PICO HOLDINGS, INC.
ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 2015
TO THE SHAREHOLDERS OF PICO HOLDINGS, INC.:
Our results for 2015 were significantly impacted by our losses from operations and the sale of our
investment in Northstar, our canola seed crushing business. When we initiated our investment in Northstar, demand
for canola oil was growing at a faster pace than supply, and the majority of canola oil on the domestic market was
imported. Food Processing companies were selling for attractive multiples and two well respected consulting firms
also reviewed and opined on the Northstar business plan. The major risk in the investment was expected to be from
completing the construction of the facility on time and on budget. Northstar's canola processing plant was
completed ahead of schedule and under the budgeted cost. The plant performed above our expectations for potential
daily capacity of 1,000 tons, indicating that we had an efficient plant.
Once the plant was fully operational, unprecedented volatility occurred in the crush margin, which
historically had been fairly stable. In addition, one of the coldest winters in 100 years gave rise to logistics issues
that prevented us from benefiting from a period of unprecedented high crush margins. The agricultural space in
general is dealing with greater risk from climate change, without commensurate reward. This is not an attractive
investment situation. As such, we made the decision to exit this investment and, accordingly, sold substantially all
of the assets of the crush plant in July 2015.
UCP continued its impressive growth in 2015. UCP reported net income of $5.8 million in 2015 and
$7.6 million for the fourth quarter of 2015. During 2015, UCP grew its year-over-year homebuilding revenue and
homes delivered by about 63% to $252.6 million and 701 homes, respectively, while decreasing its reported
year-over-year G&A expenses by approximately 1.9% to $26.9 million. At December 31, 2015, UCP’s backlog was
approximately $109 million, which we expect will position UCP well for continued growth in 2016.
Vidler Water had few transactions in 2015, as their key markets in Northern Nevada were in the early
stages of a financial recovery. Continued growth is projected in both population and jobs for Northern Nevada.
In September 2015, the Nevada Economic Planning Indicators Committee estimated that over the next five years
over 52,000 new jobs will be created in Nevada. Tesla and Switch are part of a growing number of commercial
enterprises that have determined the business climate in Nevada, and Reno / Tahoe in particular, is attractive.
The current housing supply in Northern Nevada is tight, which should lead to increased home building activity.
Climate change and the structural deficits on the Colorado River system in Arizona, combined with economic
recovery in Arizona, should lead to increased demand and value for our Arizona storage credits. As a result, we
remain cautiously optimistic that these factors will lead to more significant water sales by Vidler in Nevada and
Arizona in 2016.
Our Board of Directors now consists of nine members, of which five were appointed since January 2016.
The catalyst behind the addition of five new Board members was a combination of resignations of Board members,
and the desire of our shareholders to refresh our Board in an effort help us achieve the goals set forth in our current
business plan. Broadly, the goal of our current business plan is, as we monetize assets, to return capital to
shareholders.
Pursuant to an earlier settlement agreement entered into by us, our Board will be reduced from nine to eight
members effective after the upcoming annual meeting of shareholders. In order to reduce the Board to
eight members, one of the Class II Directors whose term of office expires at the upcoming annual meeting of
shareholders could not be nominated for re-election. It was determined by our Board that Carlos Campbell would
not be nominated for re-election. This was a very difficult decision since Mr. Campbell has served as a member of
our Board since 1998. Mr. Campbell was recognized by the National Association of Corporate Directors (“NACD”)
as an exemplary director, when in 2011 he was honored by being named a member of the NACD Directorship 100.
He has always been an advocate for board engagement and continuing education. More recently, he was
instrumental as Lead Director during the development of the company’s current business strategy and transition of
the new directors. We wish him well in all his future endeavors, and appreciate his many years of service and
contributions to the company. As we monetize assets and return capital to shareholders, further reductions in the
size of our Board will be considered.
As we move forward, corporate governance will remain a high priority. Accordingly, our Board urges
to vote in favor of all of the proposals described in the company’s proxy statement, and in particular,
to de-classify our Board and reincorporate in Delaware.
shareholders
the proposals
Our entire Board has spent considerable time discussing past events, including investments made by the
company, and believe our focus should be on taking the necessary steps to work with management to further reduce
costs and execute the current business plan. Looking forward, everyone on our Board and management
acknowledge the current broader economic outlook reflects uncertain economic growth, which may have a
dampening effect on the pace of commercial and residential real estate development. However, despite these
broader potential economic headwinds, the regional trends in California, Nevada and Arizona are giving us reason to
be reasonably optimistic that we can execute on our business plan.
Sincerely,
Raymond V. Marino II
Chairman of the Board of Directors
John R. Hart
President and Chief Executive Officer
Statements in this letter that are not historical, including statements regarding our business objectives, UCP’s
anticipated growth in 2016, expected population and job growth in Northern Nevada, the attractiveness of the
business climate in Nevada, increased home building activity in Northern Nevada, economic recovery in Arizona,
increased demand and value for our Arizona storage credits, anticipated water sales by Vidler in 2016, our ability
to achieve the goals set forth in our current business plan, and our ability to reduce costs and execute our current
business plan, are forward-looking statements based on current expectations and assumptions that are subject to
risks and uncertainties. Our actual results could differ materially from such expectations. For further information
regarding risks and uncertainties associated with our business, please refer to the “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of our SEC filings,
including our Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q, copies of which may be
obtained by contacting us at (858) 456-6022 or at http://investors.picoholdings.com. We undertake no obligation to
(and we expressly disclaim any obligation to) update these forward-looking statements, whether as a result of new
information, subsequent events, or otherwise, in order to reflect any event or circumstance which may arise after the
date of this letter. Readers are urged not to place undue reliance on these forward-looking statements, which speak
only as of the date of this letter.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED December 31, 2015
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 033-36383
PICO HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
California
(State or other jurisdiction of incorporation)
94-2723335
(IRS Employer Identification No.)
7979 Ivanhoe Avenue, Suite 300 La Jolla, California 92037
(Address of Principal Executive Offices, including Zip Code)
Registrant’s Telephone Number, Including Area Code
(888) 389-3222
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, Par Value $0.001
Name of Each Exchange On Which Registered
NASDAQ Stock Market LLC
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.
