,543) (1,603,230) 14,738,689) (2,701,461)
Benefit for federal, foreign and state income taxes (4,664,201) (1,266,608) (7,171,488) (7,562,700)
----------- ----------- ----------- -----------
Income (loss) before minority interest (3,011,342) (336,622) (7,567,201) 4,861,239
Minority interest in (income) loss of subsidiaries (97,150) 105,657 417,775 105,657
----------- ----------- ----------- -----------
Income (loss) before extraordinary gain (3,108,492) (230,965) (7,149,426) 4,966,896
Extraordinary gain, net of income tax expense of $227,821 442,240
----------- ----------- ----------- -----------
Net income (loss) $(3,108,492) $ (230,965) $(7,149,426) $ 5,409,136
=========== =========== =========== ===========
Net income (loss) per common share - basic:
Income (loss) from operations (0.25) $ (0.03) $ (0.63) $ 0.55
Extraordinary gain 0.05
----------- ----------- ----------- -----------
Net income (loss) per common share $ (0.25) $ (0.03) $ (0.63) $ 0.60
----------- ----------- ----------- -----------
Weighted average shares outstanding 12,390,096 9,054,413 11,330,911 9,012,879
=========== =========== =========== ===========
Net income (loss) per common share - diluted:
Income (loss) from operations $ (0.25) $ (0.03) $ (0.63) $ 0.52
Extraordinary gain 0.05
----------- ----------- ----------- -----------
Net income (loss) per common share $ (0.25) $ (0.03) $ (0.63) $ 0.57
----------- ----------- ----------- -----------
Weighted average shares outstanding 12,390,096 9,054,413 11,330,911 9,513,920
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE> 5
<TABLE>
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended September 30,
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used in operating activities $ (4,801,996) $(21,846,161)
------------ ------------
INVESTING ACTIVITIES:
Purchases of investments (41,725,339) (38,048,988)
Proceeds from sale of investments 7,470,282 20,703,647
Proceeds from maturity of investments 4,500,000 2,315,669
Advances to affiliate (500,000) (672,082)
Purchases of surface, water and mineral rights (13,156,503) (1,804,966)
Purchases of property and equipment (420,701) (145,537)
Other investing activities, net (188,229) 72,424
------------ ------------
Net cash used in investing activities (44,020,490) (17,579,833)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from rights offering, net of
costs of $197,000 49,833,842
Repayments of debt (449,765)
Purchase of treasury stock (291,593)
Proceeds from borrowings 7,020,380
Proceeds from the exercise of warrants 2,850,359
------------ ------------
Net cash provided by financing activities 49,384,077 9,579,146
------------ ------------
Effect of exchange rate changes on cash 434,662 (273,002)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 996,253 (30,119,850)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 36,738,373 71,654,196
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 37,734,626 $ 41,534,346
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 692,000 $ 241,000
============ ============
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
(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 accounting principles generally accepted in the United
States of America for complete financial statements.
In the opinion of management, all adjustments considered
necessary for a fair and comparable presentation of financial position
as of September 30, 2000 and December 31, 1999 and the results of
operations for the three and nine months ended September 30, 2000 and
1999, and cash flows for the nine months ended September 30, 2000 and
1999 have been included and are only of a normal recurring nature.
Certain reclassifications have been made to conform the 1999
presentation to the 2000 presentation. Operating results for the three
and nine months ended September 30, 2000 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2000.
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
the Results of Operations and Risks and Uncertainties contained in the
Company's Annual Reports on Form 10-K for the year ended December 31,
1999 as filed with the SEC.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America 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, 2000 and December 31, 1999, it is reasonably possible
that actual results could differ from the estimates upon which the
carrying values were based.
2. EARNINGS (LOSS) PER SHARE
The Company applies the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
earnings or loss per share is based on the actual weighted average
common shares outstanding during the period. Diluted earnings or loss
per share is similar to basic earnings per share, except the weighted
shares outstanding includes the dilutive effect of the Company's stock
options and warrants. Such securities are dilutive if the strike price
is less than the average market price of the Company's stock during the
period and the Company has earnings for the period. In computing
earnings per share all antidilutive securities are ignored. For the
three and nine months ended September 30, 2000, approximately 1.8
million and 1.2 million options were excluded, respectively. For the
three months and nine months ended September 30, 1999, approximately 1
million options and 500,000 options were excluded from the computation,
respectively. The following is a reconciliation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $(3,108,492) $ (230,965) $(7,149,426) $5,409,136
=========== ========== =========== ==========
Basic earnings (loss) per share $ (0.25) $ (0.03) $ (0.63) $ 0.60
=========== ========== =========== ==========
Basic weighted average common shares outstanding 12,390,096 9,054,413 11,330,911 9,012,879
Options 501,041
----------- ---------- ----------- ----------
Diluted weighted average common and
common equivalent shares outstanding 12,390,096 9,054,413 11,330,911 9,513,920
=========== ========== =========== ==========
Diluted earnings (loss) per share $ (0.25) $ (0.03) $ (0.63) $ 0.57
=========== ========== =========== ==========
</TABLE>
6
<PAGE> 7
On June 30, 1999, 119,763 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.
3. COMPREHENSIVE INCOME (LOSS)
The Company applies the provisions of SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income for the Company includes
foreign currency translation and unrealized holding gains and losses on
available for sale securities.
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net income (loss) $(3,108,492) $ (230,965) $ (7,149,426) $ 5,409,136
Net change in unrealized appreciation
(depreciation) on available for sale investments (1,052,862) 1,047,356 (5,516,665) 12,893,321
Net change in foreign currency translation 244,449 779,883 (709,947) 350,377
----------- ---------- ------------ -----------
Total comprehensive income (loss) $(3,916,905) $1,596,274 $(13,376,038) $18,652,834
=========== ========== ============ ===========
</TABLE>
Total comprehensive income (loss) is net of deferred income
tax asset of $660,000 and $1.9 million for the three and nine months
ended September 30, 2000, respectively. For the three and nine months
ended September 30, 1999, total comprehensive income (loss) is net of a
deferred income tax liability of $8.5 million and a $5.6 million,
respectively.
The components of accumulated other comprehensive loss are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ -----------
<S> <C> <C>
Unrealized appreciation (depreciation) on
on available for sale investments $ (4,941,639) $ 575,026
Foreign currency translation (5,501,800) (4,791,853)
------------ -----------
Accumulated other comprehensive loss $(10,443,439) $(4,216,827)
============ ===========
</TABLE>
Accumulated other comprehensive loss is net of deferred income
tax asset of $1.4 million at September 30, 2000 and a deferred income
tax liability of $523,000 at December 31, 1999.
4. COMMITMENTS AND CONTINGENCIES
In November 1998, 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. For these privileges and
rights, the agreement requires Vidler to pay a minimum of $2.3 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.
On January 10, 1997, Global Equity 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 Global Equity 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. Global Equity subsequently
brought a motion to have a receiver-manager appointed for MKG and
Vignoble, which motion has been adjourned. In addition, in March 1999
Global Equity 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.
7
<PAGE> 8
Accordingly, under this action Global Equity is claiming damages from
the third party and restraining the third party from further action.
As of September 30, 2000, Global Equity is in the process of
negotiating a final settlement. The proposed settlement provides for
the repayment of approximately $500,000. Consequently, during the
quarter, the Company wrote the investment down to $500,000, recording a
loss before income tax of $2.5 million.
Under the terms of a joint venture agreement between Conex and
a sino-foreign joint venture in The People's Republic of China, Conex
has a commitment to fund a third tranche of financing in the amount of
$5 million. The liability is recorded in Conex's financial statements.
During the first quarter of 2000, Conex funded $500,000 of this
commitment bringing the balance outstanding to $4.5 million. On
September 8, 2000, PICO sold its interest in Conex realizing a loss
before income tax of $4.6 million. Consequently, this liability is no
longer recorded in PICO's consolidated financial statements.
BSND, Inc. ("BSND"), a wholly owned subsidiary of Vidler
Water Company, has resolved a partnership dispute relating to Big
Springs Associates, a partnership which owns real property and water
rights in Nevada (the "Partnership"). BSND owns 50% of the
Partnership. Under the terms of an agreement resolving the dispute,
BSND agreed to sell its interest in the Partnership to the other
partner for $12.65 million cash, a gain to Vidler of approximately
$2.0 million. If the transaction has not closed by August 1, 2001,
BSND will own the Partnership in its entirety.
The Company is subject to various other litigation that arises
in the ordinary course of its business. Based upon information
presently available, management is of the opinion that such litigation
will not have a material adverse effect on the consolidated financial
position, the results of operations or cash flows of the Company.
