PICO Holdings June 30, 2006 10-Q
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington
DC 20549
FORM
10-Q
(Mark
One)
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended June 30, 2006
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
(State
or other jurisdiction of incorporation or organization)
|
|
94-2723335
(I.R.S.
Employer
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 R
No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer £ Accelerated
filer R Non-accelerated
filer £
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £
No
R
The
number of shares outstanding of the Registrant’s Common Stock, $0.001 par value,
was 15,880,458 as of June 30, 2006, excluding 3,228,300 shares of common stock
held by the registrant’s subsidiaries.
PICO
HOLDINGS, INC.
FORM
10-Q
For
the Three and Six Months Ended June 30, 2006
TABLE
OF CONTENTS
Part
I: Financial Information Page
No.
Part
II: Other Information
Part
I: Financial
Information
Item
I: Condensed
Consolidated Financial Statements
PICO
HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
|
June
30,
|
|
December
31,
|
|
2006
|
|
2005
|
ASSETS
|
|
|
|
Investments
|
$
281,835,839
|
|
$
287,446,334
|
Cash
and cash equivalents
|
97,104,235
|
|
37,794,416
|
Notes
and other receivables, net
|
15,346,409
|
|
14,692,888
|
Reinsurance
receivables
|
15,656,146
|
|
16,186,105
|
Real
estate and water assets, net
|
87,700,758
|
|
76,891,435
|
Property
and equipment, net
|
1,701,048
|
|
1,572,492
|
Other
assets
|
7,443,578
|
|
7,188,858
|
Other
assets - Discontinued Operations
|
40,917
|
|
57,094
|
Total
assets
|
$
506,828,930
|
|
$
441,829,622
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
Unpaid
losses and loss adjustment expenses
|
$
44,549,377
|
|
$
46,646,906
|
Deferred
compensation
|
47,248,779
|
|
42,737,293
|
Bank
and other borrowings
|
12,677,900
|
|
12,334,868
|
Deferred
income taxes
|
12,238,324
|
|
17,239,062
|
Other
liabilities
|
12,331,828
|
|
20,039,392
|
Reinsurance
balance payable
|
317,431
|
|
325,081
|
Other
liabilities - Discontinued Operations
|
451,089
|
|
533,548
|
Total
liabilities
|
129,814,728
|
|
139,856,150
|
Minority
interest
|
1,073,106
|
|
1,098,515
|
Commitments
and Contingencies (Note 4)
|
|
|
|
|
|
|
|
Common
stock, $.001 par value; authorized 100,000,000 shares,
|
|
|
|
20,306,923
issued in 2006 and 17,706,923 issued in 2005
|
20,307
|
|
17,707
|
Additional
paid-in capital
|
331,582,308
|
|
257,466,412
|
Retained
earnings
|
69,326,244
|
|
61,725,860
|
Accumulated
other comprehensive income
|
53,307,047
|
|
60,092,462
|
Treasury
stock, at cost (common shares: 4,426,465 in 2006 and 4,435,483
in
2005)
|
(78,294,810)
|
|
(78,427,484)
|
Total
shareholders' equity
|
375,941,096
|
|
300,874,957
|
Total
liabilities and shareholders' equity
|
$
506,828,930
|
|
$
441,829,622
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
PICO
HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2006
|
|
Three
Months Ended June 30, 2005
|
|
Six
Months Ended June 30, 2006
|
|
Six
Months Ended June 30, 2005
|
Revenues:
|
|
|
|
|
|
|
|
Net
investment income
|
$
4,432,729
|
|
$
2,622,133
|
|
$
6,505,205
|
|
$
3,812,265
|
Net
realized gain on investments
|
687,349
|
|
3,034,598
|
|
15,373,296
|
|
6,514,549
|
Sale
of real estate and water assets
|
3,832,629
|
|
96,170,744
|
|
5,088,964
|
|
98,324,824
|
Rents,
royalties and lease income
|
448,128
|
|
290,374
|
|
634,983
|
|
584,558
|
Service
revenue
|
881,871
|
|
1,044,529
|
|
1,880,355
|
|
1,933,583
|
Other
|
148,700
|
|
48,376
|
|
193,876
|
|
157,148
|
Total
revenues
|
10,431,406
|
|
103,210,754
|
|
29,676,679
|
|
111,326,927
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
Operating
and other costs
|
6,961,794
|
|
20,780,835
|
|
14,082,974
|
|
37,844,610
|
Cost
of real estate and water assets sold
|
1,301,736
|
|
38,282,899
|
|
1,681,622
|
|
39,024,947
|
Cost
of service revenue
|
440,625
|
|
278,754
|
|
887,357
|
|
561,997
|
Depreciation
and amortization
|
493,495
|
|
559,921
|
|
967,388
|
|
1,125,382
|
Interest
|
111,222
|
|
269,897
|
|
210,760
|
|
505,131
|
Total
costs and expenses
|
9,308,872
|
|
60,172,306
|
|
17,830,101
|
|
79,062,067
|
Income
before income taxes and minority interest
|
1,122,534
|
|
43,038,448
|
|
11,846,578
|
|
32,264,860
|
Provision
for income taxes
|
753,301
|
|
19,580,410
|
|
4,436,603
|
|
16,579,238
|
Income
before minority interest
|
369,233
|
|
23,458,038
|
|
7,409,975
|
|
15,685,622
|
Minority
interest in loss of subsidiaries
|
12,950
|
|
151,511
|
|
25,409
|
|
983,178
|
Income
from continuing operations
|
382,183
|
|
23,609,549
|
|
7,435,384
|
|
16,668,800
|
Income
(loss) from discontinued operations, net of tax
|
|
|
(17,050)
|
|
165,000
|
|
(39,649)
|
Net
income
|
$
382,183
|
|
$
23,592,499
|
|
$
7,600,384
|
|
$
16,629,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share - basic and diluted:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
$
0.03
|
|
$
1.83
|
|
$
0.53
|
|
$
1.32
|
Discontinued
operations
|
|
|
|
|
0.01
|
|
|
Net
income per common share
|
$
0.03
|
|
$
1.83
|
|
$
0.54
|
|
$
1.32
|
Weighted
average shares outstanding
|
14,927,125
|
|
12,919,496
|
|
14,099,282
|
|
12,642,968
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
PICO
HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
|
|
|
|
|
|
|
Six
Months Ended June 30, 2006
|
|
Six
Months Ended June 30, 2005
|
OPERATING
ACTIVITIES:
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
(12,282,596)
|
|
$
82,303,764
|
Net
cash provided by (used in) discontinued operations
|
|
(77,112)
|
|
923
|
|
|
(12,359,708)
|
|
82,304,687
|
INVESTING
ACTIVITIES:
|
|
|
|
|
Purchases
of investments
|
|
(61,099,224)
|
|
(22,419,657)
|
Proceeds
from sale of investments
|
|
32,494,541
|
|
14,251,517
|
Proceeds
from maturity of investments
|
|
39,735,857
|
|
1,250,000
|
Purchases
of property and equipment and costs capitalized to water
infrastructure
|
|
(9,555,620)
|
|
(602,554)
|
Capitalized
software costs
|
|
(988,961)
|
|
(722,015)
|
Net
cash provided by (used in) investing activities
|
|
586,593
|
|
(8,242,709)
|
|
|
|
|
|
FINANCING
ACTIVITIES:
|
|
|
|
|
Proceeds
from common stock offering, net
|
|
73,945,144
|
|
21,378,095
|
Repayments
of debt
|
|
(537,928)
|
|
(3,915,176)
|
Proceeds
from borrowings
|
|
|
|
35,000
|
Proceeds
from exercise of stock options (HyperFeed)
|
|
1,727
|
|
2,392
|
Purchase
of treasury stock for deferred compensation plans
|
|
|
|
(839)
|
Net
cash provided by financing activities
|
|
73,408,943
|
|
17,499,472
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
|
(2,326,009)
|
|
2,907,483
|
|
|
|
|
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
|
59,309,819
|
|
94,468,933
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
37,794,416
|
|
17,407,138
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
|
$
97,104,235
|
|
$
111,876,071
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
Cash
paid for interest
|
|
$
209,744
|
|
$
478,043
|
Cash
paid for income taxes
|
|
$
2,053,000
|
|
$
1,292,021
|
Distribution
of treasury stock to settle deferred compensation
liability
|
|
$
306,027
|
|
|
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
PICO
HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
1. Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements of PICO
Holdings, Inc. and Subsidiaries (the “Company” or “PICO”) have been prepared in
accordance with the interim reporting requirements of Form 10-Q, pursuant to
the
rules and regulations of the United States Securities and Exchange Commission
(the “SEC”). Accordingly, they do not include all of the information and notes
required by accounting principles generally accepted in the United States of
America (“US GAAP”) for complete consolidated financial statements.
In
the
opinion of management, all adjustments and reclassifications considered
necessary for a fair and comparable presentation of the financial statements
presented have been included and are of a normal recurring nature. Operating
results presented are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006.
These
condensed consolidated financial statements should be read in conjunction with
the Company’s audited financial statements and notes thereto, contained in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed
with the SEC.
The
preparation of condensed consolidated financial statements in accordance with
US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the condensed consolidated financial statements
and the reported amounts of revenues and expenses for each reporting period.
The
significant estimates made in the preparation of the Company’s condensed
consolidated financial statements relate to the assessment of the carrying
value
of real estate and water assets, investments, unpaid losses and loss adjustment
expenses, deferred income taxes, accounts and loans receivable, and contingent
liabilities. While management believes that the carrying values of such assets
and liabilities are appropriate as of June 30, 2006 and December 31, 2005,
it is
reasonably possible that actual results could differ from the estimates upon
which the carrying values were based.
Stock-Based
Compensation:
On
January 1, 2006, PICO adopted Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payment” (FAS 123(R)), that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise
or
liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity instruments.
The statement eliminates the ability to account for share-based compensation
transactions, as PICO formerly did, using the intrinsic value method as
prescribed by Accounting Principles Board, or APB, Opinion No. 25,
“Accounting for Stock Issued to Employees,” and generally requires that such
transactions be accounted for using a fair-value-based method and recognized
as
expenses in the consolidated statement of income.
PICO
adopted FAS 123(R) using the modified prospective method which requires the
application of the accounting standard as of January 1, 2006. In accordance
with the modified prospective method, the consolidated financial statements
for
prior periods have not been restated to reflect, and do not include, the impact
of FAS 123(R). However, as PICO had no unvested stock options outstanding,
the adoption of SFAS 123R had no impact on the accompanying condensed
consolidated financial statements.
Similarly,
because PICO had no stock options outstanding during the three and six months
ended June 30, 2005, there was no difference between reported net loss and
pro
forma net loss (as required to be disclosed under SFAS No. 123) for that period.
However, the Company’s subsidiary, HyperFeed Technologies, Inc. has stock
options outstanding and recorded stock-based compensation expense of $77,000
and
$153,000 for the three and six months ended June 30, 2006. HyperFeed’s
pro forma stock-based compensation expense for the three and six months ended
June 30, 2005 was $47,000 and $100,000, respectively.
Stock-Based
Plans Outstanding:
PICO
Holdings, Inc. 2005 Long Term Incentive Plan (the "2005 Plan"). The 2005 Plan
provides for the grant or award of various equity incentives to PICO employees,
non-employee directors and consultants. A total of 2,654,000 shares of common
stock are issuable under the 2005 Plan and it provides for the issuance of
incentive stock options, non-statutory stock options, free-standing
stock-settled stock appreciation rights, restricted stock awards, performance
shares, performance units, restricted stock units, deferred compensation awards
and other stock-based awards.
As
of
June 30, 2006 2,185,965 stock-settled SARs were outstanding with a strike price
of $33.76. The awards are fully vested and exercisable at anytime.
In
the
three and six months ended June 30, 2005 there is compensation expense recorded
for the cash settled SARs issued from the 2003 cash-settled SAR Plan.