Securities Registered Pursuant to Section 12(g) of the Act: None
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the 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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Act). Yes
No
At June 30, 2015, the aggregate market value of shares of the registrant’s common stock held by non-affiliates of the registrant (based upon the closing sale price
of such shares on the NASDAQ Global Select Market on June 30, 2015) was $266.7 million, which excludes shares of common stock held in treasury and shares
held by executive officers, directors, and stockholders whose ownership exceeds 10% of the registrant’s common stock outstanding at June 30, 2015. This calculation
does not reflect a determination that such persons are deemed to be affiliates for any other purposes.
On March 11, 2016, the registrant had 23,037,587 shares of common stock, $0.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed with the United States Securities and Exchange Commission pursuant to Regulation
14A in connection with the registrant’s 2016 Annual Meeting of Shareholders, to be filed subsequent to the date hereof, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page No.
Item 1.
BUSINESS
Item 1A. RISK FACTORS
Item 1B. UNRESOLVED STAFF COMMENTS
Item 2.
PROPERTIES
Item 3.
LEGAL PROCEEDINGS
Item 4. MINE SAFETY DISCLOSURES
PART I
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 6.
SELECTED FINANCIAL DATA
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Item 9A. CONTROLS AND PROCEDURES
Item 9B. OTHER INFORMATION
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
SIGNATURES
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27
27
27
28
30
31
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55
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100
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106
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Note About “Forward-Looking Statements”
PART I
This Annual Report on Form 10-K (including “Management’s Discussion and Analysis of Financial Condition and
Results of Operations”) contains “forward-looking statements,” as defined in the Private Securities Litigation Reform Act
of 1995, 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”, 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 Annual Report on Form 10-K.
Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our
management, such statements can only be based on current expectations and assumptions and are not guarantees of future
performance. Consequently, forward-looking statements are inherently subject to risk and uncertainties, and the actual
results and outcomes could differ materially from future results and outcomes expressed or implied by such forward-
looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without
limitation, those discussed under Part I, Item 1A “Risk Factors”, as well as those discussed elsewhere in this Annual Report
on Form 10-K and in other filings we may make from time to time with the United States Securities and Exchange
Commission (“SEC”) 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 Annual Report on Form 10-K. We undertake no obligation to (and we
expressly disclaim any obligation to) revise or update any forward-looking statements, whether as a result of new
information, subsequent events, or otherwise, in order to reflect any event or circumstance that may arise after the date
of this Annual Report on Form 10-K, unless otherwise required by law. Readers are urged to carefully review and consider
the various disclosures made in this Annual Report on Form 10-K, and the other filings we may make from time to time
with the SEC after the date of this report, which attempt to advise interested parties of the risks and uncertainties that
may affect our business, financial condition, results of operations, and prospects.
ITEM 1. BUSINESS
Introduction
PICO Holdings, Inc. is a diversified holding company that was incorporated in 1981. In this Annual Report on Form 10-K,
PICO and its subsidiaries are collectively referred to as “PICO”, “the Company”, or by words such as “we”, “us”, and “our.”
Our objective is to maximize long-term shareholder value. Currently, we believe the highest potential return to shareholders
is from a return of capital. As we monetize assets, rather than reinvest the proceeds, we intend to return capital back to shareholders
through a stock repurchase program or by other means such as special dividends.
As of December 31, 2015, our business was separated into the following segments:
• Water Resource and Water Storage Operations;
• Real Estate Operations;
• Corporate; and
• Discontinued Agribusiness Operations.
As of December 31, 2015, our major consolidated subsidiaries were (wholly-owned unless otherwise noted):
• Vidler Water Company, Inc. (“Vidler”) which acquires and develops water resources and water storage operations in the
southwestern United States, with assets and operations in Nevada, Arizona, Colorado and New Mexico; and
• UCP, Inc. (“UCP”), a 56.9% owned subsidiary which is a homebuilder and land developer in markets located in California
and Puget Sound area of Washington State, North Carolina, South Carolina and Tennessee.
The address of our main office is 7979 Ivanhoe Avenue, Suite 300, La Jolla, California 92037, and our telephone number is
(888) 389-3222.
3
Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,
amendments to those reports, are made available free of charge on our web site (www.picoholdings.com) as soon as reasonably
practicable after the reports are electronically filed or furnished with the SEC. Our website also contains other material about
PICO. Information on our website is not incorporated by reference into this Annual Report on Form 10-K.
Operating Segments and Major Subsidiary Companies
The following is a description of our operating segments and major subsidiaries. Unless otherwise noted, we own 100% of
each subsidiary. The following discussion of our segments should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included elsewhere in this Annual Report on Form 10-K. See Note 12, “Segment Reporting,” in the accompanying
consolidated financial statements for financial information for each of our operating segments and geographic areas in which we
derive revenue. Additional information regarding the performance of and recent developments in our operating segments is
included in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Water Resource and Water Storage Operations
Vidler is engaged in the water resource development business and is primarily focused on developing and selling our existing
water rights that we own in the southwestern United States. In this operation, we develop new sources of water for municipal and
industrial use, either from existing supplies of water, such as water used for agricultural purposes, acquiring unappropriated
(previously unused) water, or discovering new water sources based on science and targeted exploration. We are not a water utility,
and do not currently intend to enter into regulated utility activities.
A water right is the legal right to divert water and put it to beneficial use. Water rights are real property rights which can be
bought and sold and are commonly measured in acre-feet which is a measure of the volume of water required to cover an area of
one acre to a depth of one foot and is equal to 325,850 gallons. The value of a water right depends on a number of factors, which
may include location, the seniority of the right, whether or not the right is transferable, or if the water can be moved from one
location to another. We believe we have purchased water rights at prices consistent with their then current use, which was typically
agricultural in nature, with the expectation that the value would increase as we converted the water rights through the development
process to a higher use, such as municipal and industrial use. We acquired and developed water resources with the expectation
that such water resources would be the most competitive source of water (the most economical source of water supply) to support
new growth in municipalities or new commercial and industrial projects.