5. RECORDING INVESTMENT IN JUNGFRAUBAHN HOLDINGS AG USING EQUITY
ACCOUNTING
Having recently obtained a seat on the Board of Directors, and
based on the Company's 19.3% voting ownership of Jungfraubahn (112,672
shares), the Company has adopted the equity method of accounting for
this investment, commencing in the third quarter. Previously the
Company recorded the investment at market value under SFAS 115. The
application of equity accounting requires the investment account,
results of operations, retained earnings, unrealized gain/loss, and
accumulated foreign currency to be adjusted retroactively to report the
investment on the equity method for the percentage owned, for all
periods presented. The difference between the cost of the investment
and underlying equity in the net assets of the company of approximately
$18 million was considered negative goodwill and was allocated to the
non-current assets of Jungfraubahn. Under the equity method of
accounting, the carrying value of the Company's investment in
Jungfraubahn was $23.4 million as of September 30, 2000. The market
value of the investment at September 30, 2000 was approximately $19
million. The earnings contribution recorded using equity accounting is
included in the Statement of Operations under Equity in income of
unconsolidated affiliates for the percentage owned in all periods
presented.
6. RECENT ACCOUNTING PRONOUNCEMENT
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 to
measure those instruments at fair value. The new standard, as amended
by SFAS No. 137, becomes effective for fiscal years beginning after
June 15, 2000. Management has not assessed the effects that this
statement may have on the Company's consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition in Financial Statements," which
summarizes the SEC's interpretation of applying generally accepted
accounting principles to revenue recognition in the financial
statements. SAB No. 101 was subsequently amended in June 2000 and
becomes effective for the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. Based on the Company's current
revenue recognition policies, the adoption of SAB No. 101, as amended,
did not have a material impact on PICO's consolidated financial
position or the results of operations.
7. SEGMENT REPORTING
The Company is a diversified holding company engaged in five
major operating segments: Land, Mineral and Related Rights; Water
Rights and Water Storage; Property and Casualty Insurance Operations;
Medical Professional Liability ("MPL") Insurance Operations and
Long-Term Holdings.
8
<PAGE> 9
The accounting policies of the reportable segments are the
same as those described in the Company's 1999 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 both in the U.S. and abroad.
The following is a detail of revenues (charges) by segment:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Land, Mineral and Related Water Rights $ 609,229 $ 2,293,693 $ 1,852,634 $ 3,195,977
Water Rights and Water Storage 937,433 142,896 1,554,877 482,396
Property and Casualty Insurance 9,927,789 9,672,878 28,377,211 29,338,357
Medical Professional Liability Insurance 508,821 597,452 1,520,169 1,780,017
Long-Term Holdings (7,043,662) 1,386,752 (7,242,087) 4,116,997
----------- ----------- ----------- -----------
Total Revenues $ 4,939,610 $14,093,671 $26,062,804 $38,913,744
=========== =========== =========== ===========
</TABLE>
The following is a detail of segment profit or loss before
income taxes and minority interest:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Land, Mineral and Related Water Rights $ 167,876 $ (20,178) $ 211,877 $ 131,188
Water Rights and Water Storage (375,994) (660,358) (2,164,779) (1,975,948)
Property and Casualty Insurance 160,680 388,489 695,299 1,734,490
Medical Professional Liability Insurance (351,799) (222,322) (891,680) (916,308)
Long-Term Holdings (7,276,306) (1,088,861) (12,589,406) (1,674,883)
----------- ----------- ------------ -----------
Loss Before Taxes and Minority Interest $(7,675,543) $(1,603,230) $(14,738,689) $(2,701,461)
=========== =========== ============ ===========
</TABLE>
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS. THESE INCLUDE, BUT
ARE NOT LIMITED TO, STATEMENTS ABOUT THE COMPANY'S INVESTMENT PHILOSOPHY, PLANS
FOR EXPANSION, BUSINESS EXPECTATIONS, AND REGULATORY FACTORS. THESE STATEMENTS
REFLECT OUR CURRENT VIEWS ABOUT FUTURE EVENTS, WHICH COULD AFFECT OUR FINANCIAL
PERFORMANCE. YOU SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS,
BECAUSE THEY ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES (INCLUDING THOSE
LISTED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-Q) WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM SUCH FORWARD-LOOKING STATEMENTS, OR
FROM OUR PAST RESULTS.
RESULTS OF OPERATIONS -- THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
INTRODUCTION
PICO Holdings, Inc. is a diversified holding company. We acquire
interests in companies which our management believes:
o are undervalued at the time we buy them; and
o have the potential to provide a superior rate of return over time,
after considering the risk involved.
Our over-riding objective is to generate superior long-term growth in
shareholders' equity, as measured by book value per share. To accomplish this,
we are seeking to build a profitable operating base with our land, water, and
insurance subsidiaries, and over time to realize gains from our portfolio of
long-term investment holdings. In the long run, we expect that most of the
growth in shareholders' equity will come from realized gains on the sale of
assets, rather than operating earnings. Accordingly, when analyzing our
performance, our management places more weight on increased asset values than on
reported earnings.
Currently PICO's major assets and activities are:
o owning and developing land, mineral rights, and water rights through
Nevada Land & Resource Company, LLC, which owns approximately 1,274,407
acres of land in northern Nevada;
o owning and developing water rights and water storage operations through
Vidler Water Company, Inc.;
o property and casualty insurance through our California-based
subsidiaries Sequoia Insurance Company and Citation Insurance Company;
o "running off" the loss reserves of our Ohio-based medical professional
liability insurance companies, Physicians Insurance Company of Ohio and
The Professionals Insurance Company; and
o making long-term value-based investments in other public companies.
SUMMARY
PICO reported a net loss of $3.1 million, or $0.25 per basic and
diluted share, for the Company's third quarter, ended September 30, 2000. In the
third quarter of 1999, PICO incurred a net loss of $231,000, or $0.03 per basic
and diluted share.
For the nine months to September 30, 2000, PICO reported a net loss of
$7.1 million, or $0.63 per basic and diluted share. In the first three quarters
of 1999, PICO earned net income of $5 million, or $0.55 per basic and $0.52 per
diluted share, before an extraordinary gain of $442,000 after tax, or $0.05 per
basic and diluted share.
At September 30, 2000, PICO had shareholders' equity of $209.5 million
($16.91 per share), compared to $213.4 million ($17.23 per share) at June 30,
2000, and $173 million ($19.11 per share) at December 31, 1999.
During the third quarter of 2000, shareholders' equity was reduced by a
comprehensive loss of $3.9 million (see Note 3, "Comprehensive Income (Loss)").
This was comprised of the $3.1 million quarterly net loss and a $1.1 million
reduction in unrealized appreciation in investments, which were partially offset
by positive foreign currency translation of $244,000 as the currencies of
foreign countries where we have investments gained relative to the US dollar. In
the third quarter of 1999, PICO recorded comprehensive income of $1.6 million,
consisting of a $231,000 net loss, $1 million in net unrealized appreciation in
securities, and positive foreign currency translation of $780,000.
During the first nine months of 2000, shareholders' equity increased by
$36.5 million. The rights offering, which raised $49.8 million in new capital
after expenses and led to the increase in equity, was partly offset by a
comprehensive loss of $13.4 million. This was comprised of the $7.1 million
nine-month net loss, a $5.5 million reduction in unrealized appreciation in
investments, and
10
<PAGE> 11
$710,000 in negative currency translation. In the first nine months of 1999,
PICO recorded comprehensive income of $18.7 million, consisting of net income of
$5.4 million, $12.9 million in net unrealized appreciation in securities, and
positive foreign currency translation of $350,000.
Third quarter 2000 revenues were $4.9 million, compared to $14.1
million during the third quarter of 1999. The decrease principally resulted from
the Long-Term Holdings segment reporting investment losses in excess of revenues
of $7 million in the third quarter of 2000, compared to positive revenues of
$1.4 million in the third quarter of 1999. Investment losses exceeded revenues
in the Long-Term Holdings segment this year, principally due to realized losses
on the sale of investments in Conex Continental and MKG Enterprises and
operating losses from Conex prior to its sale. Elsewhere, revenues from Land,
Minerals & Related Water Rights were $1.7 million lower than in the third
quarter of 1999, revenues from Water Rights & Water Storage were $794,000
higher, revenues from Property & Casualty Insurance were $255,000 higher, and
revenues from Medical Professional Liability Insurance declined by $88,000.
For the first nine months of 2000, revenues were $26.1 million,
compared to $38.9 million in 1999. The decrease principally resulted from the
Long-Term Holdings segment reporting investment losses in excess of revenues of
$7.2 million in the first 9 months of 2000, compared to revenues of $4.1 million
the year before. In the other segments, compared to the first 9 months of 1999,
revenues from Land, Minerals & Related Water Rights were $1.3 million lower,
revenues from Water Rights & Water Storage were $1.1 million higher, revenues
from Property & Casualty Insurance were $961,000 lower, and revenues from
Medical Professional Liability Insurance declined by $260,000.
