<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________________ to
Commission File Number: 0-18786
PICO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2723335
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
875 PROSPECT STREET, SUITE 301
LA JOLLA, CALIFORNIA 92037
(858) 456-6022
(Address and telephone number of principal executive offices)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
The number of shares outstanding of the Registrant's Common Stock, $0.001 par
value, was 13,448,533 as of June 30, 1999. As of such date, 4,394,127 shares of
common stock were held by the registrant and subsidiaries of the registrant.
1
<PAGE> 2
PICO HOLDINGS, INC.
FORM 10-Q/A
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets as of 3
June 30, 1999 (As Restated) and December 31, 1998
Consolidated Statements of Operations 4
for the Three and Six Months Ended June 30, 1999 and 1998
(As Restated)
Consolidated Statements of Cash Flows for 5
the Six Months Ended June 30, 1999 and 1998 (As Restated)
Notes to Consolidated Financial Statements (As Restated) 6
Item 2: Management's Discussion and Analysis of Financial 15
Condition and Results of Operations (As Restated)
Item 3: Quantitative and Qualitative Disclosure About Market Risk 34
PART II: OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 35
Item 6: Exhibits and Reports on Form 8-K 35
Signature 36
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(Unaudited)
(AS RESTATED,
See Note 8)
<S> <C> <C>
ASSETS
Investments $ 143,701,881 $ 116,411,780
Cash and cash equivalents 55,637,620 71,654,196
Accrued investment income 983,917 1,295,550
Premiums and other receivables, net 10,077,526 10,414,017
Reinsurance receivables 58,436,280 55,624,830
Prepaid deposits and reinsurance premiums 1,306,581 2,187,387
Deferred policy acquisition costs 5,098,212 5,548,634
Surface, water, geothermal and mineral rights 114,782,977 116,653,211
Property and equipment, net 1,449,648 1,851,502
Income taxes receivable 4,133,384 6,522,454
Other assets 7,010,462 7,011,957
------------- -------------
Total assets $ 402,618,488 $ 395,175,518
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses, net of discount $ 146,022,492 $ 155,020,696
Unearned premiums 18,101,299 20,804,432
Reinsurance balance payable 12,793,054 12,068,890
Deferred gain on retroactive reinsurance 1,800,994 1,800,994
Other liabilities 8,657,371 11,402,000
Bank and other borrowings 12,732,435 8,966,707
Deferred income taxes 5,581,988 7,185,656
Excess of fair value of net assets acquired over purchase price 4,212,558 4,496,551
------------- -------------
Total liabilities 209,902,191 221,745,926
------------- -------------
Commitments and Contingencies (Note 5)
Preferred stock, $.01 par value, authorized 2,000,000 shares, none issued
Common stock, $.001 par value; authorized 100,000,000 shares, issued and
outstanding 13,448,533 at June 30, 1999 and 13,328,770 at December 31, 1998 13,449 13,329
Additional paid-in capital 186,004,827 183,154,588
Retained earnings 80,964,133 75,504,882
Accumulated other comprehensive loss 3,563,523 (7,705,165)
Treasury stock, at cost (4,394,127 common shares in 1999 and 4,380,780 in 1998) (77,829,635) (77,538,042)
------------- -------------
Total shareholders' equity 192,716,297 173,429,592
------------- -------------
Total liabilities and shareholders' equity $ 402,618,488 $ 395,175,518
============= =============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
3
<PAGE> 4
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(AS RESTATED, See Note 8)
<S> <C> <C> <C> <C>
Revenues:
Premium income $ 8,526,934 $ 8,455,012 $ 17,081,908 $ 17,593,463
Net investment income 1,258,276 1,805,005 3,172,630 4,368,918
Net realized gain on investments 3,115,975 1,970,236 2,771,580 2,569,679
Other income 1,626,887 1,423,978 2,011,890 2,044,476
------------ ------------ ------------ ------------
Total revenues 14,528,072 13,654,231 25,038,008 26,576,536
------------ ------------ ------------ ------------
Expenses:
Loss and loss adjustment expenses 5,575,576 5,666,837 12,091,602 13,661,078
Insurance underwriting and other expenses 6,966,283 6,522,032 13,464,747 12,512,378
------------ ------------ ------------ ------------
Total expenses 12,541,859 12,188,869 25,556,349 26,173,456
------------ ------------ ------------ ------------
Equity in loss of unconsolidated affiliates (444,285) (489,702) (805,577) (1,003,123)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
income taxes and minority interest 1,541,928 975,660 (1,323,918) (600,043)
Provision (benefit) for federal, foreign and state income taxes (5,863,807) (353,249) (6,340,929) 504,560
------------ ------------ ------------ ------------
Income (loss) from continuing operations before minority interest 7,405,735 1,328,909 5,017,011 (1,104,603)
Minority interest in (income) loss of subsidiary (498,524) 206,116
------------ ------------ ------------ ------------
Income (loss) from continuing operations 7,405,735 830,385 5,017,011 (898,487)
Income from discontinued operations, net of income tax
provision of $35,000 and $44,000 for the three and six
months of 1998, respectively 103,367 154,622
------------ ------------ ------------ ------------
Income (loss) before extraordinary gain 7,405,735 933,752 5,017,011 (743,865)
Extraordinary gain, net of income tax expense of $227,821 442,240 442,240
------------ ------------ ------------ ------------
Net income (loss) $ 7,847,975 $ 933,752 $ 5,459,251 $ (743,865)
============ ============ ============ ============
Net income (loss) per common share - basic:
Continuing operations $ 0.83 $ 0.14 $ 0.56 ($ 0.14)
Discontinued operations 0.02 0.02
Extraordinary gain 0.05 0.05
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.88 $ 0.16 $ 0.61 ($ 0.12)
============ ============ ============ ============
Weighted average shares outstanding 8,938,693 6,019,817 8,942,550 6,302,401
============ ============ ============ ============
Net income (loss) per common share - diluted:
Continuing operations $ 0.78 $ 0.13 $ 0.52 ($ 0.14)
Discontinued operations 0.02 0.02
Extraordinary gain 0.05 0.05
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.83 $ 0.15 $ 0.57 ($ 0.12)
============ ============ ============ ============
Weighted average shares outstanding 9,458,320 6,254,573 9,564,012 6,302,401
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
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<PAGE> 5
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
1999 1998
------------ ------------
(AS RESTATED, See Note 8)
<S> <C> <C>
OPERATING ACTIVITIES
Net cash used in operating activities $(16,776,599) $(2,963,657)
------------ -----------
INVESTING ACTIVITIES:
Purchases of investments (22,159,500) (9,176,347)
Proceeds from sale of investments 10,317,103 14,409,318
Proceeds from maturity of investments 2,065,669 25,000
Proceeds from the sale of real estate 2,741,980 92,375
Proceeds from the sale of property and equipment 11,048
Purchases of property and equipment (71,639) (302,037)
Advances to affiliate (571,817) (476,677)
Purchases of surface, water and mineral rights (897,547) (934,287)
Other investing activities, net (2,230,902)
------------ -----------
Net cash provided by (used in) investing activities (8,575,751) 1,417,491
------------ -----------
FINANCING ACTIVITIES:
Proceeds from borrowings 6,704,451
Proceeds from exercise of warrants 2,850,359
Purchase of treasury stock (291,593)
------------ -----------
Net cash provided by financing activities 9,263,217
------------ -----------
Effect of exchange rate changes on cash 72,557 (456,308)
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (16,016,576) (2,002,474)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 71,654,196 56,435,786
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 55,637,620 $54,433,312
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 440,000
===========
Interest $ 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
(AS RESTATED, SEE NOTE 8)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of PICO Holdings, Inc. ("PICO") and Subsidiaries (the "Company") have been
prepared in accordance with the interim reporting requirements of Form
10-Q, pursuant to the rules and regulations of the United States Securities
and Exchange Commission (the "SEC"). Accordingly, they do not include all
of the information and notes required by generally accepted accounting
principles for complete financial statements.
In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation of financial
position as of June 30, 1999 and December 31, 1998 and results of
operations for the three and six months ended June 30, 1999 and 1998, and
cash flows for the six months ended June 30, 1999 and 1998 have been
included and are of a normal recurring nature. Operating results for the
three and six months ended June 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto, together with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Risks and Uncertainties contained in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998 as filed with
the SEC. See Note 8 "Restatement of Previously Reported Financial
Information."
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses for
each reporting period. The significant estimates made in the preparation of
the Company's consolidated financial statements relate to the assessment of
the carrying value of investments, unpaid losses and loss adjustment
expenses, deferred policy acquisition costs, deferred income taxes and
contingent liabilities. While management believes that the carrying value
of such assets and liabilities are appropriate as of June 30, 1999 and
December 31, 1998, it is reasonably possible that actual results could
differ from the estimates upon which the carrying values were based.
2. DISCONTINUED OPERATIONS
On June 16, 1997, PICO announced the signing of a definitive agreement
to sell the Company's life and health insurance subsidiary, American
Physicians Life Insurance Company ("APL") and its wholly-owned subsidiary,
Living Benefit Administrators Agency, Inc. The closing occurred on December
4, 1998. The $17 million in proceeds from the sale was received during 1998.
Because APL and its subsidiary represented a major segment of the
Company's business, in accordance with Accounting Principles Board Opinion
No. 30 "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business," APL's operations have been classified
as discontinued operations.
Following is an unaudited summary of APL's stand alone financial
results for the three and six months ended June 30, 1998 included in the
statements of operations as discontinued operations:
<TABLE>
<CAPTION>
Three Six
Months Ended Months Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Total revenues $ 2,197,142 $ 4,360,121
Income before taxes 138,367 198,622
Net income 103,367 154,622
Net income per share - diluted $ 0.02 $ 0.02
</TABLE>
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<PAGE> 7
3. EARNINGS (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," the new method of reporting earnings
per share ("EPS") for the year ended December 31, 1997. For the six months
ended June 30, 1999 1,097,000 common stock options and 103,000 warrants were
excluded from the calculations because their effects were anti-dilutive. The
following is a reconciliation of basic and diluted EPS.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ 7,847,975 $ 933,752 $ 5,459,251 $ (743,865)
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.88 $ 0.16 $ 0.61 $ (0.12)
=========== =========== =========== ===========
Basic weighted average common shares outstanding 8,938,693 6,019,817 8,942,550 6,302,401
Options 519,627 234,756 621,462
----------- ----------- ----------- -----------
Diluted weighted average common and
common equivalent shares outstanding 9,458,320 6,254,573 9,564,012 6,302,401
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.83 $ 0.15 $ 0.57 $ (0.12)
=========== =========== =========== ===========
</TABLE>
On June 30, 1999, 119,763 PICO common stock warrants were exercised at
$23.80 per share for a total of $2.9 million. The remaining warrants expired
on June 30, 1999.
4. COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 established requirements for disclosure of
comprehensive income. The Company adopted the new standard for the year
ended December 31, 1998, and has reclassified previous financial statements
to conform to the new presentation. In addition to net income, comprehensive
income includes foreign currency translation and unrealized holding gains
and losses on available for sale securities, which prior to adoption were
reported separately in shareholders' equity.
The components of comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Comprehensive income (loss):
Net income (loss) $ 7,847,975 $ 933,752 $ 5,459,251 $ (743,865)
Net change in unrealized appreciation (depreciation)
on available for sale investments (10,657,503) 438,627 9,718,599 (529,116)
Net change in foreign currency translation (442,243) (835,495) 1,550,089 (1,033,275)
------------ --------- ----------- -----------
Total comprehensive income (loss) $ (3,251,771) $ 536,884 $16,727,939 $(2,306,256)
============ ========= =========== ===========
</TABLE>
Comprehensive income (loss) is net of deferred income tax benefits of
$5.5 million and deferred income tax expense of $5 million for the three and
six months ended June 30, 1999, respectively, and deferred income tax
expense of $226,000 and a deferred income tax benefit of $273,000 for the
three and six months ended June 30, 1998, respectively.
