VIDLER WATER RESOURCES, INC. - Quarter Report: 2008 June (Form 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, 2008
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 R
Accelerated filer £ 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 18,838,772 as of June 30, 2008, excluding 3,247,573 shares of common stock
held by the registrant’s subsidiaries.
PICO
HOLDINGS, INC.
FORM
10-Q
For
the Three Months Ended June 30, 2008
TABLE
OF CONTENTS
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Page
No.
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Part
I: Financial Information
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Item
1:
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2
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3
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4
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5
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Item
2:
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9
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Item
3:
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14
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Item
4:
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14
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Part
II: Other Information
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Item
1:
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14
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Item
1A:
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14
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Item
2:
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14
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Item
3:
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14
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Item
4:
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15
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Item
5:
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15
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Item
6:
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15
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1
Part I: Financial
Information
Item I: Condensed Consolidated Financial
Statements
PICO
HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
|
June
30, 2008
|
December
31, 2007
|
||
|
ASSETS
|
|||
|
Investments
|
$
228,686,593
|
$
365,523,644
|
|
|
Cash
and cash equivalents
|
165,930,852
|
70,791,025
|
|
|
Notes
and other receivables, net
|
24,998,234
|
17,151,065
|
|
|
Reinsurance
receivables
|
16,489,856
|
16,887,953
|
|
|
Real
estate and water assets, net
|
235,260,488
|
200,605,792
|
|
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Deferred
taxes, net
|
6,056,350
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||
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Property
and equipment, net
|
1,238,664
|
1,212,394
|
|
|
Other
assets
|
3,942,443
|
4,170,407
|
|
|
Total
assets
|
$
682,603,480
|
$
676,342,280
|
|
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||
|
Unpaid
losses and loss adjustment expenses
|
$
31,305,799
|
$
32,376,018
|
|
|
Deferred
compensation
|
53,176,022
|
52,546,234
|
|
|
Bank
and other borrowings
|
29,096,642
|
18,878,080
|
|
|
Deferred
income taxes, net
|
17,675,162
|
||
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Income
taxes payable
|
32,807,804
|
3,209,651
|
|
|
Other
liabilities
|
17,648,494
|
25,806,566
|
|
|
Total
liabilities
|
164,034,761
|
150,491,711
|
|
|
Commitments
and Contingencies (Note 4)
|
|||
|
Common
stock, $.001 par value; authorized 100,000,000
shares,
|
|||
|
23,263,567
issued and outstanding in 2008 and 23,259,367 in
2007
|
23,263
|
23,259
|
|
|
Additional
paid-in capital
|
437,882,756
|
435,235,358
|
|
|
Accumulated
other comprehensive income
|
42,932,618
|
79,469,438
|
|
|
Retained
earnings
|
116,001,725
|
89,405,743
|
|
|
596,840,362
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604,133,798
|
||
|
Treasury
stock, at cost (common shares: 4,424,795 in 2008 and 4,425,630 in
2007)
|
(78,271,643)
|
(78,283,229)
|
|
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Total
shareholders' equity
|
518,568,719
|
525,850,569
|
|
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Total
liabilities and shareholders' equity
|
$
682,603,480
|
$
676,342,280
|
2
PICO
HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
|
Three
Months Ended June 30, 2008
|
Three
Months Ended June 30, 2007
|
Six
Months Ended June 30, 2008
|
Six
Months Ended June 30, 2007
|
||||
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Revenues:
|
|||||||
|
Net
investment income
|
$
3,082,923
|
$
5,730,337
|
$
6,110,549
|
$
9,542,404
|
|||
|
Net
realized gain on investments
|
49,600,581
|
210,185
|
50,072,435
|
1,618,093
|
|||
|
Sale
of real estate and water assets
|
811,363
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2,117,378
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1,305,771
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4,426,376
|
|||
|
Rents,
royalties and lease income
|
162,375
|
151,381
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321,931
|
301,539
|
|||
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Other
|
266,253
|
104,995
|
589,874
|
139,265
|
|||
|
Total
revenues
|
53,923,495
|
8,314,276
|
58,400,560
|
16,027,677
|
|||
|
Costs
and Expenses:
|
|||||||
|
Operating
and other costs
|
7,172,817
|
13,026,793
|
9,189,081
|
18,252,066
|
|||
|
Cost
of real estate and water assets sold
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172,053
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704,342
|
321,898
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1,471,206
|
|||
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Depreciation
and amortization
|
308,255
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272,283
|
604,668
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548,695
|
|||
|
Total
costs and expenses
|
7,653,125
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14,003,418
|
10,115,647
|
20,271,967
|
|||
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Income
(loss) before income taxes and minority interest
|
46,270,370
|
(5,689,142)
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48,284,913
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(4,244,290)
|
|||
|
Provision
(benefit) for income taxes
|
18,328,066
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(1,975,946)
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22,295,061
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(1,052,038)
|
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Income
(loss) before minority interest
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27,942,304
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(3,713,196)
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25,989,852
|
(3,192,252)
|
|||
|
Minority
interest in loss of subsidiaries
|
300,353
|
606,130
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|||||
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Net
income (loss)
|
$
28,242,657
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$
(3,713,196)
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$
26,595,982
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$
(3,192,252)
|
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Net
income (loss) per common share – basic:
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$
1.50
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$
(0.20)
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$
1.41
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$
(0.18)
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Weighted
average shares outstanding
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18,836,607
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18,769,015
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18,835,172
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17,811,337
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Net
income (loss) per common share – diluted:
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$
1.49
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$
(0.20)
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$
1.41
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$
(0.18)
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|||
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Weighted
average shares outstanding
|
18,946,837
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18,769,015
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18,872,797
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17,811,337
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3
PICO
HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
|
Six
Months Ended June 30, 2008
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Six
Months Ended June 30, 2007
|
|||
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OPERATING
ACTIVITIES:
|
||||
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Net
cash used in operating activities
|
$(28,375,943)
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$(25,458,736)
|
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INVESTING
ACTIVITIES:
|
||||
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Purchases
of investments
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(20,208,159)
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(98,799,107)
|
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Proceeds
from sale of investments
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90,383,043
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3,848,950
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Proceeds
from maturity of investments
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61,192,968
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18,213,245
|
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Real
estate and water asset capital expenditure
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(10,972,382)
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(27,138,070)
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||
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Net
cash provided by (used in) investing activities
|
120,395,470
|
(103,874,982)
|
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FINANCING
ACTIVITIES:
|
||||
|
Proceeds
from common stock offering, net
|
100,141,935
|
|||
|
Sale
of treasury stock for deferred compensation plans
|
28,374
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29,392
|
||
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Excess
tax benefits from stock based payment arrangements
|
479,114
|
4,905,804
|
||
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Proceeds
from borrowings
|
6,928,629
|
|||
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Net
cash provided by financing activities
|
7,436,117
|
105,077,131
|
||
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Effect
of exchange rate changes on cash
|
(4,315,817)
|
(3,283)
|
||
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INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
95,139,827
|
(24,259,870)
|
||
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CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
70,791,025
|
136,621,578
|
||
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CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$165,930,852
|
$112,361,708
|
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SUPPLEMENTAL
CASH FLOW INFORMATION:
|
||||
|
Cash
paid for income taxes
|
$638,106
|
$2,865,896
|
||
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Non-cash
investing and financing activities:
|
||||
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Change
in capitalized costs included in other liabilities
|
$4,872,491
|
$5,608,295
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|
Withhold
taxes recorded in additional paid in capital related to stock appreciation
rights exercised
|
$5,398,767
|
4
PICO
HOLDINGS, INC. AND SUBSIDIARIES
(Unaudited)
1. Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements of PICO
Holdings, Inc. and subsidiaries (collectively, 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, 2008.
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, 2007 filed
with the SEC.
The
preparation of 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 liabilities at the date of
the financial statements and the reported amounts of revenues and expenses for
each reporting period. The significant estimates made in the preparation of the
Company’s consolidated financial statements relate to the assessment
of other than temporary impairments and the application of the equity
method of accounting, unpaid losses and loss adjustment expenses, reinsurance
receivables, real estate and water assets, deferred income taxes, stock-based
compensation and contingent liabilities. While management believes that the
carrying value of such assets and liabilities are appropriate as of June 30,
2008 and December 31, 2007, it is reasonably possible that actual results could
differ from the estimates upon which the carrying values were
based.
Stock-Based
Compensation:
At June
30, 2008 the Company had one stock-based payment arrangement
outstanding:
The PICO Holdings, Inc. 2005 Long Term
Incentive Plan (the "Plan"). The 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
Plan and it provides for the issuance of incentive stock options, non-statutory
stock options, free-standing stock-settled stock appreciation rights (“SAR”),
restricted stock awards (“RSA”), performance shares, performance units,
restricted stock units, deferred compensation awards and other stock-based
awards. The Plan allows for broker assisted cashless exercises and
net-settlement of income taxes and employee withholding taxes. Upon
exercise of a SAR, the employee will receive newly issued shares of PICO
Holdings common stock with a fair value equal to the in-the-money value of the
award, less applicable United States Federal, state and local withholding and
income taxes.
Restricted Stock
Awards:
During
the second quarter ended June 30, 2008, and as part of a duly adopted revised
director annual compensation program, the Company issued 4,200 RSA to the
non-employee Directors of the Company. Each Director received 700
shares that vest in one year. Until vested, the shares are held in
escrow, but the holder is entitled to vote the shares and receive any
dividends. The Company recorded a total of $157,000 of deferred
compensation that will be recognized over the vesting period of the award
beginning in the second quarter of 2008.
A summary
of Restricted Stock Awards under the Plan is as follows:
|
RSA
|
|
|
Outstanding
at January 1, 2008
|
-
|
|
Granted
|
4,200
|
|
Exercised
|
-
|
|
Outstanding
at June 30, 2008
|
4,200
|
5
Stock – Settled
SAR
For the
three and six months ended June 30, 2008, the Company recognized $997,000 and $2
million, respectively, of stock-based compensation expense from the SAR granted
during 2007. The calculation of the stock-based compensation expense
under Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(“FAS 123(R)”), was performed using the Black-Scholes option-pricing model
and is affected by various assumptions regarding certain subjective variables.
These variables include, but are not limited to, expected dividend yield,
expected stock price volatility over the term of the awards, the risk-free
interest rates, the estimated forfeiture rates, and the expected life of the
options. Expected volatility is based on the actual trading volatility of the
Company’s common stock. The Company uses historical experience to estimate
expected forfeitures and estimated terms. The expected term of a SAR grant
represents the period of time that the SAR is expected to be outstanding. The
risk-free rate is the U.S. Treasury Bond yield that corresponds to the expected
term of each SAR grant. Expected dividend yield is zero as the
Company does not foresee paying a dividend in the
future. Forfeitures are estimated to be zero based on the strike
price and expected holding period of the SAR. The Company
applied the guidance of Staff Accounting Bulletin No. 110 in
estimating the expected term of the SAR.
|
Expected
volatility
|
29%
— 31%
|
|
Expected
term
|
7
years
|
|
Risk-free
rate
|
4.3%
— 4.7%
|
|
Expected
dividend yield
|
0%
|
|
Expected
forfeiture rate
|
0%
|
No new
SAR were issued, nor were any awards exercised during the three and six months
ended June 30, 2008 and 2007.