The net loss for the third quarter of 2000 consisted of a $7.7 million
loss before income taxes and minority interest, which was partially offset by
the recognition of $4.7 million in income tax benefits and the subtraction of
$97,000 in minority income. Minority income or loss represents the interest of
outside shareholders in subsidiary companies in the net income or net losses of
those subsidiary companies. In the third quarter of 1999, PICO incurred a loss
of $1.6 million before income before taxes and minority interest. However, the
recognition of $1.3 million in income tax benefits, and the addition of $106,000
in minority losses, reduced the net loss to $231,000.
The net loss for the first nine months of 2000 was comprised of a $14.7
million loss before income taxes and minority interest, partially offset by
income tax benefits of $7.2 million and the add-back of $418,000 in minority
losses. In the first nine months of 1999, a $2.7 million loss before income
taxes and minority interest was more than offset by $7.6 million of income tax
benefits and adding back $106,000 in minority losses, resulting in net income of
$5 million before a $442,000 after-tax extraordinary gain.
In the third quarter, we recorded a $4.2 million income tax benefit,
arising from a successful appeal with Canadian federal tax authorities relating
to the utilization of net operating losses which was previously denied in a
Canadian subsidiary. PICO will receive a cash refund of approximately $2 million
for Canadian federal taxes paid relating to the years which were under appeal.
We are awaiting reassessment of Canadian provincial taxes for the same period.
If successful, this will result in a cash refund of approximately $1.7 million.
This benefit is not yet recorded in our financial statements.
Segment revenues (charges) and income (loss) before taxes and minority
interest for the third quarter and the first nine months of 2000 and 1999 were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES (CHARGES):
Land, Minerals & Related Water Rights $ 609,000 $ 2,294,000 $ 1,853,000 $ 3,196,000
Water Rights & Water Storage Assets 937,000 143,000 1,555,000 482,000
Property & Casualty Insurance 9,928,000 9,673,000 28,377,000 29,338,000
Medical Professional Liability Insurance 509,000 597,000 1,520,000 1,780,000
Long-Term Holdings (7,043,000) 1,387,000 (7,242,000) 4,118,000
----------- ----------- ------------ -----------
Total Revenues $ 4,940,000 $14,094,000 $ 26,063,000 $38,914,000
=========== =========== ============ ===========
INCOME (LOSS) BEFORE TAXES & MINORITY INTERESTS:
Land, Minerals & Related Water Rights $ 168,000 $ (20,000) $ 212,000 $ 131,000
Water Rights & Water Storage Assets (376,000) (660,000) (2,165,000) (1,976,000)
Property & Casualty Insurance 161,000 388,000 695,000 1,735,000
Medical Professional Liability Insurance (352,000) (222,000) (892,000) (916,000)
Long-Term Holdings (7,277,000) (1,089,000) (12,589,000) (1,675,000)
----------- ----------- ------------ -----------
LOSS BEFORE TAXES & MINORITY INTERESTS $(7,676,000) $(1,603,000) $(14,739,000) $(2,701,000)
=========== =========== ============ ===========
</TABLE>
11
<PAGE> 12
Detailed information on the performance and outlook for each segment is
contained later in this report; however, the major factors affecting PICO's
third quarter and nine month results were:
LAND, MINERALS & RELATED WATER RIGHTS
Third quarter revenues were $1.7 million lower than the previous year
at $609,000, due to $1.1 million lower land sales and a $558,000 reduction in
other revenues. Due to a higher gross profit on land sales and significantly
lower professional fees, Nevada Land reported income of $168,000 in the third
quarter of 2000, compared to a $20,000 loss in the 1999 quarter.
During the first nine months of 2000, segment revenues were $1.3
million lower than in the previous year at $1.9 million. Land sales were
$712,000 lower, and other revenues declined by $631,000, partly due to
non-recurrence of two items which boosted revenues in 1999--a $150,000 easement
fee and a $193,000 item related to the geothermal assets which Nevada Land
exchanged in 1999. Income for the nine months increased from $131,000 in 1999 to
$212,000 this year, primarily due to a higher gross profit on land sales.
During the fourth quarter, land sales are expected to be significantly
higher than in the first 9 months of 2000. This is explained in the LAND,
MINERALS & RELATED WATER RIGHTS segment discussion, beginning on page 13.
WATER RIGHTS & WATER STORAGE ASSETS
At this stage, income from leasing agricultural land provides most of
Vidler's recurring revenues. So far in 2000, the level of agricultural lease
revenue has been higher than in the previous year because Vidler owns more
agricultural land which is leased to farmers as a result of the purchase of
farms in Arizona's Harquahala Valley during 1999.
In the third quarter of 2000, Vidler reported revenues of $937,000, an
increase of $794,000 from the previous year. Earlier in the year, Vidler
purchased water for its own account and banked, or stored, the water at
Semitropic. During the third quarter, Vidler sold 3,691 acre-feet of this water
to a federal agency for $509,000. Revenues also increased year over year in the
third quarter due to $109,000 higher agricultural lease income and $113,000 of
revenue earned from an option granted over a water asset. The third quarter
pre-tax loss declined $284,000 to $376,000, primarily because the gain on the
sale of the water offset higher operations and maintenance expenses and interest
costs resulting from the expansion of Vidler's asset base during 1999.
During the first nine months of 2000, revenues increased by $1.1
million to $1.6 million, due to the $509,000 water sale, a $410,000 increase in
agricultural lease income, and the $113,000 from the option. The pre-tax loss of
$2.2 million for the nine months was $189,000 higher than in 1999, primarily
because the gain on the sale of the water was more than offset by higher
operations and maintenance expenses and interest costs.
PROPERTY & CASUALTY INSURANCE
Third quarter segment revenues were $255,000 higher than in 1999 at
$9.9 million, primarily due to a $200,000 improvement in investment-related
income. The segment profit of $161,000 represents a $227,000 decline from last
year due to a higher loss and loss adjustment expense ratio--that is, claims
expenses as a percentage of premium income. Sequoia posted a third quarter
profit of $184,000, down $439,000 from the preceding year, while Citation
reported a loss of $24,000, which was $211,000 smaller than the $235,000 loss
recorded in the third quarter of 1999.
For the first nine months, property & casualty insurance revenues
declined by $962,000, due to $1.9 million lower earned premiums, partly offset
by higher revenues in other areas. The segment profit fell $1 million to
$695,000 due to higher loss and loss adjustment expense ratios. For the nine
months, Sequoia reported income before taxes of $253,000 this year, compared to
$1.4 million in 1999, and Citation reported pre-tax income of $442,000, up from
$384,000 in 1999.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
As expected during the "run off" of loss reserves in this segment,
lower investment balances led to a 14.8% decline in investment income and total
revenues to $509,000 in the third quarter, and a 14.6% decline to $1.5 million
in the first nine months of 2000. The pre-tax loss increased by $130,000 to
$352,000 in the quarter, but declined by $24,000 to $892,000 in the nine months.
LONG-TERM HOLDINGS
This segment is comprised of investments where we own less than 50% of
the company, and subsidiaries which are not large enough to comprise a segment.
Our largest long-term holdings are HyperFeed Technologies, Inc., Jungfraubahn
Holding AG, and Australian Oil & Gas Corporation Limited. Our investment in
HyperFeed is accounted for under the equity method. Starting this
12
<PAGE> 13
quarter, we are also accounting for Jungfraubahn Holding AG under the equity
method. We have restated our results for all periods presented in these
financial statements to present our investment in Jungfraubahn under the equity
method of accounting.
In the third quarter of 2000, the segment reported investment losses in
excess of revenues of $7 million, compared to revenues of $1.4 million in 1999.
For the first nine months of 2000, investment losses in excess of revenues of
$7.2 million compared to revenues of $4.1 million in the first nine months of
1999. The principal reason for the revenue decline is that the 1999 periods
included realized gains of $817,000 for the quarter and $3.8 million for the
nine months, compared to net realized losses of $7.1 million and $7.7 million in
the quarter and the nine months this year.
Principally due to the realized losses on Conex and MKG and operating
losses from Conex before its sale, the third quarter segment loss was $7.3
million in 2000, compared to a $1.1 million loss in 1999. The nine-month segment
loss was $12.6 million, up from a $1.7 million loss in 1999.
The segment result does not reflect the difference between the carrying
value and the potential market value of our largest long-term investments. This
is detailed later in this report.
LAND, MINERALS AND RELATED WATER RIGHTS
---------------------------------------
NEVADA LAND & RESOURCE COMPANY, LLC
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------- -----------------------------
2000 1999 2000 1999
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Sale of Land $245,000 $1,372,000 $1,071,000 $1,783,000
Lease and Other Revenues 364,000 922,000 782,000 1,413,000
-------- ---------- ---------- ----------
Total Segment Revenues $609,000 $2,294,000 $1,853,000 $3,196,000
======== ========== ========== ==========
-------- ---------- ---------- ----------
INCOME (LOSS) BEFORE TAX $168,000 $ ( 20,000) $ 212,000 $ 131,000
======== ========== ========== ==========
</TABLE>
Nevada Land & Resource Company, LLC owns approximately 1,274,407 acres
of deeded land in northern Nevada, and the mineral rights and water rights
specifically related to that property.