Certain areas of the Southwest confronting long-term growth have insufficient known supplies of water to support their future
economic and population growth. The inefficient allocation of available water between agricultural users and municipal or industrial
users, the lack of available known water supplies in a particular location, or inadequate infrastructure to fully utilize or store
existing and new water supplies provide opportunities for us to apply our water resource development expertise.
The development of our water assets required significant capital and expertise. A complete project, from acquisition, through
development, permitting and sale, is a long-term endeavor. Typically, in the regions in which we operate, new housing, commercial
and industrial developments require an assured water supply (for example, in Arizona, access to water supplies for at least 100
years is required) before a permit for the development will be issued.
We have acquired or developed water rights and water related assets in Arizona, California, Idaho, Nevada, and New Mexico.
We also developed and operated our own water storage facility near Phoenix, Arizona, utilize water storage capacity operated by
third parties in Arizona, and “bank,” or store, water with municipalities in Nevada and New Mexico.
We have also entered into “teaming” and joint resource development arrangements with third parties who have water assets
but lack the capital or expertise to commercially develop these assets. The first of these arrangements was a water delivery teaming
agreement in southern Nevada with the Lincoln County Water District (“Lincoln/Vidler”), which is developing water resources
in Lincoln County, Nevada. In northern Nevada, we have also entered into a joint development agreement with Carson City and
Lyon County, Nevada to develop and provide water resources in Lyon County as well as a water banking agreement with Washoe
County in Reno, Nevada.
4
We generate revenues by:
•
•
•
•
selling our developed water rights to project developers including real estate developers, power generating facilities or
other commercial and industrial users who must secure rights to an assured supply of water in order to receive permits
for their development projects;
selling our developed water rights to water utilities, municipalities and other government agencies for their specific needs,
including to support population growth;
selling our stored water to commercial developers or municipalities that have either exhausted their existing water supplies,
or, in instances where our water represents the most economical source of water, for their commercial projects or
communities; and
leasing our water, farmland or ranch land while further developing the water resource.
We owned the following significant water resource and water storage assets at December 31, 2015:
Fish Springs Ranch
We own a 51% membership interest in, and are the managing partner of, Fish Springs Ranch, LLC (“FSR”), which owns the
Fish Springs Ranch and other properties totaling approximately 7,360 acres in Honey Lake Valley in Washoe County, approximately
40 miles north of Reno, Nevada. FSR also owns 12,984 acre-feet of permitted water rights related to the properties of which 7,984
acre-feet are designated as water credits, transferable to other areas within Washoe County (such as Reno and Sparks) to support
community development. Currently, there is no regulatory approval to export the additional 5,000 acre-feet per year of water from
FSR to support development in northern Reno, and it is uncertain whether such regulatory approval will be granted in the future.
To date, we have funded all of the operational expenses, development, and construction costs incurred in this partnership. We are
entitled to recover the amount we have funded and in addition, we are entitled to receive an annual financing cost of the London
Inter-Bank Offered Rate (“LIBOR”) plus 450 basis points from funding of the pipeline related expenditures, as we generate revenue
from the sale of FSR water credits.
During 2006, we began construction of a pipeline and an electrical substation to provide the power required to pump the water
to the north valleys region of Reno. In July 2008, we completed construction of and dedicated our pipeline and associated
infrastructure to Washoe County, Nevada under the terms of an Infrastructure Dedication Agreement (“IDA”) between Washoe
County and FSR. Under the provisions of the IDA, Washoe County is responsible for the operation and maintenance of the pipeline
and we own the exclusive right to the capacity of the pipeline to allow for the sale of water for future economic development in
the north valley area of Reno. Our 7,984 acre-feet of water that has regulatory approval to be imported to the north valleys of
Reno is available for sale under a Water Banking Agreement entered into between FSR and Washoe County. Under the Water
Banking Agreement, Washoe County holds our water rights in trust. We can sell our water credits to developers, who must then
dedicate the water to the local water utility for service. In December 2014, Washoe County Water Utilities merged with the Truckee
Meadows Water Authority (“TMWA”), consolidating water supply service in Washoe County. Also effective at the end of 2014,
FSR, Washoe County, and TMWA consented to the Assignment of the Water Banking Agreement and the IDA to the Truckee
Meadows Water Authority.
During 2011, a recession and other poor economic conditions in the area, including a high rate of unemployment in Washoe
County, caused the rate of population growth to slow considerably. In addition, the then issued population growth estimates from
the Nevada State Demographer were significantly lower than previous population projections. These factors caused a decline in
the estimated fair value of our water credits and pipeline rights to approximately $84.9 million compared to its then carrying value
of $101.1 million. Consequently during 2011, we recorded a $16.2 million impairment loss to reflect the decrease in the estimated
fair value of the asset. For similar reasons, during 2013, we recorded another impairment loss on this asset of $993,000.
Carson/Lyon
The capital of Nevada, Carson City, and Lyon County are located in the western part of the state, close to Lake Tahoe and the
border with California. While Carson City’s housing growth has been and is expected to be minimal due to land constraints, there
is planned growth for the Dayton corridor, directly east of Carson City. There are currently few existing water sources to support
future growth and development in the Dayton corridor area and Vidler has been working with Carson City and Lyon County for
several years on ways to deliver water to support this expected growth.
5
In 2007, we entered into development and improvement agreements with both Carson City and Lyon County to provide water
resources for planned future growth in Lyon County and to connect, or “intertie,” the municipal water systems of Carson City and
Lyon County. The agreements allow for Carson River water rights owned or controlled by us to be conveyed for use in Lyon
County. The agreements also allow us to bank water with Lyon County and authorize us to build the infrastructure to upgrade
and inter-connect the Carson City and Lyon County water systems.
We own 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 agriculture designated water rights to
municipal and industrial use, we anticipate that we will have up to 4,000 acre-feet available for municipal use in Lyon County for
future development, as and when demand occurs, principally by means of delivery through the new infrastructure we constructed.