Compensation cost was measured as the amount by which the quoted market price
of
PICO stock exceeded the exercise price at the end of the period. Changes in
the
quoted market price were reflected as an adjustment to the accrued compensation
obligation and compensation expense in the Company’s consolidated financial
statements. The Company recorded compensation expense of $7.4 million and $17.3
million for the three and six months ended June 30, 2005 respectively,
representing the difference between the exercise price of the vested SARs and
the market value of PICO stock at the end of each period. The cash liability
for
the accrued benefit was transferred to Rabbi Trust accounts in September 2005
leaving no accrued stock appreciation rights payable and increasing deferred
compensation in the accompanying consolidated balance sheets.
The
Company applies the provisions of Emerging Issues Task Force No. 97-14,
Accounting
for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi
Trust and Invested.
In
summary, investment returns generated are reported within the Company’s
financial statements (with a corresponding increase in the trust assets) and
an
expense is recorded within the caption, “Operating and other costs” for
increases in the market value of the assets held with a corresponding increase
in the deferred compensation liability (except in the case of PICO stock, which
is reported as Treasury Stock, at cost). In the event the trust assets decline
in value, the Company will recover previously expensed
compensation.
During
the three months ended June 30, 2006, the Company distributed treasury stock
with a value of $306,000 that was held in trust accounts for certain Directors
of the Company in satisfaction of deferred compensation obligations.
Employee
Compensation and Bonus Plans:
In
the
three months ended June 30, 2006, the Company accrued $2.1 million in estimated
incentive
award payable to certain members of management in accordance with the provisions
of the Company’s bonus plan. The accrual will change based on fluctuation in
book value per share of the Company for the remainder of 2006.
For
the
three and six months ended June 30, 2005, the Company accrued $2.6 million
in
estimated incentive award payable in accordance with the provisions of the
Company’s bonus plan. In addition, $2.2 million in incentive award was recorded
for certain members of Vidler Water Company’s (“Vidler”) management based on the
combined net income of Vidler and Nevada Land and Resource Company (“NLRC”) in
accordance with the related bonus plan.
Notes
and
other receivables primarily consist of installment notes from the sale of real
estate. These notes generally have terms ranging from three to ten years, with
interest rates of 7% to 10%. The Company records a provision for doubtful
accounts to allow for any specific accounts which may be unrecoverable and
is
based upon an analysis of the Company's prior collection experience, customer
creditworthiness, and current economic trends. For the three and six months
ended June 30, 2006 and 2005, no significant provision had been
recorded.
Reclassifications
Stock
appreciation rights
expense of $7.4 million and $17.3 million in the three and six months ended
June 30, 2005, respectively, has been reclassified to operating and other
costs
in the accompanying condensed consolidated statements of
operations.
Recently
Issued Accounting Pronouncements
SFAS
154 -
In June
2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS
154), "Accounting Changes and Error Corrections." SFAS 154 changes the
requirements for the accounting for and reporting of a change in accounting
principle. This Statement requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it
is
impracticable. In addition, this Statement requires that a change in
depreciation, amortization or depletion for long-lived, non-financial assets
be
accounted for as a change in accounting estimate effected by a change in
accounting principle. This new accounting standard was effective January 1,
2006. The adoption of SFAS 154 had no impact on PICO’s financial
statements.
SFAS
155
- In
February 2006, the FASB issued Statement of Financial Accounting Standards
No.
155 (SFAS 155), "Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statements No. 133 and 140." SFAS 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole,
eliminating the need to separate the derivative from its host, if the holder
elects to account for the whole instrument on a fair value basis. This new
accounting standard is effective January 1, 2007. The adoption of SFAS 155
is
not expected to have an impact on PICO’s financial statements.
FIN
48
- In
July 2006, the FASB issued FASB Interpretation 48, “Accounting for Income Tax
Uncertainties” (“FIN 48”). FIN 48 defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
“more-likely-than-not” to be sustained by the taxing authority. The recently
issued literature also provides guidance on the de-recognition, measurement
and
classification of income tax uncertainties, along with any related interest
and
penalties. FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties.
FIN
48 is
effective for fiscal years beginning after December 15, 2006. The differences
between the amounts recognized in the statements of financial position prior
to
the adoption of FIN 48 and the amounts reported after adoption will be accounted
for as a cumulative-effect adjustment recorded to the beginning balance of
retained earnings. PICO has not yet determined the impact, if any, of adopting
the provisions of FIN 48 on its financial statements.
2. Net
Income Per Share
Basic
earnings per share is computed by dividing net earnings by the weighted average
shares outstanding during the period.
Diluted
earnings per share is computed similarly to basic earnings per share except
the
weighted average shares outstanding are increased to include additional shares
from the assumed exercise of any common stock equivalents - PICO’s stock-settled
stock appreciation rights (SARs) are common stock equivalents for this purpose
-
using the treasury method, if dilutive. The number of additional shares is
calculated by assuming that the SARs were exercised, and that the proceeds
were
used to acquire shares of common stock at the average market price during the
period.
For
the
three and six months ended June 30, 2006 the Company’s stock-settled SARs are
not included in the diluted per share calculation because they were
out-of-the-money and consequently, their effect on earnings per share is
anti-dilutive. In May 2006, the Company issued 2,600,000 shares of common stock
in a stock offering.
During
the three and six months ended June 30, 2005, the Company had cash-settled
stock
appreciation rights outstanding. The rights were not considered common stock
equivalents for purposes of earnings per share because they were not convertible
into common shares of the Company when exercised; the benefit was payable in
cash. Consequently, diluted earnings per share was identical to that of the
basic earnings per share. In May 2005, the Company issued 905,000 shares of
common stock in a stock offering.
3.
Comprehensive Income
The
Company applies the provisions of SFAS No. 130, “Reporting Comprehensive
Income.” Comprehensive income for the Company includes foreign currency
translation and unrealized holding gains and losses on available for sale
securities.
The
components of comprehensive income are as follows:
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2006
|
|
Three
Months Ended June 30, 2005
|
|
Six
Months Ended June 30, 2006
|
|
Six
Months Ended June 30, 2005
|
Net
income
|
$
382,183
|
|
$
23,592,499
|
|
$
7,600,384
|
|
$
16,629,151
|
Net
change in unrealized appreciation
|
|
|
|
|
|
|
|
(depreciation)
on available for sale investments
|
(1,139,841)
|
|
10,904,723
|
|
(6,747,101)
|
|
18,568,665
|
Net
change in foreign currency translation
|
243,164
|
|
(282,438)
|
|
(38,314)
|
|
(466,396)
|
Total
comprehensive income (loss)
|
$
(514,494)
|
|
$
34,214,784
|
|
$
814,969
|
|
$
34,731,420
|
Total
comprehensive income (loss) for the three months ended June 30, 2006 is net
of
deferred income tax benefit of $19,000 and the six months ended June 30, 2006
is
net of deferred income tax benefit of $5 million. Total comprehensive income
for
the three and six months ended June 30, 2005 is net of deferred income tax
charges of $2.3 million and $4.2 million, respectively.
The
components of accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2006
|
|
December
31, 2005
|
|
Unrealized
appreciation on available for sale investments
|
|
|
|
|
$
|
59,377,311
|
|
$
|
66,124,412
|
|
Foreign
currency translation
|
|
|
|
|
|
(6,070,264
|
)
|
|
(6,031,950
|
)
|
Accumulated
other comprehensive income
|
|
|
|
|
$
|
53,307,047
|
|
$
|
60,092,462
|
|
Accumulated
other comprehensive income is net of deferred income tax liabilities of $27.4
million and $32.7 million at June 30, 2006 and December 31, 2005,
respectively.
At
June
30, 2006, the Company had $1.7 million of gross unrealized losses.
Marketable
equity securities: The
Company’s $188.4 million investments in marketable equity securities consist
primarily of investments in common stock of other publicly traded companies.
The
gross unrealized loss on equity securities was $532,000 at June 30, 2006 and
the
majority of such investments were continuously below cost for less than 12
months.
Corporate
Bonds and US Treasury Obligations:
At June
30, 2006, the bond portfolio consists of $82.9 million of publicly traded
corporate bonds and $10.5 million US Treasury obligations. The total bond
portfolio had gross unrealized losses of $1.7 million, $528,000 of which was
in
a continuous loss position for greater than 12 months. We do not consider these
investments to be other than temporarily impaired because we have the intent
and
ability to hold these bonds until recovery of fair value, which may be maturity.
The impairment is mostly due to interest rate fluctuations rather than
deterioration of the underlying issuer of the particular bonds.
4.
Commitments and Contingencies
During
the first quarter of 2006, the Company entered into a Secured Convertible
Promissory Note Agreement (“Note”) with its 80%-owned consolidated subsidiary,
HyperFeed Technologies, Inc. (“HyperFeed”). The maximum borrowing under the note
is $10 million and interest accrues at prime plus 2.75%. The exercise price
of
the conversion right is the lesser of $1.05 or 80% of the 5 day average at
the
exercise date. The Company can elect to convert all or any part of the principal
and interest outstanding into common stock of HyperFeed at any time. At June
30,
2006 HyperFeed had borrowed $6.7 million. The intercompany note and related
interest have been eliminated in consolidation.
On
June
19, 2006, HyperFeed announced a merger agreement with Exegy, Inc. Under the
terms of the merger agreement the security holders of HyperFeed will own
50% of the merged company on a fully-diluted basis, and the
security holders of Exegy
will own 50% of the merged company on a fully-diluted basis. Prior to the
merger, PICO will convert the principal outstanding on the Note into
HyperFeed common stock under the terms of the Note. At the time of
the merger PICO will also contribute cash to HyperFeed and the
holders of Exegy will contribute cash to Exegy, so that HyperFeed and Exegy
will
each have cash and cash equivalents of at least $5 million at the time of
the merger. If for any reason the proposed merger does not close,
PICO has no commitment to HyperFeed for any further funding beyond the $10
million Note. At the date of filing, HyperFeed has drawn $7.6 million
under the Note. There are no assurances, absent the proposed merger, that
additional funding, from any source, will be available to HyperFeed after
the
full utilization of PICO’s Note. HyperFeed believes that without additional
funding beyond the Note from PICO or other sources, there may
be insufficient capital resources for HyperFeed to fund its operations
beyond December 31, 2006.
Construction
of the pipeline project to convey water from the Fish Springs Ranch to a storage
tank near Reno, Nevada has begun. The total cost of the pipeline project is
estimated to be between $78 million to $83 million, which will be incurred
over the next 12 to 18 months. As of June 30, 2006, approximately $7.7 million
of costs related to the design and construction of the Fish Springs Ranch
pipeline project had been capitalized. Vidler has remaining commitments at
June
30, 2006 for future capital expenditure of approximately $10.1 million, and
is
in the process of obtaining additional bids for the remaining construction.
The
final regulatory approval required for the pipeline project is a Record of
Decision (“ROD”) for a right of way, which was granted on May 31, 2006.
Subsequently there have been two protests against the ROD being granted, and
the
matter is on appeal to the Interior Board of Land Appeals (“IBLA”). The
decision of the IBLA is expected during the third quarter of 2006, at which
time
Vidler expects the ROD to be final.
The
Company is subject to various litigation that arises in the ordinary course
of
its business. Based upon information presently available, management is of
the
opinion that such litigation will not have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
PICO
Holdings, Inc. is a diversified holding company engaged in five major operating
segments: Water Resource and Water Storage Operations, Real Estate Operations
in
Nevada, Business Acquisitions and Financing, Insurance Operations in Run Off,
and HyperFeed Technologies, Inc.