Nevada Land recognizes revenue, and the resulting gross profit or loss,
from a land sale when the transaction closes. On closing, the sale proceeds are
recorded as revenue, and a gain or loss is recognized depending on the cost
basis of the land which was sold. Therefore, because the date of closing
determines the accounting period in which the sales revenue and gain are
recorded, Nevada Land's reported revenues and income can fluctuate from quarter
to quarter depending on the closing of specific transactions.
In the third quarter of 2000, Nevada Land closed the sale of
approximately 1,759 acres of land at an average price of $139.37 per acre.
During the first nine months, the sale of approximately 9,583 acres of land
closed at an average price of $111.76 per acre. These sale prices compare to the
average cost of $34.92 per acre for the land component when PICO acquired Nevada
Land.
Nevada Land generated total revenues of $609,000 in the third quarter
of 2000, made up of $245,000 in proceeds from the sale of land and $364,000 of
other operating revenues. Nevada Land's income for the quarter was $168,000.
In the third quarter of 1999, revenues were $2.3 million, comprised of
$1.4 million of land sales proceeds and $922,000 of other revenues, which
included an easement fee of $150,000. The segment loss for the quarter was
$20,000. The primary causes of the year over year improvement in segment income
were a significantly higher gross profit from the sale of land and reduced
professional expenses this year.
For the first nine months of 2000, Nevada Land reported total revenues
of $1.9 million, comprised of $1.1 million in land sales proceeds and $782,000
in recurring operating revenues. Segment income was $212,000. In the first nine
months of 1999, Nevada Land generated revenues of $3.2 million, comprised of
$1.8 million in land sales proceeds and other revenues of $1.4 million. Segment
income for the nine months in 1999 was $131,000. The improvement in segment
income was principally due to a higher gross profit on land sales in 2000.
13
<PAGE> 14
With completed sales of $1.1 million through October 31, and
approximately $4.2 million of land and water right sales in escrow and scheduled
to close before the end of the year, Nevada Land should come close to achieving
its target of meeting or exceeding 1999's $5.8 million in sales of land and
water rights.
Progress continues on a number of possible sale and exchange
transactions involving significantly larger parcels of land. It can take several
years to complete land exchange transactions.
Nevada Land has applied for additional water rights for the beneficial
use of irrigating arable land. Where applications are successful, the value and
marketability of the associated land will usually increase. During the first
quarter of 2000, Nevada Land submitted applications for 20,480 acre-feet of
water to irrigate 5,120 acres of land. Further applications were filed recently,
as part of a program to file applications for an additional 30,720 acre-feet of
water rights to irrigate 7,680 acres of land before the end of 2000.
WATER RIGHTS AND WATER STORAGE ASSETS
-------------------------------------
VIDLER WATER COMPANY, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------ --------------------------------
2000 1999 2000 1999
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Sale of water $ 509,000 $ 509,000
Agricultural lease revenues 216,000 $ 107,000 729,000 $ 319,000
Water service revenues 47,000 34,000 134,000 159,000
Other revenues 165,000 2,000 183,000 4,000
----------- ----------- ----------- -----------
Total Segment Revenues $ 937,000 $ 143,000 $ 1,555,000 $ 482,000
----------- ----------- ----------- -----------
EXPENSES:
Depreciation and amortization (220,000) (199,000) (636,000) (607,000)
Interest (200,000) (85,000) (604,000) (471,000)
Operations and maintenance (863,000) (519,000) (2,346,000) (1,380,000)
Other (30,000) (134,000)
----------- ----------- ----------- -----------
(1,313,000) (803,000) (3,720,000) (2,458,000)
----------- ----------- ----------- -----------
LOSS BEFORE TAX $ (376,000) $ (660,000) $(2,165,000) $(1,976,000)
=========== =========== =========== ===========
</TABLE>
This segment is comprised of two distinct but inter-related activities:
the ownership and development of water rights in Nevada, Arizona, and Colorado;
and our interests in water storage facilities in Arizona and California.
After we entered the water business, most of the assets we acquired
were not ready for immediate commercial use. There has been a considerable
lead-time in developing and commercializing these assets to the point of cash
flow generation. While we believe that significant value has been created from
these efforts, this is not reflected in our financial statements because most of
the Company's significant assets are not yet generating cash flow. Our current
priority is to develop that cash flow. In the meantime, the segment is incurring
costs associated with the development of assets and expansion of the water
rights portfolio, which will not result in positive cash flow and earnings until
future years.
In the third quarter of 2000, Vidler generated total revenues of
$937,000, which includes $509,000 from the sale of water, $216,000 from leasing
agricultural land, a $113,000 option fee earned, and $47,000 from leasing some
of the Company's Colorado water assets. In the third quarter of 1999, total
revenues of $143,000 included $107,000 of agricultural lease income and $34,000
of revenue from water assets.
Earlier this year, Vidler purchased water for its own account and
banked, or stored, this water at Semitropic until it could be resold. During the
third quarter, Vidler sold 3,891 acre-feet of this water to a federal agency for
$509,000.
The growth in revenue from leasing agricultural land reflects the
larger amount of land leased to farmers following Vidler's acquisition of
various farm properties in the Harquahala Valley during 1999.
14
<PAGE> 15
Compared to the third quarter of 1999, revenues rose by $794,000 and
expenses increased by $510,000, resulting in a segment pre-tax loss of $376,000.
The pre-tax loss for the third quarter of 1999 was $660,000. The main factor in
the reduced segment loss was the gross profit on the sale of the water, which
offset higher expenses for operations and maintenance and interest, both
resulting from the expansion of Vidler's asset base during 1999.
For the first nine months of 2000, Vidler generated total revenues of
$1.6 million, including $729,000 from leasing agricultural land, the $509,000
water sale, and $134,000 from leasing some of the Company's Colorado water
assets. The pre-tax loss for the nine months was $2.2 million. In the first nine
months of 1999, Vidler generated total revenues of $482,000, including $319,000
from leasing agricultural land and $159,000 from leasing water assets in
Colorado, and the pre-tax loss was $2 million. Revenues increased $1.1 million
year over year, but expenses rose $1.3 million, resulting in a $189,000 larger
segment loss. The principal factors leading to the increased segment loss were
increases of almost $1 million for operations and maintenance expense and
$133,000 for interest, which were partly offset by the gain from the sale of
water.
The Colorado water assets, which generated the $47,000 in revenue
during the quarter and $134,000 for the nine months, are leased in perpetuity.
The lease payments are indexed for inflation, subject to a 3% minimum annual
increase. Once a water right has been leased in perpetuity, it cannot be leased
again unless the lease is canceled (if the contract allows for cancellation).
Consequently, revenue growth beyond the limits of the CPI escalators on the
Colorado leases will have to come from income from other leases, the commercial
development of other existing assets, and the acquisition of additional water
rights and water-related assets for subsequent lease or sale. If water rights
are sold, that will reduce the future revenue stream until the asset is
replaced.
Our 1999 Form 10-K contains a detailed description of our water rights
and water storage assets, and our first and second quarter 2000 Form 10-Q
reports describe any significant developments affecting these assets which
occurred during the first half. The following section updates this information
where necessary, and outlines new developments during the third quarter and the
month of October:
WATER RIGHTS
------------
SANDY, NEVADA
Vidler has applied for approximately 2,000 acre-feet of water rights
near Sandy, Nevada. Subject to the water rights being permitted, which could
happen before the end of 2000, preliminary agreement has been reached to supply
the underlying water to support additional growth at Primm, Nevada, a town in
the fast-growing Interstate 15 corridor. We expect the transaction to close
shortly after the water rights have been permitted.
HARQUAHALA VALLEY WATER RIGHTS
Vidler controls approximately 55,913 acre-feet of transferable ground
water in the Harquahala Valley, which is located in La Paz County, approximately
75 miles northwest of metropolitan Phoenix, Arizona.
Under state legislation, the Central Arizona Canal Project is committed
to convey up to 20,000 acre-feet of Harquahala ground water to cities and
communities in Arizona as an assured municipal water supply. Vidler is able to
supply this water and is meeting with communities and developers in the Phoenix
metropolitan area, some of whom need to secure further water supply to support
expected growth. Vidler expects to enter the first such agreement within the
next 6 to 12 months.
There is also demand for water within the Harquahala Valley itself.