A summary
of SAR activity under the Plan is as follows:
|
SAR
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Contractual
Term Remaining
|
|||||
|
Outstanding
at January 1, 2008
|
2,007,018
|
$
|
34.72
|
||||
|
Granted
|
-
|
||||||
|
Exercised
|
-
|
||||||
|
Outstanding
at June 30, 2008
|
2,007,018
|
$
|
34.72
|
8 years
|
|||
|
Vested
and exercisable at June 30, 2008
|
1,509,766
|
$
|
34.72
|
7.6
years
|
|||
At June
30, 2008, 1.5 million of the total outstanding SAR were in-the-money with an
intrinsic value of $13.2 million. Assuming all of the in-the-money
SAR could be exercised, and a 40% withholding tax rate, PICO would issue 181,979
newly issued common shares to the holders of the SAR.
A summary
of the status of the Company’s unvested SAR as of June 30, 2008 and changes
during the six months then ended is as follows:
|
SAR
|
Weighted
Average Gant
Date
Fair Value
|
||||
|
Unvested
at January 1, 2008
|
497,252
|
$
18.24
|
|||
|
Granted
|
-
|
||||
|
Vested
|
-
|
||||
|
Unvested
at June 30, 2008
|
497,252
|
$
|
18.24
|
||
At June
30, 2008 there was $5.5 million of unrecognized compensation cost related to
unvested SAR granted under the Plan. That cost is expected to be
recognized over the next 2.25 years.
Deferred
Compensation:
At June
30, 2008 and December 31, 2007, the Company had $53.2 million and $52.5 million,
respectively, recorded as deferred compensation payable to various members of
management and certain non-employee directors of the Company. The assets of the
plan are held in Rabbi Trust accounts which are invested consistent with the
Company’s investment policy. The investments are held in separate accounts,
accounted for as available for sale securities, and are reported in the
accompanying consolidated balance sheets within the caption, “Investments”.
Assets of the trust will be distributed according to predetermined payout
elections established by each employee.
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 reverses previously expensed compensation.
Notes and Other
Receivables:
Notes and
other receivables primarily consist of installment notes from the sale of real
estate. These notes generally have terms of ten years, with interest rates of 8%
to 12%. The Company records a provision for doubtful accounts to allow for any
specific accounts which are estimated to be unrecoverable and is based upon an
analysis of the Company's prior collection experience, customer
creditworthiness, and current economic trends and circumstances. No significant
provision for bad debts was required for the three and six months ended June 30,
2008 and 2007, respectively.
Bank and Other
Borrowings:
For the
six months ended June 30, 2008, the Company increased its borrowings by $6.9
million under two additional Swiss franc loan facilities in
Switzerland. The additional borrowings bear interest at a weighted
average of 4.4% and mature at various dates from 2009 to 2011 and are
collateralized by the Company's Swiss investments. In addition,
the Company also recorded $1.6 million of mortgage debt associated with the
acquisition of real estate. The note bears simple interest at the
annual rate of 12% and is due in 2009.
Realized Gains:
On April
22, 2008, the Company sold its interest in Junfraubahn Holding
AG. The Company had owned approximately 23% of Jungfraubahn and
accounted for the investment under SFAS 115, "Investments in Debt and Equity
Securities". Net proceeds to the Company were $75.3 million
resulting in pre-tax realized gain of approximately $46.1 million.
Operating
and Other Costs:
For the
three and six months ended June 30, 2008, the Company reported a foreign
currency loss of $647,000 and a gain of $3.1 million, respectively, and for the
three and six months ended June 30, 2007, the Company reported a foreign
currency loss of $317,000 and a gain of $80,000, respectively. The foreign
currency transaction gain or loss, which results from a Swiss Franc denominated
loan from PICO Holdings to one of its subsidiaries, is included in the
caption, “Operating and other costs” in the accompanying condensed
consolidated financial statements.
Accounting
for Income Taxes:
The
Company adopted the provisions of Financial Standards Accounting Board
Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”) an interpretation of
FASB Statement No. 109 (“SFAS 109”) on January 1, 2007. As a result of
the implementation of FIN 48, the Company recognized a $293,000 increase in the
liability for unrecognized income tax benefits through opening retained
earnings. At the adoption date of January 1, 2007, the Company provided for
$3.5 million of unrecognized tax benefits, $2.5 million of which would affect
the effective tax rate if recognized.
The
Company recognizes any interest and penalties related to uncertain tax positions
in income tax expense. For the six months ended June 30, 2008, the Company
recorded approximately $1.7 million in interest and penalties related to
uncertain tax positions. The tax years 2002-2006 remain open to
examination by the taxing jurisdictions to which the Company’s significant
operations are subject. As of June 30, 2008, the Company does not
believe that it is reasonably possible that there will be a material change in
the estimated unrecognized tax benefits within the next twelve
months.
The
effective income tax rate is 40% and 46% for the three and six months
ended June 30, 2008, respectively, and 35% and 25% for the three and six months
ended June 30, 2007, respectively. The effective rate differs from
the statutory rate primarily due to the recognition of interest expense and
penalties on uncertain tax positions, operating losses without any associated
tax benefit from subsidiaries that are excluded from the consolidated federal
income tax return, certain non-deductible compensation expense, and state income
tax charges.
Deferred
income tax liabilities decreased by $23.8 million and current income tax payable
increased by $26.6 million during the six months ended June 30, 2008 primarily
due to the sale of Jungfraubahn Holding AG which reduced deferred tax
liabilities recorded on the unrealized appreciation by $16.4 million and
increased current taxes payable by $18.4 million. FIN 48
liabilities increased by $11.3 million for a tax liability and associated
interest and penalties for a subsidiary in receivership together with a
receivable of $9.7 million due from the receiver, who is managing the estate of
the subsidiary.
Recently
Issued Accounting Pronouncements
SFAS 161 - In March 2008, the
Financial Accounting Standards Board (“FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging
Activities – An Amendment of SFAS No. 133” (“SFAS 161”). SFAS 161
seeks to improve financial reporting for derivative instruments and hedging
activities by requiring enhanced disclosures regarding the impact on financial
position, financial performance, and cash flows. To achieve this increased
transparency, SFAS 161 requires (1) the disclosure of the fair value of
derivative instruments and gains and losses in a tabular format; (2) the
disclosure of derivative features that are credit risk-related; and
(3) cross-referencing within the footnotes. SFAS 161 is effective for PICO
on January 1, 2009. PICO is currently in the process of determining the
effect, if any, that the adoption of SFAS 161 will have on the condensed
consolidated financial statements.
SFAS 141(R) - In December
2007, the FASB issued SFAS No. 141(R) (“SFAS 141(R)”), “Business
Combinations”. SFAS 141(R) replaces SFAS 141 and requires
assets and liabilities acquired in a business combination, contingent
consideration and certain acquired contingencies to be measured at their fair
values as of the date of acquisition. SFAS 141(R) also requires that
acquisition-related costs and restructuring costs be recognized separately from
the business combination. SFAS 141(R) is effective for PICO on January 1, 2009.
PICO is currently in the process of determining the effect, if any, that the
adoption of SFAS 141(R) will have on the condensed consolidated financial
statements.
SFAS 160 - In December 2007,
the FASB issued SFAS No. 160 (“SFAS 160”), “Non-controlling Interests in
Consolidated Financial Statements, an Amendment of ARB No.
51”. SFAS 160 clarifies the accounting for non-controlling
interests and establishes accounting and reporting standards for the
non-controlling interest in a subsidiary, including classification as a
component of equity. SFAS 160 is effective for PICO on January 1, 2009. PICO is
currently in the process of determining the effect, if any, that the adoption of
SFAS 160 will have on the condensed consolidated financial
statements.
6
Recently
Adopted Accounting Pronouncements
SFAS 159 - In February 2007,
the FASB issued SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities” (“SFAS
159”). SFAS 159 allows entities to voluntarily choose to measure certain
financial assets and liabilities at fair value (“fair value option”). The fair
value option may be elected on an instrument-by-instrument basis and is
irrevocable, unless a new election date occurs. If the fair value option is
elected for an instrument, SFAS 159 specifies that unrealized gains and losses
for that instrument be reported in earnings at each subsequent reporting date.
SFAS 159 was effective for PICO on January 1, 2008. PICO did not apply the
fair value option to any of its outstanding instruments and, therefore, SFAS 159
did not have an impact on the condensed consolidated financial
statements.
SFAS 157 - In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for
measuring fair value under US GAAP, and expands disclosures about fair value
measurements. SFAS 157 applies to other accounting pronouncements that
require or permit fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007, and for interim periods within
those fiscal years. PICO adopted SFAS 157 January 1, 2008.
Subsequently, in February 2008, the FASB issued two staff position on SFAS 157
(FSP FAS 157-1 and 157-2) which scope out the lease classification measurements
under FASB Statement No. 13 from SFAS 157 and delays the effective date on SFAS
157 for all nonrecurring fair value measurements of nonfinancial assets and
nonfinancial liabilities until fiscal years beginning after November 15, 2008.
PICO is currently in the process of determining the effect, if any, the adoption
of SFAS 157 for its non-financial assets and liabilities, effective
January 1, 2009, will have on the condensed consolidated financial
statements.
SFAS 157,
which defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants at the measurement date. SFAS 157 establishes a three-level
fair value hierarchy that prioritizes the inputs used to measure fair value.
This hierarchy requires entities to maximize the use of observable inputs and
minimize the use of unobservable inputs. The three levels of inputs used to
measure fair value are as follows:
Level 1 —
Quoted prices in active markets for identical assets or
liabilities.
Level 2 —
Observable inputs other than quoted prices included in Level 1, such as
quoted prices for similar assets and liabilities in active markets; quoted
prices for identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.