The
accounting policies of the reportable segments are the same as those described
in the Company’s 2005 Annual Report on Form 10-K. Management analyzes segments
using the following information:
Segment
assets:
|
At
June 30, 2006
|
|
At
December 31, 2005
|
Total
Assets:
|
|
|
|
Water
Resource and Water Storage Operations
|
$141,786,145
|
|
$86,353,051
|
Real
Estate Operations in Nevada
|
67,737,948
|
|
66,513,641
|
Business
Acquisitions and Financing
|
141,636,695
|
|
127,980,663
|
Insurance
Operations in Run Off
|
150,672,697
|
|
156,366,749
|
HyperFeed
Technologies, Inc.
|
4,995,445
|
|
4,615,518
|
|
$506,828,930
|
|
$441,829,622
|
Segment
revenues and income (loss) before taxes and minority interest for the second
quarter and first half of 2006 and 2005 were:
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
2006
|
2005
|
2006
|
2005
|
Revenues:
|
|
|
|
|
Water
Resource and Water Storage Operations
|
$
673,988
|
$94,592,339
|
$
982,284
|
$
94,999,526
|
Real
Estate Operations in Nevada
|
4,626,254
|
2,150,567
|
6,391,587
|
4,517,959
|
Business
Acquisitions and Financing
|
3,188,181
|
2,021,945
|
12,160,869
|
3,883,479
|
Insurance
Operations in Run Off
|
1,059,598
|
3,401,330
|
8,259,920
|
5,992,297
|
HyperFeed
Technologies
|
883,385
|
1,044,573
|
1,882,019
|
1,933,665
|
Total
Revenues
|
$10,431,406
|
$103,210,754
|
$29,676,679
|
$111,326,926
|
|
|
|
|
|
Income
(Loss) Before Taxes and Minority Interest:
|
|
|
|
|
Water
Resource and Water Storage Operations
|
$
(782,481)
|
$
51,832,868
|
$(1,961,377)
|
$
50,314,427
|
Real
Estate Operations in Nevada
|
2,723,539
|
1,177,510
|
3,650,393
|
2,416,112
|
Business
Acquisitions and Financing
|
879,334
|
(11,557,502)
|
7,627,147
|
(22,604,667)
|
Insurance
Operations in Run Off
|
748,396
|
3,154,340
|
7,549,002
|
5,407,457
|
HyperFeed
Technologies
|
(2,446,254)
|
(1,568,768)
|
(5,018,587)
|
(
3,268,469)
|
Income
Before Taxes and Minority Interest
|
$
1,122,534
|
43,038,448
|
$11,846,578
|
$
32,264,860
|
|
6.
Private Placement of Common
Stock
|
On
May 4,
2006, the Company completed a sale of 2.6 million shares of newly-issued common
stock to institutional investors at a price of $30 per share. After placement
costs, the net proceeds to the Company were $73.9 million. The Company filed
a
registration statement on Form S-3 to register the shares under the Securities
Act, which became effective in June 2006.
7.
Subsequent
Events
In
July
2006, Nevada Land and Resource Company and Vidler Water Company entered into
an
agreement with Southern Nevada Water Authority to sell Spring Valley Ranch
and
related water assets for $22 million. Closing of the sale is expected to occur
on August 21, 2006. It is anticipated that if the sale closes, the net gain
before tax will be approximately $17 million in the quarter ended September
30,
2006.
The
following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere in this
report and the Consolidated Financial Statements and Notes thereto included
in
our annual report on Form 10-K.
This
Form 10-Q (including the “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” section) contains “forward-looking
statements” regarding our business, financial condition, results of operations,
and prospects, including, without limitation, statements about our expectations,
beliefs, intentions, anticipated developments, and other information concerning
future matters. Words such as “expects,” “anticipates,” “intends,” “plans,”
“believes,” “seeks,” “estimates,” and similar expressions or variations of such
words are intended to identify forward-looking statements, but are not the
exclusive means of identifying forward-looking statements in this Form 10-Q.
Although
forward-looking statements in the Form 10-Q represent the good faith judgment
of
our management, such statements can only be based on facts and factors currently
known by us. Consequently, forward-looking statements are inherently subject
to
risks and uncertainties, and the actual results and outcomes could differ from
those discussed in or anticipated by the forward-looking statements. Factors
that could cause or contribute to such differences in results and outcomes
include, without limitation, those discussed under the heading “Risk Factors”
and elsewhere in our 2005 Annual Report on Form 10-K. Readers are urged not
to
place undue reliance on these forward-looking statements, which speak only
as of
the date of this Form 10-Q. We undertake no obligation to revise or update
any
forward-looking statement in order to reflect any event or circumstance which
may arise after the date of this Form 10-Q. Readers are urged to carefully
review and consider the various disclosures made in this Form 10-Q and our
2005
Annual Report on Form 10-K, which attempt to advise interested parties of the
risks and factors which may affect our business, financial condition, results
of
operations, and prospects.
INTRODUCTION
PICO
Holdings, Inc. (PICO and its subsidiaries are referred to as “PICO” and “the
Company,” and by words such as “we” and “our”) is a diversified holding company.
PICO seeks to acquire businesses and interests in businesses which we identify
as undervalued based on fundamental analysis--that is, our assessment of what
the business is worth, based on the private market value of its assets,
earnings, and cash flow. Typically, the businesses will be generating free
cash
flow and have a low level of debt, or, alternatively, strong interest coverage
ratios or the ability to realize surplus assets. As well as being undervalued,
the business must have special qualities such as unique assets, a potential
catalyst for change, or be in an industry with attractive economics. We are
also
interested in acquiring businesses and interests in businesses where there
is
significant unrecognized value in land and other tangible assets.
We
have
acquired businesses and interests in businesses by the acquisition of private
companies, and the purchase of shares in public companies, both directly through
participation in financing transactions and through open market purchases.
When
acquisitions become core operations, we become actively involved in the
management and strategic direction of the business.
Our
objective is to generate superior long-term growth in shareholders’ equity, as
measured by book value per share. We anticipate that PICO’s earnings will
fluctuate, and that the results for any one quarter or year are not necessarily
indicative of our future performance.
Our
business is separated into five major operating segments:
· |
Water
Resource and Water Storage
Operations;
|
· |
Real
Estate Operations in Nevada;
|
· |
Business
Acquisitions and Financing (contains businesses, interests in businesses,
and other parent company assets);
|
· |
Insurance
Operations in “Run Off”; and
|
· |
HyperFeed
Technologies, Inc. (“HyperFeed”).
|
Currently
our major consolidated subsidiaries are:
· |
Vidler
Water Company, Inc. (“Vidler”), which develops and owns water resources
and water storage operations in the southwestern United States, primarily
in Nevada and Arizona;
|
· |
Nevada
Land & Resource Company, LLC (“Nevada Land”), which owns approximately
700,000 acres of land in Nevada, and the mineral rights and water
rights
related to the land owned;
|
· |
Physicians
Insurance Company of Ohio (“Physicians”), which is running off its medical
professional liability insurance loss
reserves;
|
· |
Citation
Insurance Company (“Citation”), which is running off its historic property
& casualty insurance and workers’ compensation loss reserves;
|
· |
Global
Equity AG, which holds our interest in Jungfraubahn Holding AG;
and
|
· |
HyperFeed,
which is a leading developer of ticker plant technologies, data
distribution, smart order routing, and managed data services to the
financial community.
|
RESULTS
OF OPERATIONS--THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND
2005
Shareholders’
Equity
At
June
30, 2006, PICO had shareholders’ equity of $375.9 million ($23.67 per share),
compared to $302.2 million ($22.77 per share) at March 31, 2006, and $300.9
million ($22.67 per share) at December 31, 2005. Book value per share increased
by $1.00, or 4.4%, during the first half of 2006, and by $0.90, or 4%, during
the second quarter of 2006.
During
the second quarter of 2006, shareholders’ equity increased by $73.7 million,
primarily due to the issuance of 2.6 million new shares for net proceeds of
$73.9 million.
The
$75
million increase in shareholders’ equity during the first half of 2006 also
resulted primarily from the issuance of 2.6 million new shares for net proceeds
of $73.9 million. Although PICO reported $7.6 million in net income for the
six
months, this only had a minor effect on shareholders’ equity, as most of net
income came from realized gains, which were largely included in shareholders’
equity in prior periods as unrealized gains.
Comprehensive
Income
In
accordance with Statement of Financial Accounting Standards No. 130, “Reporting
Comprehensive Income,” PICO reports comprehensive income as well as net income
from the Condensed Consolidated Statement of Operations. Comprehensive income
measures changes in shareholders’ equity, and includes unrealized items which
are not recorded in the Consolidated Statement of Operations, for example,
foreign currency translation and the change in investment gains and losses
on
available-for-sale securities.
For
the
second quarter of 2006, PICO recorded a comprehensive loss of $514,000,
principally due to a $1.1 million net decrease in unrealized appreciation in
investments. The reduction in unrealized appreciation in investments during
the
second quarter primarily resulted from a decrease in the market value of listed
stocks, which our management believes reflects typical fluctuation in the stock
market.
For
the
first half of 2006, PICO recorded comprehensive income of $815,000, principally
represented by the first half’s $7.6 million in net income, which was largely
offset by a $6.7 million net reduction in unrealized appreciation in
investments. The reduction in unrealized appreciation in investments during
the
first half of 2006 primarily resulted from a decrease in unrealized appreciation
in listed stocks, due to the sale of our holdings in Anderson-Tully Company
(“Anderson-Tully”) during the first quarter of 2006. At December 31, 2005,
shareholders’ equity included an unrealized gain, net of deferred taxes, on
Anderson-Tully, which was realized during the first quarter of 2006.
Net
Income
Segment
revenues and income (loss) before taxes and minority interest for the second
quarter and first half of 2006 and 2005 were:
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
2006
|
2005
|
2006
|
2005
|
Revenues:
|
|
|
|
|
Water
Resource and Water Storage Operations
|
$
674,000
|
$
94,592,000
|
$
982,000
|
$
95,000,000
|
Real
Estate Operations in Nevada
|
4,626,000
|
2,151,000
|
6,392,000
|
4,518,000
|
Business
Acquisitions and Financing
|
3,188,000
|
2,022,000
|
12,161,000
|
3,883,000
|
Insurance
Operations in Run Off
|
1,060,000
|
3,401,000
|
8,260,000
|
5,992,000
|
HyperFeed
Technologies
|
883,000
|
1,045,000
|
1,882,000
|
1,934,000
|
Total
Revenues
|
$10,431,000
|
$103,211,000
|
$29,677,000
|
$111,327,000
|
|
|
|
|
|
Income
(Loss) Before Taxes and Minority Interest:
|
|
|
|
|
Water
Resource and Water Storage Operations
|
$(
782,000)
|
$
51,833,000
|
$(1,961,000)
|
$
50,314,000
|
Real
Estate Operations in Nevada
|
2,724,000
|
1,178,000
|
3,650,000
|
2,416,000
|
Business
Acquisitions and Financing
|
879,000
|
(11,558,000)
|
7,627,000
|
(22,604,000)
|
Insurance
Operations in Run Off
|
748,000
|
3,154,000
|
7,549,000
|
5,407,000
|
HyperFeed
Technologies
|
(2,446,000)
|
(
1,569,000)
|
(5,018,000)
|
(
3,268,000)
|
Income
Before Taxes and Minority Interest
|
$
1,123,000
|
$
43,038,000
|
$11,847,000
|
$
32,265,000
|
Second
quarter revenues decreased $92.8 million and first-half revenues decreased
$81.7
million year over year. This was primarily due to Vidler’s sale of real estate
and water assets in the Harquahala Valley Irrigation District of Arizona for
$94.4 million, which was included in revenues in the second quarter and first
half of 2005.
Second
quarter costs and expenses decreased $50.9 million and first-half costs and
expenses decreased $62.2 million year over year. In the second quarter and
first
half of 2005, costs and expenses included $38.9 million for the cost of the
real estate and water assets sold in the Harquahala Valley. In 2005, costs
and
expenses also included Stock
Appreciation Rights (“SAR”) expense of $7.4 million in the second quarter and
$17.3 million in the first half, compared to zero in 2006.