Earlier in the year, we disclosed that Vidler had granted an
electricity-generating company a 24-month option to purchase 1,700 acres of land
and the associated 5,100 acre-feet of water rights for $7.1 million. The
purchase price represents $4,200 per acre of land, or $1,400 per acre-foot of
water. On October 18, 2000, the electricity-generating company announced that it
planned to construct a 1,080-megawatt natural gas-fired merchant generating
facility in La Paz County, Arizona. The electricity-generating company has
indicated that it may wish to acquire more land and water from Vidler than
covered by the original option agreement, and that it intends to exercise the
option, possibly before the end of 2000.
LINCOLN COUNTY PUBLIC/PRIVATE JOINT VENTURE ("THE MESQUITE PROJECT")
The joint venture is carrying out a drilling program to support its
applications for more than 100,000 acre-feet of water rights in Lincoln County,
Nevada. The joint venture intends to supply water to rapidly growing communities
in southern Nevada. In
15
<PAGE> 16
addition to the previously announced agreement to supply developers near
Mesquite with 17,000 acre-feet of water, tentative agreement has been reached to
supply an electricity-generating company with a minimum of 6,700 acre-feet of
water, and a maximum of 9,000 acre-feet of water, at $3,300 per acre-foot. The
sale of the water is subject to the electricity-generating company obtaining
permitting for a new power plant, and then financing, which could take 2 to 3
years.
We are pursuing similar joint ventures with other Nevada counties.
ADDITIONAL RANCH PROPERTIES IN NEVADA
In July 2000, Vidler invested more than $10 million in two
water-righted ranch properties in northern Nevada:
o we purchased a 51% interest in Fish Springs Ranch, LLC and a 50%
interest in Vidler Brown, LLC. These partnerships own the 8,600 acre
Fish Springs Ranch, and more than 8,000 acre-feet of permitted,
transferable water rights. Fish Springs Ranch is located in Honey Lake
Valley in Washoe County, 40 miles north of Reno, Nevada.
Fish Springs can supply 8,000 acre-feet of water to customers in
Nevada's north valleys where water is in strong demand and there are
few alternative sources of supply. Vidler is already negotiating with
potential customers, including an industrial user and developers in
Washoe County. An additional source of demand could come from Lemmon
Valley, a north valley which is currently over-pumping its aquifer; and
o we purchased Robison Ranch, which is located in White Pine County,
approximately 40 miles west of Ely, Nevada. The property is now known
as Spring Valley Ranches. The real estate assets acquired consist of
approximately 9,800 acres of deeded land, and 500,000 acres of Forest
Service and Bureau of Land Management allotment land. We believe that
the land has significant environmental value to federal agencies,
making it suitable for a land exchange transaction.
In addition, we intend to develop up to 20,000 acre-feet of water
rights related to the property. It is anticipated that the long-term
end-users of water from White Pine County, and the other northern
counties of Nevada, will be located in Southern Nevada, particularly in
Clark County, which includes the City of Las Vegas and surrounding
municipalities.
These investments were made as part of Vidler's strategy of increasing
its ownership of water rights in Nevada, which has been the fastest-growing
state in the nation for more than 5 years. It has been publicly stated that the
northern counties are the only practical source of water to support the
continued growth of Southern Nevada. We are considering further property
purchases and joint venture opportunities to increase the quantity of water
available to Vidler in northern Nevada.
COLORADO WATER ASSETS
A definitive agreement has been concluded to sell water rights to the
City of Golden, Colorado for $1 million in cash. This transaction is expected to
close by the end of 2000.
We have granted the City options to acquire other water rights. The
present value of the aggregate exercise price is approximately $1.6 million.
WATER STORAGE OPERATIONS
------------------------
VIDLER ARIZONA RECHARGE FACILITY
Vidler has received the final permit required to operate a full-scale
recharge facility at its water storage site in the Harquahala Valley. Vidler
estimates that the full-scale facility will have more than 1 million acre-feet
of storage capacity. The permit allows Vidler to "recharge," or put into
storage, up to 100,000 acre-feet of water per annum.
Vidler expects construction to be completed by the end of 2000, at a
cost of less than $9 million.
The Arizona Water Banking Authority has directed its staff to begin
negotiations to utilize the Vidler Arizona Recharge Facility to "bank," or
store, Arizona water supplies. We expect to enter the first agreement to store
water, and to begin recharging water and generating cash flow from the facility,
in 2001.
16
<PAGE> 17
Once Vidler has concluded agreements to store water, we will know the
rate at which customers need to be able to recover water, so that we can design,
finance and construct the final stage of the project, which will allow water to
be recovered at commercial rates. The cost of the final stage cannot be
accurately predicted until the requirements of the users are determined,
although this could equal or exceed the $9 million required for the second
stage. Vidler will not be constructing the improvements for full-scale recovery
until binding storage contracts are in place.
OTHER PROJECTS
--------------
Vidler continues to be approached by parties who are interested in
obtaining a water supply, or discussing joint ventures to commercially develop
water assets and/or develop water storage facilities. We believe that Vidler has
become the leading private water rights aggregator in Arizona and Nevada, and
the leading private owner-operator of water storage in Arizona and California.
Our presence in these markets has consolidated our expertise and reputation for
providing solutions to both end-users who require water and to parties who are
otherwise unable to commercialize water assets.
The most recent of these joint ventures is a Water Resource Planning
Memorandum of Understanding which was signed on November 1, 2000 with the MUDDY
RIVER IRRIGATION DISTRICT in Nevada. Under the agreement, Vidler will work with
the Irrigation District to maximize the efficiency of its irrigation system, and
then evaluate opportunities to commercially utilize water which is surplus to
irrigation needs.
PROPERTY AND CASUALTY INSURANCE
-------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ----------------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES (CHARGES):
Sequoia - Earned Premiums $ 8,279,000 $ 4,134,000 $ 23,112,000 $ 12,675,000
Citation - Earned Premiums (6,000) 4,134,000 352,000 12,675,000
Investment Income 1,405,000 1,237,000 3,882,000 3,660,000
Realized Investment Gain (Loss) 32,000 105,000 (185,000)
Other 218,000 168,000 926,000 513,000
----------- ----------- ------------ ------------
Total Segment Revenues 9,928,000 9,673,000 28,377,000 29,338,000
----------- ----------- ------------ ------------
EXPENSES:
Loss & Loss Adjustment Expense (5,958,000) (5,728,000) (16,932,000) (16,731,000)
Underwriting Expenses (3,809,000) (3,557,000) (10,750,000) (10,873,000)
----------- ----------- ------------ ------------
(9,767,000) (9,285,000) (27,682,000) (27,604,000)
----------- ----------- ------------ ------------
INCOME BEFORE TAXES:
Sequoia Insurance Company 184,000 623,000 253,000 1,351,000
Citation Insurance Company (23,000) (235,000) 442,000 384,000
----------- ----------- ------------ ------------
SEGMENT INCOME BEFORE TAXES $ 161,000 $ 388,000 $ 695,000 $ 1,735,000
=========== =========== ============ ============
</TABLE>
This segment is comprised of the California-based property and casualty
insurance subsidiaries Sequoia Insurance Company and Citation Insurance Company.
In the third quarter of 2000, total segment revenues of $9.9 million
included earned premiums of $8.3 million, $1.4 million in investment income, and
$32,000 in realized gains from the sale of portfolio investments. In the third
quarter of 1999, segment revenues were $9.7 million, including earned premiums
of $8.3 million, and investment income of $1.2 million. After expensing goodwill
of $74,000 from the Personal Express Insurance Services, Inc. acquisition,
segment income before taxes for the quarter was $161,000 in 2000, compared to
$388,000 in 1999.
In the first nine months of 2000, segment revenues of $28.4 million
included $23.5 million in earned premiums, $3.9 million in investment income,
and realized gains of $105,000. This compares to segment revenues of $29.3
million, earned premiums of $25.4 million, investment income of $3.7 million,
and realized losses of $185,000 in the first nine months of 1999. After
expensing $124,000 of goodwill from the Personal Express acquisition, segment
income before taxes for the nine months was $695,000 in 2000, compared to $1.7
million in 1999.
17
<PAGE> 18
In May 2000, Sequoia acquired Personal Express Insurance Services, Inc.
for approximately $3 million. Personal Express markets personal insurance
products to customers in Bakersfield and Fresno, California. This acquisition is
expected to generate approximately $7.5 million of additional annual premiums
for Sequoia. Historically, this block of business has produced an underwriting
profit (i.e., a combined ratio below 100%).
In 1998 and 1999 Sequoia and Citation "pooled," or shared, most
premiums and expenses. From January 1, 2000, the pooling arrangement was
terminated. Sequoia now writes all business in the states of California and
Nevada, and Citation only writes renewal business in Arizona. Due to the
termination of the pooling arrangement, and the fact that all business in
California and Nevada had been transitioned to Sequoia in recent years, Sequoia
accounted for virtually all of the segment's earned premium.
The individual results of Sequoia and Citation are not directly
comparable to prior years due to the cancellation of the pooling agreement, and
Sequoia's results are no longer directly comparable due to the Personal Express
acquisition.