Level 3 —
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. This includes
certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
The
following table sets forth the Company’s financial assets and liabilities that
were measured at fair value on a recurring basis at June 30, 2008 by level
within the fair value hierarchy. PICO did not have any nonfinancial assets or
liabilities that were measured or disclosed at fair value on a recurring basis
at June 30, 2008. As required by SFAS No. 157, assets and liabilities
measured at fair value are classified in their entirety based on the lowest
level of input that is significant to the fair value measurement. The Company’s
assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to
the asset or liability:
|
Quoted
Prices In Active
|
Significant
Other
|
Significant
|
|||
|
Markets
for Identical Assets
|
Observable
Inputs
|
Unobservable
Inputs
|
|||
|
Assets
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
Balance
at June 30, 2008
|
|
|
Available
for sale securities (A)
|
$223,777,061
|
$3,441,733
|
$227,218,794
|
||
|
Liabilities
|
|||||
|
Deferred
compensation (B)
|
$53,176,022
|
$53,176,022
|
Approximately $1.5 million of
the Company's investment portfolio does not have a readily available
market value and are not included in the above table as the investments are
reported at cost.
|
(A)
|
Where
there are quoted market prices that are readily available in an active
market, securities are classified as Level 1 of the valuation
hierarchy. Level 1 marketable equity securities are valued
using quoted market prices multiplied by the number of shares owned and
debt securities are valued using a market quote in an active
market. Level 2 available for sale securities include
securities where the markets are not active, that is where there are few
transactions, or the prices are not current or the prices vary
considerably over time.
|
|
(B)
|
Deferred
compensation plans are compensation plans directed by the Company and
structured as a rabbi trust for certain executives and non-employee
directors. The investment assets of the rabbi trust are valued
using quoted market prices multiplied by the number of shares held in each
trust account including the shares of PICO Holdings common stock held in
the trusts. The related deferred compensation liability represents the
fair value of the investment
assets.
|
2. Net
Income (Loss) Per Share
Basic
earnings or loss per share is computed by dividing net earnings by the weighted
average number of shares outstanding during the period. Diluted earnings or loss
per share is computed similarly to basic earnings or loss per share except the
weighted average shares outstanding are increased to include additional shares
from the assumed exercise of any common stock equivalents using the treasury
method, if dilutive. SAR are considered common stock equivalents for this
purpose. The number of additional shares is calculated by assuming
that the SAR 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, 2008 the Company’s stock-settled SAR were
included in the diluted per share calculation using the treasury stock
method. For the three and six months ended June 30, 2007 the
Company’s stock-settled SAR were excluded from the diluted per share calculation
because their effect on earnings per share was anti-dilutive.
3. Comprehensive
Income (Loss)
The
Company applies the provisions of SFAS No. 130, “Reporting Comprehensive
Income.” Comprehensive income for the Company includes foreign currency
translation and unrealized holding gains and losses on available for sale
securities.
The
components of comprehensive income are as
follows:
|
Three
Months Ended June 30, 2008
|
Three
Months Ended June 30, 2007
|
Six
Months Ended June 30, 2008
|
Six
Months Ended June 30, 2007
|
||||
|
Net
income (loss)
|
$
28,242,657
|
$
(3,713,196)
|
$
26,595,982
|
$
(3,192,252)
|
|||
|
Net
change in unrealized appreciation (depreciation) on available for
sale securities
|
(34,675,913)
|
12,168,869
|
(37,308,019)
|
19,973,245
|
|||
|
Net
change in foreign currency translation
|
(1,440,394)
|
599,035
|
771,199
|
1,057,253
|
|||
|
Total
comprehensive income (loss)
|
$
(7,873,650)
|
$
9,054,708
|
$
(9,940,838)
|
$
17,838,246
|
Total comprehensive income is net of
deferred income tax benefit of $17.9 million and $23.7 million for the three and
six months ended June 30, 2008, respectively and net of a deferred income tax
charge of $4.5 million and $8.2 million for the three and six months ended June
30, 2007, respectively.
The
components of accumulated other comprehensive income:
|
June
30, 2008
|
December
31, 2007
|
||
|
Unrealized
appreciation on available for sale securities
|
$
45,148,480
|
$
82,456,499
|
|
|
Foreign
currency translation
|
(2,215,862)
|
(2,987,061)
|
|
|
Accumulated
other comprehensive income
|
$
42,932,618
|
$
79,469,438
|
Accumulated
other comprehensive income is net of deferred income tax liabilities of $20
million and $44.7 million at June 30, 2008 and December 31, 2007,
respectively.
Marketable equity securities:
The Company’s investments in marketable equity securities totaling $185.3
million at June 30, 2008, consist primarily of investments in common stock of
foreign and domestic publicly traded companies. The gross unrealized gains and
losses on equity securities were $71 million and $6.9 million respectively, at
June 30, 2008 and $128.1 million and $2.6 million respectively, at December 31,
2007. The majority of the losses at June 30, 2008 were continuously below cost
for less than 12 months. During the three and six months ended June
30, 2008, the Company recorded $754,000 and $1.9 million, respectively, of other
than temporary impairment charges on marketable equity securities. No
impairment charges were recorded during the three and six months ended June 30,
2007.
Corporate Bonds and US Treasury
Obligations: At June 30, 2008, the Company’s bond portfolio consists of
$41.1 million of publicly traded corporate bonds, $1.2 million United States
Treasury obligations and $1.1 of Municipal Bonds. The total bond portfolio had
gross unrealized gains and losses of $247,000 and $3.5 million respectively, at
June 30, 2008 and gross unrealized gains and losses of $438,000 and $2.6 million
respectively, at December 31, 2007. At June 30, 2008, slightly more than 80% of
the gross loss was continuously below amortized cost for greater than 12 months.
However, the Company does not consider these investments to be other than
temporarily impaired because of the Company’s intent and ability to hold these
bonds until recovery of fair value, which may be at their maturity. The
impairment is primarily due to interest rate fluctuations rather than
deterioration of the underlying issuer of the particular bonds. During the three
and six months ended June 30, 2008, the Company recorded impairment charges of
$60,000 and $400,000, respectively, on a corporate bond due to deterioration of
the underlying issuer's financial condition. No impairment charges were recorded
during the three and six months ended June 30, 2007.
.
7
4. Commitments and
Contingencies
The California Department of
Insurance (“CDI”) completed its statutory examination requirement of Citation
Insurance Company as of December 31, 2006. A draft report by the CDI was
presented to the Company which included a deficiency in Citation’s loss and
loss adjustment expense reserves of $6.3 million. The CDI’s opinion
of the deficiency was subsequently reduced to $2.5 million and included in their
final examination report. The Company disagreed with the conclusion
and although the examination report was issued with an adjustment, the Company
was not required to and did not make an adjustment to Citation Insurance
Company’s statutory or US GAAP reserves.
Neither
PICO nor its subsidiaries are parties to any potentially material pending legal
proceedings other than the following.
Exegy
Litigation:
HyperFeed
Technologies, Inc. (“HyperFeed”), our majority-owned subsidiary, was
a provider of enterprise-wide ticker plant and transaction technology
software and services enabling financial institutions to process and use high
performance exchange data with Smart Order Routing and other applications.
During 2006, PICO and HyperFeed negotiated a business combination with Exegy
Incorporated (“Exegy”). On August 25, 2006, PICO, HyperFeed, and Exegy entered
into a contribution agreement, pursuant to which the common stock of HyperFeed
owned by PICO would have been contributed to Exegy in exchange for Exegy's
issuing certain Exegy stock to PICO. However, in a letter dated
November 7, 2006, Exegy informed PICO and HyperFeed that it was terminating the
agreement. In connection with the termination of the contribution
agreement, the parties have filed certain lawsuits.
The
lawsuit filed by Exegy against PICO and HyperFeed seeking monetary damages and
declaratory judgment that Exegy’s purported November 7, 2006 termination of the
August 25, 2006 contribution agreement was valid and the lawsuit filed by
PICO and HyperFeed against Exegy are still pending in the United States
Bankruptcy Court, District of Delaware. On February 22, 2008 PICO and
HyperFeed filed amended counterclaims against Exegy in connection with the
failed merger, alleging that Exegy’s termination of the contribution agreement
was wrongful and in bad faith. Other than the counterclaims filed on
February 22, 2008, by PICO and HyperFeed against Exegy, no material developments
in these proceedings occurred during the second quarter of 2008.
At June
30, 2008, the outcome of this litigation is uncertain. Consequently,
the Company has not accrued any loss that may be associated with this
matter.
Fish
Springs Ranch, LLC:
In 2006,
the Company started construction of a pipeline from Fish Springs in
northern Nevada to the north valleys of Reno, Nevada.
The final
regulatory approval required for the pipeline project was a Record of Decision
(“ROD”) for a right of way, which was granted on May 31,
2006. Subsequently, there were two protests against the ROD, and the
matter was appealed and subsequently dismissed. However, in October
2006, one protestant, the Pyramid Lake Paiute Tribe (the "Tribe"), filed an
action with the U.S. District Court against the Bureau of Land Management and US
Department of the Interior. The Tribe asserted that the exportation of 8,000
acre feet of water per year from Fish Springs would negatively impact their
water rights located in a basin within the boundaries of the Tribe
reservation. The Company was able to reach a $7.3 million financial
settlement with the Tribe that ended the dispute in June 2007. The settlement
agreement is pending ratification by the United States Congress, which PICO
anticipates will occur in the last quarter of 2008 or within the first six
months of 2009. No material developments occurred relating to this
dispute or the settlement agreement during the second quarter of
2008.
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 resolution of such litigation will not likely have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
| 5. Segment Reporting |
PICO is
a diversified holding company engaged in four major operating segments: Water
Resource and Water Storage Operations, Real Estate Operations, Insurance
Operations in Run Off and Corporate.
The
accounting policies of the reportable segments are the same as those described
in the Company’s 2007 Annual Report on Form 10-K filed with the Securities and
Exchange Commission ("SEC"). Management analyzes segments using the following
information:
Segment
assets:
|
At
June 30, 2008
|
At
December 31, 2007
|
||
|
Total
Assets:
|
|||
|
Water
Resource and Water Storage Operations
|
$223,127,297
|
$231,863,512
|
|
|
Real
Estate Operations
|
80,989,686
|
83,750,531
|
|
|
Insurance
Operations in Run Off
|
220,106,449
|
221,348,861
|
|
|
Corporate
|
158,380,048
|
139,379,376
|
|
| Total assets |
$682,603,480
|
$676,342,280
|
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||
|
2008
|
2007
|
2008
|
2007
|
|
|
Water
Resource and Water Storage Operations
|
$377,896
|
$1,492,627
|
$1,197,181
|
$2,466,991
|
|
Real
Estate Operations
|
1,571,758
|
2,960,805
|
3,166,178
|
6,467,991
|
|
Insurance
Operations in Run Off
|
4,834,439
|
1,213,198
|
6,507,571
|
3,268,643
|
|
Corporate
|
47,139,402
|
2,647,646
|
47,529,630
|
3,824,052
|
|
Total
Revenues
|
$53,923,495
|
$8,314,276
|
$58,400,560
|
$16,027,677
|
|
Income
(Loss) Before Income Taxes and Minority Interest:
|
||||
|
Water
Resource and Water Storage Operations
|
$(1,227,923)
|
$(7,209,479)
|
$(2,187,961)
|
$(7,590,530)
|
|
Real
Estate Operations
|
440,656
|
1,638,571
|
862,780
|
3,838,589
|
|
Insurance
Operations in Run Off
|
4,498,553
|
862,380
|
5,707,810
|
2,563,230
|
|
Corporate
|
42,559,084
|
(980,614)
|
43,902,284
|
(3,055,579)
|
|
Income
(Loss) Before Income Taxes and Minority Interest
|
$46,270,370
|
$(5,689,142)
|
$48,284,913
|
$(4,244,290)
|
|
6. Subsequent
Event
|
On July
3, 2008, the Company sold its interest in the Semitropic Water Storage
Facility. Net proceeds to the Company were $11.7 million. The
sale generated a pre-tax gain of approximately $8.7 million which will be
reported during the three months ending September 30, 2008.