PICO
recorded income before taxes and minority interest of $1.1 million in the second
quarter of 2006, compared to income of $43 million in the second quarter of
2005. The $41.9 million year over year decrease in second quarter income before
taxes and minority interest primarily resulted from a $52.6 million decrease
in
Water segment income due to the $55.5 million contribution to income from the
sale of real estate and water assets in the Harquahala Valley Irrigation
District in 2005. In addition, the Insurance Operations in Run Off segment
income decreased by $2.4 million, primarily due to a $2.6 million decrease
in
realized gains year over year. The Business Acquisitions & Finance segment
result improved by $12.4 million year over year. This was primarily due a $7.4
million expense related to SAR in the second quarter of 2005 which did not
recur
in 2006 and to a $3.9 million change year over year in an expense related to
foreign currency. In addition, Real Estate Operations in Nevada segment income
increased by $1.5 million year over year, primarily due to a $1.2 million
increase in gross margin from land sales.
After
a
provision for taxes of $753,000, PICO reported net income of $382,000 ($0.03
per
share) for the second quarter of 2006, all from continuing
operations.
For
the
second quarter of 2005, after a $19.6 million provision for taxes, PICO
generated net income of $23.6 million ($1.83 per share), consisting of income
of
$23.6 million ($1.83 per share) from continuing operations and a loss from
discontinued operations of $17,000 after-tax ($0.00 per share).
PICO
recorded income before taxes and minority interest of $11.8 million in the
second quarter of 2006, compared to income of $32.3 million in the second
quarter of 2005. The $20.4 million year over year decrease in first half income
before taxes and minority interest primarily resulted from a $52.2 million
decrease in Water segment income due to the $55.5 million contribution to income
from the sale of real estate and water assets in the Harquahala Valley
Irrigation District in 2005, which did not recur in 2006. The Business
Acquisitions & Finance segment result improved by $30.2 million year over
year. This was primarily due to a $17.3 million expense related to SAR in the
first half of 2005, which did not recur in 2006, as well as a $6.8 million
year
over year increase in realized gains, and a $5.3 million change year over year
in the foreign currency expense.
After
a
provision for taxes of $4.4 million, in the first half of 2006, PICO reported
net income of $7.6 million ($0.54 per share), consisting of income of $7.4
million ($0.53 per share) from continuing operations, and a gain from
discontinued operations of $165,000 after-tax ($0.01 per share).
For
the
first half of 2005, after a $16.6 million provision for taxes, PICO reported
net
income of $16.6 million ($1.32 per share), consisting of $16.7 million ($1.32
per share) in income from continuing operations, partially offset by income
from
discontinued operations of $40,000 after-tax ($0.00 per share).
WATER
RESOURCE AND WATER STORAGE OPERATIONS
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
2006
|
2005
|
2006
|
2005
|
|
|
|
|
|
Revenues:
|
|
|
|
|
Sale
of Real Estate and Water Assets
|
$
7,000
|
$94,395,000
|
$
35,000
|
$94,547,000
|
Lease
of Water
|
21,000
|
21,000
|
43,000
|
41,000
|
Lease
of Agricultural Land
|
20,000
|
129,000
|
40,000
|
258,000
|
Interest
|
577,000
|
41,000
|
883,000
|
94,000
|
Other
|
49,000
|
6,000
|
(19,000)
|
60,000
|
Segment
Total Revenues
|
$674,000
|
$94,592,000
|
$982,000
|
$95,000,000
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Cost
of Real Estate and Water Assets Sold
|
$(
2,000)
|
$(37,816,000)
|
$(
11,000)
|
$(37,889,000)
|
Commission
and Other Cost of Sales
|
|
(
1,065,000)
|
|
(
1,065,000)
|
Depreciation
and Amortization
|
(
323,000)
|
(
319,000)
|
(
589,000)
|
(
635,000)
|
Interest
|
(
1,000)
|
(
143,000)
|
(
1,000)
|
(
273,000)
|
Overhead
Expenses
|
(
563,000)
|
(
2,555,000)
|
(1,051,000)
|
(
3,020,000)
|
Project
Expenses
|
(
567,000)
|
(
861,000)
|
(1,291,000)
|
(
1,804,000)
|
Segment
Total Expenses
|
$(1,456,000)
|
$(42,759,000)
|
$(2,943,000)
|
$(44,686,000)
|
Income
(Loss) Before Tax
|
$(
782,000)
|
$51,833,000
|
($1,961,000)
|
$50,314,000
|
Water
Resource and Water Storage Operations are primarily conducted through Vidler
Water Company.
Over
the
past 5 years, several large sales of real estate and water assets have generated
the bulk of Vidler’s revenues. Since the date of closing determines the
accounting period in which the sales revenues and gross margin are recorded,
Vidler’s reported revenues and income fluctuate from quarter to quarter
depending on the dates when specific transactions close. Consequently,
sales of real estate and water assets for any individual quarter are not
indicative of likely revenues for future quarters or the full financial
year.
Sale
of Harquahala Valley Irrigation District Real Estate and Water
Assets
In
June
2005, Vidler closed on the sale of real estate and water assets in the
Harquahala Valley Irrigation District of Arizona to a real estate developer.
The
sale of the Harquahala Valley Irrigation District real estate and water assets
added $94.4 million to revenues and approximately $55.5 million to income.
After
the repayment of borrowings collateralized by the properties, the exercise
of
options to acquire certain farms that we sold in the transaction, and closing
and other costs, Vidler received net cash proceeds of $83.4 million.
Segment
Results
In
the
second quarter of 2006, Vidler generated $674,000 in revenues. The largest
revenue item was $577,000 of interest earned from the temporary investment
of
funds in money market funds and corporate bonds maturing in 2006 and 2007.
After
operating expenses of $1.5 million, Vidler generated a loss before taxes of
$782,000 for the second quarter of 2006.
In
the
second quarter of 2005, Vidler generated $94.6 million in revenues. The sale
of
the Harquahala Valley Irrigation District real estate and water assets added
$94.4 million to revenues and approximately $55.5 million to income.
Project
Expenses consist of costs related to the development of existing water
resources, such as maintenance and professional fees. Project expenses are
recorded as expenses as incurred, and could fluctuate from period to period
depending on activity regarding Vidler’s various water resource projects. Costs
related to the development of water resources which meet the criteria to be
recorded as assets in our financial statements are capitalized to the cost
of
the asset, and amortized against matching revenues once revenues are generated.
Project
Expenses were $567,000 in the second quarter of 2006, compared to $861,000
in
the second quarter of 2005. The $294,000 year over year decrease was principally
due to a reduction in legal, engineering, and consulting expenses, which were
higher in 2005 due to the preparation of an Environmental Impact Study related
to Fish Springs Ranch.
Overhead
Expenses consist of costs which are not related to the development of specific
water resources, such as salaries and benefits, rent, and audit fees. Overhead
Expenses were $563,000 in the second quarter of 2006, compared to $2.6 million
in the second quarter of 2005. In the second quarter of 2005, Overhead Expenses
included the accrual of $2.2 million in incentive compensation for Vidler
management, compared to $30,000 in the second quarter of 2006.
In
the
first half of 2006, Vidler generated $982,000 in revenues. The largest revenue
item was $883,000 of interest earned from the temporary investment of funds
in
money market funds and corporate bonds maturing in 2006 and 2007. After
operating expenses of $2.9 million, Vidler generated a loss before taxes of
$2
million for the first half of 2006.
In
the
first half of 2005, Vidler generated $95 million in revenues. The sale of the
Harquahala Valley Irrigation District real estate and water assets added $94.4
million to revenues and approximately $55.5 million to income.
Project
Expenses were $1.8 million in the first half of 2006, compared to $1.3 million
in the first half of 2005. The $513,000 year over year decrease was principally
due to a reduction in legal, engineering, and consulting expenses, which were
higher in 2005 due to the preparation of an Environmental Impact Study related
to Fish Springs Ranch.
Overhead
Expenses were $3 million in the first half of 2006, compared to $1.1 million
in
the second quarter of 2005. In the first half of 2005, Overhead Expenses
included the accrual of $2.2 million in incentive compensation for Vidler
management, compared to $30,000 in the first half of 2006.
Fish
Springs Ranch
During
the second quarter of 2006, we sold 2.6 million shares of newly-issued PICO
common stock in a private placement for net proceeds of $73.9 million.
Vidler
has a 51% membership interest in Fish Springs Ranch LLC, and is the managing
partner. The funds raised in the stock offering have largely been
contributed to Vidler, and the primary use will be to design and construct
a
pipeline to convey 8,000 acre-feet of water annually from Fish Springs Ranch
to
a central storage tank in northern Reno, Nevada, which could supply water to
the
new projects of several developers. The total cost of the pipeline project
is estimated at $78 million to $83 million, over the next 12 to 18 months.
Design of the pipeline project is nearly complete. As of June 30, 2006,
Vidler has outlaid approximately $7.7 million for the pipeline project, which
has been capitalized (i.e., recorded as an asset on our balance sheet).
The
final
regulatory approval required for the pipeline project is a Record of Decision
(“ROD”) for a right of way, which was granted on May 31, 2006.
Subsequently there have been two protests against the ROD being granted, and
the
matter is on appeal to the Interior Board of Land Appeals (“IBLA”). The
decision of the IBLA is expected during the third quarter of 2006, at which
time
Vidler expects the ROD to be final.
REAL
ESTATE OPERATIONS IN NEVADA
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
2006
|
2005
|
2006
|
2005
|
Revenues:
|
|
|
|
|
Sale
of Land
|
$3,826,000
|
$1,775,000
|
$5,054,000
|
$3,778,000
|
Lease
and Royalty
|
407,000
|
141,000
|
552,000
|
286,000
|
Interest
and Other
|
393,000
|
235,000
|
786,000
|
454,000
|
Segment
Total Revenues
|
$4,626,000
|
$2,151,000
|
$6,392,000
|
$4,518,000
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Cost
of Land Sales
|
$(1,299,000)
|
$(467,000)
|
$(1,671,000)
|
$(1,136,000)
|
Operating
Expenses
|
(
603,000)
|
(506,000)
|
(1,071,000)
|
(
966,000)
|
Segment
Total Expenses
|
$(1,902,000)
|
$(973,000)
|
$(2,742,000)
|
$(2,102,000)
|
|
|
|
|
|
Income
Before Tax
|
$2,724,000
|
$1,178,000
|
$3,650,000
|
$2,416,000
|
Real
Estate Operations in Nevada are primarily conducted through Nevada Land &
Resource Company, LLC.
Nevada
Land recognizes revenue from land sales, and the resulting gross profit or
loss,
when the sales transactions close. On closing, the entire sales price is
recorded as revenue, and a gross margin is recognized depending on the cost
basis attributed to the land. Since the date of closing determines the
accounting period in which the sales revenue and gross margin are recorded,
Nevada Land’s reported revenues and income fluctuate from quarter to quarter
depending on the dates when specific transactions close. Consequently, land
sales revenues for any individual quarter are not indicative of likely revenues
for future quarters or the full financial year.
In
the
second quarter of 2006, segment total revenues were $4.6 million. Nevada Land
sold approximately 51,539 acres of land for $3.8 million. The average sales
price was $74 per acre, and our average basis in the land sold was $25 per
acre.
The gross margin on land sales was $2.5 million, which represents a gross margin
percentage of 66%.
In
the
second quarter of 2005, segment total revenues were $2.2 million. Nevada Land
sold approximately 17,091 acres of land for $1.8 million. The average sales
price was $104 per acre, and our average basis in the land sold was $27 per
acre. The gross margin on land sales was $1.3 million, which represents a gross
margin percentage of 73.7%.
The
second quarter segment result improved by $1.5 million year over year,
principally due to a $1.2 million higher gross margin from land sales year
over
year.
For
the
first half of 2006, segment total revenues were $6.4 million. Nevada Land sold
approximately 65,902 acres of land for $5.1 million. The average sales price
was
$77 per acre, and our average basis in the land sold was $25 per acre. The
gross
margin on land sales was $3.4 million, which represents a gross margin
percentage of 66.9%.
For
the
first half of 2005, segment total revenues were $4.5 million. Nevada Land sold
approximately 38,917 acres of land for $3.8 million. The average sales price
was
$97 per acre, and our average basis in the land sold was $29 per acre. The
gross
margin on land sales was $2.6 million, which represents a gross margin
percentage of 69.9%.