Due to recession and prevailing economic conditions during 2010, including a high rate of unemployment in Lyon County,
the rate of growth of development in the Dayton corridor had slowed considerably which caused a decline in the estimated fair
value of our asset. Consequently, we recorded an impairment loss on this asset of $10.3 million in the fourth quarter of 2010.
Vidler Arizona Recharge Facility
We built and received the necessary permits to operate a full-scale water “recharge” facility that allows us to bank water
underground in the Harquahala Valley, Arizona. “Recharge” is the process of placing water into storage underground. We have
the permitted right, through September 2020, to recharge 100,000 acre-feet of water per year at the Vidler Arizona Recharge
Facility, and we are permitted to store as much as one million acre-feet of water in the aquifer underlying much of the valley.
When needed, the water will be “recovered,” or removed from storage, by ground water wells. This stored water creates a long
term storage credit (“LTSC”).
We hold our Colorado River water at this facility, which is a primary source of water for the Lower Basin States of Arizona,
California, and Nevada. The water storage facility is strategically located adjacent to the Central Arizona Project (“CAP”) aqueduct,
a conveyance canal running from Lake Havasu to Phoenix and Tucson. The recharged water was from surplus flows of CAP
water which Arizona wanted recharged in Arizona, as opposed to that water flowing downstream. Proximity to the CAP provides
a competitive advantage as it minimizes the cost of water conveyance.
We are able to provide storage for users located both within Arizona and out of state (with approvals from the state of Arizona).
Potential users include industrial companies, power-generating companies, developers, and local governmental political
subdivisions in Arizona, and out-of-state users such as municipalities and water agencies in Nevada and California. The Arizona
Water Banking Authority (“AWBA”) has the responsibility for intrastate and interstate storage of water for governmental entities.
To date, we have not stored water at the facility for any third party.
While Arizona is the only southwestern state with surplus flows of Colorado River water available for storage, in recent years
there has been little to no surplus flows available to us as drought conditions have reduced the flow of the Colorado River and
other water users have fully utilized their water allocations. In the future, we do not anticipate purchasing and storing surplus
flows of Colorado River water. At the end of 2015, we had LTSCs of approximately 251,000 acre-feet of water in storage at the
facility. To date, we have not generated any revenue from selling our stored water at this facility.
Phoenix AMA Water Storage
As of December 31, 2015, we owned approximately 157,000 acre-feet of LTSCs stored in the Arizona Active Management
Area (“AMA”), 126,000 acre-feet of which is in the Roosevelt Water Conservation District (“RWCD”). For the purposes of storing
water, the RWCD is part of the Phoenix AMA, which corresponds to the Phoenix metropolitan area. Accordingly, water stored
in the AMA may be recovered and used anywhere in the AMA and could have a variety of uses for commercial developments
within the Phoenix metropolitan area. During 2011 and 2012 we acquired additional LTSCs in RWCD and also LTSCs in five
other storage sites in the AMA. All of the storage sites we utilize within the AMA are operated by third parties.
Harquahala Valley Ground Water Basin
Any new residential development in Arizona must obtain a permit from the Arizona Department of Water Resources certifying
a “designated assured water supply” sufficient to sustain the development for at least 100 years. Harquahala Valley groundwater
meets the designation of assured water supply.
6
Under Arizona law, the property and water rights in the Harquahala Valley are located in one of three areas in the state from
which groundwater may be withdrawn and transferred from a rural area to a metropolitan area. In July 1998, we were granted
approval for the transportation of three acre-feet of groundwater per acre of previously irrigated ground, totaling 3,837 acre-feet
of groundwater, from Harquahala Valley into the Phoenix-Scottsdale metropolitan area. During 2011, we were granted approval
for 9,877 acre-feet of groundwater, which included the prior 3,837 acre-feet awarded.
We own 1,926 acres of land and have the ability to utilize 6,040 acre-feet of groundwater for development within the Harquahala
Basin. The Analysis of Adequate Water Supply for the 6,040 acre-feet must be renewed before December 2021 in order to maintain
these rights.
In addition, the area in and around the Harquahala Valley appears to be a desirable area to site natural gas fired and solar
power-generating plants. The site’s proximity to energy transmission lines and the high solarity in the region are strengths of the
location. The water assets we own in this region could potentially provide a water source for energy plants that might be constructed
in this area.
Lincoln County, Nevada Water Delivery and Teaming Agreement
Lincoln/Vidler entered into a water delivery teaming agreement to locate and develop water resources in Lincoln County,
Nevada for planned projects under the County’s master plan. Under the agreement, proceeds from sales of water will be shared
equally after Vidler is reimbursed for the expenses incurred in developing water resources in Lincoln County. Lincoln/Vidler has
filed applications for more than 100,000 acre-feet of water rights with the intention of supplying water for residential, commercial,
and industrial use, as contemplated by the county’s approved master plan. We believe that this is the only known new source of
water for Lincoln County. Although it is uncertain, Vidler currently anticipates that up to 40,000 acre-feet of water rights will
ultimately be permitted from these applications, and put to use for planned projects in Lincoln County.
Tule Desert Groundwater Basin
Lincoln/Vidler jointly filed permit applications in 1998 for approximately 14,000 acre-feet of water rights for industrial use
from the Tule Desert Groundwater Basin in Lincoln County, Nevada. In November 2002, the Nevada State Engineer awarded
Lincoln/Vidler a permit for 2,100 acre-feet of water rights, which Lincoln/Vidler subsequently sold in 2005, and ruled that an
additional 7,240 acre-feet could be granted pending additional studies by Lincoln/Vidler (the “2002 Ruling”). Subsequent to the
2002 Ruling and consistent with the Nevada State Engineer’s conditions, we completed these additional engineering and scientific
studies.
On April 15, 2010, Lincoln/Vidler and the Nevada State Engineer announced that we had concluded a Settlement Agreement
with respect to litigation between the parties regarding the amount of water to be permitted in the Tule Desert Groundwater Basin.
The Settlement Agreement resulted in the granting to Lincoln/Vidler of the original application of 7,240 acre-feet of water rights
with an initial 2,900 acre-feet of water rights available for sale or lease by Lincoln/Vidler. The balance of the water rights (4,340
acre-feet) is the subject of staged pumping and development over the next several years to further refine the modeling of the basin
and potential impacts, if any, from deep aquifer pumping in the remote, unpopulated desert valley in Lincoln County, Nevada.