7
<PAGE> 8
The components of accumulated comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Accumulated other comprehensive loss:
Unrealized appreciation (depreciation)
on available for sale investments $ 7,206,812 $(2,511,787)
Foreign currency translation (3,643,289) (5,193,378)
----------- -----------
Accumulated other comprehensive loss $ 3,563,523 $(7,705,165)
=========== ===========
</TABLE>
The components of accumulated comprehensive income (loss) are net of
deferred income tax expense of $3.7 million at June 30, 1999 and a deferred
income tax benefit of $1.3 million at December 31, 1998.
5. COMMITMENTS AND CONTINGENCIES
In November 1998, Vidler Water Company, Inc. ("Vidler") entered into an
operating lease to acquire 185,000 acre-feet of underground water storage
privileges and associated rights to recharge and recover water located near
the California Aqueduct northwest of Bakersfield. The agreement requires
Vidler to pay for these privileges and rights a minimum of $2.3 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.
The Company is subject to various litigation which arise in the ordinary
course of its business. Based upon information presently available,
management is of the opinion that such litigation will not have a material
adverse effect on the Company's consolidated financial position, results of
operations, or cash flows.
On January 10, 1997, Global Equity Corporation ("GEC"), a wholly-owned
subsidiary, commenced an action in British Columbia against MKG Enterprises
Corp. ("MKG"), Vignoble Wines Agency Inc. ("Vignoble") to enforce repayment
of a $5 million loan made by GEC to MKG. On the same day, the Supreme Court
of British Columbia granted an order preventing MKG from disposing of
certain assets pending resolution of the action. GEC subsequently brought a
motion to have a receiver-manager appointed for MKG and Vignoble, which
motion has been adjourned. In addition, in March 1999 GEC filed an action
in the Supreme Court of British Columbia against a third party. This action
states the third party had fraudulently entered into loan agreements with
MKG. Accordingly, under this action GEC is claiming damages from the third
party and seeking an order restraining the third party from taking any
further action in connection with MKG's assets.
In connection with the sale of their interests in Nevada Land and
Resource Company, LLC ("NLRC") by the former members, a limited partnership
agreed to act as consultant to NLRC in connection with the maximization of
the development, sales, leasing, royalties or other disposition of land,
water, mineral and oil and gas rights with respect to certain property
owned in Nevada. In exchange for these services, the partnership was to
receive from NLRC a consulting fee calculated as 50% of any net proceeds
that NLRC actually receives from the sale, leasing or other disposition of
all or any portion of the Nevada property or refinancing of the Nevada
property provided that NLRC has received such net proceeds in a threshold
amount equal to the aggregate of: (i) the capital investment by GEC and the
Company in the Nevada property, (ii) a 20% cumulative return on such
capital investment, and (iii) a sum sufficient to pay the United States
federal income tax liability, if any, of NLRC in connection with such
capital investment. Either party could terminate this consulting agreement
in April 2002 if the partnership had not received or become entitled to
receive by that time any amount of the consulting fee. No payments have
been made under this agreement through June 30, 1999. By letter dated March
13, 1998, NLRC gave notice of termination of the consulting agreement based
on NLRC's determination of default by the partnership under the terms of
the agreement. In November 1998, the partnership sued NLRC for wrongful
termination of the consulting contract. On March 12, 1999, NLRC filed a
cross-complaint against the partnership for breach of written contract,
breach of fiduciary duty and seeking declaratory relief. The litigation is
still pending.
Effective September 1, 1999, the parties entered into a settlement
agreement wherein they agreed that the lawsuit would be
8
<PAGE> 9
dismissed without prejudice, and that NLRC would deliver a report on or
before June 30, 2002 to the limited partnership of the amount of the
consulting fee which would be owed by NLRC to the limited partnership if
the consulting agreement were in effect.
Based upon information presently available, management is of the opinion
that the above litigation will not have a material adverse effect on the
Company's consolidated financial position, results of operations or cash
flows.
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 measures those instruments at fair value.
The new standard, as amended, becomes effective for fiscal years beginning
after June 15, 2000. Management does not expect this statement to have a
material effect on the Company's consolidated financial statements.
7. SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes
standards for disclosure about operating segments in annual statements and
selected information in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise". The Company adopted this
new accounting standard beginning with the December 31, 1998 financial
statements.
The Company is a diversified holding company engaged in five major
operating segments: Investment Operations; Surface, Water and Mineral Rights
Operations; Property and Casualty Insurance Operations; Medical Professional
Liability ("MPL") Insurance Operations and Other Operations.
The accounting policies of the reportable segments are the same as those
described in the Company's 1998 annual report on Form 10-K/A. 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 by segment from continuing
operations:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Operations $ 2,932,847 $ 1,922,297 $ 2,657,846 $ 3,009,499
Surface, Water and Mineral Rights 875,941 407,764 1,241,784 578,595
Property and Casualty Insurance 9,917,556 10,316,051 19,665,479 21,107,560
Medical Professional Liability Insurance 634,485 489,373 1,182,565 1,189,617
Other Operations 167,243 518,746 290,334 691,265
----------- ----------- ----------- -----------
Total Revenues-Continuing Operations $14,528,072 $13,654,231 $25,038,008 $26,576,536
=========== =========== =========== ===========
</TABLE>
The following is a detail of segment income (loss) from continuing
operations before income taxes and minority interest:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Operations $ 1,492,960 $ 166,729 $ (371,024) $ (416,527)
Surface, Water and Mineral Rights (758,736) (304,408) (1,455,864) (740,644)
Property and Casualty Insurance 1,111,293 1,414,666 1,346,001 1,010,755
Medical Professional Liability Insurance (208,350) (353,943) (693,986) (426,194)
Other Operations (95,239) 52,616 (149,045) (27,433)
----------- ----------- ----------- -----------
Income (Loss) Before Taxes and Minority Interest $ 1,541,928 $ 975,660 $(1,323,918) $ (600,043)
=========== =========== =========== ===========
</TABLE>
9
<PAGE> 10
8. RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION
In response to a review by the staff of the United States Securities and
Exchange Commission in connection with the Company's Form S-3 registration
statement and changes in tax legislation, the Company has restated
previously issued financial statements to:
1. Change its accounting for its investment in Hyperfeed Technologies,
Inc. ("Hyperfeed") to: (i) reflect the adoption of equity accounting
for PICO's investment in HyperFeed, (ii) value Hyperfeed common
stock warrants at estimated fair value and (iii) record the carrying
value of Hyperfeed common stock warrants;
2. To reverse previously recorded investment revenue related to real
estate development projects to the appropriate prior periods;
3. Amortize a portion of the deferred lease payment relating to the
Semitropic water storage facility;
4. Change the presentation of interest forgiven to reflect the amount
as extraordinary gain, net of taxes; and
5. Record a deferred federal income tax benefit from tax loss
carryforwards based upon a change in tax legislation.
The Company's consolidated financial statements for the years ended
December 31, 1998, 1997 and 1996 and for the three months ended March 31,
1999 and 1998 and for the three and six months ended June 30, 1999 and
1998 have been restated from amounts previously reported.
10
<PAGE> 11
Presented in the table below are the effects of the restatement on previously
reported information as of and for the three and six months ended June 30, 1999
and 1998:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 1999 June 30, 1998
------------------------------- -------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total revenues $ 14,528,072 $ 14,528,072 $ 13,654,231 $ 13,654,231
Total expenses 11,705,131 12,541,859 12,187,942 12,188,869
Equity in loss of unconsolidated
affiliates (404,630) (444,285) (284,428) (489,702)
------------ ------------ ------------ ------------
Income from continuing operations
before income taxes and minority interest 2,418,311 1,541,928 1,181,861 975,660
Provision (benefit) for taxes 831,654 (5,863,807) (296,152) (353,249)
------------ ------------ ------------ ------------
Income from continuing operations
before minority interest 1,586,657 7,405,735 1,478,013 1,328,909
Minority interest (499,118) (498,524)
------------ ------------ ------------ ------------
Income from continuing
operations 1,586,657 7,405,735 978,895 830,385
Discontinued operations 103,367 103,367
------------ ------------ ------------ ------------
Income before extraordinary gain 1,586,657 7,405,735 1,082,262 933,752
Extraordinary gain, net of tax 442,240
------------ ------------ ------------ ------------
Net income $ 1,586,657 $ 7,847,975 $ 1,082,262 $ 933,752
============ ============ ============ ============
Net Income per share - basic $ 0.18 $ 0.88 $ 0.18 $ 0.16
============ ============ ============ ============
Net Income per share - diluted $ 0.17 $ 0.83 $ 0.17 $ 0.15
============ ============ ============ ============
</TABLE>
The following presents the effects of the restatements on net income (loss), for
the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------------------------- -------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Total revenues $ 25,038,008 $ 25,038,008 $ 27,388,298 $ 26,576,536
Total expenses 24,552,954 25,556,349 26,177,702 26,173,456
Equity in loss of unconsolidated affiliates (624,517) (805,577) (486,821) (1,003,123)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes and minority interest (139,463) (1,323,918) 723,775 (600,043)
Provision (benefit) for taxes 404,597 (6,340,929) 929,638 504,560
------------ ------------ ------------ ------------
Income from continuing operations
before minority interest (544,060) 5,017,011 (205,863) (1,104,603)
Minority interest 206,116 206,116
------------ ------------ ------------ ------------
Income (loss) from continuing operations (544,060) 5,017,011 253 (898,487)
Discontinued operations 154,622 154,622
------------ ------------ ------------ ------------
Income (loss) before
extraordinary gain (544,060) 5,017,011 154,875 (743,865)
Extraordinary gain, net of tax 442,240
------------ ------------ ------------ ------------
Net income (loss) $ (544,060) $ 5,459,251 $ 154,875 $ (743,865)
============ ============ ============ ============
Net income (loss) per share - basic $ (0.06) $ 0.61 $ 0.02 $ (0.12)
============ ============ ============ ============
Net income (loss) per share - diluted $ (0.06) $ 0.57 $ 0.02 $ (0.12)
============ ============ ============ ============
</TABLE>
11
<PAGE> 12
The following presents the effects of the restatements on the consolidated
balance sheet as of June 30, 1999:
<TABLE>
<CAPTION>
June 30, 1999
------------------------------
As Previously
Reported As Restated
------------- ------------
<S> <C> <C>
Investments $137,187,677 $143,701,881
Total assets $396,437,618 $402,618,488
Deferred tax liabilities $ 9,645,476 $ 5,581,988
Total liabilities $213,965,679 $209,902,191
Unrealized gain (loss), net of tax $ 1,907,673 $ 7,206,812
Retained earnings $ 76,018,914 $ 80,964,133
Total shareholders' equity $182,471,939 $192,716,297
</TABLE>
(1) ACCOUNTING FOR INVESTMENT IN HYPERFEED
For the three months ended June 30, 1999 and 1998 the Company recorded
equity in losses of $40,000 and $207,000, respectively. For the six months
ended June 30, 1999 and 1998 the Company recorded equity in losses of
$181,000 and $516,000, respectively. Equity in losses reflect the before tax
effect of PICO's share of the losses of Hyperfeed based on the combination
of the common stock and preferred stock ownership percentage in 1999 and
1998 (the preferred stock was acquired on December 18, 1998 and PICO's
losses from that date forward were based on the combined percentage),
amortization of goodwill based on a straight line, ten year amortization
period, and any dilution gains or losses that arise from third party capital
infusions in Hyperfeed.
For the three months ended June 30, 1999 the individual components of
the above were PICO's share of the losses of Hyperfeed of $765,000,
amortization of goodwill of $161,000 and dilution gains of $886,000. For the
three months ended June 30, 1998, PICO's share of the loss of Hyperfeed was
$265,000, amortization of goodwill was $37,000 and dilution gains were
$95,000. For the six months ended June 30, 1999 the individual components of
the above are PICO's share of the losses of Hyperfeed of $1 million,
amortization of goodwill of $322,000 and dilution gains of $1.2 million. For
the six months ended June 30, 1998, PICO's share of the loss of Hyperfeed
was $540,000, amortization of goodwill was $74,000 and dilution gains were
$97,000.