The
first
half segment result improved by $1.2 million year over year, principally due
to
a $741,000 higher gross margin from land sales year over year. The remainder
of
the improvement in the first half segment result was due to a $598,000 increase
in other revenues year over year, which exceeded a $105,000 increase in other
operating expenses year over year. The increase in other revenues resulted
from
increases of $266,000 in lease and royalty revenues, and $158,000 in interest
and other revenues.
Demand
continues to be strong for our real estate holdings. We currently have
approximately 58,000 acres of land in escrow for $5.9 million that we expect
to
close by the end of 2006.
BUSINESS
ACQUISITIONS AND FINANCING
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
2006
|
2005
|
2006
|
2005
|
Revenues:
|
|
|
|
|
Realized
Gains On Sale of Holdings
|
$
541,000
|
$
333,000
|
$8,698,000
|
$1,887,000
|
Investment
Income
|
2,551,000
|
1,646,000
|
3,266,000
|
1,906,000
|
Other
|
96,000
|
43,000
|
197,000
|
90,000
|
Segment
Total Revenues
|
$3,188,000
|
$2,022,000
|
$12,161,000
|
$3,883,000
|
|
|
|
|
|
Segment
Total Expenses
|
$(2,309,000)
|
$(13,580,000)
|
$(4,534,000)
|
$(26,487,000)
|
Income
(Loss) Before Tax
|
$879,000
|
$(11,558,000)
|
$7,627,000
|
$(22,604,000)
|
This
segment contains businesses, interests in businesses, and other parent company
assets. Revenues and results in this segment vary considerably from period
to
period, primarily due to fluctuations in net realized gains or losses on the
sale of holdings, and are not necessarily comparable from year to year.
The
largest holding in this segment is Jungfraubahn Holding AG, which has a market
value and carrying value of $44.2 million (before taxes) at June 30, 2006.
For
the
second quarter of 2006, Business Acquisitions and Financing segment revenues
were $3.2 million. Investment income was $2.6 million, including $1.2 million
from Jungfraubahn Holding AG’s annual dividend payment for 2005 which was
declared in April 2006 and paid in May 2006. Net gains of $541,000 were realized
gains on the sale of various securities. After expenses of $2.3 million, the
segment generated income before taxes of $879,000 for the second quarter of
2006.
In
the
second quarter of 2005, Business Acquisitions and Financing segment revenues
were $2 million. Investment income was $1.6 million, including $1.1 million
from
Jungfraubahn Holding AG’s annual dividend payment. Net gains of $333,000 were
realized gains on the sale of various securities. After total expenses of $13.6
million, the segment incurred a loss before taxes of $11.6 million for the
second quarter of 2005.
Second
quarter segment revenues increased by $1.2 million year over year, principally
due to $1 million higher investment income. The increase in investment income
was primarily due to higher interest income as a result of larger sums invested
and rising interest rates.
Second
quarter segment expenses decreased by $11.3 million year over year. The expenses
recorded in this segment primarily consist of holding company costs which are
not allocated to our other segments, for example, rent for our head office.
Our
interests in Swiss public companies are held directly and indirectly by Global
Equity AG, a wholly owned subsidiary which is incorporated in Switzerland.
Part
of Global Equity AG’s funding comes from a loan from PICO, which is denominated
in Swiss Francs. Under GAAP, we are required to record a benefit (expense)
through the statement of operations to reflect fluctuation in the exchange
rate
between the Swiss Franc and the U.S. dollar, although there was no net impact
on
shareholders’ equity before related tax effects. A exchange rate benefit of $2.1
million, which reduced segment expenses, was recorded in PICO’s statement of
operations in the second quarter of 2006, compared to a $1.7 million exchange
rate expense in the second quarter of 2005.
In
the
second quarter of 2005, segment expenses also included a $7.4 million expense
related to the PICO Holdings, Inc. Stock Appreciation Rights (“SAR”) Program,
which was still in effect during the first half of 2005. Under the SAR program,
the change in the “in the money” amount (i.e., the difference between the market
value of PICO stock and the exercise price of the SAR) of SAR outstanding during
each quarter was recorded through the consolidated statement of operations.
An
increase in the “in the money” amount of SAR (i.e., if the price of PICO stock
rose during the quarter) was recorded as an expense. Substantially all of the
second quarter 2005 $7.4 million SAR expense resulted from the $3.85 per share
increase in the PICO stock price during the second quarter of 2005. The SAR
Program was amended in the third quarter of 2005, and the spread value of the
SAR outstanding was monetized based on the last sale price of PICO stock on
September 21, 2005.
During
the fourth quarter of 2005, the Company’s shareholders approved the PICO
Holdings, Inc. 2005 Long-Term Incentive Plan (“2005 Plan”), and 2,185,965
stock-based SAR, with an exercise price of $33.76, were issued to various of
the
Company’s officers, employees, and non-employee Directors. When stock-based SAR
are exercised, new shares of stock will be issued to the participant to satisfy
the spread value of the SAR being exercised. No expense was recorded in the
second quarter and first half of 2006 related to the 2005 Plan, as all of the
stock-based SAR that have been granted are fully vested.
In
the
first half of 2006, Business Acquisitions and Financing segment revenues were
$12.2 million. Net realized gains were $8.7 million, primarily represented
by
gains of $6.8 million on the sale of our holding in Anderson-Tully Company,
and
$1 million on the sale of part of our holding in Raetia Energie AG. Investment
income was $3.3 million. After total expenses of $4.5 million, the segment
generated income before taxes of $7.6 million for the first half of 2006.
Segment expenses were reduced by a $2.4 million exchange rate benefit, as
discussed above.
Anderson-Tully
was a timber Real Estate Investment Trust (“REIT”), which owned approximately
325,000 acres of high-quality timberlands in the southeastern United States.
During 2003 and 2004, we accumulated almost 10% of Anderson-Tully at an average
cost of approximately $242,000 per share. During the first quarter of 2006,
Anderson-Tully was acquired by a timberlands investment management organization,
for approximately $446,000 per share.
In
the
first half of 2005, Business Acquisitions and Financing segment revenues were
$3.9 million, principally consisting of $1.9 million in net realized gains,
and
investment income of $1.9 million. After total expenses of $26.5 million, the
segment incurred a loss before taxes of $22.6 million for the first half of
2005.
First
half segment revenues increased by $8.3 million year over year, principally
due
to $6.8 million higher realized gains and $1.4 million higher investment income,
as discussed above.
First
half segment expenses decreased by $22 million year over year. In 2005, segment
expenses included SAR expense of $17.3 million compared to zero in 2006. The
remainder of the reduction in expenses is due to a $5 million year over year
change in the exchange rate expense (benefit), from a $2.6 million expense
in
the first half of 2005 to a $2.4 million benefit, which reduced other expenses,
in 2006.
During
the first quarter of 2006, PICO entered into a second convertible promissory
note agreement with our subsidiary, HyperFeed Technologies, Inc. The maximum
amount that can be borrowed under the note is $10 million. The principal
outstanding on the note was $6.7 million at June 30, 2006. Interest is payable
on the outstanding balance at the prime rate plus 2.75%, and PICO has the right
to convert all or part of the amount due into HyperFeed common stock. The
conversion price is the lower of either $1.05, or 80% of the 5-day moving
average price of HyperFeed common stock on the conversion date. In the
accompanying consolidated financial statements, the principal and interest
owing
from HyperFeed to PICO are eliminated on consolidation.
On
June
19, 2006, HyperFeed announced a merger agreement with Exegy, Inc. The security
holders of HyperFeed will own 50% of the merged company on a fully-diluted
basis, and the security holders of Exegy will own 50% of the merged company
on a
fully-diluted basis. Prior to the merger, we will convert the principal
outstanding on the convertible promissory note into HyperFeed common stock
under
the terms of the note. At the time of the merger, PICO will contribute cash
to
HyperFeed and the holders of Exegy will contribute cash to Exegy, so that
HyperFeed and Exegy will each have cash and cash equivalents of at least $5
million at the time of the merger.
On
June
26, 2006, HyperFeed filed a Schedule 14C Information Statement with the SEC,
regarding a proposed 1 for 1,000 reverse stock split, which would result in
HyperFeed ceasing to file periodic reports with the SEC, and becoming a private
company. HyperFeed is responding to SEC staff comments on the Schedule 14C.
INSURANCE
OPERATIONS IN RUN OFF
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|
2006
|
2005
|
2006
|
2005
|
Revenues:
|
|
|
|
|
Investment
Income
|
$
913,000
|
$
700,000
|
$1,584,000
|
$1,365,000
|
Realized
Investment Gains
|
147,000
|
2,701,000
|
6,676,000
|
4,627,000
|
Segment
Total Revenues
|
$1,059,000
|
$3,401,000
|
$8,260,000
|
$5,992,000
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Operating
and Underwriting Expenses
|
$(311,000)
|
$(247,000)
|
$(711,000)
|
$(585,000)
|
Segment
Total Expenses
|
$(311,000)
|
$(247,000)
|
$(711,000)
|
$(585,000)
|
|
|
|
|
|
Income
Before Taxes:
|
|
|
|
|
Physicians
Insurance Company of Ohio
|
$656,000
|
$2,160,000
|
$5,945,000
|
$4,326,000
|
Citation
Insurance Company
|
96,000
|
994,000
|
1,604,000
|
1,081,000
|
Segment
Income Before Tax
|
$748,000
|
$3,154,000
|
$7,549,000
|
$5,407,000
|
This
segment consists of Physicians Insurance Company of Ohio and Citation Insurance
Company. Both Physicians and Citation are in “run off.” This means that the
companies are handling and resolving claims on expired policies, but not writing
new business.
Revenues
and results in this segment vary considerably from period to period, primarily
due to fluctuations in net realized gains or losses on the sale of holdings,
and
are not necessarily comparable from year to year. Typically, most of the
revenues of a “run off” insurance company come from investment income, which is
expected to decline over time as fixed-income securities mature or are sold
to
provide the funds to pay claims and expenses.
The
Insurance Operations in Run Off segment generated total revenues of $1.1 million
in the second quarter of 2006, compared to $3.4 million in the second quarter
of
2005. Investment income was $913,000 in the second quarter of 2005, compared
to
$700,000 in the second quarter of 2005. Realized investment gains were $147,000
in the second quarter of 2006, compared to $2.7 million in the second quarter
of
2005.
Operating
and underwriting expenses were $311,000 in the second quarter of 2006, compared
to $247,000 in the second quarter of 2005. Consequently, segment income
decreased from $3.2 million in the second quarter of 2005 to $748,000 in the
second quarter of 2006, primarily due to a $2.6 million reduction in realized
gains.
The
Insurance Operations in Run Off segment generated total revenues of $8.3 million
in the first half of 2006, compared to $6 million in the first half of 2005.
Investment income was $1.6 million in both the first half of 2006, compared
to
$1.4 million in the first half of 2005. Realized investment gains were $6.7
million in the first half of 2006, compared to $4.6 million in the first half
of
2005.
Operating
and underwriting expenses were $711,000 in the first half of 2006, compared
to
$585,000 in the first half of 2005. Consequently, primarily as a result of
the
$2.1 million year over year increase in realized gains, segment income increased
from $5.4 million in the first half of 2005 to $7.5 million in the first half
of
2006.
On
February 7, 2005, we reported on Schedule 13G that Physicians and Citation
own a
total of 310,000 common shares of Consolidated-Tomoka Land Co. (Amex: CTO),
representing approximately 5.5% of CTO. Consolidated-Tomoka owns approximately
12,000 acres of land in and around Daytona Beach, Florida, and a portfolio
of
income properties in the southeastern United States. The investment was
purchased between September 2002 and February 2004 at a cash cost of $6.5
million, or approximately $20.90 per CTO share. At June 30, 2006, the market
value and carrying value of the investment was $16.9 million (before
taxes).
No
other
investments of the insurance companies have reached a threshold requiring public
disclosure under the securities laws of the countries where the investments
are
held.