When an insurance company writes a policy, the amount of the premium is
referred to as "written" premium; however the premium is recognized as revenue,
or "earned," over the term of the policy. Therefore, there is a time lag before
a change in the volume of "written" premium is reflected in the amount of
"earned" premium that an insurance company reports as revenue.
In the third quarter of 2000, the segment's earned premiums increased
fractionally from the third quarter of 1999; however, over the first nine
months, earned premiums were 7.4% below 1999 levels. Due to the time lag between
a policy being written and the premium being earned, the drop in earned premiums
for the nine months reflects the declining volume of business which Sequoia and
Citation were writing in 1999. From January 2000, Sequoia began to experience
growth in written premiums from its existing business. Beginning in the third
quarter, this is now leading to growth in earned premium.
In the first nine months of 2000, Sequoia's written premiums were 26.0%
higher than in the same period in 1999. Written premiums grew 2.6% in the first
quarter, 11.8% in the second quarter, and 64.5% in the third quarter. The second
and third quarter numbers include new revenues from Personal Express. In
mid-May, Sequoia began to write new policies which were generated by the
Personal Express Bakersfield office. From July 1, which was the start of the
third quarter, the amount of premium written with Personal Express customers
increased significantly, because Sequoia also had the opportunity to renew
existing policies for clients of the Bakersfield office as these expired with
the former carrier.
In the third quarter, reflecting a full three months contribution from
Personal Express, written premiums in personal lines of insurance increased
almost seven-fold, or $3 million, to $3.6 million. Due to the fixed nature of
some costs, Sequoia's management anticipates that operating expenses will
increase at a slower rate than premium volume. This should have the effect of
reducing Sequoia's average operating expense per policy and underwriting expense
ratio.
During the third quarter, Sequoia had written premiums of $10.7 million
in commercial lines of insurance. This represents an increase of $2.5 million,
or 31.3%, over the same quarter in 1999. During the second quarter, A.M. Best
Company, a leading insurance company rating service, increased its rating for
Sequoia from "B++" (Very Good) to "A-" (Excellent). The rating upgrade allowed
Sequoia to compete for business in a new market segment--customers who can only
purchase insurance from companies with an "A" rating--and was the principal
cause of the growth in commercial insurance premium volume this quarter.
In the third quarter of 2000, Sequoia produced total revenues of $9.2
million, including $8.3 million in earned insurance premiums and $773,000 in
investment income. After expensing $74,000 of Personal Express goodwill, pre-tax
income for the third quarter was $184,000, compared to $623,000 in the third
quarter of 1999.
For the first nine months of 2000, Sequoia generated total revenues of
$25.5 million, including $23.1 million in earned insurance premiums and $1.9
million in investment income. After expensing $124,000 of Personal Express
goodwill, Sequoia earned $253,000 in the first nine months, compared to $1.4
million in 1999. The $1.1 million decrease in nine month income is principally
caused by Sequoia's loss and loss adjustment expense ratio--that is, claims
expenses as a percentage of premium income--remaining above the long-term
average, particularly in the first quarter when a loss of $349,000 was incurred.
18
<PAGE> 19
Sequoia's "combined ratio," a ratio which is commonly used to analyze
the performance of insurance companies, calculated on the basis of generally
accepted accounting principles was:
SEQUOIA'S GAAP INDUSTRY RATIOS
------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Loss and Loss Adjustment Expense Ratio 65.5% 53.8% 67.0% 57.7%
Underwriting Expense Ratio 42.9% 43.7% 42.4% 43.7%
----- ----- ----- -----
Combined Ratio 108.4% 97.5% 109.4% 101.4%
===== ===== ===== =====
</TABLE>
A combined ratio of less than 100% indicates that the insurance company
is making a profit on its base insurance business, prior to investment income,
realized investment gains or losses, extraordinary items, taxes, and other
non-insurance items. Sequoia manages its business so as to have a combined ratio
of less than 100% each year; however, this is not always achieved in every
quarter or year.
Citation's third quarter revenues of $774,000 include $633,000 of
investment income. Citation generated a pre-tax loss of $24,000 for the quarter,
compared to a pre-tax loss of $235,000 last year. Citation's loss in the 1999
quarter was caused by a $553,000 charge which was taken to increase loss
reserves in the artisan/contractor line of business. Citation stopped writing
this type of insurance in 1994, two years prior to the reverse merger with
Physicians Insurance Company of Ohio.
For the nine months, Citation generated $2.8 million in revenues and a
$442,000 pre-tax profit, compared to income of $384,000 in 1999 when results
were impacted by a $1.2 million charge to increase artisan/contractor loss
reserves.
Citation's combined ratio is not meaningful due to the termination of
the pooling arrangement which had a number of unusual effects. For example,
Citation now has a small amount of earned premium income relative to its
underwriting and other expenses, which distorts the combined ratio.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Investment Income, Net of Expenses $ 509,000 $ 597,000 $ 1,520,000 $ 1,780,000
--------- --------- ----------- -----------
Total Segment Revenues $ 509,000 $ 597,000 $ 1,520,000 $ 1,780,000
========= ========= =========== ===========
--------- --------- ----------- -----------
LOSS BEFORE TAX $(352,000) $(222,000) $ (892,000) $ (916,000)
========= ========= =========== ===========
</TABLE>
Physicians Insurance Company of Ohio and The Professionals Insurance
Company are in "run off." This means that they are handling claims arising from
historical business, but not writing new business. All of the segment's revenues
come from investment income. The level of investment assets and loss reserve
liabilities in this segment are decreasing as claims are paid and investments
are sold when funds are needed to make the payments. Accordingly, it is
anticipated that investment income in this segment will decline over time.
The investment income recorded in this segment is largely offset by an
expense called "reserve discount accretion." Our medical professional liability
claims reserves are discounted to reflect the fact that some claims will not be
paid until future years, but funds from the corresponding premiums can be
invested in the meantime. Each quarter, a portion of this discount is removed
and recognized as an expense.
In the third quarter of 2000, the segment generated investment income
and total revenues of $509,000. After $459,000 of reserve discount accretion and
operating expenses of $402,000, the segment produced a pre-tax loss of $352,000.
In the third quarter of 1999, investment income and segment revenues were
$597,000, and the pre-tax loss was $222,000 after reserve discount accretion
expense of $544,000, and other expenses of $275,000.
19
<PAGE> 20
For the first nine months of 2000, investment income and total revenues
were $1.5 million and the pre-tax loss was $892,000 following $1.4 million in
reserve discount expense and $1 million in other expenses. The comparable
figures for the first nine months of 1999 were revenues of $1.8 million, a
pre-tax loss of $916,000, reserve discount expense of $1.6 million, and other
expenses of $1.1 million.
No unusual trends in claims emerged during the first nine months of
2000.
At September 30, 2000, our medical professional liability loss reserves
stood at $47.1 million, net of reinsurance and reserve discount, compared to $49
million at June 30, 2000, and $53.7 million at December 31, 1999.
MEDICAL PROFESSIONAL LIABILITY INSURANCE - LOSS AND LOSS EXPENSE RESERVES
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------------------------
(in millions) (in millions) (in millions)
<S> <C> <C> <C>
Direct Reserves $71.7 $74.4 $81.6
Ceded Reserves (18.5) (18.8) (20.4)
Discount Of Net Reserves (6.1) (6.6) (7.5)
----- ----- -----
Net Medical Professional Liability Reserves $47.1 $49.0 $53.7
===== ===== =====
</TABLE>
LONG-TERM HOLDINGS
------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES (CHARGES):
Realized Investment Losses $(7,120,000) $ 817,000 $ (7,693,000) $ 3,782,000
Investment Income 673,000 402,000 672,000 (259,000)
Other Income (596,000) 168,000 (221,000) 595,000
----------- ----------- ------------ -----------
Segment Total Revenues $(7,043,000) $ 1,387,000 $ (7,242,000) $ 4,118,000
=========== =========== ============ ===========
----------- ----------- ------------ -----------
LOSS BEFORE TAXES $(7,277,000) $(1,089,000) $(12,589,000) $(1,675,000)
=========== =========== ============ ===========
</TABLE>
Our largest long-term holdings are HyperFeed Technologies, Inc.,
Jungfraubahn Holding AG, and Australian Oil & Gas Corporation Limited. The
details of our investment in each company at the end of the quarter were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, 2000 CARRYING VALUE SHARE EQUIVALENTS CLOSING PRICE (USD)
-------------------------------- -------------- ----------------- -------------------
<S> <C> <C> <C> <C>
CARRYING VALUE BEFORE TAXES:
HyperFeed Common & preferred $ 2,506,000 7,156,538 $2.28
Warrants 8,315,000 4,055,195 Unlisted
------------ -----------
Total $10,821,000 11,211,733
Jungfraubahn (now at equity) Common 23,362,000 112,672 $168.40 -- see below
Australian Oil and Gas Common 8,140,000 8,426,044 $0.966
------------
Total carrying value before
taxes $42,323,000
Deferred taxes (736,000)
------------
CARRYING VALUE, NET OF TAXES $41,587,000
============
--------------------------------------------------------------------------------------------------------------------
</TABLE>
Starting this quarter, we are now accounting for our investment in
Jungfraubahn under the equity method. Our results for all periods presented in
these financial statements have been restated as if our investment had always
been carried under the equity method of accounting, beginning with our original
purchase in 1996. At September 30, 2000, the carrying value under the equity
method was $23.4 million before taxes, or $207.35 per Jungfraubahn share, and
the market value was $19 million before taxes, or $168.40 per share of
Jungfraubahn.