At June 30, 1999 and December 31, 1998, the investment in Hyperfeed
consisted of 2,370,000 shares of common stock (representing 16.7% of the
common shares outstanding) and 4,786,547 shares of voting convertible
preferred stock, representing a 24% diluted voting interest and an
additional 4,055,195 common stock warrants, which, on a diluted basis, would
represent an additional 17% voting interest. The common and preferred stock
are presented using the equity method of accounting for investments in
common stock as prescribed by Accounting Principles Board No. 18, and have a
combined carrying value of $4.7 and $4.9 million at June 30, 1999 and
December 31, 1998, respectively. The difference between the carrying value
of the investment and the underlying equity in the net assets or liabilities
of Hyperfeed is considered goodwill and is being amortized over 10 years on
a straight line basis. At June 30, 1999 and December 31, 1998, the common
stock warrants are carried at an estimated fair value using the Black
Scholes option pricing model of $26 million and $6.1 million, respectively,
with an unrealized gain net of deferred income tax liability of $14.4
million and $1.3 million, respectively. The Black Scholes pricing model
incorporates assumptions in calculating an estimated fair value. The
following assumptions were used in the computations: no dividend yield for
all years; a risk-free interest rates ranging from 5% to 6%; a two year
12
<PAGE> 13
expected life; and a historical 4 year cumulative volatility of 133%. The
market value of the common shares and preferred shares based on the June 30,
1999 closing price of Hyperfeed common stock is approximately $17.5 million,
and $35.3 million, respectively. The market value of the common shares and
preferred shares based on the December 31, 1998 closing price of Hyperfeed
common stock is approximately $5 million, and $10.2 million, respectively.
(2) ACCOUNTING FOR CAPITALIZED INTEREST
In 1995, Raven Development Company ("Raven"), a wholly owned subsidiary,
began the orderly withdrawal from the real estate development business
through the sale of its remaining land and improved residential lots in
Ohio. Over the course of a number of years, affiliated companies made loans
to Raven for the purchase of land and the development of infrastructure.
Raven capitalized the interest cost on a stand-alone basis and the
affiliated companies recorded interest income. In consolidation, the
affiliated companies annually recorded an entry to reverse the effects of
the interest income and the capitalized interest. However, the capitalized
interest cost was allocated to each lot sold by Raven and became part of the
cost of sales. The elimination of the interest component of cost of sales
was not made in consolidation and, as a result, a credit remained in the
capitalized interest account. In the first quarter of 1998, as the last of
Raven's lots were sold, the cost of lots sold was adjusted to reverse the
cumulative credit in the capitalized interest account, resulting in an
adjustment to investment income of approximately $800,000. The financial
statements for the three and six months ended June 30, 1998 have been
restated to reflect the elimination of the interest expense component of the
cost of land sold. The impact of this restatement reduced revenues by
$812,000 and net income by $533,000 for the six months ended June 30, 1998.
Income in 1999 and shareholders' equity at June 30, 1999 and December 31,
1998 were unaffected.
(3) ACCOUNTING FOR DEFERRED LEASE PAYMENTS RELATED TO SEMITROPIC WATER
STORAGE
Vidler entered into an operating lease for the use of the Semitropic
Water Storage facility. The lease is payable over 10 years and allows Vidler
to operate the asset for 35 years. Revenue will be generated from the asset
through the recharge, storage and recovery of water.
The lease payments were previously treated as prepaid lease amounts to
be amortized on a straight-line basis over the remaining estimated useful
life of the asset, which is the term of the lease contract. It was the
Company's initial assessment that the recharge component of the facility was
not operational at December 31, 1998 and throughout the nine months ended
September 30, 1999. It was originally determined that the facility would not
be operational and available for its intended use until the completion of
the recharge/farming season which occurred one year after the lease
commenced. It was the Company's intention to begin amortization in the
fourth quarter of 1999 consistent with the Company's interpretation of SFAS
No. 34. Further consideration of the facts and in the absence of
authoritative guidance interpreting when the facility was available for its
intended use in this unique industry caused the Company to reconsider the
treatment. . The Company now believes it is appropriate to begin
amortization in the period in which Vidler had its first opportunity to put
water in storage which was January 1999. Accordingly, the amortization has
been recorded beginning January 1, 1999 and the quarterly financial
statements for the three months ended March 31, 1999 have been amended to
reflect amortization of the lease payments. The effect on income, pre-tax is
$166,667 for the three months ended June 30, 1999 and $333,334 for the six
months ended June 30, 1999.
(4) ACCOUNTING FOR EXTRAORDINARY GAIN
In April 1999, Nevada Land & Resource Company, LLC settled $5 million of
outstanding borrowings by exchanging the particular land deed, which was
collateral for the note. As a result of this settlement the Company
recognized a $670,000 gain because accrued interest was forgiven. The
amount, net of tax of $228,000, was presented as a reduction in expenses in
the previously filed 10-Q. The presentation has been restated to reflect
this amount as extraordinary gain, net of taxes for the three and six months
ended June 30, 1999.
(5) ACCOUNTING FOR CHANGES IN TAX LEGISLATION
During June 1999, the Internal Revenue Service issued final legislative
regulations that allow the Company to use net operating loss carryforwards
of an acquired company to offset the taxable income arising in any company
within the consolidated tax returns of the PICO Holdings group. These loss
carryforwards were previously restricted for use against taxable income of
the specific entity in which the losses arose. Due to the uncertainty
surrounding the realization of these deferred tax assets, the Company had
recorded a valuation allowance. As a result of the issuance of these
regulations, the Company has reevaluated the future recovery of this asset
and has determined that the valuation allowance is no longer required.
Consequently, the Company
13
<PAGE> 14
reevaluated the need for the valuation allowance, and as a result recorded
a deferred income tax benefit of $6.5 million in the statement of
operations.
The Company determined that the income tax benefit resulting from these
tax regulations should have been reflected in the period of enactment.
Accordingly, the Company has restated the results for the three and six
months ended June 30, 1999.
14
<PAGE> 15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section of the Report contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Discussion containing such forward-looking statements may be found in
Management's Discussion and Analysis of Financial Condition and Results of
Operations under the captions "Results of Operations -Three and Six Months Ended
June 30, 1999 and 1998," "Liquidity and Capital Resources," and "Risk Factors."
Actual results for future periods could differ materially from those discussed
in this section as a result of the various risks and uncertainties discussed
herein. A comprehensive summary of such risks and uncertainties can be found in
the Company's 1998 Form 10-K/A.
RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION
In response to a review by the staff of the United States Securities and
Exchange Commission in connection with the Company's Form S-3 registration
statement and changes in income tax legislation, the Company has restated
previously issued financial statements to change its accounting for its
investment in Hyperfeed Technologies, Inc. ("Hyperfeed"), to (i) reflect the
adoption of equity accounting for PICO's investment in Hyperfeed (ii) value
Hyperfeed common stock warrants at estimated fair value and (iii) record the
carrying value of Hyperfeed common stock warrants received as consideration for
extending the due date on outstanding loans as interest income during 1997. The
previous financial statements presented the investment in Hyperfeed common stock
at market value and the preferred stock and warrants received in 1998 as a
result of the debt conversion at cost. Additionally, the financial statements
have been restated from amounts previously reported to account for changes in
tax legislation, reverse previously recorded 1998 investment revenue related to
real estate development projects, to the appropriate prior period, to change the
presentation of interest forgiven to reflect the amount as extraordinary gain,
net of taxes, and to amortize a portion of the deferred lease payment relating
to the Semitropic water storage facility. Consequently, the Company's
consolidated financial statements for the years ended December 31, 1998, 1997
and 1996 and for the three months ended March 31, 1999 and 1998 and for the
three and six months ended June 30, 1999 and 1998 have been restated from
amounts previously reported. The effects of the restatement have been presented
in Note 8 and have been reflected herein.
RESULTS OF OPERATIONS -- THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
SUMMARY
PICO Holdings, Inc. and consolidated subsidiaries reported net income of $7.8
million, or $0.88 per share, for the quarter ended June 30, 1999, compared to
income of $934,000, or $0.16 per share, during the second quarter of 1998. For
the six month period ended June 30, 1999, PICO reported net income of $5.5
million, or $0.61 per share, compared to a net loss of $744,000, or $0.12 per
share, during the first half of 1998. Per share amounts are stated as "basic"
earnings per share.
Shareholders' equity at June 30, 1999 was $192.7 million, up $19.3 million
over December 31, 1998. Book value per share calculated on an undiluted basis as
of June 30, 1999 was $21.28 per share, up $1.90 per share from year-end 1998.
These increases in shareholders' equity and book value per share resulted
primarily from (1) a $9.7 million improvement in unrealized appreciation of
investments, net of income tax, (2) net income of $5.5 million, (3)a $1.5
million improvement in the Company's foreign currency translation adjustment in
shareholders' equity principally as a result of the strength of the Swiss franc
relative to the U.S. dollar, and (4) nearly $2.9 million in paid-in capital from
the exercise by warrant holders of approximately 120,000 PICO common stock
warrants at $23.80 per share. These increases were partially offset by $292,000
in costs from the purchase of treasury stock. The $9.7 million appreciation of
the Company's investment portfolio principally relates to its investment in
Hyperfeed common stock warrants which are convertible into Hyperfeed common
stock, valued at the estimated fair value using the Black Scholes option-pricing
model.
The $7.8 million net income for the second quarter of 1999 included $223,000
of income from Nevada Land & Resource Company, LLC ("NLRC"), compared to a
$203,000 loss in 1998; $876,000 from PICO's property and casualty ("P&C")
insurance operations, compared to $426,000 in income in 1998, $882,000 from
investment operations, compared to $171,000 in 1998; and $6.5 million in
deferred tax benefits due to recent changes in tax legislation (See Note 8,
"Restatement of Previously Reported Financial Information"). These amounts were
partially offset by $925,000 in losses from water rights operations, compared to
a $103,000 loss in 1998, and a $193,000 loss from the runoff of medical
professional liability ("MPL") insurance operations, compared to an $89,000 loss
in 1998. Included in these amounts were $3.1 million in realized investment
gains in 1999 and $2.0 million in 1998. The $426,000 improvement in NLRC's
results was primarily due to increased land sales and other operating income..
Increased project costs and non-capitalizable interest expense were principally
responsible for the additional losses incurred by PICO's water rights
operations.
15
<PAGE> 16
The $5.5 million net income recorded in the first half of 1999 included
$155,000 in income from NLRC, versus a $398,000 loss in 1998, $976,000 from P&C
operations, compared to $775,000 in 1998; and a $6.5 million deferred tax
benefit due to recent changes in tax legislation (See Note 8, "Restatement of
Previously Reported Financial Information"). This income was partially offset by
losses of $1.5 million from water rights operations, compared to a $343,000 loss
in 1998; $576,000 from investment operations compared to $71,000 of income in
1998; $592,000 from MPL operations, compared to a $207,000 loss in 1998 and
$130,000 from other operations, compared to a $58,000 loss in 1998.
Second quarter 1999 and 1998 revenues were $14.5 million and $13.7 million,
respectively. Second quarter 1999 revenues included $3.1 million in realized
investment gains compared to $2.0 million in 1998. Investment income for the
second quarter was $1.3 million, down $547,000 from that of the 1998 second
quarter, largely due to lower interest rates and a reduced level of fixed income
securities. P&C premium income was slightly higher than that of the 1998 second
quarter. Revenues for the first half of 1999 were $25.0 million versus $26.6
million in 1998. Reduced investment income, which was $3.2 million during the
first six months of 1999 compared to $4.4 million in 1998, accounted for nearly
all this difference in revenues. The 1999 six months results included realized
investment gains of $2.8 million compared to $2.6 million in 1998.