The Tule Desert Groundwater Basin water resources were developed by Lincoln/Vidler to support the Lincoln County
Recreation, Conservation and Development Act of 2004 (the “Land Act”) and Vidler’s proposed Toquop Power generation project,
as discussed below. The water permitted under the Settlement Agreement is anticipated to provide sufficient water resources to
support the development of the Toquop Power generation project and a portion of Land Act properties.
Lincoln County Power Plant Project
We developed the Toquop Power project. We are finalizing the required studies and National Environmental Protection Act
(“NEPA”) permits for the project. We continue to engage in discussions with potential energy generation partners capable of
building a power generation facility in Lincoln County. We own 100% of this power plant project, as it is not part of the Lincoln/
Vidler teaming agreement.
7
Kane Springs
In 2005, Lincoln/Vidler agreed to sell water to a developer of Coyote Springs, a new planned residential and commercial
development 60 miles north of Las Vegas, as and when supplies were permitted from Lincoln/Vidler’s existing applications in
Kane Springs, Nevada. Lincoln/Vidler currently has priority applications for approximately 17,375 acre-feet of water in Kane
Springs for which the Nevada State Engineer has requested additional data before making a determination on the applications
from this groundwater basin. The actual permits received may be for a lesser quantity, which cannot be accurately predicted.
Currently, we have an option agreement with a developer to sell our remaining 500 acre-feet of water rights we own in this
area at a price of $8,858 per acre-foot. In January 2015, we signed an amendment to the option agreement whereby if all 500
acre-feet are purchased by the developer, the purchase price will be reduced by $2,500 per acre-feet in exchange for the developer
incurring additional drilling costs that would have been incurred by us in connection with the sale. The agreement expires in
September 2017 and requires an annual option fee of $60,000 to maintain the rights under the option. To date, the developer has
made all required annual option payments.
8
The following table summarizes our other water rights and real estate assets at December 31, 2015:
Name and location of asset
Brief description
Present commercial use
Nevada:
Truckee River Water Rights
Dry Lake
Muddy River
Dodge Flat
Colorado:
Tunnel
New Mexico:
Campbell Ranch
Approximately 299 acre-feet of Truckee
River water rights permitted for
municipal use.
Water rights are available to support
development through sale, lease, or
partnering arrangements.
Vidler owns 595 acres of agricultural and
ranch land in Dry Lake Valley. Lincoln/
Vidler owns the 1,009 acre-feet of
permitted agricultural groundwater rights
associated with the land.
Located in Lincoln County.
267 acre-feet of water rights.
Located 35 miles east of Las Vegas.
Water rights and land are available to
support development through sale, lease,
or partnering arrangements.
Currently leased to Southern Nevada
Water Authority through September 30,
2016.
1,428 acre-feet of permitted municipal
and industrial use water rights, and 1,068
acres of land.
Water rights and land are available for
sale, lease or other partnering
arrangements.
Located in Washoe County, east of Reno.
Approximately 164 acre-feet of water
rights.
Located in Summit County (the
Colorado Rockies), near Breckenridge.
In November 2014, we entered into an
option agreement with a solar developer
for the potential development of a solar
power project of up to 180 megawatts.
63 acre-feet of water leased under long
term leases. 101 acre-feet are available
for sale or lease.
Application for a new appropriation of
717 acre-feet of ground water. Vidler is
in partnership with the land owner. The
water rights would be used for a new
residential and commercial development.
Located 25 miles east of Albuquerque.
In November 2014, our application was
denied by the New Mexico State
Engineer causing us to record an
impairment loss of $3.5 million which
reduced the capitalized costs and other
assets of this project to zero. We
appealed this decision on November 19,
2014.
Lower Rio Grande Basin
Approximately 1,261 acre-feet of
agricultural water rights.
Water is available for sale, lease or other
partnering opportunities.
Located in Dona Ana and Sierra
Counties.
Approximately 101 acre-feet of
municipal rights. 16 acre-feet currently
under contract, expected to close prior to
April 1, 2016.
Located in Santa Fe and Bernalillo
Counties.
In 2014, we entered into a long term
lease for a portion of these water rights
that continued into 2015.
Water is available for sale, lease, or other
partnering opportunities.
Middle Rio Grande Basin
Our Real Estate Operations
Our real estate operations are primarily conducted through UCP, our homebuilder and land developer with land acquisition
and entitlement expertise in California, Washington State, North Carolina, South Carolina and Tennessee.
We formed UCP, LLC, the predecessor company to UCP, in 2007 with the objective of acquiring attractive and well-located
finished and partially-developed residential lots, primarily in select California and Washington markets. In 2010, UCP, LLC
formed Benchmark Communities, LLC (“Benchmark”) to design, construct and sell high quality single-family homes on certain
of the lots owned by UCP, LLC.
9
On July 23, 2013, UCP, Inc. completed an initial public offering (“IPO”). Since our acquisition of UCP, LLC and through the
completion of UCP’s IPO, UCP, LLC operated as a wholly owned subsidiary of the Company. Subsequent to the IPO, we have
held a majority of the voting power of UCP, Inc. and of the economic interests of UCP, LLC, the subsidiary through which we
operate our business. As of December 31, 2015, we owned 56.9% of the voting interest in UCP, Inc. and we owned 56.9% of the
economic interests of UCP, LLC and UCP, Inc. owned 43.1% of the economic interests of UCP, LLC.
On April 10, 2014, we completed the acquisition of the assets and liabilities of Citizens Homes, Inc. (“Citizens”) used in the
purchase of real estate and the construction and marketing of residential homes in North Carolina, South Carolina and Tennessee,
(the “Citizens Acquisition”) in order to position us to expand our operations into markets located in North Carolina, South Carolina
and Tennessee. The Citizens Acquisition provides increased scale and presence in established markets with immediate revenue
opportunities through an established backlog. Additional synergies are expected in the areas of purchasing leverage and integrating
the best practices in operational effectiveness.