20
<PAGE> 21
At September 30, 2000, these three long-term holdings had a potential
market value (before taxes) of approximately $52.7 million, and a carrying value
(before taxes) of $42.3 million. After allowing for taxes on the net unrealized
gains, the tax-effected carrying value of the holdings was $41.6 million, or
19.9% of PICO's shareholders' equity.
Following the sale of our interest in Summit Global Management, Inc.
during the first quarter, and the disposal of our investment in Conex
Continental, Inc. during the third quarter, the remaining subsidiary in this
segment is SISCOM, Inc.:
o on January 31, 2000, we sold our interest in Summit Global Management,
Inc., and its wholly-owned subsidiary Monitor Capital, Inc., for
$100,000. Summit Global Management, Inc. had been a subsidiary in this
segment until its sale. A $75,000 loss was realized on the sale, which
was recognized in the calculation of realized investment losses for the
nine months; and
o on September 8, 2000, we sold our investment in Conex Continental, Inc.
for nominal consideration. Conex was a consolidated subsidiary in this
segment until its sale. Conex contributed a pre-tax loss of $890,000 in
the third quarter, and $2.1 million in the first nine months of 2000. A
$4.6 million loss was realized on the sale, which is included in
realized investment losses for the third quarter and the nine months.
After recognizing the related income tax effects, the sale resulted in
a $1.8 million reduction in shareholders' equity.
During the third quarter, we recognized a loss of $2.5 million after
writing down the value of a loan made to MKG Enterprises Corp. to $500,000,
being estimated realizable value. Including the related income tax benefit, this
resulted in a $600,000 reduction in shareholders' equity.
For the third quarter of 2000, the segment generated investment losses
in excess of revenue of $7 million and a pre-tax loss of $7.3 million, primarily
due to realized losses on Conex and MKG and operating losses from Conex prior to
its sale. In the third quarter of 1999, PICO realized gains of $817,000 from the
sale of part of its portfolio of European value stocks. Segment revenues of $1.4
million, and a $1.1 million pre-tax loss were recorded.
For the first nine months of 2000, the segment generated investment
losses in excess of revenue of $7.2 million and a pre-tax loss of $12.6 million,
primarily due to realized losses on Conex and MKG and operating losses from
Conex until its sale. In the first nine months of 1999, PICO recorded realized
gains of $3.8 million, segment revenues were $4.1 million, and the pre-tax loss
was $1.7 million.
Highlights in the Long-Term Holdings segment included:
o on September 5, 2000, Jungfraubahn Holding AG announced its results for
the first 6 months of 2000. Revenues rose 28.8% to 51.1 million Swiss
Francs (CHF), EBIT (earnings before interest and tax) improved almost 5
times to CHF10.9 million, and net income reached CHF8.1 million. EPS
for the first 6 months was CHF13.9. At September 30, the price of
Jungfraubahn was CHF292, and the prevailing Swiss Franc: US Dollar
exchange rate was CHF1.7339 = $US1.00;
o on October 31, 2000, HyperFeed reported third quarter revenue of $12.4
million, EBITDA (earnings before interest, tax, depreciation and
amortization) of $2.1 million, and net income of $766,000. HyperFeed's
$35.7 million in revenues for the first 9 months has already surpassed
1999's full-year revenue of $33.1 million. This was also HyperFeed's
second consecutive profitable quarter; and
o during the quarter, PICO invested $201,000 to increase its investment
in AOG to 17.98% (8,426,044 shares) at September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES--THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
PICO Holdings, Inc. is a diversified holding company. Our assets
primarily consist of investments in our operating subsidiaries, investments in
other public companies, and cash and cash equivalents. At September 30, 2000, on
a consolidated basis the Company had $37.7 million in cash and cash equivalents,
compared to $62.1 million at June 30, 2000, and $36.7 million at December 31,
1999.
21
<PAGE> 22
Our cash flow position fluctuates depending on the requirements of our
operating subsidiaries for capital, and activity in our investment portfolios.
Our primary sources of funds include cash balances, cash flow from operations,
and--potentially--the sale of investments, and the proceeds of bank borrowings
or offerings of equity and debt. We endeavor to manage our balance sheet to
ensure that cash is always available to take advantage of new investment
opportunities.
In broad terms, here is the cash flow profile of our principal
operating subsidiaries:
o Nevada Land & Resource Company, LLC is actively selling land which is
not part of PICO's long-term utilization plan for the property. Nevada
Land's principal sources of cash flow are the proceeds of cash sales,
and collections of principal and interest on sales contracts where
Nevada Land has provided vendor financing. Since these receipts and
other revenues exceed Nevada Land's operating costs, Nevada Land is
generating strong positive cash flow which provides a potential source
of funds to finance other group activities;
o Vidler Water Company, Inc. is currently utilizing cash to purchase
water-righted properties, to complete the construction of the Vidler
Arizona Recharge Facility, to maintain and develop existing assets, to
pursue applications for water rights, and to cover financing and
operating expenses. Other group companies are currently providing
financing to meet Vidler's on-going expenses and to fund capital
expenditure and the purchase of additional water-righted properties.
None of Vidler's significant water-related assets are generating cash
flow yet. As commercial use of these assets begins--which will likely
be in 2001--we expect that Vidler will start to generate free cash flow
as receipts from leasing water or storage and the proceeds from selling
water begin to overtake maintenance capital expenditure, financing
costs, and operating expenses. As water lease and storage contracts are
signed, we anticipate that Vidler may be able to monetize some of the
contractual revenue streams which could provide another potential
source of funds;
o over the next 12 to 24 months, we expect that Sequoia Insurance Company
will generate positive cash flow from increased written premium volume,
resulting from growth in the existing book of business and the Personal
Express acquisition. Shortly after a policy is written, the premium is
collected and the funds can be invested for a period of time before
they are required to pay claims. Any free cash flow generated by
Sequoia will likely be deployed in the company's investment portfolio;
o Citation Insurance Company is generating only a minor amount of premium
income from renewal business in one state. Most of the funds required
to pay claims are coming from the maturity of fixed-income investments
in Citation's portfolio; and
o during the "run off" process, Physicians Insurance Company of Ohio and
The Professionals Insurance Company are obtaining funds to pay claims
from the maturity of fixed-income securities, the realization of
investments, and recoveries from reinsurance companies.
The Ohio and California Departments of Insurance prescribe minimum
levels of capital and surplus for insurance companies, and set guidelines for
insurance company investments. PICO's insurance subsidiaries aim to structure
the maturity of fixed income securities to match the projected pattern of claims
payments; however, it is possible that fixed-income and equity securities may
occasionally need to be sold at unfavorable times when the bond market and/or
the stock market are depressed.
As shown in the Consolidated Statements of Cash Flow, there was a
$996,000 net increase in cash and cash equivalents in the first nine months of
2000, compared to a $30.1 million net decrease in the first nine months of 1999.
During the first nine months of 2000, $4.8 million of cash was used in
Operating Activities. The principal uses of cash were claims payments by our
insurance subsidiaries and operating costs at Vidler. In the first nine months
of 1999, Operating Activities used cash of $21.8 million, primarily due to the
payment of insurance claims.
In the first nine months of 2000, $44 million of cash was used in
Investing Activities. This primarily reflects:
(a) activity in the investment portfolios of our insurance companies,
where the proceeds of cash and cash equivalents and maturing fixed-income
securities were reinvested in longer-dated corporate bonds and equities;
(b) the investment of approximately $14 million in the purchase of two
water-righted ranch properties in Nevada and the construction of improvements
necessary to recharge water on a commercial scale at Vidler's Arizona water
storage facility; and
(c) the acquisition of Personal Express for approximately $3 million.
22
<PAGE> 23
In the first nine months of 1999, Investing Activities used $17.6
million of cash, as the purchase of additional shares in Jungfraubahn and AOG
exceeded the proceeds from the sale and maturity of investments.
The rights offering, which raised $49.8 million in new equity capital
in March, resulted in the $49.4 million cash inflow from Financing Activities in
the first nine months of 2000. In the first nine months of 1999, there was a
$9.6 million net inflow from Financing Activities as Swiss franc borrowings to
finance part of PICO's portfolio of European value stocks raised $7 million, the
exercise of PICO warrants provided $2.9 million, and the purchase of treasury
stock used $292,000.