Expenses for the second quarter and first six months of 1999 were $12.5
million and $25.6 million, respectively. These amounts compare to $12.2 million
and $26.2 million, respectively, during the same periods of 1998. These expense
reductions primarily relate to decreases in expenses of the insurance
operations. P&C expenses included strengthening of reserves of approximately
$400,000 and $627,000 for the 1999 second quarter and the first six months,
respectively, based upon claims experience in the artisan-contractor insurance
coverage previously provided by Citation.
The loss before taxes for the first six months of 1999 and 1998 included
losses from PICO's investments of its unconsolidated affiliates of $806,000 and
$1 million, respectively. PICO's equity in Hyperfeed losses, amortization of
goodwill and dilution gains before taxes included in these amounts produced
combined losses of $181,000 and $516,000 for the first half of 1999 and 1998,
respectively. Dilution gains included in these amounts were $1.2 million and
$97,000, respectively. (See Footnote 8, "Restatement of Previously Reported
Financial Information"). The loss before taxes for the second quarters of 1999
and 1998 included losses from PICO's share of the losses of its unconsolidated
affiliates of $444,000 and $490,000, respectively. PICO's equity in Hyperfeed
losses, amortization of goodwill and dilution gains before taxes included in
these amounts produced combined losses of $40,000 and $206,000 for the second
quarters of 1999 and 1998, respectively. Dilution gains included in these
amounts were $886,000 and $95,000, respectively. These dilution gains for the
three and six months principally resulted from Hyperfeed issuing common stock to
third parties from the exercise of common stock warrants. In the event that
Hyperfeed records any capital transactions in the future, PICO could realize
additional dilution gains or losses.
Total assets of $402.6 million at June 30, 1999 increased over the $395.2
million at December 31, 1998 principally as a result of the unrealized
appreciation of Hyperfeed common stock warrants. Liabilities decreased $11.8
million, largely due to the reduction in claims reserves of the insurance
companies and reduction of deferred tax liabilities due to recent changes in tax
legislation(See Note 8, "Restatement of Previously Reported Financial
Information.")
Prior period per share amounts have been adjusted to reflect PICO's December
16, 1998 1-for-5 reverse stock split.
16
<PAGE> 17
The Company's ongoing operations are organized into five segments: INVESTMENT
OPERATIONS; SURFACE, WATER, AND MINERAL RIGHTS; PROPERTY AND CASUALTY INSURANCE;
MEDICAL PROFESSIONAL LIABILITY INSURANCE and OTHER OPERATIONS. Revenues and
income before taxes and minority interests from CONTINUING OPERATIONS, by
business segment, are shown in the following schedules:
Operating Revenues--Continuing Operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1999 1998 1999 1998
------ ------ ------ ------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Investment Operations $ 2.9 $ 1.9 $ 2.7 $ 3.0
Surface, Water and Mineral Rights 0.9 0.4 1.2 0.6
Property and Casualty Insurance 9.9 10.4 19.7 21.1
Medical Professional Liability Insurance 0.6 0.5 1.2 1.2
Other Operations 0.2 0.5 0.2 0.7
------ ------ ------ ------
Total Revenues-Continuing Operations $ 14.5 $ 13.7 $ 25.0 $ 26.6
====== ====== ====== ======
</TABLE>
17
<PAGE> 18
Income (Loss) Before Taxes and Minority Interest--Continuing Operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Investment Operations $ 1.5 $ 0.2 $ (0.4) $ (0.4)
Surface, Water and Mineral Rights (0.8) (0.3) (1.4) (0.7)
Property and Casualty Insurance 1.1 1.4 1.4 1.0
Medical Professional Liability Insurance (0.2) (0.3) (0.7) (0.4)
Other Operations (0.1) (0.2) (0.1)
------ ------ ------ ------
Income (Loss) Before Taxes and Minority Interest $ 1.5 $ 1.0 $ (1.3) $ (0.6)
====== ====== ====== ======
</TABLE>
INVESTMENT OPERATIONS
INVESTMENT OPERATIONS are conducted primarily by PICO, Physicians Insurance
Company of Ohio ("Physicians"), GEC and Physicians Investment Company, all
wholly-owned subsidiaries. The Company holds a number of investments in both
publicly and privately held corporations. These investments may be passive or
they may represent positions where the Company is able to exert significant
influence over the operating, financing and management strategies and decisions
of the corporation. The Company invests in businesses that it believes to be
undervalued or may benefit from additional capital, restructuring of operations
or management or improved competitiveness through operational efficiencies with
existing Company operations. However, not all investment activities are included
within the INVESTMENT OPERATIONS business segment. For example, investment
revenues and investment income generated by Physicians are first allocated to
the MEDICAL PROFESSIONAL LIABILITY INSURANCE segment based upon the amount of
invested assets needed to support Physicians' outstanding insurance reserves.
The remainder is classified as part of the INVESTMENT OPERATIONS business
segment. (See the MEDICAL PROFESSIONAL LIABILITY INSURANCE segment below.) In
addition, investment revenues and investment income generated by Sequoia and
Citation are included in the PROPERTY AND CASUALTY INSURANCE business segment
and those from The Professionals Insurance Company ("PRO"), in the MEDICAL
PROFESSIONAL LIABILITY INSURANCE segment, and not in the INVESTMENT OPERATIONS
business segment. SEE NOTE 7, "SEGMENT REPORTING."
INVESTMENT OPERATIONS revenues were $2.7 million for the first six months of
1999 compared to $3 million during the first six months of 1998, a decline of
$300,000. As shown below, 1999 realized investment gains of $3.0 million
surpassed those of the first half of 1998 by $600,000. However, investment
income for the first six months of 1999 allocated to INVESTMENT OPERATIONS was
$900,000 less than during the first half of 1998. This decrease in investment
income assigned to INVESTMENT OPERATIONS resulted primarily from reduced levels
of fixed income securities and invested cash and reduced interest rates.
Investment income assigned to the INVESTMENT OPERATIONS segment was
negative for the first six months and second quarter of 1999 as a result of
allocations of investment income to the MEDICAL PROFESSIONAL LIABILITY INSURANCE
segment. Approximately $1.1 million in investment income was allocated to the
MEDICAL PROFESSIONAL LIABILITY INSURANCE segment for the first half of 1999
compared to $1.3 million during the same 1998 period and $600,000 during the
second quarter of 1999 compared to $600,000 in 1998. Allocation of investment
income results from the allocation of invested assets to business segments,
since invested assets are not directly assigned.
Second quarter revenues of $2.9 million surpassed those of the same 1998
period by $1.0 million. Realized investment gains were $3.1 million for the
second quarter of 1999 compared to $1.9 million in the 1998 second quarter.
Investment income for the second quarter of 1999 was $500,000 less than in the
second quarter of 1998 due to a reduced level of interest bearing instruments
and an increase in the amount of loans within the consolidated group. Other
income amounted to $400,000 during the second quarter of 1999, an increase of
$300,000 over the second quarter of 1998.
18
<PAGE> 19
Revenues (charges) from INVESTMENT OPERATIONS are summarized below:
INVESTMENT OPERATIONS REVENUES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Investment Operations Revenues (Charges):
Realized Investment Gains $ 3.1 $ 1.9 $ 3.0 $ 2.4
Investment Income (charges) (0.6) (0.1) (0.4) 0.5
Other Income 0.4 0.1 0.1 0.1
------ ------ ------ ------
Investment Operations Revenues $ 2.9 $ 1.9 $ 2.7 $ 3.0
====== ====== ====== ======
</TABLE>
At June 30, 1999, the consolidated investment portfolio contained $7.2
million, net of taxes, in unrealized gains, compared to $2.5 million in
unrealized losses at December 31, 1998. Most of this $9.7 million improvement
was attributable to the Company's investment in Hyperfeed warrants which were
valued using the Black Scholes option-pricing model
INVESTMENT OPERATIONS produced a $371,000 loss before taxes during the first
half of 1999 compared to a $417,000 loss during the first half of 1998., The
first half of 1999 included approximately $600,000 of loss from PICO's equity in
its investee, Conex Continental Inc., as well as $200,000 of loss from PICO's
equity in its investment in Hyperfeed. This compares to a $1 million loss from
the first six months of 1998. During the second quarter of 1999, INVESTMENT
OPERATIONS produced $1.5 million in pre-tax income, compared to $167,000 in
income during the same 1998 quarter. This $1.3 million increase in pre-tax
income was primarily generated by realized investment gains which increased from
$1.9 million during the second quarter of 1998 to $3.1 million in the 1999
second quarter.
The Company's INVESTMENT OPERATIONS income can fluctuate greatly from period
to period. A number of factors contribute to these fluctuations, including,
among other things, the mix of the Company's portfolio, timing of the Company's
realization of capital gains, the volume of trading and demand for individual
securities the Company owns and fluctuations in the U.S. and world stock and
bond markets in general. Therefore, future results cannot and should not be
predicted based upon past performance alone.
See "RISK FACTORS."
Income (loss) before tax from INVESTMENT OPERATIONS for the three and six
months ended June 30, 1999 and 1998 included:
INVESTMENT OPERATIONS INCOME (LOSS) BEFORE TAX
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Investment Operations Income (Loss) Before Tax:
Investment Operations Income $ 1.9 $ 0.7 $ 0.4 $ 0.6
Equity in Loss of Investee (0.4) (0.5) (0.8) (1.0)
------ ------ ------ ------
Investment Operations Income (Loss) Before Tax $ 1.5 $ 0.2 $ (0.4) $ (0.4)
====== ====== ====== ======
</TABLE>
19
<PAGE> 20
SURFACE, WATER, AND MINERAL RIGHTS
There are two subsidiaries that comprise the surface, water and mineral
rights segment operations: Vidler and NLRC. Vidler, a Delaware corporation,
engages in the water marketing and transfer business. The business plan calls
for Vidler to identify areas where water supplies are needed in the southwestern
United States and then to acquire and aggregate agricultural water supplies and
develop them for the use of municipalities, water districts, developers and
others. In addition, Vidler develops and manages water storage to facilitate
more efficient use of water primarily for use by others. Vidler has purchased or
leased water rights and related assets in Colorado, Nevada, Arizona and
California.
NLRC, a limited liability company, was acquired in 1997. NLRC owns
approximately 1.3 million acres of deeded land, fee-simple, located in northern
Nevada, together with appurtenant surface, water and mineral rights. NLRC is
actively engaged in activities it believes will maximize the property's value in
relation to water rights, mineral rights and land development.
Following is a breakdown of revenue and pre-tax income (loss) before minority
interest from SURFACE, WATER, AND MINERAL RIGHTS operations for the periods
shown:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Revenues - Surface, Water and Mineral Rights:
VIDLER:
Operating Revenues $ 0.2 $ 0.2 $ 0.3 $ 0.3
NLRC:
Operating Revenues 0.3 0.2 0.5 0.3
Land Sales 0.4 0.4
------ ------ ------ ------
Segment Total Revenues $ 0.9 $ 0.4 $ 1.2 $ 0.6
====== ====== ====== ======
Income (Loss) Before Tax and Minority Interest:
Vidler Water Company, Inc. $ (1.0) $ (0.1) $ (1.6) $ (0.3)
Nevada Land and Resources Company LLC 0.2 (0.2) 0.1 (0.4)
------ ------ ------ ------
Income (Loss) Before Tax and Minority Interest $ (0.8) $ (0.3) $ (1.5) $ (0.7)
====== ====== ====== ======
</TABLE>
SURFACE, WATER, AND MINERAL RIGHTS
Operating revenues include land leases, principally for grazing, agricultural,
communications and easement purposes; water sales and leasing and other income.
A portion of the lease revenue Vidler receives is from leases under a perpetual
agreement. Payments for these leases are indexed to the consumer price index
("CPI"), with a 3% minimum increase per year. Currently, approximately 28% of
Vidler's total revenue is subject to this type of lease. Once water rights or
assets are leased in perpetuity, they cannot be leased again unless the lease is
cancelled, if cancelable. Consequently, future revenue growth beyond the limits
of these CPI escalators is dependent upon growth in leases not subject to
perpetual agreements, development of existing assets, and acquisition of
additional water rights and water related assets for subsequent lease or sale.