8
Item
2: Management’s Discussion and Analysis of Financial Condition and
Results of Operations
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 accompanying Notes included elsewhere in
this report, and the Consolidated Financial Statements and accompanying Notes
included in our Annual Report on Form 10-K.
Note
about “Forward-Looking Statements”
This
Quarterly Report on Form 10-Q (including the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” section) contains
“forward-looking statements” as defined in Section 21E of the Securities
Exchange Act of 1934, as amended, 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 “may”, “will”, “could”,
“expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”,
“should,” “target,” “projects,” “contemplates,” “predicts,” “potential”,
“continue” 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 Quarterly Report on Form
10-Q.
Although
forward-looking statements in this Quarterly Report on Form 10-Q reflect the
good faith judgment of our management, such statements can only be based on
current expectations and assumptions. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and the actual
results and outcomes could differ from what is expressed or implied by the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, without limitation, those discussed
under “Item 1A. Risk Factors” in our 2007 Annual Report on Form 10-K, and in
other filings made from time to time with the U.S. Securities and Exchange
Commission after the date of this report. Readers are urged not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this Quarterly Report on Form 10-Q. We undertake no obligation to
(and we expressly disclaim any obligation to) revise or update any
forward-looking statement, whether as a result of new information, subsequent
events, or otherwise (except as may be required by law), in order to reflect any
event or circumstance which may arise after the date of this Quarterly Report on
Form 10-Q.
INTRODUCTION
PICO
Holdings, Inc. (PICO and its subsidiaries are collectively referred to as “PICO”
and “the Company,” and by words such as “we” and “our”) is a diversified holding
company. We seek to build and operate businesses where significant value can be
created from the development of unique assets, and to acquire businesses which
we identify as undervalued and where our management participation in operations
can aid in the recognition of the business’s fair value, as well as create
additional value.
Our
objective is to maximize long-term shareholder value. We manage our
operations to achieve a superior return on net assets over the long term,
as opposed to short-term earnings.
Our
business is separated into four major operating segments:
|
·
|
|
|
·
|
|
|
·
|
|
|
·
|
Corporate (formerly known as “Business Acquisitions
& Financing”). At June 30, 2008, this segment contains
cash, bank time deposits, the assets and related liabilities of deferred
compensation plans, interests in small businesses, and other parent
company assets.
|
Currently
our major consolidated subsidiaries are:
|
·
|
Vidler
Water Company, Inc. (“Vidler”), a business which we started more than 10
years ago, acquires and develops water resources and water storage
operations in the southwestern United States, with assets in Nevada,
Arizona, Idaho, California, and Colorado;
|
|
·
|
Nevada
Land & Resource Company, LLC (“Nevada Land”), an operation that we
built since we acquired the company more than 10 years ago, which owns
approximately 449,000 acres of former railroad land in Nevada, and certain
mineral rights and water rights related to the
property;
|
|
·
|
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 property &
casualty insurance and workers’ compensation loss reserves;
and
|
|
·
|
Global
Equity AG, a holding company incorporated in
Switzerland. Following the sale of our interest in Jungfraubahn
Holding AG (“Jungfraubahn”) in April 2008, Global Equity AG’s assets
principally consist of bank time deposits denominated in U.S. Dollars and
Swiss Francs.
|
RESULTS
OF OPERATIONS--THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
Shareholders’
Equity
At June
30, 2008, PICO had shareholders’ equity of $518.6 million ($27.53 per share),
compared to $525.1 million ($27.88 per share) at March 31, 2008, and $525.9
million ($27.92 per share) at December 31, 2007.
Shareholders’
equity decreased by $7.3 million during the first half of 2008, primarily due to
a $9.9 million comprehensive loss, which was partially offset by a $2.6 million
increase in paid-in capital, principally due to SAR. Book value per share
decreased by $0.39, or 1.4%, during the first half of 2008.
During
the second quarter of 2008, shareholders’ equity decreased by $6.5 million,
primarily due to a $7.9 million comprehensive loss, which was partially offset
by a $1.3 million increase in paid-in capital, principally due to
SAR. Book value per share decreased by $0.35, or 1.3%, during the
second quarter of 2008.
Comprehensive
Income (Loss)
In
accordance with Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”, PICO reports
comprehensive income (loss) as well as net income (loss) from the Condensed
Consolidated Statement of Operations. Comprehensive income (loss) measures
changes in shareholders’ equity from non-owner sources, and includes unrealized
items which are not recorded in the Consolidated Statement of Operations, for
example, foreign currency translation and the change in unrealized investment
gains and losses on available-for-sale securities.
For the
second quarter of 2008, PICO recorded a comprehensive loss of $7.9 million. This
consisted of a $34.7 million net decrease in unrealized appreciation in
investments and a $1.4 million foreign currency translation loss, which was
partially offset by the quarter’s net income of $28.2 million. The $34.7 million
reduction in unrealized appreciation in investments during the second quarter,
and the $28.2 million net income for the quarter, are both primarily due to the
sale of our interest in Jungfraubahn in April 2008. At March 31, 2008,
Jungfraubahn represented approximately $26.5 million of the total net unrealized
appreciation in investments, and the sale of our interest in Jungfraubahn in
April 2008 added approximately $30 million to second quarter net
income. Excluding Jungfraubahn, net unrealized appreciation in
available-for-sale securities decreased by approximately $8.2 million during the
second quarter of 2008.
For the
first half of 2008, PICO recorded a comprehensive loss of $9.9 million. This
consisted of a $37.3 million net decrease in unrealized appreciation in
investments, which was partially offset by the first half’s net income of $26.6
million and a $772,000 foreign currency translation gain. The reduction in
unrealized appreciation in investments and net income for the first half of 2008
primarily resulted from the sale of our interest in Jungfraubahn. At
December 31, 2007, Jungfraubahn represented approximately $26.2 million of the
total net unrealized appreciation in investments, and the sale of our interest
in Jungfraubahn in April 2008 added approximately $30 million net income for the
first half of 2008. Excluding Jungfraubahn, net unrealized
appreciation in available-for-sale securities decreased by approximately $11.1
million during the six months ended June 30, 2008.
Segment
Results of Operations
Segment
revenues and income (loss) before taxes and minority interest for the second
quarter and first half of 2008 and 2007 were:
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||
|
2008
|
2007
|
2008
|
2007
|
|
|
Revenues:
|
||||
|
Water
Resource and Water Storage Operations
|
$378,000
|
$1,493,000
|
$1,197,000
|
$2,467,000
|
|
Real
Estate Operations
|
1,572,000
|
2,961,000
|
3,166,000
|
6,467,000
|
|
Insurance
Operations in Run Off
|
4,834,000
|
1,213,000
|
6,508,000
|
3,270,000
|
|
Corporate
|
47,139,000
|
2,647,000
|
47,530,000
|
3,824,000
|
|
Total
Revenues
|
$53,923,000
|
$8,314,000
|
$58,401,000
|
$16,028,000
|
|
Income
(Loss) Before Income Taxes and Minority Interest:
|
||||
|
Water
Resource and Water Storage Operations
|
$(1,228,000)
|
$(7,209,000)
|
$(2,188,000)
|
$(7,591,000)
|
|
Real
Estate Operations
|
441,000
|
1,639,000
|
863,000
|
3,839,000
|
|
Insurance
Operations in Run Off
|
4,498,000
|
862,000
|
5,708,000
|
2,563,000
|
|
Corporate
|
42,559,000
|
(
981,000)
|
43,902,000
|
(3,055,000)
|
|
Income
(Loss) Before Income Taxes and Minority Interest
|
$46,270,000
|
$(5,689,000)
|
$48,285,000
|
$(4,244,000)
|
Second
Quarter Net Income (Loss)
Second
quarter revenues were $53.9 million in 2008, compared to $8.3 million in
2007, an increase of $45.6 million year over year. Revenues from the Corporate
segment increased $44.5 million year over year, principally due to the $46.1
million realized gain on the sale of our interest in Jungfraubahn in 2008.
Revenues from the Insurance Operations in Run Off segment increased $3.6 million
year over year, primarily due to a $3.3 million increase in net realized
investment gains. These increases were partially offset by revenue decreases
year over year of $1.4 million in Real Estate Operations, primarily due to $1.4
million lower land sales revenues, and $1.1 million in Water Resource and Water
Storage Operations, primarily due to a $1.3 million decrease in interest
earned.
Second
quarter costs and expenses were $7.7 million in 2008, compared to $14
million in 2007. The $6.3 million year over year decrease in expenses is
principally due to the settlement with the Pyramid Lake Pauite Tribe (“the Tribe
settlement”) which resulted in a $7.3 million expense being recorded in the
Water Resources and Water Storage Operations segment in the second quarter of
2007, which did not recur in 2008.
PICO
recorded income before taxes and minority interest of $46.3 million in the
second quarter of 2008, compared to a $5.7 million loss before taxes and
minority interest in the second quarter of 2007. The $52 million year over year
increase in second quarter income before taxes and minority interest primarily
resulted from a $43.5 million increase in the Corporate segment result,
principally due to the $46.1 million realized gain on the sale of Jungfraubahn
in 2008. In addition, the Water Resource and Water Storage Operations
segment result improved by $6 million, principally due to the $7.3 million Tribe
settlement expense recorded in the second quarter of 2007, and the Insurance
Operations in Run Off segment result increased by $3.6 million, primarily due to
a $3.3 million increase in net realized investment gains. These
increases were partially offset by a $1.2 million year over year decrease in the
Real Estate Operations segment result, primarily due to an $874,000 lower gross
margin on the sale of real estate.
For the
second quarter of 2008, after an income tax provision of $18.3 million and
minority interest of $300,000, PICO reported net income of $28.2 million ($1.49
per diluted share).
In the
second quarter of 2007, after an income tax benefit of $2 million, PICO reported
a net loss of $3.7 million ($0.20 per share).