Our Business Strategy
We actively source, evaluate and acquire land for residential real estate development and homebuilding. For each of our real
estate assets, we periodically analyze ways to maximize value by either (i) building single-family homes and marketing them for
sale under our Benchmark Communities brand, or (ii) completing entitlement work and horizontal infrastructure development and
selling lots to third-party homebuilders. We perform this analysis using a disciplined analytical process, which we believe is a
differentiating component of our business strategy.
As of December 31, 2015, we owned or controlled 5,878 lots, providing us with significant lot supply, which we believe will
support our business strategy for a multi-year period. We believe that our sizable inventory of well-located land provides us with
a significant opportunity to develop communities and design, construct, and sell homes under our Benchmark Communities brand.
While we expect to opportunistically sell select residential lots to third-party homebuilders when we believe that will maximize
our returns or lower our risk, we expect that homebuilding and home sales will constitute our primary means of generating revenue
growth for the foreseeable future. As of December 31, 2015, we had 134 completed and 292 under construction homes including
51 model homes, which we believe to be appropriate for our current growth plans.
When acquiring real estate assets, we focus on seeking maximum long-term risk-adjusted returns. Our underwriting and
operating philosophies emphasize capital preservation, risk identification and mitigation, and risk-adjusted returns. We seek to
mitigate our exposure to market downturns and capitalize on market upturns through the following key strategies:
•
identifying and regularly reviewing the risks associated with our assets and business, including market, entitlement and
environmental risks, and structuring transactions to minimize the impact of those risks;
• maintaining high quality in our construction activities;
• maintaining a strong balance sheet, using a prudent amount of leverage;
•
•
leveraging our purchasing power and controlling costs;
attracting highly experienced professionals and encouraging them to maintain a deep understanding and ownership of
their respective disciplines;
• maintaining a strong corporate culture that is based on our core values, including integrity, honesty, transparency,
innovation, quality and excellence; and
• maintaining rigorous supervision over our operations.
10
Markets
We operate in five states in two distinct markets, West and Southeast. In our Western market our operations are homebuilding
and land development and in our Southeastern market our operations are mainly homebuilding. We believe that these areas have
attractive residential real estate investment characteristics, such as favorable long-term population demographics, a demand for
single-family housing that often exceeds available supply, large and growing employment bases, and the ability to generate above-
average returns. We continue to experience significant homebuilding and land development opportunities in our current markets
and are evaluating potential expansion opportunities in other markets that we believe have attractive long-term investment
characteristics.
State
West
Market(s)
California
Central Valley area (Fresno and Madera counties)
Monterey Bay area (Monterey County)
South San Francisco Bay area (Santa Clara and San Benito counties)
Southern California (Los Angeles, Ventura and Kern counties)
Washington
Puget Sound area (King, Snohomish, Thurston and Kitsap counties)
Southeast
North Carolina
South Carolina
Tennessee
Charlotte area
Myrtle Beach area
Nashville area
Homebuilding Operations
We build homes through our wholly owned homebuilding subsidiary, Benchmark Communities. Benchmark Communities
operates under the principle that “Everything Matters!” This principle underlies all phases of our new home process including
planning, design, construction, sales and the customer experience. We are diversified by product offering, which we believe
reduces our exposure to any particular market or customer segment. We decide to target specific and identifiable buyer segments
by project and geographic market, in part dictated by each particular asset, its location, topography and competitive market
positioning, and the amenities of the surrounding area and the community in which it is located.
We believe our customers look for distinctive new homes; accordingly, we design homes in thoughtful and creative ways to
create homes that we expect buyers will find highly desirable. We seek to accomplish this by collecting and analyzing information
about the characteristics of our target buyer segments and incorporating our analysis into new home designs. We source information
about our target buyer segments from our experience selling new homes and through market research that enables us to identify
design preferences that we believe will appeal to our customers. We target diverse buyer segments, including first-time buyers,
first-time move-up buyers, second-time move-up buyers and active-adult buyers. Most of our communities target multiple buyer
segments, enabling us to seek increased sales pace and reduce our dependence on any single buyer segment.
We contract with third party architects, engineers and interior designers to assist our experienced internal product development
personnel in designing homes that are intended to reflect our target customers’ tastes and preferences. In addition to identifying
desirable design and amenities, this process includes a rigorous value engineering strategy that allows us to seek efficiencies in
the construction process.
Customer Experience
We seek to make the home buying experience friendly, effective and efficient. Our integrated quality assurance and customer
care functions assign the same personnel at each community the responsibility for monitoring quality control and managing the
customer experience. As a standard practice, we seek to communicate with each homeowner multiple times during their first two
years of ownership in an effort to ensure satisfaction with their new home. Additionally, we monitor the effectiveness of our
customer experience efforts with third-party surveys that measure our home buyers’ perception of the quality of our homes and
the responsiveness of our customer service. Our customer experience program seeks to optimize customer care in terms of
availability, response time and effectiveness, and we believe that it reduces our exposure to future liability claims. We believe
that our continuing commitment to quality and the customer experience provides a compelling value proposition for prospective
home buyers and reduces our exposure to long-term construction defect claims.
11
Homebuilding, Marketing and Sales Process
We realize that homebuilding is a local business. As a result we focus on the unique characteristics of each market. In our
West homebuilding market, consistent with local market custom, we typically release for sale and construct homes in phases of
four to twelve homes based upon projected sales rates. In our Southeast market, consistent with local market custom, we typically
release lots for sale in phases of eight to twenty lots allowing customers to select a specific home on their chosen lot.
In both markets, we adhere to an “even flow” construction methodology that allows us to standardize the timing of new home
starts in order to reduce labor and material costs and administrative inefficiencies in the construction process. Our even-flow
method provides visibility to our material suppliers, vendors and subcontractors, helping them balance their labor and material
needs consistently over time, which we believe results in higher-quality craftsmanship and lower production costs to us. Our
even-flow method provides us enhanced visibility, oversight, and control of the production process, and allows us to more effectively
manage our working capital accounts.