The sale of water rights or assets reduces future revenue streams from water
rights and assets until those assets can be replaced.
Revenues from SURFACE, WATER, AND MINERAL RIGHTS operations for the six
months ended June 30, 1999 doubled over those of the same 1998 period,
increasing from $600,000 to $1.2 million. As shown above, all of the increase in
revenues was provided by NLRC, including a $400,000 increase in land sales.
Vidler's revenues remained constant at $300,000. For the second quarter,
revenues increased $500,000 or 125% over the second quarter of 1998 to $900,000.
Once again, this increase was due to NLRC, primarily from land sales.
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<PAGE> 21
SURFACE, WATER, AND MINERAL RIGHTS operations for the first half of 1999
resulted in a $1.4 million loss before taxes and minority interest, compared to
a $700,000 loss during the same 1998 six month period. Operating and overhead
expenses exceeded Vidler's revenues during the first half and second quarter of
1999 resulting in losses of $1.6 million and $1 million, respectively. Vidler
produced before tax losses of $300,000 and $100,000, respectively, during the
same 1998 periods. Most of the increase in overhead expenses relates to
increased interest expense, amortization of expense related to the Semitropic
lease, salaries and benefits related to the acquisition of additional assets.
NLRC produced before tax profits of $130,000 and $200,000 for the first half
and second quarter of 1999. This compares to losses of $400,000 and $200,000,
respectively, during the same 1998 periods. As evidenced by the revenues from
land sales shown above, NLRC continues to actively market selected non-strategic
parcels of land.
During the second half of 1999, NLRC settled $5 million of outstanding debt
by exchanging the land deed that was collateral for the borrowing. The $442,000
gain resulting from forgiveness of the accrued interest is presented as an
extraordinary item, net of $227,000 of income tax expense on the statement of
operations.
PROPERTY AND CASUALTY INSURANCE
Sequoia and Citation account for all of the ongoing revenues of the PROPERTY
AND CASUALTY ("P&C") INSURANCE business segment. These companies write
predominately light commercial and multiple peril insurance coverage in central
and northern California and Nevada. Sequoia and Citation are continually seeking
ways to realize savings and take advantage of synergies and to combine
operations, wherever possible.
As shown below, earned premiums made up most of the PROPERTY AND CASUALTY
INSURANCE segment revenues. Premiums are earned pro-rata throughout the year
according to the coverage dates of the underlying policies:
PROPERTY AND CASUALTY INSURANCE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
------ ------ ------ ------
P & C Insurance Revenues (Charges): (in millions) (in millions)
<S> <C> <C> <C> <C>
Earned Premiums - Sequoia $ 4.3 $ 4.4 $ 8.6 $ 9.0
Earned Premiums - Citation 4.3 4.4 8.6 8.8
Investment Income 1.2 1.4 2.4 2.8
Realized Investment Gains (Losses) (0.2) 0.1
Other 0.1 0.2 0.3 0.4
------ ------ ------ ------
Total P&C Insurance Revenues $ 9.9 $ 10.4 $ 19.7 $ 21.1
====== ====== ====== ======
P & C Insurance Income Before Taxes:
Sequoia Insurance Company $ 0.6 $ 0.7 $ 0.7 $ 0.4
Citation Insurance Company 0.5 0.7 0.6 0.6
------ ------ ------ ------
Total P&C insurance Income Before Taxes $ 1.1 $ 1.4 $ 1.3 $ 1.0
====== ====== ====== ======
</TABLE>
PROPERTY AND CASUALTY INSURANCE revenues for the first half of 1999 were
$19.7 million compared to $21.1 million during the first six months of 1998.
Declining earned premiums accounted for approximately $600,000 of this $1.3
million , or 6.6%, decrease between years, principally as a result of continuing
increased underwriting selectivity applied to Citation's business and aggressive
competition for commercial multiple peril business within the state of
California. Total PROPERTY AND CASUALTY INSURANCE earned premiums for the first
half of 1999 were $17.2 million compared to $17.8 million in 1998. Practically
all new P&C insurance applications and policies scheduled to renew are now being
processed through Sequoia and subjected to Sequoia's underwriting standards
which are much more stringent than those previously employed by Citation prior
to its change in control. As a result, a significant portion of Citation's prior
book of business has not been renewed over the past two-plus years. As
previously mentioned, increased competition within the state of California for
commercial insurance has also decreased earned premiums. Accounting for
21
<PAGE> 22
most of the remaining difference between years was investment income, down
$400,000 or 14.3%. The decline in investment income principally resulted from a
reduction in invested assets during 1998 and 1999 resulting from cash
utilization in operating activities due to the decline in premium revenue.
Investment losses realized during the first half of 1999 amounted to $200,000,
compared to $100,000 in realized investment gains during the first six months of
1998.
For the quarters ended June 30, 1999 and 1998, PROPERTY AND CASUALTY
INSURANCE operations produced revenues of $9.9 million and $10.4 million,
respectively. Earned premiums were $8.6 million and $8.8 million, respectively
for the two periods. Investment income for the second quarter of 1999 was $1.2
million compared to $1.4 million during the same 1998 quarter.
Sequoia and Citation entered into a reinsurance pooling agreement effective
January 1, 1998 which provides for the pooling of all insurance premiums,
losses, loss adjustment expenses ("LAE") and administrative and other insurance
operating expenses between Sequoia and Citation and a 50/50 retrocession between
the companies. The reinsurance pooling agreement calls for these items to be
split equally between the two companies. Since the inception of the reinsurance
pooling agreement, Sequoia's retained net written and earned premiums have been
significantly reduced by the premium cessions to Citation. However, the decline
in Sequoia's retained net written and earned premiums due to the reinsurance
pooling agreement produced a corresponding increase in Citation's net written
and earned premiums.
PROPERTY AND CASUALTY INSURANCE operations produced $1.3 million in income
before taxes during for the first half of 1999, up $400,000 from the $1.0
million recorded during the same 1998 period. The 1997-98 "El Nino" phenomenon
had a significant impact on the 1998 results. As shown below, Citation's and
Sequoia's 1999 loss and LAE ratios for the first six months improved 5.8 and 8.2
percentage points, respectively, over the first half of 1998, principally due to
improved claims experience. Citation's loss and LAE ratio for the six months
ended June 30, 1999 was 9.6 percentage points higher than Sequoia's. The
principal reason for this difference was loss experience from the
artisan-contractor coverage no longer written by Citation. Citation strengthened
claims and LAE reserves for artisan-contractor claims by $627,000 during the
first six months of 1999.
Higher expense ratios for both Sequoia and Citation resulted from the reduced
level of premiums, resulting in a higher ratio of overhead expenses to earned
premiums. For the second quarter, Citation's and Sequoia's loss ratios for 1999
increased slightly over those of the second quarter of 1998. Citation's expense
ratio remained at about the same level as during the second quarter of 1998, but
Sequoia's expense ratio decreased 1.5 percentage points principally due to
reduced overhead expenses. SEE RATIOS BELOW BASED UPON LOSSES, LAE AND INSURANCE
OPERATING EXPENSES CALCULATED ON THE BASIS OF GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP), DIVIDED BY NET EARNED PREMIUM.
The following schedule shows Citation's losses, LAE and insurance operating
expenses as percentages of earned premiums:
CITATION INSURANCE COMPANY
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
(GAAP Basis) (GAAP Basis)
<S> <C> <C> <C> <C>
Loss and LAE Ratio 65.7% 64.4% 69.2% 75.0%
Expense Ratio 43.8% 43.6% 42.3% 40.5%
------ ------ ------ ------
Loss and Expense Ratio 109.5% 108.0% 111.5% 115.5%
====== ====== ====== ======
</TABLE>
22
<PAGE> 23
The following schedule shows Sequoia's losses, LAE and insurance operating
expenses as percentages of earned premiums:
SEQUOIA INSURANCE COMPANY
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
(GAAP Basis) (GAAP Basis)
<S> <C> <C> <C> <C>
Loss and LAE Ratio 52.3% 51.9% 59.6% 67.8%
Expense Ratio 45.6% 47.1% 44.2% 44.1%
------ ------ ------ ------
Loss and Expense Ratio 97.9% 99.0% 103.8% 111.9%
====== ====== ====== ======
</TABLE>
Loss and LAE ratios, insurance operating expense ratios and combined ratios
were calculated using net earned premiums as a denominator. Theoretically, a
combined loss and expense ratio of less than 100% indicates that the insurance
company is making a profit on its base insurance business before consideration
of investment income, realized investment gains or losses, extraordinary items,
taxes and other non-insurance items.
MEDICAL PROFESSIONAL LIABILITY INSURANCE
Physicians' and PRO's medical professional liability insurance business was
sold to Mutual Assurance Inc. ("Mutual") on August 28, 1995. All new and renewal
MPL insurance policies written between July 16 and December 31, 1995 were 100%
reinsured by Mutual. Physicians and PRO ceased writing new and renewal MPL
insurance policies effective January 1, 1996. Physicians continues to administer
and adjust the remaining claims and LAE reserves. Accordingly, although
Physicians and PRO effectively ceased writing MPL insurance in 1995, MEDICAL
PROFESSIONAL LIABILITY INSURANCE is treated as a separate business segment of
continuing operations due to the continued management of claims and the active
management of invested assets.
Physicians' and PRO's assets are not designated on an individual security
basis as belonging either to the MEDICAL PROFESSIONAL LIABILITY INSURANCE or the
INVESTMENT OPERATIONS business segment. Consequently, Physicians' invested
assets produce income in both the MEDICAL PROFESSIONAL LIABILITY INSURANCE and
INVESTMENT OPERATIONS segments. All of PRO's operating revenues and pre-tax
income are assigned to the MEDICAL PROFESSIONAL LIABILITY INSURANCE segment.
However, all investment income and realized investment gains generated by
Physicians from assets in excess of those needed to support the MPL claims are
allocated to the Investment Operations segment. SEE NOTE 7, "SEGMENT REPORTING."
Revenues(charges) and pre-tax loss from MEDICAL PROFESSIONAL LIABILITY
INSURANCE operations were as follows for the periods shown:
MEDICAL PROFESSIONAL LIABILITY INSURANCE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
(in millions) (in millions)
<S> <C> <C> <C> <C>
MPL Revenues (Charges):
Investment Income, Net of Expenses $ 0.6 $ 0.7 $ 1.2 $ 1.4
Premiums (0.2) (0.2)
------ ------ ------ ------
MPL Revenues $ 0.6 $ 0.5 $ 1.2 $ 1.2
====== ====== ====== ======
MPL Loss Before Tax: $ (0.2) $ (0.3) $ (0.7) $ (0.4)
====== ====== ====== ======
</TABLE>
23
<PAGE> 24
Since the withdrawal of Physicians and PRO from their personal automobile and
homeowners lines of business in the late 1980's, MPL has been these two
companies' only sources of insurance premiums. Investment income revenues will
continue to accrue to the MPL runoff.
MEDICAL PROFESSIONAL LIABILITY INSURANCE revenues were $1.2 million during
the first half of 1999, the same as in the first half of 1998. Investment income
during the first six months of 1999 accounted for all of the $1.2 million in
revenues, but was approximately $200,000 or 14% less than during the same 1998
period For the 1999 second quarter, revenues were $600,000, an increase of
$100,000 over the second quarter of 1998. Investment income continued to decline
during the second quarter and first six months of 1999, principally as a result
of the reduced level of MPL claims and, correspondingly, the resultant reduced
level of invested assets allocated to the MEDICAL PROFESSIONAL LIABILITY
INSURANCE business segment.
MPL operations produced a pre-tax loss of approximately $700,000 during the
first six months of 1999, compared to a $400,000 loss during the same 1998
period. The 1999 second quarter loss of $200,000 compares to a $300,000 loss
during the second quarter of the previous year.
Physicians' claims department staff continues to process the runoff of the
remaining MPL loss and loss adjustment expense claims which is progressing
routinely. At June 30, 1999, MPL reserves totaled $54.2 million, net of
reinsurance and discount. This compares to $60.9 million at December 31, 1998.