First
Half Net Income (Loss)
Revenues
for the first half of 2008 were $58.4 million, compared to $16 million in 2007,
an increase of $42.4 million year over year. Revenues from the Corporate segment
increased $43.7 million year over year, principally due to the $46.1 million
realized gain on the sale of Jungfraubahn in 2008. Revenues from the Insurance
Operations in Run Off segment increased $3.2 million year over year, primarily
due to a $3.1 million increase in net realized investment gains. These increases
were partially offset by revenue decreases year over year of $3.3 million in
Real Estate Operations, primarily due to $3.4 million lower land sales revenues,
and $1.3 million in Water Resource and Water Storage Operations, primarily due
to a $1.7 million decrease in interest earned.
First
half costs and expenses were $10.1 million in 2008, compared to $20.3
million in 2007. The $10.2 million year over year decrease in expenses is
principally due to the $7.3 million Tribe settlement expense in the Water
Resources and Water Storage Operations segment in the first half of 2007, which
did not recur in 2008.
PICO
recorded income before taxes and minority interest of $48.3 million in the first
half of 2008, compared to a $4.2 million loss before taxes and minority interest
in the first half of 2007. The $52.5 million year over year increase in first
half income before taxes and minority interest primarily resulted from a $47
million increase in the Corporate segment result, principally due to the $46.1
million realized gain on the sale of Jungfraubahn in 2008. In
addition, the Water Resource and Water Storage Operations segment result
improved by $5.4 million, principally due to the $7.3 million Tribe settlement
expense recorded in the second quarter of 2007, and the Insurance Operations in
Run Off segment result increased by $3.1 million, primarily due to a $3.1
million increase in net realized investment gains. These increases were
partially offset by a $3 million year over year decrease in the Real Estate
Operations segment result, primarily due to an $2.2 million lower gross margin
on the sale of real estate.
After an
income tax provision of $22.3 million and minority interest of $606,000, PICO
reported net income of $26.6 million ($1.41 per diluted share) for the first
half of 2008.
For the
first half of 2007, after an income tax benefit of $1.1 million, PICO recorded a
net loss of $3.2 million ($0.18 per share).
9
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||
|
2008
|
2007
|
2008
|
2007
|
|
|
Revenues:
|
||||
|
Sale
of real estate and water assets
|
$116,000
|
$
5,000
|
$246,000
|
$
8,000
|
|
Net
investment income
|
183,000
|
1,451,000
|
749,000
|
2,411,000
|
|
Other
|
79,000
|
37,000
|
202,000
|
48,000
|
|
Segment
total revenues
|
$378,000
|
$1,493,000
|
$1,197,000
|
$2,467,000
|
|
Expenses:
|
||||
|
Cost
of real estate and water assets
|
$(18,000)
|
$(
2,000)
|
$(40,000)
|
$(
2,000)
|
|
Depreciation
and amortization
|
(282,000)
|
(
255,000)
|
(559,000)
|
(
517,000)
|
|
Overhead
|
(715,000)
|
(
503,000)
|
(1,573,000)
|
(
1,039,000)
|
|
Project
expenses
|
(591,000)
|
(7,942,000)
|
(1,213,000)
|
(
8,500,000)
|
|
Segment
total expenses
|
$(1,606,000)
|
$(8,702,000)
|
$(3,385,000)
|
$(10,058,000)
|
|
Loss
before income taxes and minority interest
|
$(1,228,000)
|
$(7,209,000)
|
$(2,188,000)
|
$(7,591,000)
|
Over the
past few years, several large sales of real estate and water assets have
generated the bulk of Vidler’s revenues. Since the date of closing
generally determines the accounting period in which the sales revenues and cost
of sales 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 necessarily indicative of likely revenues for future
quarters or the full financial year.
Segment
Results
Vidler
generated total revenues of $378,000 in the second quarter of 2008 compared to
$1.5 million in the corresponding period in 2007, and $1.2 million in the first
half of 2008 compared to $2.5 million in the first half of 2007.
The
decline in revenues for both the three and six month period ended June 30, 2008
compared to the corresponding periods in 2007 is due primarily to a reduction in
net investment income. This income has been generated largely from the temporary
investment of cash proceeds raised from common stock offerings by PICO in May
2006 and February 2007. In aggregate, the stock offerings raised net proceeds of
$174.1 million, which were principally allocated to Vidler for existing and new
projects, including the design and construction of a pipeline to convey water
from Fish Springs Ranch to Reno. See "Fish Springs Ranch” below.
As a result of expenditure on new acquisitions and infrastructure of real
estate and water assets in the southwestern U.S. throughout 2007 and 2008 to
date, Vidler’s funds available for investment have declined, leading to lower
levels of net investment income.
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.
Project
Expenses consist of costs related to the development of existing water
resources, such as maintenance and professional fees. Project Expenses
are expensed as appropriate under US GAAP, and could fluctuate from period
to period depending on activity within 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 as part of
the cost of the asset, and charged to cost of sales when revenue is
recognized. Project Expenses principally relate to:
|
·
|
the
operation and maintenance of the Vidler Arizona Recharge
Facility;
|
|
·
|
the
development of water rights in the Tule Desert groundwater basin (part of
the Lincoln County agreement);
|
|
·
|
the
utilization of water rights at Fish Springs Ranch as future municipal
water supply for the north valleys of the Reno, Nevada
area;
|
|
·
|
the
operation of Fish Springs Ranch, and maintenance of the associated water
rights; and
|
|
·
|
in
the second quarter and first half of 2007, a settlement of all outstanding
claims and legal actions with the Pyramid Lake Paiute Tribe (“the Tribe
settlement”). See “Fish
Springs Ranch” below.
|
Overhead
Expenses were little changed year over year, at $715,000 in the second quarter
of 2008, compared to $503,000 in the second quarter of 2007. However, Project
Expenses were $591,000 in the second quarter of 2008, compared to $7.9 million
in the second quarter of 2007. The decrease was due to an expense of $7.3
million in the second quarter of 2007, resulting from a settlement between Fish
Springs Ranch LLC and the Pyramid Lake Paiute Tribe. See “Fish Springs Ranch”
below.
Overhead
Expenses were $1.6 million in the first half of 2008 compared to $1 million in
the first half of 2007. This increase of $534,000 is primarily due to increased
staff costs as Vidler’s development activities have
increased. However, Project Expenses were $1.2 million in the first
half of 2008, compared to $8.5 million in the first half of 2007, due to the
$7.3 million expense in the first half of 2007 resulting from the Tribe
settlement.
The year
over year decreases in the segment’s loss before income taxes and minority
interest of $6 million in the second quarter, and $5.4 million in the first
half, were principally due to the $7.3 million Tribe settlement expense in 2007,
partially offset by higher net investment income earned in 2007 as a result of
more liquid funds available in 2007 compared to 2008 for short-term investment.
The decline in short-term liquid funds year over year is due to expenditures by
Vidler throughout 2007 and 2008 to date on various real estate and water assets
in selected areas of the southwestern U.S. -- including construction
of the pipeline at Fish Springs Ranch (see “Fish Springs Ranch”
below)
Fish
Springs Ranch
Vidler
has a 51% membership interest in, and is the managing partner of, Fish Springs
Ranch, LLC (“Fish Springs”). Fish Springs has constructed a pipeline to
convey at least 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 in the north valleys of Reno.
As of
June 30, 2008, $93.8 million of direct pipeline costs and other related
expenditure, including interest, has been capitalized within the Real Estate and
Water Assets section of our balance sheet. As and when water is sold
by Fish Springs and revenues are generated, the asset will be expensed as a
cost of sale in our consolidated statement of operations in the period in which
the associated revenues are recorded.
We
believe that the current market value of water in the area exceeds the total
cost of the pipeline and the water to be supplied. To date, Vidler has entered
into agreements to sell approximately 119.5 acre-feet of water at a price of
$45,000 per acre-foot. On July 22, 2008, the pipeline and associated
infrastructure was dedicated to Washoe County, Nevada under the terms of an
Infrastructure Dedication Agreement (“IDA”) between Washoe County and Fish
Springs. Under the provisions of the IDA, Washoe County is responsible for the
operation and maintenance of the pipeline and Fish Springs has the exclusive
right to the capacity of the pipeline to allow for the sale of water to future
development in the north valley area of Reno. As a result of the
dedication of the pipeline to Washoe County, the Fish Springs water is now
available for sale, and we expect the sales of 119.5 acre feet to close during
our fiscal third quarter ending September 30, 2008. The balance of the water
from Fish Springs that has regulatory approval to be imported to the North
Valleys of Reno (7,880.5 acre-feet) is also available for sale under a Water
Banking Agreement entered into between Fish Springs and Washoe County. Under the
Water Banking Agreement, Washoe County holds transferred and dedicated water
rights in trust on behalf of Fish Springs, which will then be able to transfer
and assign water rights credits. Fish Springs can sell the water credits to
developers, who must then dedicate the water to the local water utility for
service.
Without
changing the potential revenues to Fish Springs, the IDA and Water Banking
Agreement allow Washoe County to perform its role as a water utility by
delivering and maintaining water service to new developments. The agreements
enable Fish Springs to complete its water development project by selling water
credits to developers, who can then obtain will-serve commitments from Washoe
County.
Coyote
Springs
A hearing
was completed in 2006 on a filing for water rights from Kane Springs, and in
January 2007 Lincoln/Vidler was awarded 1,000 acre-feet of permitted water
rights. The Nevada State Engineer has requested additional data before making a
determination on the balance of the applications from this groundwater basin,
where Lincoln/Vidler maintains priority applications for approximately 17,375
acre-feet of water. The actual permits received may be for a lesser quantity,
which cannot be accurately predicted.
Lincoln/Vidler
is responsible for obtaining the right-of-way over federally managed lands
relating to a pipeline to convey the water rights from Kane Springs on behalf of
the buyer of the 1,000 acre-feet awarded to Lincoln/Vidler. On obtaining the
right-of-way, which is expected sometime in 2008, Lincoln/Vidler expects to
close on the sale of the permitted water rights for a current price of $7,320
per acre-foot.
Tule
Desert Groundwater Basin
In
1998, Lincoln/Vidler filed for 14,000 acre-feet of water rights for municipal
use from the Tule Desert Groundwater Basin. In November 2002, the Nevada State
Engineer granted and permitted an application for 2,100 acre-feet of water
rights -- which Lincoln/ Vidler subsequently sold to a developer -- and ruled
that an additional 7,244 acre-feet could be granted pending additional studies
by Lincoln/Vidler. Lincoln/Vidler has completed the required hydro-geological
studies and submitted the data to the Nevada State Engineer’s office in March
2008. This data is being reviewed by the U.S. Geological Survey and we
anticipate a decision on the award of further water rights by the Nevada State
Engineer later in 2008. Lincoln/Vidler has agreements in place with developers
to sell up to 7,240 acre-feet of water rights at a current price of $9,075 per
acre-foot.