We routinely monitor and actively manage our even flow production process to align with prevailing and expected future unit
absorption trends. In the event our inventory builds faster than homes are sold, we will typically halt construction when homes
are structurally complete, but prior to the selection of certain amenities, such as flooring and counter tops, until we have entered
into a sales contract and received a non-refundable customer deposit. This process allows us to reduce the amount of capital
invested in our inventory of homes until homes are under contract and allows buyers to select and customize certain non-structural
elements of the home.
Our sales and marketing process uses extensive advertising and promotional strategies, including Benchmark Communities’
website, community marketing brochures, and the use of billboards and other roadside signage. Brokerage operations are conducted
through our wholly owned subsidiaries in each state, as follows: (1) BMC Realty Advisors, Inc. (“BMC Realty”) in California
and Washington; (2) Builders BMC, Inc. in North Carolina; (3) BMCH Tennessee, LLC in Tennessee; and (4) Benchmark
Communities, LLC in South Carolina.
We typically staff two professional sales personnel at each of our communities. Our in-house sales teams have offices in their
respective model complex and are responsible for selling homes, interfacing with customers between the time a sales contract is
executed and the home sale closes, and coordinating with our escrow management department. Our sales personnel work with
potential buyers to determine their unique needs and then by demonstrating the functionality and livability of our homes with floor
plans, price information, development and construction timetables, tours of model homes and the selection of amenities. Our sales
personnel are internally trained, generally have prior experience selling new homes in their respective markets, and are licensed
by applicable real estate oversight agencies.
Model homes are one of our primary sales tools. Depending on the amount of time we expect it will take to complete sales
at a community and the number of different homes we are offering, we typically build between two and four model homes. As
of December 31, 2015, we owned 51 completed and seven under construction model homes. Our marketing staff uses interior
designers, architects and color consultants to create model homes designed to appeal to our targeted buyer segments. Our models
typically include features that are included in the base price of the particular home model, and options and upgrades that a home
buyer may elect to purchase. We often use an on-site design center that offers our customers the opportunity to purchase various
options and upgrades and provides additional revenue opportunities. The on-site design center experience enhances our customer’s
experience.
Home Buyer Financing
The majority of our home buyers finance a significant portion of the purchase price of their home with long-term mortgage
financing. We assist prospective purchasers in obtaining mortgage financing by providing referrals to one of our preferred lenders.
Our preferred lenders have a track record of offering our customers competitive rates and terms, a desire to enhance our customer’s
experience and the ability to perform on an agreed schedule in order to meet our expectations and those of our customers. Through
our lender referral process, we seek to reduce the challenges our customers encounter when trying to obtain mortgage financing
for our homes.
Quality Control and Customer Service
We pay particular attention to the product design process and carefully consider quality and choice of materials in order to
attempt to eliminate building deficiencies. The quality and workmanship of the subcontractors we employ are monitored and we
make regular inspections and evaluations of our subcontractors to seek to ensure that our standards are met.
12
We have quality control and customer service staff who seek to provide a positive experience for each home buyer throughout
the pre-sale, sale, building, closing and post-closing periods. These employees are responsible for providing after sales customer
service. Our quality and service initiatives include taking home buyers on a comprehensive tour of their home prior to closing
and using customer survey results to improve our standards of quality and customer satisfaction.
Warranty Program
We provide a “fit and finish” warranty on our home sales that covers workmanship and materials consistent with local market
custom (two years in the West homebuilding market and one year in the Southeast homebuilding market). As is customary in the
homebuilding industry, our trade partners who build our homes sign contracts with the provision to provide warranty repairs inside
the fit and finish warranty period, including structural and water intrusion repairs up to the period designated by the respective
State’s Statute of Repose.
Along with our homeowners receiving warranty information, they also receive important home maintenance guidelines in an
effort to help them enjoy and prolong the durability of their home. Customers who actively and correctly maintain their home not
only protect the value of their home, but minimize the longer-term risk to us that is normally associated with homes that are not
properly maintained.
The limited warranty covering construction defects is transferable to subsequent buyers not under direct contract with us and
requires that home buyers agree to the conditions, restrictions and procedures set forth in the warranty. We accrue estimated
warranty costs based upon our estimates of the expense we expect to incur for work under warranty.
There can be no assurance, however, that the terms and limitations of the limited warranty will be effective against claims
made by home buyers; that we will be able to renew our insurance coverage or renew it at reasonable rates; that we will not be
liable for damages, the cost of repairs, and/or the expense of litigation surrounding possible construction defects, soil subsidence
or building related claims; or that claims will not arise out of uninsurable events or circumstances not covered by insurance and
not subject to the effective indemnification agreements with our subcontractors.
Raw Materials
When constructing homes we use various materials and components. It has typically taken us four to six months to construct
a home, during which time we are subject to price fluctuations in raw materials.
Land Development
As a homebuilder and land developer, we are positioned to either build new homes on our lots or to sell our lots to third-party
homebuilders. While our business plan contemplates building new homes on the majority of our lots, we proactively monitor
market conditions and our operations allow us to opportunistically sell a portion of our lots to third-party homebuilders if we
believe that will maximize our returns or lower our risk. We believe that our ability and willingness to opportunistically build on
or sell our lots to third-party homebuilders afford us the following important advantages:
•
exploit periods of cyclical expansion by building on our lots;
• manage our operating margins and reduce operating income volatility by opportunistically selling lots as operating
performance and market conditions dictate; and
• manage operating risk in periods where we anticipate cyclical contraction by reducing our land supply through lot sales.
We benefit from the long-standing relationships our executive management team at UCP has with key land owners, brokers,
lenders, as well as development and real estate companies in our market. These relationships have provided us with opportunities
to evaluate and privately negotiate acquisitions outside of a broader marketing process. In addition, we believe that our financial
position, positive reputation in our markets among potential land sellers and brokers, as well as our track record of acquiring lots
since 2008, provide land sellers and brokers confidence that we will consummate transactions in a highly professional, efficient
and transparent manner. Our ability to regularly do so in turn strengthens these relationships for future opportunities. We believe
our relationships with land owners and brokers will continue to provide opportunities to source land acquisitions prior to a full
marketing process, helping us to maintain a significant pipeline of opportunities on favorable terms and prices.