MPL loss and LAE reserves continue to decline as a result of the disposition of
claims.
MPL INSURANCE -- LOSS AND LAE RESERVES
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(in millions)
<S> <C> <C>
Direct Reserves $ 89.7 $ 97.1
Ceded Reserves (28.1) (27.7)
Discount of Net Reserves (7.4) (8.5)
------ ------
Net MPL Reserves $ 54.2 $ 60.9
====== ======
</TABLE>
Although MPL reserves are certified annually by two independent actuaries, as
required by Ohio insurance regulations, significant fluctuations in reserve
levels can occur based upon a number of variables used in actuarial projections
of ultimate incurred losses and LAE.
24
<PAGE> 25
OTHER OPERATIONS
OTHER OPERATIONS consists principally of Summit Global Management's (Summit)
investment management operations.
Revenues (charges) and pre-tax losses from other operations are summarized
below:
OTHER OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Revenues (Charges) from Other Operations:
Investment Management Services $ 0.2 $ 0.3 $ 0.5 $ 0.6
Less: Intercompany Portfolio Mgmt. Charges (0.1) (0.1) (0.2)
Other 0.3 (0.1) 0.3
------ ------ ------ ------
Revenues from Other Operations $ 0.2 $ 0.5 $ 0.3 $ 0.7
====== ====== ====== ======
------ ------ ------ ------
Other Operations-Loss Before Tax $ (0.1) $ -- $ (0.2) $ (0.1)
====== ====== ====== ======
</TABLE>
Revenues from OTHER OPERATIONS for the first six months of 1999 were
approximately $200,000 compared to $700,000 during the first half of 1998.
Summit's revenues after the elimination of intercompany charges provided
approximately $100,000 of this decline. A decline of $400,000 in revenues from
miscellaneous other sources accounted for the remainder of the total decline in
revenues. The 1998 period included $200,000 in commission income from a now
inactive insurance agency, CLM Insurance Agency, owned by Sequoia and $100,000
in real estate sales by Raven Development Company, a deactivated real estate
development agency owned by Physicians. Second quarter 1999 revenues were
$200,000, a reduction of $300,000 from the $500,000 reported during the second
quarter of 1998 which included the $200,000 CLM Insurance Agency commission
previously discussed.
OTHER OPERATIONS recorded approximately $200,000 in losses before taxes for
the first six months of 1999, $100,000 in 1998 and a $100,000 loss during the
second quarter of 1999. No income or loss was recorded during the 1998 second
quarter.
DISCONTINUED OPERATIONS
The Company completed its disposal of all interests in the operations of
American Physicians Life Insurance Company ("APL"), the Company's former life
and health insurance subsidiary on December 4, 1998. During the first six months
of 1998, discontinued operations reported revenues of $4.4 million and pre-tax
income of approximately $200,000. For the 1998 second quarter, revenues and
pre-tax income were $2.2 million and $138,000, respectively. SEE NOTE 2,
"DISCONTINUED OPERATIONS."
LIQUIDITY AND CAPITAL RESOURCES - SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO
JUNE 30, 1998
Operating activities used $16.8 million of cash during the six months ended
1999 compared to cash used of $3 million during the same period of 1998. The
increase in cash used by operations was caused primarily by operating expenses,
claims and LAE payments (both property and casualty and MPL) and reductions in
premiums received. Although insurance premiums earned continued to decline
slightly in 1999, reinsurance receivables increased $2.8 million during the
first six months of 1999. This increase primarily resulted from increases in P&C
insurance reinsurance reserves, rather than increases in reinsurance balances
receivable from reinsurers. As loss reserves are paid at later dates,
corresponding reinsurance reserves will be billed and due from reinsurers at
that time. Actual balances due from reinsurers at June 30, 1999 were $1.9
million compared to $1.1 million at December 31, 1998. This $800,000 increase
resulted from the payment of claims during the period that exceeded reinsurance
retention limits. All of the Company's reinsurers are highly rated (at least
"A", "Excellent") by A. M. Best Company, except for one company, which is not
rated due to its withdrawal from the reinsurance business in 1995. PICO has very
little business reinsured with this reinsurer and its balance
25
<PAGE> 26
is current. A. M. Best Company's ratings reflect A. M. Best Company's assessment
of the reinsurer's financial condition, as well as the expertise and experience
of its management.
Cash flow from investing activities used $8.6 million during the first six
months of 1999 compared to $1.4 million of cash provided during 1998. During
1999, the Company purchased an additional 6.2 million shares of Australian Oil
and Gas for $6.6 million, increasing its ownership to approximately 15.4%. In
addition, 71,000 shares of Jungfraubahn Holding AG were purchased for $11
million. This acquisition was financed with $3.7 million in cash and $7.1
million of borrowings denominated in Swiss Francs. For the six months ended, the
borrowings, translated at average rates in effect during the period amounted to
$7 million. The sale and maturity of investments provided $12.3 million during
1999. Cash provided by investing activities during 1998 primarily included
proceeds from the sale of investments of $14.4 million offset by purchases of
investments of $9.2 million.
Financing activities during 1999 provided cash of $2.9 million from the
exercise of 120,000 common stock warrants. Offsetting cash proceeds from the
warrants was the $6.7 million in borrowings obtained to purchase additional
shares of Jungfraubahn Holding AG. There were no financing activities that
provided or used cash during the same period in 1998.
Vidler is committed to funding its obligation with Semitropic for water
storage (see Note 5). The $2.4 million payment, due in November is required
annually through the year 2008. In addition, the Company is committed to
maintaining Sequoia's capital and statutory policyholder surplus at a minimum of
$7.5 million. At June 30, 1999, Sequoia's statutory policyholder surplus was
$25.5 million. The Company is also committed to maintaining Sequoia's Best
Rating at or above the "B++" (Very Good) level, which may at some time in the
future require additional capital infusions into Sequoia.
At June 30, 1999, the Company had no other significant commitments for
capital expenditures, other than in the ordinary course of business.
CAPITAL RESOURCES
The Company's primary source of funds are its available cash resources of
$55.6 million at June 30, 1999, operating cash flows, liquidation of
non-essential investment holdings, borrowings, public and private debt
offerings, policy premiums and other fees.
THE COMPANY'S STATE OF READINESS FOR THE YEAR 2000
The Company continues to progress in its efforts to define the scope and
magnitude of the Year 2000 ("Y2K") problem and to execute its plans to bring
information technology and non-information technology systems into Y2K
compliance.
The initial phase of planning, inventorying and evaluating all information
technology systems, and non-information technology systems and their components,
for Y2K compliance is complete. The evaluation did not disclose any significant
Y2K processing difficulties or concerns. The focus has primarily been on the
insurance operations of the Company because of the custom applications software
used to process insurance policies, policy claims, and insurance underwriting.
Fortunately, the majority of the non-insurance information and non-information
technology systems are Y2K compliant and do not require any significant
alterations. The focus of remediation is on the insurance specific applications.
The second phase of the project, which primarily includes implementing
corrections to remedy Y2K deficiencies, is approximately 95% complete. As noted
above, the insurance systems software has been the primary focus of the efforts.
To bring the insurance systems into Y2K compliance, the Company's internal
information systems staff is re-writing lines of existing code to function with
a four-digit date field. The Company also replaced existing DOS software with a
current Y2K compliant version.
Phase three pertains to testing and validation of each system. As hardware
and software changes are made to the systems, they are tested for compliance.
This phase will continue as each insurance application is reprogrammed. Despite
the best efforts by management, problems will arise requiring the Company to
quickly respond while there is still time. Phase four, when completed, will set
forth contingency plans addressing potential business interruption and failure,
is expected to be finalized during the last half of 1999.
THIRD PARTY RELATIONSHIPS
The Company has relationships with several banks and other financial
institutions and service providers that provide business information on a
regular basis. In addition, the Company reports financial results on a regular
basis to state and federal agencies.
26
<PAGE> 27
While these relationships are important to the Company's business, should any
third parties be adversely affected by the Y2K problem, the resulting risk of
business interruption should not be significant to the Company. The Company,
however, has no means of ensuring that these parties will be Year 2000 ready.
The inability of those parties to complete their Y2K readiness process could
materially impact the Company.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
The financial impact of making the required systems changes has not been
material, nor is it expected to be material, to the Company's consolidated
financial position, results of operations or cash flows. The Company has
incurred approximately $100,000 for hardware and computer programming. The
Company expects to incur another $10,000 to $20,000 to complete the project.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES AND CONTINGENCY PLANS
A reasonable, most likely worst case scenario of the Y2K impact would be a
slow down in internal and external reporting, and insurance related processing
of policies, claims and underwriting functions. It is unlikely the Company would
experience any material business cessation or significant business disruption.
The Company is completing its specific plans to continue operations in case
of unexpected delays in completing remediation or if Y2K problems impact the
Company in unforeseen ways. It appears many business systems could function
manually for a limited amount of time. The Company anticipates completing its
contingency plan during the last half of 1999. Overall, the Company is
approximately 95% through its Y2K project.
Pursuant to the "Year 2000 Information and Readiness Disclosure Act," the
foregoing discussion initially made on September 30, 1998 is designated a Year
2000 readiness disclosure.
RISK FACTORS
In addition to the other information in this Form 10-Q, the following risk
factors should be considered carefully in evaluating PICO and our business. This
Form 10-Q contains forward-looking statements that involve risks and
uncertainties. The statements contained in this document that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Exchange Act, including statements regarding our expectations, beliefs,
intentions, plans or strategies regarding the future. All forward-looking
statements included in this document are based on information available to us on
the date thereof, and we assume no obligation to update any such forward-looking
statements.
IF WE DO NOT SUCCESSFULLY LOCATE, SELECT AND MANAGE INVESTMENTS AND ACQUISITIONS
OR IF OUR INVESTMENTS OR ACQUISITIONS OTHERWISE FAIL OR DECLINE IN VALUE, OUR
FINANCIAL CONDITION COULD SUFFER
We invest in businesses that we believe are undervalued or that will benefit
from additional capital, restructuring of operations or improved competitiveness
through operational efficiencies.
Failures and/or declines in the market values of businesses we invest in or
acquire, as well as our failure to successfully locate, select and manage
investment and acquisition opportunities, could have a material adverse effect
on our business, financial condition, results of operations and cash flows. Such
business failures, declines in market values, and/or failure to successfully
locate, select and manage investments and acquisitions could result in inferior
investment returns compared to those which may have been attained had we
successfully located, selected and managed new investments and acquisition
opportunities, or had our investments or acquisitions not failed or declined in
value. We could also lose part or all of our investments in these businesses and
experience reductions in our net income, cash flows, assets and shareholders'
equity.
We will continue to make selective investments, and endeavor to enhance and
realize additional value to these acquired companies through our influence and
control. This could involve the restructuring of the financing or management of
the entities in which we invest and initiating and facilitating mergers and
acquisitions. Any acquisition could result in the use of a significant portion
of our available cash, significant dilution to you, and significant acquisition
related charges. Acquisitions may also result in the assumption of liabilities,
including liabilities that are unknown or not fully known at the time of the
acquisition, which could have a material adverse effect on us.
We do not know of any reliable statistical data that would enable us to
predict the probability of success or failure of our
27
<PAGE> 28
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 Korean investments in 1997 and approximately $5 million in investments
written down in 1998. We reported net realized investment gains in 1997 of $27.1
million and in 1996 of $21.4 million; however, we reported a net realized
investment loss of $4.4 million for 1998. Our financial statements indicated net
unrealized investment gains, before taxes, of $18.6 million at December 31, 1996
and $6.3 million at December 31, 1997, and net unrealized investment losses of
$5.3 million at December 31, 1998.
Our ability to achieve an acceptable rate of return on any particular
investment is subject to a number of factors which are beyond our control,
including increased competition and loss of market share, quality of management,
cyclical or uneven financial results, technological obsolescence, foreign
currency risks and regulatory delays.
Our investments may not achieve acceptable rates of return and we may not
realize the value of the funds invested; accordingly, these investments may have
to be written down or sold at their then-prevailing market values.