Western
Nevada
In the
fourth quarter of 2007, Vidler entered into development and improvement
agreements with both Carson City and Lyon County, Nevada to provide water
resources for planned future growth in Lyon County and to connect the municipal
water systems of Carson City and Lyon County.
The
agreements allow for Carson River water rights owned or controlled by Vidler to
be conveyed for use in Lyon County. The agreements also allow Vidler to bank
water with Lyon County and authorize Vidler to build the infrastructure to
upgrade and inter-connect the Carson City and Lyon County water
systems.
As a
result of this Carson-Lyon Intertie project, Carson City will receive greater
stability in the peak day demands of its water supply. In addition,
the ranches from which the water rights are being utilized will, in part, be
acquired by Carson City for use as precious riverfront open space for the
community. It is anticipated that the Lyon County utility will have as much as
4,000 acre-feet of water for development projects in the Dayton corridor for
which there is currently limited supplies of water available, as well as new
water infrastructure to improve Lyon County’s water management program. The
connection of the two water systems will also allow Carson City and Lyon County
greater stability and flexibility with their water supplies in the event of
emergencies such as wildfires or infrastructure failures.
Estimated
total capital costs for the proposed new infrastructure are expected to be
approximately $23 million over a four to six year period. The infrastructure
will be sufficient to deliver an expected volume of water totaling 4,000
acre-feet per year. Expenditures on this project commenced in the second quarter
of 2008.
As of
June 30, 2008, Vidler has acquired and optioned water rights consisting of both
Carson River agriculture designated water rights and certain municipal and
industrial designated water rights. On completion of our re-designation
development process of the water rights to municipal and industrial use, we
anticipate approximately 4,000 acre-feet to be available for municipal use in
Lyon County, principally by means of delivery through the proposed new
infrastructure.
Semitropic
Water Banking and Exchange Program
On July
2, 2008, Vidler completed the sale of its remaining interest of 30,000 acre-feet
of storage capacity at the Semitropic Water Banking and Exchange Program in
California. The sale generated cash proceeds of $11.7 million and is expected to
give rise to a gain of approximately $8.7 million in our fiscal third quarter
for the period ending September 30, 2008. We still retain approximately 10,000
acre-feet of water stored in the facility and we are actively pursuing the sale
of this water.
10
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||
|
2008
|
2007
|
2008
|
2007
|
|
|
Revenues:
|
||||
|
Sale
of real estate and water assets
|
$689,000
|
$2,112,000
|
$1,054,000
|
$4,419,000
|
|
Net
investment income
|
613,000
|
680,000
|
1,536,000
|
1,537,000
|
|
Other
|
270,000
|
169,000
|
576,000
|
511,000
|
|
Segment
total revenues
|
$1,572,000
|
$2,961,000
|
$3,166,000
|
$6,467,000
|
|
Expenses:
|
||||
|
Cost
of real estate and water assets
|
$(154,000)
|
$(
703,000)
|
$(281,000)
|
$(1,469,000)
|
|
Operating
expenses
|
(977,000)
|
(
619,000)
|
(2,022,000)
|
(1,159,000)
|
|
Segment
total expenses
|
$(1,131,000)
|
$(1,322,000)
|
$(2,303,000)
|
$(2,628,000)
|
|
Income
before income taxes and minority interest
|
$441,000
|
$1,639,000
|
$863,000
|
$3,839,000
|
Currently
our largest business in the Real Estate Operations segment is conducted through
our subsidiary Nevada Land & Resource Company, LLC (“Nevada Land”). Our real
estate operations also comprise the operations of UCP LLC (“UCP”) and Global
Equity Corporation (“Global Equity”).
UCP was
formed with the objective of acquiring attractive and well-located finished
lots, partially-developed lots and un-entitled land in select California
markets, where medium-sized regional developers and homebuilders may have
liquidity challenges as a result of the downturn in the housing market. In the
first half of 2008, UCP has acquired or controls a total of 57 finished
lots, and 1,033 potential lots in various stages of entitlement, all in and
around the Fresno, California region.
Global
Equity is a Canadian company which manages the Phoenix Capital Income Trust and
its subsidiary Phoenix Capital, Inc. (collectively “Phoenix”). Phoenix was in
the business of acquiring interests in privately-traded Canadian real estate
partnerships and syndicates (collectively “partnership units”) at an appropriate
discount to the value of the underlying real estate owned by the syndicate or
partnership, to reflect the lack of a public trading market for the partnership
units. Global Equity is managing the existing portfolio of partnership units
owned by Phoenix, and Global Equity is the vehicle through which additional
partnership units are now being acquired.
Nevada
Land recognizes revenue from land sales when a sale transaction closes. On
closing, the entire sales price is recorded as revenue, and the associated cost
basis is reported as cost of land sold. Since the date of closing determines the
accounting period in which the revenue and cost of land are recorded, Nevada
Land’s reported results fluctuate from quarter to quarter, depending on the
dates when transactions close. Consequently, results for any one quarter are not
necessarily indicative of likely results for future quarters or the full
financial year. In the following, gross margin is defined as revenue
less cost of sales, and gross margin percentage is defined as gross margin
divided by revenue.
At least
annually, or more frequently if needed, Nevada Land reviews the carrying value
of its real estate to ensure there is no impairment of the asset. As of
June 30, 2008 there was no impairment.
In the
second quarter of 2008, Nevada Land sold approximately 5,915 acres of land for
$689,000. The average sales price was $116 per acre, and our average basis in
the land sold was $26 per acre. The gross margin on land sales was $535,000,
which represents a gross margin percentage of 77.7%.
In the
second quarter of 2007, Nevada Land sold approximately 21,620 acres of real
estate for $2.1 million. The average sales price was $98 per acre, and our
average basis in the land sold was $33 per acre. The gross margin on sales of
real estate was $1.4 million, which represents a gross margin percentage of
66.7%.
The
second quarter segment result decreased by $1.2 million year over year,
principally due to an $874,000, or 62%, decline in gross margin from land sales
year over year. This primarily resulted from a 73% decrease in the volume of
real estate sold, although the gross margin percentage improved slightly year
over year.
In the
first half of 2008, Nevada Land sold approximately 10,076 acres of land for $1.1
million. The average sales price was $105 per acre, and our average basis in the
land sold was $28 per acre. The gross margin on sales of real estate was
$773,000, which represents a gross margin percentage of 73.3 %.
In the
first half of 2007, segment total revenues were $6.5 million. Nevada Land sold
approximately 47,404 acres of real estate for $4.4 million. The average sales
price was $93 per acre, and our average basis in the land sold was $31 per acre.
The gross margin on land sales was $2.9 million, which represents a gross margin
percentage of 66.8%.
The first
half segment result decreased by $3 million year over year. This was due to a
$2.2 million decrease in gross margin from real estate sales year over year,
primarily as a result of the significant decrease (79%) in the volume of land
sold in the first half of 2008 compared to the corresponding period in 2007. In
addition, segment total expenses were $863,000 higher in the first half of 2008
compared to the corresponding period in 2007, primarily due to the additional
overhead incurred in the operations of UCP that commenced in 2008.
Despite
the slow-down in real estate sales at Nevada Land, we are seeing strong
development activity with respect to our geothermal rights, which appears to
reflect the increased demand in the U.S. for alternative energy sources. Nevada
Land owns the geothermal rights to over 1.3 million acres in northern Nevada. We
hold the geothermal rights on property we still own, and we have retained the
geothermal rights on all land sales that we previously recorded. Typically, we
structure geothermal development agreements with power companies that
incorporate a lease element, as well as a royalty on the actual energy generated
from a geothermal plant. We are currently managing seven geothermal leases, over
a total of 16,500 acres, in varying stages of development with five different
power companies.
11
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||
|
2008
|
2007
|
2008
|
2007
|
|
|
Revenues:
|
||||
|
Net
investment income
|
$1,272,000
|
$990,000
|
$1,891,000
|
$1,807,000
|
|
Net
realized gain on sale or impairment
of investments
|
3,537,000
|
204,000
|
4,551,000
|
1,432,000
|
|
Other
|
25,000
|
19,000
|
66,000
|
31,000
|
|
Segment
total revenues
|
$4,834,000
|
$1,213,000
|
$6,508,000
|
$3,270,000
|
|
Expenses:
|
||||
|
Segment
total expenses
|
$(336,000)
|
$(351,000)
|
$(800,000)
|
$(707,000)
|
|
Income
Before Taxes:
|
||||
|
Physicians
Insurance Company of Ohio
|
$4,230,000
|
$742,000
|
$5,162,000
|
$1,991,000
|
|
Citation
Insurance Company
|
268,000
|
120,000
|
546,000
|
572,000
|
|
Income
before income taxes and minority interest
|
$4,498,000
|
$862,000
|
$5,708,000
|
$2,563,000
|
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.
Once an
insurance company is in “run off” and the last of its policies has expired,
typically most revenues come from net investment income (that is, interest from
fixed-income securities and dividends from stocks) earned on funds held as part
of their insurance business. In addition, realized gains or losses
arise from the sale or impairment of the securities investments which correspond
to the insurance company’s reserves and shareholders’ equity.
Revenues
and results in this segment vary considerably from period to period and are not
necessarily comparable from year to year, primarily due to fluctuations in net
realized investment gains, and favorable or unfavorable development in our loss
reserves.
The
Insurance Operations in Run Off segment generated total revenues of $4.8 million
in the second quarter of 2008, compared to $1.2 million in the second quarter of
2007. Net investment income was $1.3 million in the second quarter of 2008,
compared to $990,000 in the second quarter of 2007. Net realized gains on the
sale or impairment of securities were $3.5 million in the second quarter of
2008, compared to $204,000 in the second quarter of 2007. Operating and
underwriting expenses were $336,000 in the second quarter of 2008, compared to
$351,000 in the second quarter of 2007. Consequently, segment income increased
from $862,000 in the second quarter of 2007 to $4.5 million in the second
quarter of 2008.
The
Insurance Operations in Run Off segment generated total revenues of $6.5 million
in the first half of 2008, compared to $3.3 million in the first half of 2007.
Net investment income was $1.9 million in the first half of 2008, compared to
$1.8 million in the first half of 2007. Net realized gains on the sale or
impairment of securities were $4.6 million in the first half of 2008, compared
to $1.4 million in the first half of 2007. Operating and underwriting expenses
were $800,000 in the first half of 2008, compared to $707,000 in the first half
of 2007. Consequently, segment income increased from $2.6 million in the first
half of 2007 to $5.7 million in the first half of 2008.