Physicians
Insurance Company of Ohio
During
the second quarter of 2006, Physicians generated total revenues of $811,000,
including realized gains of $146,000. Operating and underwriting expenses were
$158,000, resulting in income before taxes of $653,000.
During
the first half of 2006, Physicians generated total revenues of $6.3 million,
including realized gains of $5.2 million. Operating and underwriting expenses
were $363,000, resulting in income before taxes of $5.9 million.
PHYSICIANS
INSURANCE COMPANY OF OHIO -- LOSS AND LOSS ADJUSTMENT EXPENSE
RESERVES
(In
Millions)
|
|
|
June
30, 2006
|
March
31, 2006
|
December
31, 2005
|
Direct
Reserves
|
$12.6
|
$12.7
|
$12.9
|
Ceded
Reserves
|
(1.0)
|
(
1.0)
|
(
1.0)
|
Net
Medical Professional Liability Insurance Reserves
|
$11.6
|
$11.7
|
$11.9
|
At
June
30, 2006, Physicians’ loss and loss adjustment reserves were $11.6 million, net
of reinsurance, compared to $11.7 million at March 31, 2006, and $11.9 million
at December 31, 2005. Reserves decreased by $150,000 during the second quarter
and $263,000 during the first half, due to the payment of losses and loss
adjustment expenses. Recoveries from reinsurance companies were immaterial
in
both periods. No unusual trends in claims were noted.
Citation
Insurance Company
During
the second quarter of 2006, Citation generated total revenues of $249,000.
Operating and underwriting expenses were $153,000, resulting in income before
taxes of $96,000.
During
the first half of 2006, Citation generated total revenues of $2 million,
including realized gains of $1.5 million. Operating and underwriting expenses
were $348,000, resulting in income before taxes of $1.6 million.
CITATION
INSURANCE COMPANY -- LOSS AND LOSS ADJUSTMENT EXPENSE
RESERVES
(In
Millions)
|
|
|
|
|
|
June
30, 2006
|
March
31, 2006
|
December
31, 2005
|
Property
& Casualty Insurance
|
|
|
|
Direct
Reserves
|
$7.6
|
$7.9
|
$8.2
|
Ceded
Reserves
|
(
1.8)
|
(1.7)
|
(1.8)
|
Net
Property & Casualty Insurance Reserves
|
$5.8
|
$6.2
|
$6.4
|
|
|
|
|
Workers’
Compensation Insurance
|
|
|
|
Direct
Reserves
|
$24.4
|
$24.9
|
$25.6
|
Ceded
Reserves
|
(12.4)
|
(12.8)
|
(13.1)
|
Net
Workers’ Compensation Insurance Reserves
|
$12
|
$12.1
|
$12.5
|
|
|
|
|
Total
Reserves
|
$17.8
|
$18.3
|
$18.9
|
At
June
30, 2006, Citation’s claims reserves were $17.8 million, net of reinsurance,
consisting of $5.8 million in net property and casualty insurance reserves
and
$12 million in net workers’ compensation reserves. At March 31, 2006, Citation’s
claims reserves were $18.3 million, net of reinsurance, consisting of $6.2
million in net property and casualty insurance reserves and $12.1 million in
net
workers’ compensation reserves. At December 31, 2005, Citation’s claims reserves
were $18.9 million, net of reinsurance, consisting of $6.4 million in net
property and casualty insurance reserves and $12.5 million in net workers’
compensation reserves. There were no unusual trends in claims during the first
half of 2006.
During
the first half of 2006, Citation’s net property and casualty insurance reserves
declined by $619,000 due to the payment of $638,000 in direct losses and loss
adjustment expenses, partially offset by the recovery of approximately $19,000
from reinsurance companies. During the second quarter of 2006, Citation’s net
property and casualty insurance reserves declined by $307,000.
During
the first half of 2006, Citation’s net workers’ compensation reserves declined
by $469,000 due to the payment of $1.2 million in direct losses and loss
adjustment expenses, partially offset by the recovery of approximately $733,000
from reinsurance companies. During the second quarter of 2006, Citation’s net
workers’ compensation reserves decreased $120,000.
HYPERFEED
TECHNOLOGIES
|
Three
months ended June 30,
|
Six
months ended June 30,
|
|
2006
|
2005
|
2006
|
2005
|
|
|
|
|
|
Revenues:
|
|
|
|
|
Service
|
$882,000
|
$1,045,000
|
$1,880,000
|
$1,934,000
|
Investment
Income
|
1,000
|
|
2,000
|
|
Segment
Total Revenues
|
$883,000
|
$1,045,000
|
$1,882,000
|
$1,934,000
|
|
|
|
|
|
Expenses:
|
|
|
|
|
Cost
of service
|
$(
441,000)
|
$
(279,000)
|
$
(887,000)
|
$
(562,000)
|
Depreciation
and amortization
|
(
130,000)
|
(196,000)
|
(292,000)
|
(409,000)
|
Other
|
(2,758,000)
|
(2,139,000)
|
(5,721,000)
|
(4,231,000)
|
Segment
Total Expenses
|
$(3,329,000)
|
$(2,614,000)
|
$(6,900,000)
|
$(5,202,000)
|
|
|
|
|
|
Segment
Loss Before Taxes and Minority Interest
|
$(2,446,000)
|
$(1,569,000)
|
$(5,018,000)
|
$(3,268,000)
|
During
the second quarter of 2006, HyperFeed generated $883,000 in revenues. Service
revenues were $882,000 and the costs of service were $441,000, resulting in
gross margin of $441,000. After the deduction of $2.9 million in other operating
expenses, HyperFeed generated a segment loss before taxes and minority interest
of $2.4 million.
During
the second quarter of 2005, HyperFeed generated $1 million in revenues. Service
revenues were $1 million and the costs of service were $279,000, resulting
in
gross margin of $766,000. After the deduction of $2.3 million in other operating
expenses, HyperFeed generated a segment loss before taxes and minority interest
of $1.6 million.
Year
over
year, the second quarter segment loss increased by $877,000. Other operating
expenses increased by $553,000, primarily due to increases in the cost of labor,
communications, and data. In addition, revenues decreased $162,000, primarily
due to the inclusion of two one-time fee contracts in 2005, which did not recur
in 2006.
During
the first half of 2006, HyperFeed generated $1.9 million in revenues. Service
revenues were $1.9 million and the costs of service were $887,000, resulting
in
gross margin of $993,000. After the deduction of $6.9 million in other operating
expenses, HyperFeed generated a segment loss before taxes and minority interest
of $5 million.
During
the first half of 2005, HyperFeed generated $1.9 million in revenues. Service
revenues were $1.9 million and the costs of service were $562,000, resulting
in
gross margin of $1.4 million. After the deduction of $5.2 million in other
operating expenses, HyperFeed generated a segment loss before taxes and minority
interest of $3.3 million.
Year
over
year, the first half segment loss increased by $1.7 million. Although service
revenues were little changed year over year, higher cost of service (primarily
data license fees) reduced gross margin by $325,000. In addition, other
operating expenses increased by $1.4 million year over year, primarily due
to
increases in the cost of labor, communications, and data.
DISCONTINUED
OPERATIONS
During
2003, HyperFeed sold two businesses, which are now recorded as discontinued
operations: its retail trading business and its consolidated market data feed
customers. The discontinued operations of HyperFeed broke even after-tax in
the
second quarter of 2006, compared to a $17,000 after-tax loss in the second
quarter of 2005. In the first half of 2006, the discontinued operations of
HyperFeed generated an after-tax gain of $165,000, compared to an after-tax
loss
of $40,000 in the first half of 2005.
LIQUIDITY
AND CAPITAL RESOURCES--SIX MONTHS ENDED JUNE 30, 2006 AND
2005
PICO’s
assets primarily consist of our operating subsidiaries, holdings in other public
companies, marketable securities, and cash and cash equivalents. On a
consolidated basis, the Company had $97.1 million in cash and equivalents at
June 30, 2006, compared to $53.7 million at March 31, 2006 and $37.8 million
at
December 31, 2005. The increase in cash and cash equivalents was primarily
due
to the May 2006 sale of 2.6 million shares of the Company’s common stock for net
proceeds of $73.9 million.
Our
cash
flow position fluctuates depending on the requirements of our operating
subsidiaries for capital, and activity in our insurance company investment
portfolios. Our primary sources of funds include cash balances, cash flow from
operations, the sale of holdings, and--potentially--the proceeds of borrowings
or offerings of equity and debt. Currently, management believes that cash
balances and cash flows are adequate to service existing debt and fund
operations for the next twelve months.
In
broad
terms, the cash flow profile of our principal operating subsidiaries
is:
· |
As
Vidler’s water assets are monetized, Vidler is generating free cash flow
as receipts from the sale of real estate and water assets have overtaken
maintenance capital expenditure, financing costs, and operating
expenses;
|
· |
Nevada
Land is actively selling land which has reached its highest and best
use.
Nevada Land’s principal sources of cash flow are the proceeds of
cash sales
and collections of principal and interest on sales contracts where
Nevada
Land has provided vendor financing. These receipts and other revenues
exceed Nevada Land’s operating costs, so Nevada Land is generating strong
cash flow;
|
· |
Investment
income more than covers the operating expenses of the “run off” insurance
companies, Physicians and Citation. The funds to pay claims come
from the
maturity of fixed-income securities, the realization of fixed-income
investments and stocks held in their investment portfolios, and recoveries
from reinsurance companies; and
|
· |
HyperFeed
maintains its own cash and cash equivalents balances, and borrowings.
At
June 30, 2006, HyperFeed held approximately $173,000 in cash and
cash
equivalents, and no external borrowings. PICO has extended a $10
million
secured convertible promissory to HyperFeed, on which $6.7 million
was
drawn at June 30, 2006. Subsequent to June 30, 2006 HyperFeed had
drawn
another $950,000. PICO anticipates HyperFeed drawing the balance
of the
note over the next several months. In addition, if the proposed merger
with Exegy, Inc. closes, PICO will invest another $5 million into
HyperFeed on or around the close of the merger. See
“Business Acquisitions and Financing” segment in Item 2, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
above.
|
The
Departments of Insurance in Ohio and California prescribe minimum levels of
capital and surplus for insurance companies, set guidelines for insurance
company investments, and restrict the amount of profits which can be distributed
as dividends. Typically, our insurance subsidiaries structure the maturity
of
fixed-income securities to match the projected pattern of claims payments.
When
interest rates are at very low levels, to insulate the capital value of the
bond
portfolios against a decline in value which would be brought on by a future
increase in interest rates, the bond portfolios may have a shorter duration
than
the projected pattern of claims payments.
As
shown
in the Condensed Consolidated Statements of Cash Flow, cash and cash equivalents
increased by $59.3 million in the first half of 2006, compared to a $94.5
million net increase in the first half of 2005.
During
the first half of 2006, Operating Activities used cash of $12.4 million. The
principal components of 2006 operating cash flows include the payment of claims
by Citation and Physicians and the cost of drilling wells in several locations
by Vidler.
During
the first half of 2005, Operating Activities generated cash of $82.3 million.
Vidler’s sale of real estate and water assets in the Harquahala Valley
Irrigation District generated an operating cash inflow of approximately $87.4
million. All other operating activities resulted in a net cash outflow of $4.1
million.
Investing
Activities provided $587,000 of cash in the first half of 2006, compared to
$8.2
million of cash used in the first half of 2005. The sale and maturity of
investments exceeded purchases, providing $11.1 million in cash. The principal
use of investing cash was $9 million in outlays for property and equipment,
primarily related to the Fish Springs pipeline project. The use of $9.2 million
of cash in Investing Activities in 2005 primarily consisted of the purchase
of
$13.3 million of fixed-income securities, partially offset by $5.2 million
cash
provided by the sale or maturity of fixed-income securities.
Financing
Activities provided $73.4 million of cash in the first half of 2006. This
primarily represented the sale of 2.6 million newly-issued shares of PICO common
stock for net proceeds of $73.9 million. In the first half of 2005, Financing
Activities provided $17.5 million of cash. This primarily represented the sale
of 905,000 newly-issued shares of PICO common stock for net proceeds of $21.4
million, partially offset by the repayment of $3.9 million in principal on
notes
collateralized by certain farm properties which Vidler sold in the Harquahala
Valley Irrigation District.