We may not be able to sell our investments in both private and public
companies when it appears to be advantageous to do so and we may have to sell
these investments at a discount. Investments in private companies are not as
marketable as investments in public companies. Investments in public companies
are subject to prices determined in the public markets and, therefore, values
can vary dramatically. In particular, the ability of the public markets to
absorb a large block of shares offered for sale can affect our ability to
dispose of an investment in a public company.
To successfully manage newly acquired companies, we must, among other things,
continue to attract and retain key management and other personnel. The diversion
of the attention of management from the day-to-day operations, or difficulties
encountered in the integration process, could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
WE MAY MAKE INVESTMENTS AND ACQUISITIONS THAT MAY YIELD LOW OR NEGATIVE RETURNS
FOR AN EXTENDED PERIOD OF TIME, WHICH COULD TEMPORARILY OR PERMANENTLY DEPRESS
OUR RETURN ON INVESTMENTS
We generally make strategic investments and acquisitions that tend to be long
term in nature. We invest in businesses that we believe to be undervalued or may
benefit from additional capital, restructuring of operations or management or
improved competitiveness through operational efficiencies with our existing
operations. We may not be able to develop acceptable revenue streams and
investment returns. We may lose part or all of our investment in these assets.
The negative impacts on cash flows, income, assets and shareholders' equity may
be temporary or permanent. We make investments for the purpose of enhancing and
realizing additional value by means of appropriate levels of shareholder
influence and control. This may involve restructuring of the financing or
management of the entities in which we invest and initiating or facilitating
mergers and acquisitions. These processes can consume considerable amounts of
time and resources. Consequently, costs incurred as a result of these
investments and acquisitions may exceed their revenues and/or increases in their
values for an extended period of time until we are able to develop the potential
of these investments and acquisitions and increase the revenues, profits and/or
values of these investments. Ultimately, however, we may not be able to develop
the potential of these assets that we anticipated.
IF MEDICAL MALPRACTICE INSURANCE CLAIMS TURN OUT TO BE GREATER THAN THE RESERVES
WE ESTABLISH TO PAY THEM, WE MAY NEED TO LIQUIDATE CERTAIN INVESTMENTS IN ORDER
TO SATISFY OUR RESERVE REQUIREMENTS
Under the terms of our medical malpractice liability policies, there is an
extended reporting period for claims. Under Ohio law the statute of limitations
is one year after the cause of action accrues. Also, under Ohio law a person
must make a claim within four years; however, the courts have determined that
the period may be longer in situations where the insured could not have
reasonably discovered the injury in that four-year period. Claims of minors must
be brought within one year of the date of majority. As a result, some claims may
be reported a number of years following the expiration of the medical
malpractice liability policy period.
Physicians Insurance Company of Ohio and The Professionals Insurance Company
have established reserves to cover losses on claims incurred under the medical
malpractice liability policies including not only those claims reported to date,
but also those that may have been incurred but not yet reported. The reserves
for losses are estimates based on various assumptions and, in accordance with
Ohio law, have been discounted to reflect the time value of money. These
estimates are based on actual and industry experience
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<PAGE> 29
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, the capital of the insurance companies could
reach levels which are lower than required by law.
Reserves are money that we set aside to pay insurance claims. We strive to
establish a balance between maintaining adequate reserves to pay claims while at
the same time using our cash resources to invest in new companies.
IF WE UNDERESTIMATE THE AMOUNT OF INSURANCE CLAIMS, OUR FINANCIAL CONDITION
COULD BE MATERIALLY MISSTATED AND OUR FINANCIAL CONDITION COULD SUFFER
Our insurance subsidiaries may not have established reserves adequate to meet
the ultimate cost of losses arising from claims. It has been, and will continue
to be, necessary for our insurance subsidiaries to review and make appropriate
adjustments to reserves for claims and expenses for settling claims. Inadequate
reserves could have a material adverse effect on our business, financial
condition, results of operations and cash flows. Inadequate reserves could cause
our financial condition to fluctuate from period to period and cause our
financial condition to appear to be better than it actually is for periods in
which insurance claims reserves are understated. In subsequent periods when we
discover the underestimation and pay the additional claims, our cash needs will
be greater than expected and our financial results of operations for that period
will be worse than they would have been had our reserves been accurately
estimated originally.
The inherent uncertainties in estimating loss reserves are greater for some
insurance products than for others, and are dependent on:
- the length of time in reporting claims;
- the diversity of historical losses among claims;
- the amount of historical information available during the
estimation process;
- the degree of impact that changing regulations and legal
precedents may have on open claims; and
- the consistency of reinsurance programs over time.
Because medical malpractice liability and commercial casualty claims may not
be completely paid off for several years, estimating reserves for these types of
claims can be more uncertain than estimating reserves for other types of
insurance. As a result, precise reserve estimates cannot be made for several
years following the year for which reserves were initially established.
During the past several years, the levels of the reserves for our insurance
subsidiaries have been very volatile. As a result of our claims experience, we
have had to significantly increase these reserves in the past several years.
Significant increases in the reserves may be necessary in the future, and the
level of reserves for our insurance subsidiaries may be volatile in the future.
These increases or volatility may have an adverse effect on our business,
financial condition, results of operations and cash flows.
THERE HAS BEEN A DOWNTURN IN THE PROPERTY & CASUALTY INSURANCE BUSINESS WHICH,
IN THE SHORT TERM, HINDERS OUR ABILITY TO PROFIT FROM THIS INDUSTRY
The property and casualty insurance industry has been highly cyclical, and
the industry has been in a cyclical downturn over the last several years. This
is due primarily to competitive pressures on pricing, which has resulted in
lower profitability for us. Pricing is a function of many factors, including the
capacity of the property and casualty industry as a whole to underwrite
business, create policyholders' surplus and generate positive returns on their
investment portfolios. The level of surplus in the industry varies with returns
on invested capital and regulatory barriers to withdrawal of surplus. 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, results of operations and cash flows
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<PAGE> 30
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 capital 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
capital. The insurance companies' capital levels are reported annually in their
statutory annual statements to the insurance departments.
Failure to meet one or more capital levels may result in state regulators
requiring the insurance company to submit a business plan demonstrating
achievement of the required capital levels. This may include the addition of
capital, a restructuring of assets and liabilities, or changes in operations. At
or below certain lower capital levels, state regulators may supervise the
operation of the insurance company and/or require the liquidation of the
insurance company. Such insurance department actions could adversely affect our
business, financial condition, results of operations and cash flows and decrease
the value of our investments in our insurance subsidiaries. If the insurance
departments were to require changes in the operations of our insurance
subsidiaries, we may incur additional expenses and we may lose customers. If the
insurance departments were to require additional capital in our insurance
subsidiaries or a restructuring of our assets and liabilities, our investment
returns could suffer. If the insurance departments were to place our insurance
companies under their supervision, we would lose customers, our revenues may
decrease more rapidly than our expenses, and our investment returns would
suffer. We may even lose part or all of our investments in our insurance
subsidiaries if our insurance subsidiaries are liquidated by the insurance
departments.
WE MAY BE INADEQUATELY PROTECTED AGAINST MAN MADE AND NATURAL CATASTROPHES,
WHICH COULD REDUCE THE AMOUNT OF CAPITAL SURPLUS AVAILABLE FOR INVESTMENT
OPPORTUNITIES
As with other property and casualty insurers, operating results and financial
condition can be adversely affected by volatile and unpredictable natural and
man made disasters, such as hurricanes, windstorms, earthquakes, fires, and
explosions. Our insurance subsidiaries generally seek to reduce their exposure
to catastrophic events through individual risk selection and the purchase of
reinsurance. Our insurance subsidiaries' estimates of their exposures depend on
their views of the possibility of a catastrophic event in a given area and on
the probable maximum loss created by that event. While our insurance
subsidiaries attempt to limit their exposure to acceptable levels, it is
possible that an actual catastrophic event or multiple catastrophic events could
significantly exceed the maximum loss anticipated, resulting in a material
adverse effect on our business, financial condition, results of operations and
cash flows. Such events could cause unexpected insurance claims and expenses for
settling claims well in excess of premiums, increasing cash needs, reducing
surplus and reducing assets available for investments. Capital invested in our
insurance companies may produce inferior investment returns as a result of these
additional funding requirements.
We insure ourselves against catastrophic losses by obtaining insurance
through other insurance companies known as reinsurers. The future financial
results of our insurance subsidiaries could be adversely affected by disputes
with their reinsurers with respect to coverage and by the solvency of the
reinsurers.
OUR INSURANCE SUBSIDIARIES COULD BE DOWNGRADED WHICH WOULD NEGATIVELY IMPACT OUR
BUSINESS
Our insurance subsidiaries' ratings may not be maintained or increased, and a
downgrade would likely adversely affect our business, financial condition,
results of operations and cash flows. A.M. Best and Company's ("A.M. Best")
ratings reflect the assessment of A.M. Best of an insurer's financial condition,
as well as the expertise and experience of its management. Therefore, A.M. Best
ratings are important to policyholders. A.M. Best ratings are subject to review
and change overtime. Failure to maintain or improve our A.M. Best ratings could
have a material adverse effect on the ability of our insurance subsidiaries to
underwrite new insurance policies, as well as potentially reduce their ability
to maintain or increase market share. Management believes that many potential
customers will not insure with an insurer that carries an A.M. Best rating of
less than B+, and that customers who do so will demand lower rates.
Our insurance subsidiaries are currently rated as follows:
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<PAGE> 31
- Sequoia Insurance Company B++ (Very Good)
- Citation Insurance Company B+ (Very Good)
- Physicians Insurance Company of Ohio NR-3 (rating procedure
inapplicable)
- The Professionals Insurance Company NR-3 (rating procedure
inapplicable)
POLICYHOLDERS MAY NOT RENEW THEIR POLICIES, WHICH WOULD UNEXPECTEDLY REDUCE OUR
REVENUE STREAM
Insurance policy renewals have historically accounted for a significant
portion of our net revenue. We may not be able to sustain historic renewal rates
for our products in the future. A decrease in renewal rates would reduce our
revenues. It would also decrease our cash receipts and the amount of funds
available for investments and acquisitions. If we were not able to reduce
overhead expenses correspondingly, this would adversely affect our business,
financial condition, results of operations and cash flows.
IF WE ARE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, THEN WE WILL BE SUBJECT
TO A SIGNIFICANT REGULATORY BURDEN
We at all times intend to conduct our business so as to avoid being regulated
as an investment company under the Investment Company Act of 1940. However, if
we were required to register as an investment company, our ability to use debt
would be substantially reduced, and we would be subject to significant
additional disclosure obligations and restrictions on our operational
activities. Because of the additional requirements imposed on an investment
company with regard to the distribution of earnings, operational activities and
the use of debt, in addition to increased expenditures due to additional
reporting responsibilities, our cash available for investments would be reduced.
The additional expenses would reduce income. These factors would adversely
affect our business, financial condition, results of operations and cash flows.
SUBSTANTIAL REGULATION MAY PREVENT US FROM REALIZING A PROFIT FROM OUR WATER
RIGHTS
The water rights held by us and the transferability of these rights to other
uses and places of use are governed by the laws concerning water rights in the
states of Arizona, California, Colorado and Nevada. The volumes of water
actually derived from these rights may vary considerably based upon physical
availability and may be further limited by applicable legal restrictions. As a
result, the amounts of acre feet anticipated do not in every case represent a
reliable, firm annual yield of water, but in some cases describe the face amount
of the water right claims or management's best estimate of such entitlement.
Legal impediments exist to the sale or transfer of some of these water rights,
which in turn may affect their commercial value. If we were unable to transfer
or sell our water rights, we will not be able to make a profit, we will not have
enough cash receipts to cover cash needs, and we may lose some or all of our
value in our water rights investments.
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, 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.
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 ASSETS MAY BECOME CONCENTRATED IN A LIMITED NUMBER OF FACILITIES,
MAKING OUR GROWTH AND PROFITABILITY VULNERABLE TO FLUCTUATIONS IN LOCAL
ECONOMIES AND GOVERNMENTAL REGULATIONS.