The $3.5
million net realized investment gain reported in the second quarter of 2008
consisted of $3.9 million in gains on the sale of various portfolio holdings,
which were partially offset by a $393,000 charge for other-than-temporary
impairment of our holdings in three common stocks. The $4.6 million
net realized investment gain reported in the first half of 2008 consisted of
$5.9 million in gains on the sale of various portfolio holdings, which were
partially offset by a $1.3 million charge for other-than-temporary impairment of
our holdings in six common stocks.
We
regularly review any securities in which we have an unrealized
loss. If we determine that the decline in market value is
other-than-temporary, under US GAAP we record a charge to reduce the basis of
the security from its original cost (or previously written-down value if a
provision for other-than-temporary impairment has been recorded in a previous
accounting period) to current carrying value, which is typically the market
price at the balance sheet date when the provision is recorded. The
determination is based on various factors, primarily the extent and duration of
the unrealized loss. A charge for other-than-temporary impairment is
a non-cash charge, which is recorded as a realized loss. Charges for
other-than-temporary impairment do not affect book value per share, as the
after-tax decline in the market value of investments carried under SFAS No. 115,
“Accounting for Certain Investments in Debt and
Equity Securities” (“SFAS No. 115”), is already reflected in
shareholders’ equity. The written-down value becomes our new basis in
the investment.
Based on
the extent and duration of the unrealized losses, it was determined that the
declines in market value are other-than-temporary. Consequently, we
recorded a charge to reduce our basis in the stocks to their market value at
June 30, 2008.
Physicians
Insurance Company of Ohio
At June
30, 2008, Physicians’ loss and loss adjustment expense reserves were
approximately $6.4 million, net of reinsurance, compared to $6.5 million, net of
reinsurance, at December 31, 2007. Net reserves decreased by $106,000 during the
first half of 2008, due to the payment of claims. No unusual trends in claims
were noted.
|
PHYSICIANS
INSURANCE COMPANY OF OHIO -- LOSS AND LOSS ADJUSTMENT EXPENSE
RESERVES
|
||
|
June 30,
2008
|
December
31, 2007
|
|
|
Direct
Reserves
|
$6,497,000
|
$6,603,000
|
|
Ceded
Reserves
|
( 83,000)
|
( 83,000)
|
|
Net
Medical Professional Liability Insurance Reserves
|
$6,414,000
|
$6,520,000
|
Citation Insurance
Company
At June
30, 2008, Citation’s claims reserves were approximately $8.7 million, net of
reinsurance, consisting of $3.1 million in net property and casualty insurance
reserves and $5.6 million in net workers’ compensation reserves. At December 31,
2007, Citation’s claims reserves were approximately $9.2 million, net of
reinsurance, consisting of $3.1 million in net property and casualty insurance
reserves and $6.1 million in net workers’ compensation reserves. There were no
unusual trends in claims during the first half of 2008.
During
the first half of 2008, Citation’s net property and casualty insurance reserves
declined by $89,000, and Citation’s net workers’ compensation reserves declined
by $419,000, due to the payment of claims.
|
CITATION
INSURANCE COMPANY -- LOSS AND LOSS ADJUSTMENT EXPENSE
RESERVES
|
||
|
June
30, 2008
|
December
31, 2007
|
|
|
Property
& Casualty Insurance
|
||
|
Direct
Reserves
|
$3,495,000
|
$3,587,000
|
|
Ceded
Reserves
|
( 435,000)
|
( 438,000)
|
|
Net
Property & Casualty Insurance Reserves
|
$3,060,000
|
$3,149,000
|
|
Workers’
Compensation
|
||
|
Direct
Reserves
|
$21,313,000
|
$22,186,000
|
|
Ceded
Reserves
|
(15,679,000)
|
(16,133,000)
|
|
Net
Workers’ Compensation Insurance Reserves
|
$5,634,000
|
$6,053,000
|
|
Total
Reserves
|
$8,694,000
|
$9,202,000
|
12
|
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||
|
2008
|
2007
|
2008
|
2007
|
|
|
Revenues:
|
||||
|
Net
realized gain on sale or impairment of investments
|
$46,060,000
|
$
6,000
|
$45,519,000
|
$
5,000
|
|
Net
investment income
|
1,014,000
|
2,609,000
|
1,934,000
|
3,786,000
|
|
Other
|
65,000
|
32,000
|
77,000
|
33,000
|
|
Segment
total revenues
|
$47,139,000
|
$2,647,000
|
$47,530,000
|
$3,824,000
|
|
Expenses:
|
||||
|
Stock
appreciation rights expense
|
$( 997,000)
|
$(1,994,000)
|
||
|
Other
|
(3,583,000
|
$(3,628,000)
|
(1,634,000)
|
$(6,879,000)
|
|
Segment
total expenses
|
$(4,580,000)
|
$(3,628,000)
|
$(3,628,000)
|
$(6,879,000)
|
|
Income
(loss) before income taxes and minority interest
|
$42,559,000
|
$(981,000)
|
$43,902,000
|
$(3,055,000)
|
This
segment consists of strategic interests in businesses, and the activities of
PICO which are not included in other segments. The segment also
contains the deferred compensation assets held in trust for the benefit of
several PICO officers, as well as the corresponding and offsetting deferred
compensation liabilities. Revenues in this segment vary considerably
from period to period, primarily due to fluctuations in net realized gains or
losses on the sale or impairment of securities.
Until
April 2008, the largest asset in this segment was a 22.5% shareholding in
Jungfraubahn Holding AG, a publicly-traded Swiss corporation which operates
railway and related tourism and transport activities in the Swiss
Alps. On April 22, 2008, we sold our interest in Jungfraubahn for net
proceeds of 75.5 million Swiss Francs (“CHF”), or approximately US$75.3
million. To alleviate currency exposure on the sales proceeds, we
converted CHF67.5 million into U.S. dollars, and invested the US$66.8 million in
a short term deposit with Deutsche Bank AG, Frankfurt (Germany).
The sale
of Jungfraubahn resulted in a gain of $46.1 million before taxes in our
consolidated statement of operations in the second quarter and first half of
2008. However, the sale only had a minimal effect on shareholders’ equity and
book value per share, as most of the gain and related tax effects had already
been recorded in previous accounting periods as a net unrealized gain, in the
Other Comprehensive Income component of Shareholders’ Equity.
For the
second quarter of 2008, Corporate segment revenues were $47.1 million,
principally represented by a net realized investment gain of $46.1
million. The net realized investment gain primarily consisted of
$46.5 million in realized gains on the sale of securities, which were partially
offset by a $421,000 provision for other-than-temporary impairment of three
common stocks and one bond held in deferred compensation
accounts. The provision for other-than-temporary impairment is offset
by a corresponding reduction in deferred compensation payable to the
participating officers, which reduces segment total expenses, resulting in no
effect on the segment loss before tax. Based primarily on the extent
and duration of the unrealized losses, it was determined that the declines in
market value are other-than-temporary, and we recorded a charge to reduce our
basis in the securities to their market value at June 30, 2008.
After
$4.6 million of expenses, the segment recorded income before taxes of $42.6
million for the second quarter of 2008.
For
the first half of 2008, Corporate segment revenues were $47.5 million,
principally represented by a net realized investment gain of $45.5
million. The net realized investment gain primarily consisted of
$46.5 million in realized gains on the sale of securities, which were partially
offset by a $936,000 provision for other-than-temporary impairment of five
stocks and one bond held in deferred compensation accounts. After
$3.6 million of expenses, the segment recorded income before taxes of $43.9
million for the first half of 2008.
Second
quarter segment revenues increased $44.5 million and segment income increased
$43.5 million year over year, essentially due to the realized gain on the sale
of Jungfraubahn.
Second
quarter segment expenses increased $952,000 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, any
compensation cost for stock-settled Stock Appreciation Rights (“SAR”), and
deferred compensation expense. In the second quarter of 2008,
expenses included SAR cost of $997,000, compared to zero in the second quarter
of 2007, which principally accounted for the year over year increase in second
quarter expenses in the segment.
First
half segment revenues increased $43.7 million and segment income increased $47
million year over year, essentially due to the realized gain on the sale of
Jungfraubahn.
First
half segment expenses decreased $3.3 million year over year. During the first
half of 2008, segment expenses were reduced by a $3.1 million exchange rate
benefit, compared to an $80,000 exchange rate benefit in the first half of 2007
(see next section).
Inter-Company
Loan
In
addition to the interest in Jungfraubahn held in this segment until April 2008,
PICO European Holdings, LLC (“PICO European”) holds a portfolio of interests in
Swiss public companies. PICO European is a wholly-owned subsidiary of
Physicians, and forms part of the Insurance Operations in Run Off segment. Part
of PICO European’s funding comes from a loan from PICO Holdings, Inc., which is
denominated in Swiss Francs. Since the U.S. dollar is the functional currency
for our financial reporting, under US GAAP we are required to record a benefit
or expense through the statement of operations to reflect fluctuation in the
exchange rate between the Swiss Franc and the U.S. dollar affecting the loan
amount, although there is no net impact on consolidated shareholders’ equity
before the related tax effects.
During
accounting periods when the Swiss Franc appreciates relative to the U.S. dollar
– such as the first half of 2007 and 2008 – under US GAAP we are required to
record a benefit through the statement of operations to reflect the fact that
PICO European owes PICO Holdings more U.S. dollars.
Conversely,
during accounting periods when the Swiss Franc depreciates relative to the U.S.
dollar – such as the second quarter of 2007 and 2008 – we record an expense to
reflect the fact that PICO European owes PICO Holdings fewer U.S.
dollars. An exchange rate expense of $647,000 was recorded in PICO’s
statement of operations in the second quarter of 2008, compared to a $317,000
exchange rate expense in the second quarter of 2007.
SAR
Expense
During
2005, the Company’s Compensation Committee established a stock-based Stock
Appreciation Rights (“SAR”) plan, the PICO Holdings, Inc. Long-Term Incentive
Plan (“the 2005 SAR Plan”), which was approved by shareholders in December
2005.
On
December 8, 2005, the Compensation Committee granted 2,195,965 stock-based SAR,
with an exercise price of $33.76, to various Company’s officers, employees, and
non-employee directors. The SAR granted in 2005 were fully vested,
and no compensation expense was recorded in accordance with US GAAP in effect at
the time.
In 2006,
PICO adopted SFAS No. 123(R), “Share-Based
Payment”. Under SFAS No. 123(R), where SAR vest over a period
of time, compensation expense is recorded over the vesting period.
During
2007, 486,470 stock-settled SAR were granted to four officers with an exercise
price of $42.71, and 172,939 stock-settled SAR were granted to one officer with
an exercise price of $44.69. The SAR granted in 2007 vest over four
years.
SAR
expense of $997,000 for the second quarter of 2008 and $2 million for the first
half of 2008 was recorded related to the 2007 SAR grant, which vests over four
years. The SAR expense was calculated based on the estimated fair
value of the vested SAR as of the award date. We expect to record an
additional $5.5 million in compensation expense related to these SAR over the
future vesting period.