During
the first half of 2006, we continued to design a pipeline to convey water from
the Fish Springs Ranch to a storage tank near Reno, Nevada, and began
construction of a plant to generate the electricity which will be required
to
pump the water. The total cost of the pipeline project is estimated to be in
the
$78 million to $83 million range, which will be outlaid over the next 12 to
18
months. As of June 30, 2006, approximately $7.7 million of costs related to
the
design and construction of the Fish Springs Ranch pipeline project has been
capitalized. Vidler has commitments for future capital expenditure amounting
to
approximately $10.1 million, and is in the process of obtaining additional
bids
for the remaining construction.
Share
Repurchase Program
In
October 2002, PICO’s Board of Directors authorized the repurchase of up to $10
million of PICO common stock. The stock purchases may be made from time to
time
at prevailing prices through open market or negotiated transactions, depending
on market conditions, and will be funded from available cash.
As
of
June 30, 2006, no stock had been repurchased under this
authorization.
The
following information sets forth factors that could cause our actual results
to
differ materially from those contained in forward-looking statements we have
made in this quarterly report and those we may make from time to time.
You
should carefully consider the following risks, together with other matters
described in this Form 10-Q or incorporated herein by reference in evaluating
our business and prospects. If any of the following risks occurs, our business,
financial condition or operating results could be harmed. In such case, the
trading price of our securities could decline, in some cases significantly.
The
risks described below are not the only ones we face. Additional risks not
presently known to us, or that we currently deem immaterial, may also impair
our
business operations. For a more detailed discussion of the factors that could
cause actual results to differ, see the Risk Factors section in
our Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 10, 2006.
Variances
in physical availability of water, along with environmental and legal
restrictions and legal impediments, could impact profitability from our water
rights.
The
water
rights held by us and the transferability of these rights to other uses and
places of use are governed by the laws concerning water rights in the states
of
Arizona, Colorado and Nevada. The volumes of water actually derived from the
water rights applications or permitted rights may vary considerably based upon
physical availability and may be further limited by applicable legal
restrictions. As a result, the amounts of acre-feet anticipated from the water
rights applications or permitted rights do not in every case represent a
reliable, firm annual yield of water, but in some cases describe the face amount
of the water right claims or management’s best estimate of such entitlement.
Legal impediments may 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 may lose some or all of our value in
our
water rights acquisitions.
Water
we
lease or sell may be subject to regulation as to quality by the United States
Environmental Protection Agency acting pursuant to the federal Safe Drinking
Water Act. While environmental regulations do not directly affect us, the
regulations regarding the quality of water distributed affects our intended
customers and may, therefore, depending on the quality of our water, impact
the
price and terms upon which we may in the future sell our water
rights.
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 resource acquisitions, management, development, and sale and
lease activities. Accordingly, our long-term future profitability will primarily
be 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.
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 resource and water storage development
projects.
Our
profitability is significantly affected by changes in the market price of water.
In the future, water prices may fluctuate widely as demand is affected by
climatic, demographic and technological factors.
Our
water activities may become concentrated in a limited number of assets, making
our growth and profitability vulnerable to fluctuations in local economies
and
governmental regulations.
In
the
future, we anticipate that a significant amount of Vidler’s revenues and asset
value will come from a limited number of assets, including our water resources
in Nevada and Arizona and the Vidler Arizona Recharge Facility. Although we
continue to acquire and develop additional water assets, in the foreseeable
future we anticipate that our revenues will still be derived from a limited
number of assets, primarily located in Arizona and Nevada.
Our
water sales may meet with political opposition in certain locations, thereby
limiting our growth in these areas.
The
transfer of water rights from one use to another may affect the economic base
of
a community and will, in some instances, be met with local opposition. Moreover,
certain of the end users of our water rights, namely municipalities, regulate
the use of water in order to manage growth. If we are unable to effectively
transfer water rights, our liquidity will suffer and our revenues would
decline.
The
fair values of our real estate and water assets are linked to external growth
factors.
The
real
estate and water assets we hold have fair values that are significantly affected
by the growth in population and the general state of the local economies where
our real estate and water assets are located, primarily in the states of Arizona
and Nevada.
In
certain circumstances, we finance sales of real estate and water assets, and
we
secure such financing through deeds of trust on the property, which are only
released once the financing has been fully paid off.
Purchasers
of our real estate and water assets may default on their financing obligations
and the fair value of the secured property may be affected by the factors noted
above. Accordingly, such defaults and declines in market values may have an
adverse effect on our business, financial condition, and the results of
operations and cash flows.
If
we do not successfully locate, select and manage acquisitions and investments
,
or if our acquisitions or investments 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. If a business in which we invest fails or
its
fair value declines, we could experience a material adverse effect on our
business, financial condition, the results of operations and cash flows.
Additionally, our failure to successfully locate, select and manage acquisition
and investment opportunities could have a material adverse effect on our
business, financial condition, the results of operations and cash flows. Such
business failures, declines in fair values, and/or failure to successfully
locate, select and manage acquisitions or investments could result in an
inferior return on shareholders’ equity. We could also lose part or all of our
capital in these businesses and experience reductions in our net income, cash
flows, assets and shareholders’ equity.
Failure
to successfully manage newly acquired companies could adversely affect our
business.
Our
management of the operations of acquired businesses requires significant
efforts, including the coordination of information technologies, research and
development, sales and marketing, operations, and finance. These efforts result
in additional expenses and involve significant amounts of management’s time. To
successfully manage newly acquired companies, we must, among other things,
continue to attract and retain key management and other personnel. The diversion
of the attention of management from the day-to-day operations, or difficulties
encountered in the integration process, could have a material adverse effect
on
our business, financial condition, and the results of operations and cash flows.
If we fail to integrate acquired businesses into our operations successfully,
we
may be unable to achieve our strategic goals and the value of your investment
could suffer.
Our
acquisitions may not achieve expected rates of return, and we may not realize
the value of the funds we invest.
We
will
continue to make selective acquisitions, and endeavor to enhance and realize
additional value to these acquired companies through our influence and control.
You will be relying on the experience and judgment of management to locate,
select and develop new acquisition and investment opportunities. 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 acquisitions and investments, or to
predict the availability of suitable investments at the time we have available
cash. We may not be able to find sufficient opportunities to make this business
strategy successful. Additionally, when any of our acquisitions do not achieve
acceptable rates of return or we do not realize the value of the funds invested,
we may write-down the value of such acquisitions or sell the acquired businesses
at a loss. We have made a number of acquisitions in the past that have been
highly successful, and we have also made acquisitions that have lost either
part
or all of the capital invested. 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.
We
may make acquisitions and investments that may yield low or negative returns
for
an extended period of time, which could temporarily or permanently depress
our
return on shareholders’ equity.
We
generally make acquisitions and investments that tend to be long term in nature.
We acquire 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 acquisitions 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 acquisitions and
investments 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
acquisitions and investments and increase the revenues, profits and/or values
of
these acquisitions.. Ultimately, however, we may not be able to develop the
potential of these assets that we originally anticipated.
We
may not be able to sell our investments when it is advantageous to do so and
we
may have to sell these investments at a discount to fair
value.
No
active
market exists for some of the companies in which we invest. We acquire stakes
in
private companies that are not as liquid as investments in public companies.
Additionally, some of our acquisitions may be in restricted or unregistered
stock of U.S. public companies. Moreover, even our investments for which there
is an established market are subject to dramatic fluctuations in their market
price. These illiquidity factors may affect our ability to divest some of our
acquisitions and could affect the value that we receive for the sale of such
investments.
Our
acquisitions of and investments in foreign companies subject us to additional
market and liquidity risks which could affect the value of our
stock.
We
have
acquired, and may continue to acquire, shares of stock in foreign public
companies. Typically, these foreign companies are not registered with the SEC
and regulation of these companies is under the jurisdiction of the relevant
foreign country. The respective foreign regulatory regime may limit our ability
to obtain timely and comprehensive financial information for the foreign
companies in which we have invested. In addition, if a foreign company in which
we invest were to take actions which could be deleterious to its shareholders,
foreign legal systems may make it difficult or time-consuming for us to
challenge such actions. These factors may affect our ability to acquire
controlling stakes, or to dispose of our foreign investments, or to realize
the
full fair value of our foreign investments. In addition, investments in foreign
countries may give rise to complex cross-border tax issues. We aim to manage
our
tax affairs efficiently, but given the complexity of dealing with domestic
and
foreign tax jurisdictions, we may have to pay tax in both the U.S. and in
foreign countries, and we may be unable to offset any U.S. tax liabilities
with
foreign tax credits. If we are unable to manage our foreign tax issues
efficiently, our financial condition and the results of operations and cash
flows could be adversely affected.
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 that are adequate
to
meet the ultimate cost of losses arising from claims. It has been, and will
continue to be, necessary for our insurance subsidiaries to review and make
appropriate adjustments to reserves for claims and expenses for settling claims.
Inadequate reserves could have a material adverse effect on our business,
financial condition, and the results of operations and cash flows. Inadequate
reserves could cause our financial condition to fluctuate from period to period
and cause our financial condition to appear to be better than it actually is
for
periods in which insurance claims reserves are understated. In subsequent
periods when we discover the underestimation and pay the additional claims,
our
cash needs will be greater than expected and our financial 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 various factors
including:
·
|
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, commercial property and casualty, and workers’
compensation 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. We have had to significantly increase
and
decrease these reserves in the past several years.
Furthermore,
we have reinsurance agreements on all of our insurance books of business with
reinsurance companies. We base the level of reinsurance purchased on our direct
reserves on our assessment of the overall direct underwriting risk.
We
attempt to ensure that we have acceptable net risk, but it is possible that
we
may underestimate the amount of reinsurance required to achieve the desired
level of net claims risk.
In
addition, while we carefully review the credit worthiness of the companies
we
have reinsured part, or all, of our initial direct underwriting risk with,
our
reinsurers could default on amounts owed to us for their portion of the direct
insurance claim. Our insurance subsidiaries, as direct writers of lines of
insurance, have ultimate responsibility for the payment of claims, and any
defaults by reinsurers may result in our established reserves not being adequate
to meet the ultimate cost of losses arising from claims.
Significant
increases in the reserves may be necessary in the future, and the level of
reserves for our insurance subsidiaries may be volatile in the future. These
increases or volatility may have an adverse effect on our business, financial
condition, and the results of operations and cash flows.
State
regulators could require changes to our capitalization and/or to the operations
of our insurance subsidiaries, and/or place them into rehabilitation or
liquidation.
Beginning
in 1994, Physicians and Citation became subject to the provisions of the
Risk-Based Capital for Insurers Model Act which has been adopted by the National
Association of Insurance Commissioners for the purpose of helping regulators
identify insurers that may be in financial difficulty. The Model Act contains
a
formula which takes into account asset risk, credit risk, underwriting risk
and
all other relevant risks. Under this formula, each insurer is required to report
to regulators using formulas which measure the quality of its capital and the
relationship of its modified capital base to the level of risk assumed in
specific aspects of its operations. The formula does not address all of the
risks associated with the operations of an insurer. The formula is intended
to
provide a minimum threshold measure of capital adequacy by individual insurance
company and does not purport to compute a target level of capital. Companies
which fall below the threshold will be placed into one of four categories:
Company Action Level, where the insurer must submit a plan of corrective action;
Regulatory Action Level, where the insurer must submit such a plan of corrective
action, the regulator is required to perform such examination or analysis the
Superintendent of Insurance considers necessary and the regulator must issue
a
corrective order; Authorized Control Level, which includes the above actions
and
may include rehabilitation or liquidation; and Mandatory Control Level, where
the regulator must rehabilitate or liquidate the insurer. All companies’
risk-based capital results as of December 31, 2005 exceed the Company Action
Level.
If
we are required to register as an investment company, then we will be subject
to
a significant regulatory burden.