We anticipate that in the future, a substantial majority of Vidler's revenues
and asset value may be derived from a single asset, the MBT Ranch water storage
facility. Currently, we have obtained only a pilot permit for the recharge and
storage of a limited
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amount of water at that facility. We have not yet applied for a recovery permit
and have applied for, but not yet received, a full-scale permit for that
facility. There can be no assurance (i) that we will be able to obtain permits
for the facility at the recharge, storage or recovery levels anticipated, or at
all, (ii) that the full-scale storage facility will have the capacity currently
anticipated, or (iii) that we will be able to contract with third parties for
storage of water on commercially reasonable terms, or at all.
A majority of our water revenue historically has been derived from the Vidler
Tunnel. Although we have recently begun to acquire additional water assets, we
anticipate that our revenues will be derived from a limited number of water
assets for the foreseeable future.
PROJECT DEVELOPMENT RISKS
If we choose to develop a water asset, we face the risks of delays or
unexpected increases in the cost of development and construction. These risks
may result from slower growth in local economies, poor performance of local
industries, higher interest rates, strikes, bad weather, material shortages, or
increases in material and labor costs.
As we proceed with the development of our properties, including related
infrastructure, we will be required to satisfy various regulatory authorities
that we are in compliance with the laws, regulations and policies enforced by
them. In addition, there can be no assurance that additional federal and state
laws and regulations will not be imposed in the future.
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 (the "EPA") acting pursuant to the
federal Safe Drinking Water Act ("SDWA"). 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 (i.e., 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, results of operations and cash flows may be adversely affected by:
- exposure to fluctuations in exchange rates;
- the imposition of governmental controls;
- the need to comply with a wide variety of foreign and U.S. export
laws;
- political and economic instability;
- trade restrictions;
- changes in tariffs and taxes;
- volatile interest rates;
- changes in certain commodity prices;
- exchange controls which may limit our ability to withdraw money;
- the greater difficulty of administering business overseas; and
- general economic conditions outside the United States.
Changes in any or all of these factors could result in reduced market values
of investments, loss of assets, additional expenses,
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<PAGE> 33
reduced investment income, reductions in shareholders' equity due to foreign
currency fluctuations and a reduction in our global diversification.
OUR COMMON STOCK PRICE MAY BE LOW WHEN YOU WANT TO SELL YOUR SHARES
The trading price of our common stock has historically been, and is expected
to be, subject to fluctuations. The market price of the common stock may be
significantly impacted by:
- quarterly variations in financial performance;
- shortfalls in revenue or earnings from levels forecast by
securities analysts;
- changes in estimates by such analysts;
- product introductions;
- our competitors' announcements of extraordinary events; such as
- acquisitions;
- litigation; and
- general economic conditions.
Our results of operations have been subject to significant fluctuations,
particularly on a quarterly basis, and our future results of operations could
fluctuate significantly from quarter to quarter and from year to year. Causes of
such fluctuations may include the inclusion or exclusion of operating earnings
from newly acquired or sold operations. At December 31, 1996, the closing price
of our common stock on the Nasdaq National Market was $20.63 per share, compared
to $13.25 at December 31, 1998. On a quarterly basis between these two dates,
closing prices have ranged from a high of $32.19 at December 31, 1997 to a low
of $13.25 at December 31, 1998.
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.
WE ARE SUBJECT TO YEAR 2000 RISKS FOR WHICH WE MAY NOT BE PREPARED, WHICH COULD
CREATE INTERNAL ADMINISTRATIVE PROBLEMS REQUIRING COSTLY, INEFFICIENT REMEDIAL
MEASURES
Many currently installed computer systems and software products are not
capable of distinguishing 20th century dates from 21st century dates. As a
result, in less than one year, computer systems and/or software used by many
companies in a very wide variety of applications may experience operating
difficulties unless they are modified or upgraded to adequately process
information
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involving, related to or dependent upon the century change. Significant
uncertainty exists in the software and information services industries
concerning the scope and magnitude of problems associated with the century
change. In light of the potentially broad effects of the year 2000 on a wide
range of business systems, we may be affected.
We continue to progress in our efforts to define the scope and magnitude of
the Year 2000 ("Y2K") problem and to execute our plans to ensure information
technology and non-information technology systems are Y2K compliant.
The initial phase of planning, inventorying and evaluating all information
technology systems, and non-information technology systems and their components,
for Y2K compliance is complete. The evaluation has not disclosed any significant
Y2K processing difficulties or concerns. The focus has primarily been on the
insurance operations of Vista because of the custom applications software used
to process insurance policies, policy claims, and insurance underwriting.
Fortunately, the majority of the non-insurance information and non-information
technology systems are deemed Y2K compliant and do not require any significant
alterations. The focus of remediation is on the insurance specific applications.
The second phase of the project, which primarily includes implementing
corrections to remedy Y2K deficiencies, is approximately 95% complete. As noted
above, the insurance systems software has been the primary focus of the efforts.
To renovate the insurance systems to a Y2K ready state, our internal information
systems staff is re-writing lines of existing code to function with a four-digit
date field. We have also replaced existing DOS software with a current Y2K
compliant version.
Phase three pertains to testing and validation of each system. As hardware
and software changes are made to the systems, they are tested for compliance.
This phase will continue as each insurance application is reprogrammed. Despite
the best efforts by management, problems will arise requiring us to quickly
respond while there is still time. Phase four, when completed, will set forth
contingency plans addressing potential business interruption and failure, and is
expected to be finalized during the last half of 1999.
We have relationships with several banks and other financial institutions and
service providers that provide business information to us on a regular basis. In
addition, we report financial results on a regular basis to state and federal
agencies. While these relationships are important to our business, should any
third party be adversely affected by the Y2K problem, the resulting risk of
business interruption should not be significant to us. However, the inability of
those parties to complete their Y2K readiness process could materially impact us
in a manner that we have not foreseen.
The likely worst case scenario is a partial failure of some accounting and
reporting functions that could be corrected by manually recording and delivering
the required information.
The foregoing factors, individually or in the aggregate, could materially
adversely affect our operating results and could make comparison of historic
operating results and balances difficult or not meaningful.
THIRD PARTY RELATIONSHIPS
We have relationships with several banks and other financial institutions
and service providers that provide business information on a regular basis. In
addition, we report financial results on a regular basis to state and federal
agencies. While these relationships are important our business, should any third
parties be adversely affected by the Y2K problem, the resulting risk of business
interruption should not be significant to us. We, however, have no means of
ensuring that these parties will be Year 2000 ready. The inability of those
parties to complete their Y2K readiness process could materially impact our
business.
The likely worst case scenario is a partial failure of some accounting and
reporting functions that could be corrected by manually recording and delivering
the required information.
The foregoing factors, individually or in the aggregate, could materially
adversely affect our operating results and could make comparison of historic
operating results and balances difficult or not meaningful.
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
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nature as the Company generally secures rates for periods of approximately one
to three years and therefore approximates fair value. At June 30, 1999, the
Company had $31.6 million of fixed maturity securities and mortgage loans, $67.6
million of marketable equity securities that were subject to market risk, and
$34.3 million of investments denominated in foreign currencies, primarily Swiss
francs. The Company's investment strategy is to manage the duration of the
portfolio relative to the duration of the liabilities while managing interest
rate risk.
The Company uses two models to analyze the sensitivity of its assets and
liabilities subject to the above risks. For its fixed maturity securities, and
mortgage loans, the Company uses duration modeling to calculate changes in fair
value. For its marketable securities the Company uses a hypothetical 20%
decrease in the fair value to analyze the sensitivity of its market risk assets
and liabilities. For investments denominated in foreign currencies the Company
uses a hypothetical 20% decrease in the local currency of that investment.
Actual results may differ from the hypothetical results assumed in this
disclosure due to possible actions taken by management to mitigate adverse
changes in fair value and because the fair value of a securities may be affected
by credit concerns of the issuer, prepayment rates, liquidity, and other general
market conditions. The sensitivity analysis duration model produced a loss in
fair value of $300,000 for a 100 basis point decline in interest rates on its
fixed securities and mortgage loans. The hypothetical 20% decrease in fair value
of the Company's marketable equity securities produced a loss in fair value of
$11.6 million that would impact the unrealized appreciation in shareholders'
equity. The hypothetical 20% decrease in the local currency of the Company's
foreign denominated investments produced a loss of $5.5 million that would
impact the unrealized appreciation and foreign currency translation in
shareholders' equity.
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
None.
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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: January 27, 2000 By: /s/ Gary W. Burchfield
--------------------------------------
Gary W. Burchfield
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
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EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
+ 2.2 Agreement and Plan of Reorganization, dated as of May
1, 1996, among PICO, Citation Holdings, Inc. and
Physicians and amendment thereto dated August 14, 1996
and related Merger Agreement.
+++++ 2.3 Second Amendment to Agreement and Plan of
Reorganization dated November 12, 1996.
# 2.4 Agreement and Debenture, dated November 14, 1996 and
November 27, 1996, Respectively, by and between
Physicians and 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.
* 10.8 Flexible Benefit Plan
-10.55 Consulting Agreements, effective January 1, 1997,
regarding retention of Ronald Langley and John R. Hart
as consultants by Physicians and GEC.
++ 10.57 PICO 1995 Stock Option Plan
-+++ 10.58 Key Employee Severance Agreement and Amendment No. 1
thereto, each made as of November 1, 1992, between PICO
and Richard H. Sharpe and Schedule A identifying other
substantially identical Key Employee Severance
Agreements between PICO and certain of the executive
officers of PICO.
+++ 10.59 Agreement for Purchase and Sale of Shares, dated May 9,
1996, among Physicians, GPG and GEC.
++ 10.60 Agreement for the Purchase and Sale of Certain Assets,
dated July 14, 1995 between Physicians, PRO and Mutual
Assurance, Inc.
++ 10.61 Stock Purchase Agreement dated March 7, 1995 between
Sydney Reinsurance Corporation and Physicians.
++ 10.62 Letter Agreement, dated September 5, 1995, between
Physicians, Christopher Ondaatje and the South East
Asia Plantation Corporation Limited.
++++ 10.63 Amendment No. 1 to Agreement for Purchase and Sale of
Certain Assets, dated July 30, 1996 between Physicians,
PRO and Mutual Assurance, Inc.
+++++ 16.1. Letter regarding change in Certifying Accountant from
Deloitte & Touche LLP, Independent auditors.
# 21. Subsidiaries of PICO.
27. Financial Data Schedule.
### 28. Form S-8, Registration Statement under the Securities
Act of 1933, for the PICO Holdings, Inc. Employees
401(k) Retirement Plan and Trust, Registration No.
333-36881.
#### 29. Form S-8, Registration Statement under the Securities
Act of 1933, for the Physicians Insurance Company of
Ohio 1995 Non-Qualified Stock Option Plan and assumed
by PICO Holdings, Inc., Registration No. 333-32045.
</TABLE>
- ----------
* 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).
37
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME OF PICO
HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 31,655
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 89,149
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 143,702
<CASH> 55,638
<RECOVER-REINSURE> 1,866
<DEFERRED-ACQUISITION> 5,098
<TOTAL-ASSETS> 402,618
<POLICY-LOSSES> 146,022
<UNEARNED-PREMIUMS> 18,101
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
13
0
<COMMON> 0
<OTHER-SE> 192,703
<TOTAL-LIABILITY-AND-EQUITY> 402,618
17,082
<INVESTMENT-INCOME> 3,173
<INVESTMENT-GAINS> 2,772
<OTHER-INCOME> 2,012
<BENEFITS> 12,092
<UNDERWRITING-AMORTIZATION> 5,638
<UNDERWRITING-OTHER> 7,827
<INCOME-PRETAX> (1,324)
<INCOME-TAX> (6,341)
<INCOME-CONTINUING> 5,017
<DISCONTINUED> 0
<EXTRAORDINARY> 442
<CHANGES> 0
<NET-INCOME> 5,459
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.57
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