13
LIQUIDITY
AND CAPITAL RESOURCES—SIX MONTHS ENDED JUNE 30, 2008 AND 2007
Cash
Flow
Our
assets primarily consist of our operating subsidiaries, holdings in
publicly-traded securities, and cash and cash equivalents. On a consolidated
basis, the Company had $165.9 million in cash and equivalents at June 30, 2008,
compared to $70.8 million at December 31, 2007. In addition to cash
and cash equivalents, at June 30, 2008, the consolidated group held fixed-income
securities with a market value of $43.4 million, and equities with a market
value of $185.3 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 the proceeds of borrowings or offerings of
equity and debt.
In broad
terms, the cash flow profile of our principal operating subsidiaries
is:
|
·
|
As
Vidler’s water assets are monetized, Vidler is expected to generate free
cash flow as receipts from the sale of real estate and water assets will
have overtaken acquisition and development costs, maintenance capital
expenditure, financing costs, and operating
expenses;
|
|
·
|
Nevada
Land is actively selling real estate which has reached its highest and
best use. Nevada Land’s principal sources of cash flow are the proceeds of
sales of real estate for cash, 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 and development
costs, so Nevada Land is generating positive cash flow. We are
redeploying part of the cash flow from Nevada Land to build the business
of UCP, by acquiring lots and un-entitled land in selected California
markets; and
|
|
·
|
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.
|
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 $95.1 million in the first half of 2008, compared to a $24.3
million net decrease in the first half of 2007.
During
the first half of 2008, Operating Activities used $28.4 million in cash. The
principal operating cash inflows were cash land sales by Nevada Land and
repayments on notes related to previous land sales, as well as investment income
from the Insurance Operations in Run Off segment and from liquid funds held in
the other segments. The principal operating cash outflows relate to the
acquisition and development of real estate and water assets for future
development, and overhead expenses. During the first half of 2008, we
outlaid $27.5 million to acquire and develop real estate and water assets, which
is classified as an operating cash flow, since we are in the business of
acquiring and developing real estate and water assets with a view to possible
re-sale at an appropriate time in the future.
During
the first half of 2007, Operating Activities used $25.5 million in cash. The
principal operating cash inflow was land sales by Nevada Land and repayments on
notes related to previous land sales. The principal operating cash outflows
include overhead expenses, tax payments, and the payment of management incentive
compensation related to 2006 performance. In addition, an Operating Cash outflow
of $4.9 million was recorded, which relates to the exercise of stock-based stock
appreciation rights (“SAR”) during the first half of 2007.
In the
first half of 2008, Investing Activities provided $120.4 million of
cash. During the first half of 2008, the sale of stocks generated
cash of $87.7 million, primarily due to the sale of our interest in Jungfraubahn
for $75.3 million, and we used $17.2 million to purchase new
stocks. Proceeds from the maturity and call of bonds provided cash of
$63.9 million, and we used $3 million to buy new bonds. In addition,
$11 million was used for the purchase of property & equipment and costs
capitalized to water infrastructure, which primarily related to the final stages
of the Fish Springs pipeline.
Investing
Activities used $103.9 million of cash in the first half of 2007. The principal
investing use of cash was a $65.3 million net increase in fixed-income
securities, which represents the temporary investment of a portion of the
proceeds of the February 2007 stock offering. In addition, $27.1 million was
used for property and equipment, primarily related to the Fish Springs pipeline
project, and $11.5 million net was invested in stocks.
Financing
Activities provided $7.4 million of cash in the first half of 2008, primarily
due to a $6.9 million increase in Swiss Franc (CHF) borrowings from our bank in
Switzerland. This represented borrowings of CHF 2.8 million ($2.6 million) on
our current account facility, and the proceeds of an additional fixed advance of
CHF 4.5 million ($4.3 million), which carries a 4.43% interest rate and is due
for repayment in 2011.
Separately,
during the second quarter of 2008, our bank in Switzerland approved an increase
of CHF 2 million in our current account credit facility, which we have not drawn
on. We now have total borrowing capacity in Switzerland of CHF 25 million ($24.5
million), consisting of CHF 20 million ($19.6 million) of fixed advances due for
repayment from 2009 to 2011, and a CHF 5 million ($4.9 million) current account
credit facility. At June 30, 2008, we had borrowed approximately CHF
22.8 million ($22.3 million) of this capacity. The additional Swiss Franc fixed
advance and the increase in the current account credit facility allow PICO
European, a subsidiary of Physicians Insurance Company of Ohio, to acquire
additional interests in Swiss public companies, financed in the local
currency.
Financing
Activities provided $105.1 million of cash in the first half of 2007. This
primarily represented the sale of 2.8 million newly-issued shares of PICO common
stock for net proceeds of $100.1 million. In addition, there was a $4.9 million
tax benefit related to the exercise of SAR.
Universal
Shelf Registration Statement
In
November 2007, we filed a universal shelf registration statement with the SEC
for the periodic offering and sale of up to $400 million of debt securities,
common stock, and warrants, or any combination thereof, in one or more
offerings, over a period of three years. The SEC declared the
registration statement effective in December 2007.
At the
time of any such offering, we will establish the terms, including the pricing,
and describe how the proceeds from the sale of any such securities will be
used. As of June 30, 2008, we have not issued any securities under
the universal shelf registration. While we have no plans for the
current offer or sale of any such securities, the universal shelf registration
provides us with increased flexibility and control over the timing and size of
any potential financing in response to both market and strategic
opportunities.
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, 2008, no stock had been repurchased under this
authorization.
Off-Balance
Sheet Arrangements
As of
June 30, 2008, we had no off-balance sheet arrangements that have or are
reasonably likely to have a material current or future effect on our
consolidated financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Our
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. We currently have interest
rate risk as it relates to its fixed maturity securities, 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, our
borrowings are short to medium term in nature and therefore approximate fair
value. At June 30, 2008, we had $43.4 million of fixed maturity securities,
$185.3 million of marketable equity securities that were subject to market risk,
of which $101.8 million were denominated in foreign currencies, primarily Swiss
francs. Our investment strategy is to manage the duration of the portfolio
relative to the duration of the liabilities while managing interest rate
risk.
We use
two models to report the sensitivity of our assets and liabilities subject to
the above risks. For fixed maturity securities we use duration modeling to
calculate changes in fair value. The 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 of the security. At June 30, 2008, the
model calculated a loss in fair value of $2.4 million. For our marketable equity
securities, we use a hypothetical 20% decrease in the fair value to analyze the
sensitivity of our market risk assets and liabilities. For investments
denominated in foreign currencies, we use a hypothetical 20% decrease in the
local currency of that investment. The actual results may differ from the
hypothetical results assumed in this disclosure due to possible actions we may
take 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 our marketable equity securities would produce a loss in fair
value of $37.1 million that would impact the unrealized appreciation in
shareholders’ equity, before the related tax effect. The hypothetical 20%
decrease in the local currency of our foreign denominated investments would
produce a loss of $15.9 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
was no change in the Company’s internal control over financial reporting as
defined in Exchange Act Rule 13a-15(f) during the quarter ended June 30,
2008, that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Part
II: Other Information
The
Company is subject to various litigation arising in the ordinary course of its
business. Members of PICO’s insurance group are frequently a party in
claims proceedings and actions regarding insurance coverage, all of which PICO
considers routine and incidental to 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.
Neither
PICO nor its subsidiaries are parties to any potentially material pending legal
proceedings other than the following.
Exegy
Litigation:
The
lawsuit filed by Exegy against PICO and HyperFeed seeking monetary damages and
declaratory judgment that Exegy’s purported November 7, 2006 termination of the
August 25, 2006 contribution agreement was valid and the lawsuit filed by
PICO and HyperFeed against Exegy are still pending in the United States
Bankruptcy Court, District of Delaware. No material developments in
these proceedings occurred during the second quarter of 2008. For
more information on these proceedings, see "Item 3. Legal Proceedings" in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2007.
Fish
Springs Ranch, LLC:
The
Company’s settlement agreement with the Pyramid Lake Paiute Tribe of Indians
(the “Tribe”) relating to the exportation of water from the properties owned by
Fish Springs Ranch, LLC is pending ratification by the United States Congress,
which we anticipate will occur in the last quarter of 2008 or within the first
six months of 2009. No material developments occurred relating to
this dispute or the settlement agreement during the second quarter of
2008. For more information on this dispute, see “Item 3. Legal
Proceedings” in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007.
Item
1A: Risk Factors
There are
no material changes to our risk factors described in our Form 10-K for the year
ended December 31, 2007, as filed on February 29, 2008.
Item
2: Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item
3: Defaults Upon Senior Securities
None
14
PICO’s
annual meeting of shareholders was held May 16, 2008. At the
meeting:
(1) the three
nominees named in PICO’s 2008 proxy statement, Ronald Langley, John R. Hart, and
John D. Weil, were elected to serve as directors for a three-year term expiring
in 2011; and
(2) the
selection of Deloitte & Touche LLP to serve as independent registered public
accounting firm for PICO for 2008 was ratified.
The
number of votes cast for, against or withheld, and the number of abstentions and
broker non-vote, where applicable, as to each such matter, are set forth
below.
|
For
|
Against/
Withheld
|
Abstained
|
Broker
Non-Votes
|
|
|
(1) Election
of Directors:
|
||||
|
NOMINEE
|
||||
|
Ronald
Langley
|
10,587,584
|
2,757,589
|
||
|
John
R. Hart
|
10,557,355
|
2,787,818
|
||
|
John
D. Weil
|
12,359,151
|
986,022
|
||
|
(2)
Ratification of the Independent Auditor
|
13,246,021
|
79,860
|
19,292
|
PICO's directors, whose terms of
office continue, are S. Walter Foulkrod, Richard D. Ruppert, Carlos C. Campbell,
and Kenneth J. Slepicka.
Item
5: Other Information
None
Item
6. Exhibits
|
Exhibit
Number
|
Description
|
|
|
3(i)
|
Amended
and Restated Articles of Incorporation of PICO.
(1)
|
|
|
3(ii)
|
Amended
and Restated By-laws of PICO. (2)
|
|
|
31.1
|
||
|
31.2
|
||
|
32.1
|
||
|
32.2
|
|
(1)
|
Incorporated
by reference to Exhibit 3(i) in the Form 10-Q filed with the SEC on
November 7, 2007.
|
|
|
(2)
|
Incorporated
by reference to Exhibit 3(ii) in the Form 8-K filed with the SEC on
February 29, 2008.
|
15
PICO
HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant
to the requirements of the United States Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August
8, 2008
PICO
HOLDINGS, INC.
By: /s/ Maxim C. W.
Webb
Maxim C.
W. Webb
Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer and Authorized Signatory)