At
all
times we intend to conduct our business so as to avoid being regulated as an
investment company under the Investment Company Act of 1940. However, if we
were
required to register as an investment company, our ability to use debt would
be
substantially reduced, and we would be subject to significant additional
disclosure obligations and restrictions on our operational activities. Because
of the additional requirements imposed on an investment company with regard
to
the distribution of earnings, operational activities and the use of debt, in
addition to increased expenditures due to additional reporting responsibilities,
our cash available for investments would be reduced. The additional expenses
would reduce income. These factors would adversely affect our business,
financial condition, and the results of operations and cash flows.
We
are directly impacted by international affairs, which directly exposes us to
the
adverse effects of any foreign economic or governmental
instability.
As
a
result of global investment diversification, our business, financial condition,
the results of operations and cash flows may be adversely affected by:
·
|
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, reduced investment income,
reductions in shareholders’ equity due to foreign currency fluctuations and a
reduction in our global diversification.
Because
our operations are diverse, analysts and investors may not
be able to evaluate us adequately, which may negatively influence our share
price.
PICO
is a
diversified holding company with operations in real estate and related water
rights and mineral rights; water resource development and water storage;
insurance operations in run-off; and business acquisitions and financing. Each
of these areas is unique, complex in nature, and difficult to understand. In
particular, the water resource business is a developing industry within the
western United States with very little historical data, very few experts and
a
limited following of analysts. Because we are complex, analysts and investors
may not be able to adequately evaluate our operations and PICO in total. This
could cause them to make inaccurate evaluations of our stock, or to overlook
PICO, in general. These factors could have a negative impact on the trading
volume and price of our stock.
Fluctuations
in the market price of our common stock may affect your ability 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 and condition;
|
·
|
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 June 30, 2006, the closing price
of
our common stock on the NASDAQ Global Market was $32.25 per share, compared
to
$15.67 at December 31, 2003. On a quarterly basis between these two dates,
closing prices have ranged from a high of $35.37 to a low of $15.31.
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
rely
on the services of several key executive officers. If they depart, it could
have
a significant adverse effect. Messrs. Langley and Hart, our Chairman and
CEO, respectively, 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.
We
use estimates and assumptions in preparing financial statements in
accordance with accounting principles generally accepted in the United States
of
America.
The
preparation of our financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, disclosure of contingent liabilities at the date of
financial statements and the reported amount of revenues and expenses during
the
reporting period. We regularly evaluate our estimates, which are based on
historical experience and on various other assumptions that are believed to
be
reasonable under the circumstances. The result of these evaluations forms the
basis for making judgments about the carrying values of assets and liabilities
and the reported amount of revenues and expenses that are not readily apparent
from other sources. The carrying values of assets and liabilities and the
reported amount of revenues and expenses may differ by using different
assumptions. In addition, in future periods, in order to incorporate all known
experience at that time, we may have to revise assumptions previously made
which
may change the value of previously reported assets and liabilities. This
potential subsequent change in value may have a material adverse effect on
our
business, financial condition, and the results of operations and cash
flows.
Repurchases
of our common stock could have a negative effect on our cash flows and our
stock
price.
Our
Board
of Directors has authorized the repurchase of up to $10 million of our common
stock. The stock purchases may be made from time to time at prevailing prices
though open market, or negotiated transactions, depending on market conditions,
and will be funded from available cash resources of the company. Such a
repurchase program may have a negative impact on our cash flows, and could
result in market pressure to sell our common stock.
Future
changes in financial accounting standards may cause adverse unexpected revenue
fluctuations and affect our reported results of
operations.
A
change
in accounting standards could have a significant effect on our reported results
and may even affect our reporting transactions completed before the change
is
effective. New accounting pronouncements and varying interpretations of
pronouncements have occurred and may occur in the future. Changes to existing
rules or the questioning of current practices may adversely affect our reported
financial results of the way we conduct our business.
Compliance
with changing regulation of corporate governance and public disclosure may
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, SEC regulations and NASDAQ Stock Market rules, are creating
uncertainty for companies such as ours. These new or changed laws, regulations
and standards are subject to varying interpretations in many cases due to their
lack of specificity, and as a result, their application in practice may evolve
over time as new guidance is provided by regulatory and governing bodies, which
could result in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and governance practices.
We are committed to maintaining high standards of corporate governance and
public disclosure. As a result, our efforts to comply with evolving laws,
regulations and standards have resulted in, and are likely to continue to result
in, increased general and administrative expenses and a diversion of management
time and attention from revenue-generating activities to compliance activities.
In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley
Act
of 2002 and the related regulations regarding our required assessment of our
internal controls over financial reporting and our external auditors’ audit of
that assessment has required the commitment of substantial financial and
managerial resources. We expect these efforts to require the continued
commitment of significant resources. Further, our board members, chief executive
officer, and chief financial officer could face an increased risk of personal
liability in connection with the performance of their duties and we may be
required to indemnify them for any expenses incurred in defending against
claims. As a result, we may have difficulty attracting and retaining qualified
board members and executive officers, which could harm our business. If our
efforts to comply with new or changes laws, regulations, and standards differ
from the activities intended by regulatory or governing bodies due to
ambiguities related to practice, our reputation could be harmed.
Absence
of dividends could reduce our attractiveness to investors.
Some
investors favor companies that pay dividends, particularly in market downturns.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, we do not currently anticipate paying cash dividends on our common
stock.
We
may need additional capital in the future to fund the growth of our business,
and financing may not be available.
We
currently anticipate that our available capital resources and operating income
will be sufficient to meet our expected working capital and capital expenditure
requirements for at least the next 12 months. However, we cannot assure you
that
such resources will be sufficient to fund the long-term growth of our business.
We may raise additional funds through public or private debt or equity
financings if such financings become available on favorable terms, but such
financing may dilute our stockholders. We cannot assure you that any additional
financing we need will be available on terms favorable to us, or at all. If
adequate funds are not available or are not available on acceptable terms,
we
may not be able to take advantage of unanticipated opportunities or otherwise
respond to competitive pressures. In any such case, our business, operating
results or financial condition could be materially adversely
affected.
Litigation
may harm our business or otherwise distract our
management.
Substantial,
complex or extended litigation could cause us to incur large expenditures and
distract our management. For example, lawsuits by employees, stockholders or
customers could be very costly and substantially disrupt our business. Disputes
from time to time with such companies or individuals are not uncommon, and
we
cannot assure that that we will always be able to resolve such disputes out
of
court or on terms favorable to us.
THE
FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY
AFFECT OUR OPERATING RESULTS AND CASH FLOWS AND FINANCIAL CONDITION AND COULD
MAKE COMPARISON OF HISTORIC OPERATING RESULTS AND CASH FLOWS AND BALANCES
DIFFICULT OR NOT MEANINGFUL.
PICO’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. PICO currently has interest
rate risk as it relates to its fixed maturity securities and mortgage
participation interests, equity price risk as it relates to its marketable
equity securities, and foreign currency risk as it relates to investments
denominated in foreign currencies. Generally, PICO’s borrowings are short to
medium term in nature and therefore approximate fair value. At June 30, 2006,
PICO had $93.4 million of fixed maturity securities, $188.4 million of
marketable equity securities that were subject to market risk, of which $108.7
million were denominated in foreign currencies, primarily Swiss francs. PICO’s
investment strategy is to manage the duration of the portfolio relative to
the
duration of the liabilities while managing interest rate risk.
PICO
uses two
models to report the sensitivity of its assets and liabilities subject to the
above risks. For its fixed maturity securities, and mortgage participation
interests, PICO uses duration modeling to calculate changes in fair value.
The
sensitivity analysis duration model calculates the price of a fixed maturity
assuming a theoretical 100 basis point increase in interest rates and compares
that to the actual quoted price if the security. At June 30, 2006, the model
calculated a loss in fair value of $1.8 million. For its marketable securities,
PICO uses a hypothetical 20% decrease in the fair value to analyze the
sensitivity of its market risk assets and liabilities. For investments
denominated in foreign currencies, PICO uses a hypothetical 20% decrease in
the
local currency of that investment. Actual results may differ from the
hypothetical results assumed in this disclosure due to possible actions taken
by
management to mitigate adverse changes in fair value and because the fair value
of securities may be affected by credit concerns of the issuer, prepayment
rates, liquidity, and other general market conditions. The hypothetical 20%
decrease in fair value of PICO’s marketable equity securities produced a loss in
fair value of $37.7 million that would impact the unrealized appreciation in
shareholders’ equity, before the related tax effect. The hypothetical 20%
decrease in the local currency of PICO’s foreign denominated investments
produced a loss of $19.2 million that would impact the foreign currency
translation in shareholders’ equity.
Under
the supervision of
and with the participation of our management, including our principal executive
officer and principal financial officer, we evaluated the effectiveness of
our
disclosure controls and procedures, as such term is defined under Rules
13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
Based on this evaluation, our principal executive officer and principal
financial officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this quarterly report. There
were no material changes in our internal controls over financial reporting
for
the three
months ended June 30, 2006.
Part
II: Other Information
The
Company is
subject to various litigation that arises in the ordinary course of its
business. Based upon information presently available, management is of the
opinion that such litigation will not have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company.
A
description of
the risk factors associated with our business is included under “Risk Factors”
in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations”, contained in Item 2 of Part I of this report. Such
description includes any changes to and supersedes the description of the risk
factors associated with our business previously disclosed in Item 1 of our
2005 Annual Report on Form 10-K and is incorporated herein by reference. There
are no material changes to the risk factors described in our Form
10-K.
On
May 4,
2006, the Company completed a private placement of 2.6 million newly-issued
common shares to accredited investors at a price of $30.00 per share, for net
proceeds of $73.9 million. Merriman, Curham, Ford and Co. served as placement
agent for the transaction. The aggregate offering price was $78 million and
the
aggregate commissions were $3.9 million. The sale of these shares was exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof. Under the terms of the agreement between
the
Company and the accredited investors, the Company filed a Registration Statement
on Form S-3 with the SEC to register these 2.6 million common shares for resale
and naming the accredited investors as Selling Shareholders therein. The SEC
declared the registration statement effective June 7, 2006. The Selling
Shareholders table from the registration statement is incorporated by reference
into this Item 2 of Part II of this report.
ISSUER
PURCHASES OF EQUITY SECURITIES
Period
|
(a)Total
number of shares purchased
|
(b)
Average Price Paid per Share
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly Announced
Plans or Programs (1)
|
(d)Maximum
Number (or Approximate Dollar Value) of Shares (or Units) that May
Yet Be
Purchased Under the Plans or Programs (1)
|
|
|
|
|
|
4/1/06
- 4/30/06
|
-
|
-
|
|
|
5/1/06
- 5/31/06
|
-
|
-
|
|
|
6/1/06
- 630/06
|
-
|
-
|
|
|
|
(1)
In October 2002, PICO’s Board of Directors authorized the repurchase of up
to $10 million of PICO common stock. The stock purchases may be made
from
time to time at prevailing prices through open market or negotiated
transactions, depending on market conditions, and will be funded
from
available cash. As of June 30, 2006, no stock had been repurchased
under
this authorization.
|
Item
3: Defaults
Upon Senior Securities
None
Item
4: Submission
of Matters to a Vote of Security Holders
None
Item
5: Other
Information
None
Item
6: Exhibits
Exhibit
Number
|
Exhibit
Description
|
3.1
|
|
Amended
and Restated Articles of Incorporation of PICO.(1)
|
3.2
|
|
Amended
and Restated By-laws of PICO. (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Incorporated
by reference to exhibit of same number filed with Form 8-K dated
December
4, 1996 (File No. 000-18786).
|
|
(2)
|
Filed
as Appendix to the prospectus in Part I of Registration Statement
on Form
S-4 filed with the SEC on October 2, 1996 (File No.
333-06671).
|
PICO
HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PICO
HOLDINGS, INC.
Dated:
August 7, 2006 By:
/s/
Maxim C. W. Webb
Maxim
C.
W. Webb
Chief
Financial Officer and Treasurer
(Principal
Financial and Accounting Officer)