At September 30, 2000, PICO had no other significant commitments for
future capital expenditures, other than in the ordinary course of business.
PICO is committed to maintaining Sequoia's capital and statutory
surplus at a minimum of $7.5 million. At September 30, 2000, Sequoia had
approximately $21.8 million in capital and statutory surplus. PICO also aims to
maintain Sequoia's A.M. Best rating at or above its present "A-" (Excellent)
level. At some time in the future, this may require the injection of additional
capital.
RISK FACTORS
In addition to the risks and uncertainties discussed in the preceding
sections of "Management's Discussion and Analysis of Financial Condition and the
Results of Operations," and elsewhere in this document, the following risk
factors should be considered carefully in evaluating PICO and its business. 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.
BECAUSE OUR OPERATIONS ARE SO DIVERSE, ANALYSTS AND INVESTORS MAY NOT BE ABLE TO
EVALUATE OUR COMPANY ADEQUATELY, WHICH MAY NEGATIVELY INFLUENCE OUR SHARE PRICE
PICO is a diversified holding company with operations in land, minerals
and related water rights; water rights and water storage; property and casualty
insurance; medical professional liability insurance; and other long-term
holdings. Each of these areas is unique, complex in nature, and difficult to
understand. In particular, water rights is a developing industry within the
western United States with very little historical data, very few experts and a
limited following of analysts. Because we are so complex, analysts and investors
may not be able to adequately evaluate our operations, and PICO in total. This
could cause them to make inaccurate evaluations of our stock, or to overlook
PICO, in general. These factors could have a negative impact on the trading
volume and price of our stock.
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.
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, the 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
23
<PAGE> 24
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 have made a number of investments in the past that have been highly
successful, such as Fairfield Communities, Inc., which we sold in 1996, and
Resource America, Inc., which we sold in 1997. We have also made investments
that have lost money, such as our approximate $4 million loss from the Korean
investments in 1997, an approximate $5 million write-down of investments in
1998, a $3.2 million write-down of an oil and gas investment in 1999, and $7.1
million in investment losses in the third quarter of 2000. We reported net
realized investment gains in 1999 of $441,000 and gains of $21.4 million in
1997; however, we reported a net realized investment loss of $4.4 million for
1998. We reported a net unrealized investment gain of $675,000 at December 31,
1999, and a net unrealized loss of $4.9 million at September 30, 2000.
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, and the 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 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, 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
24
<PAGE> 25
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, and the 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 the 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:
o the length of time in reporting claims;
o the diversity of historical losses among claims;
o the amount of historical information available during the estimation
process;
o the degree of impact that changing regulations and legal precedents may
have on open claims; and
o 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, and the results of operations and cash flows.
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
25
<PAGE> 26
returns on invested capital and regulatory barriers to withdrawal of surplus.
Increases in surplus have generally been accompanied by increased price
competition among property and casualty insurers.
The cyclical trends in the industry and the industry's profitability can
also be affected 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, the 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, and the 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, and the 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.
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,
and the results of operations and cash flows. A.M. Best 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 over time. Failure to maintain
26
<PAGE> 27
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:
<TABLE>
<S> <C>
o Sequoia Insurance Company A- (Excellent)
o Citation Insurance Company B+ (Very Good)
o Physicians Insurance Company of Ohio NR-3 (rating procedure inapplicable)
o The Professionals Insurance Company NR-3 (rating procedure inapplicable)
</TABLE>
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, and the 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
At all times we 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, and the results of
operations and cash flows.
VARIANCES IN PHYSICAL AVAILABILITY OF WATER, ALONG WITH LEGAL RESTRICTIONS AND
LEGAL IMPEDIMENTS COULD IMPACT PROFITABILITY 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 the water rights applications or permitted 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
from the water rights applications or permitted rights 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.
OUR FUTURE WATER REVENUES ARE UNCERTAIN AND DEPEND ON A NUMBER OF FACTORS, WHICH
MAY MAKE OUR REVENUE STREAMS AND PROFITABILITY VOLATILE
We engage in various water rights acquisition, management, development,
and sale and lease activities. Accordingly, our long-term future profitability
will be primarily dependent on our ability to develop and sell or lease water
and water rights, and will be affected by various factors, including timing of
acquisitions, transportation arrangements, and changing technology. To the
extent we possess junior or conditional water rights, such rights may be
subordinated to superior water right holders in periods of low flow or drought.
Our current water rights and the transferability of these rights to
other uses and places of use are governed by the laws concerning water rights in
the states of Arizona, 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. Legal
impediments exist to sale or transfer of some of these water rights which may
affect their commercial value.
27
<PAGE> 28
In addition to the risk of delays associated with receiving all
necessary regulatory approvals and permits, we may also encounter unforeseen
technical difficulties which could result in construction delays and cost
increases with respect to our water development projects.
OUR WATER ACTIVITIES MAY BECOME CONCENTRATED IN A LIMITED NUMBER OF ASSETS,
MAKING OUR GROWTH AND PROFITABILITY VULNERABLE TO FLUCTUATIONS IN LOCAL
ECONOMIES AND GOVERNMENTAL REGULATIONS
In the future, we anticipate that a significant amount of Vidler's
revenues and asset value will come from a limited number of assets, including
our water rights in the Harquahala Valley and the Vidler Arizona Recharge
Facility.
Historically, a majority of Vidler's water service revenue has come
from our Colorado water assets. Although we continue to acquire and develop
additional water assets, in the foreseeable future we anticipate that our
revenues will still be derived from a limited number of assets.
THE PRICE OF WATER IS VOLATILE, WHICH CAN HAVE A SIGNIFICANT EFFECT ON OUR COSTS
OF ACQUIRING WATER AND THE PRICES AT WHICH WE ARE ABLE TO SELL WATER
Our profitability is significantly affected by changes in the market
price of water. Water prices may in the future fluctuate widely and are affected
by climatic, demographic and technologic factors affecting demand.
ENVIRONMENTAL REGULATIONS MAY DETRACT FROM OUR FUTURE REVENUE STREAMS AND
PROFITABILITY BY LIMITING OUR CUSTOMER BASE
Water we lease or sell may be subject to regulation as to quality by
the United States Environmental Protection Agency acting pursuant to the federal
Safe Drinking Water Act. While environmental regulations do not directly affect
us, the regulations regarding the quality of water distributed affects our
intended customers and may, therefore, depending on the quality of our water,
impact the price and terms upon which we may in the future sell our water or
water rights.
OUR WATER SALES MAY MEET WITH POLITICAL OPPOSITION IN CERTAIN LOCATIONS, THEREBY
LIMITING OUR GROWTH IN THESE AREAS
The transfer of water rights from one use to another may affect the
economic base of a community and will, in some instances, be met with local
opposition. Moreover, certain of the end users of our water rights, namely
municipalities, regulate the use of water in order to control or deter growth.
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, the results of operations and cash flows may be adversely affected
by:
o exposure to fluctuations in exchange rates;
o the imposition of governmental controls;
o the need to comply with a wide variety of foreign and U.S. export laws;
o political and economic instability;
o trade restrictions;
o changes in tariffs and taxes;
o volatile interest rates;
o changes in certain commodity prices;
o exchange controls which may limit our ability to withdraw money;
o the greater difficulty of administering business overseas; and
o 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.
28
<PAGE> 29
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:
o quarterly variations in financial performance;
o shortfalls in revenue or earnings from levels forecast by securities
analysts;
o changes in estimates by such analysts;
o product introductions;
o our competitors' announcements of extraordinary events such as
acquisitions;
o litigation; and
o 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, 1997,
the closing price of our common stock on the NASDAQ National Market was $32.19
per share, compared to $12.31 at December 31, 1999. 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 $12.31 at December 31, 1999. During 2000, closing prices
have ranged from a low of $9.875 per share on March 27 to a high of $14.125 on
January 18.
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 OUR 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 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.
At the Annual Meeting of Shareholders on October 19, 2000, our
shareholders voted to amend the Articles of Incorporation to eliminate the
preferred shares. We anticipate that the necessary documentation will be filed
with the California Secretary of State shortly, and that the preferred shares
will be eliminated by the end of the fourth quarter.
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.
29
<PAGE> 30
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. At September 30, 2000, the
Company had $71.4 million of fixed maturity securities and mortgage loans, $70.9
million of marketable equity securities that were subject to market risk, and
$38.9 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 $1 million for a 100 basis point increase 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
$5.8 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 $6.7 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.
30
<PAGE> 31
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 13, 2000 By: /s/ Gary W. Burchfield
-------------------------------------
Gary W. Burchfield
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
31
<PAGE> 32
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 Hyperfeed.
# 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.
-10.55 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.
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.
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.
# 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).
32