13
The land development process in our markets can be very complex and often requires highly-experienced individuals that
can respond to numerous unforeseen challenges with a high degree of competency and integrity. We actively seek land acquisition
opportunities where others might seek to avoid complexities, as we believe we can add significant value through our expertise in
entitlements, re-entitlements, horizontal land planning and development.
Acquisition Process
Our ability to identify, evaluate and acquire land in desirable locations and on favorable terms is critical to our success. We
evaluate land opportunities based on risk-adjusted returns and employ a rigorous due diligence process to identify risks, which
we then seek to mitigate.
We leverage our relationships with land owners, brokers, developers and financial institutions, and our history of purchasing
land since 2008, to seek the “first look” at land acquisition opportunities or to evaluate opportunities before they are broadly
marketed. We use a variety of transaction structures, including purchase and option contracts, to maximize our risk-adjusted
return, with particular emphasis on reducing our risk, conserving our capital while accommodating the particular needs of each
seller.
We combine our entitlement, land development and homebuilding expertise to increase the flexibility of our business, seek
enhanced margins, control our lot deliveries and maximize returns. Additionally, we believe that the integration of the entitlement,
development and homebuilding process allows us to deliver communities that achieve a high level of customer satisfaction. Our
entitlement expertise allows us to add value through the zoning and land planning process. Our land development entitlement
expertise allows us to consider a broader range of land acquisition opportunities from which to seek superior risk-adjusted returns.
We selectively evaluate expansion opportunities in our existing markets as well as new markets that we believe have attractive
long-term investment characteristics. These characteristics include, among others, demand for single-family housing that exceeds
available supply, well regarded educational systems and institutions, high educational attainment levels, desirable transportation
infrastructure, proximity to major trade corridors, positive employment trends, diverse employment bases and high barriers to the
development of residential real estate, such as geographic or political factors.
Owned and Controlled Lots
The following tables present certain information with respect to our owned or controlled lots, which were pursuant to purchase
or option contracts:
West
Southeast
Total
West
Southeast
Total
(1) Controlled lots are those subject to a purchase or option contract.
Owned
As of December 31, 2015
Controlled(1)
415
3,869
882
4,751
712
1,127
Total
4,284
1,594
5,878
Owned
As of December 31, 2014
Controlled(1)
469
4,410
1,033
5,443
456
925
Total
4,879
1,489
6,368
Our property portfolio consisted of 93 communities in 39 cities in our West and Southeast markets as of December 31, 2015
and 83 communities in 38 cities in our West and Southeast markets as of December 31, 2014.
14
Our Financing Strategy
We intend to use debt and equity as part of our ongoing financing strategy at UCP, coupled with redeployment of cash flows
from continuing operations. This strategy provides us with the financial flexibility to access capital on attractive terms. In that
regard, we expect to employ prudent levels of leverage to finance the acquisition and development of our lots and construction of
our homes. We attempt to match the duration of our real estate assets with the duration of the capital that finances each real estate
asset.
Our indebtedness in this segment is primarily comprised of senior notes due in 2017, and project-level secured acquisition,
development and construction loans. Substantially all of UCP’s project debt is guaranteed by UCP, LLC and UCP, Inc. We
consider a number of factors when evaluating our level of indebtedness and when making decisions regarding the incurrence of
new indebtedness, including the purchase price of assets to be acquired with debt financing, the estimated market value of our
assets, the expected asset’s duration, and the ability of particular assets to generate cash flow to cover the expected debt service.
We intend to finance future acquisitions and developments with the most advantageous source of capital available to us at the
time of the transaction, which may include a combination of common and preferred equity issued by UCP, secured and unsecured
corporate level debt issued by UCP, property-level debt and mortgage financing and other public, private or bank debt.
Government Regulation and Environmental Matters
We are subject to various local, state, and federal statutes, ordinances, rules, and regulations concerning zoning, building
design, construction, and similar matters, including local regulations which impose restrictive zoning and density requirements
in order to limit the number of homes that can be built within the boundaries of a particular locality. In addition, we are subject
to registration and filing requirements in connection with the construction, advertisement, and sale of our communities in certain
states and localities in which we operate. We may also be subject to periodic delays or may be precluded entirely from developing
communities due to building moratoriums that could be implemented in the future in the states in which we operate. Generally,
such moratoriums relate to insufficient water or sewerage facilities or inadequate road capacity.
In addition, some state and local governments in markets where we operate have approved, and others may approve, slow-
growth, or no-growth initiatives that could negatively affect the availability of land and building opportunities within those areas.
Approval of these initiatives could adversely affect our ability to build and sell homes in the affected markets and/or could require
the satisfaction of additional administrative and regulatory requirements, which could result in slowing the progress or increasing
the costs of our homebuilding operations in these markets. Any such delays or costs could have a negative effect on our future
revenues and earnings.
We are also subject to a variety of local, state, and federal laws and regulations concerning protection of health and the
environment. The particular environmental laws which apply to any given community vary greatly according to the community
site, the site’s environmental conditions, and the present and former uses of the site. These environmental laws may result in
delays, may cause us to incur substantial compliance, remediation, and/or other costs; and prohibit or severely restrict development
and homebuilding activity.
Despite our past ability to obtain necessary permits and approvals for our communities, we anticipate that increasingly stringent
requirements will be imposed on developers and homebuilders in the future. Although we cannot predict the effect of these
requirements, they could result in time-consuming and expensive compliance programs and in substantial expenditures, which
could cause delays and increase our cost of operations. In addition, our ability to obtain or renew permits or approvals and the
continued effectiveness of permits already granted or approvals already obtained is dependent upon many factors, some of which
are beyond our control, such as changes in policies, rules, and regulations and their interpretation and application.
Seasonality
The homebuilding industry generally exhibits seasonality. We have historically experienced, and in the future expect to
continue to experience, variability in our operating results and capital needs on a quarterly basis. Although we enter into home
sales contracts throughout the year, a significant portion of our sales activity takes place during the spring and summer, with the
corresponding closings taking place during the fall and winter. Additionally, our capital needs are typically greater during the
spring and summer when we are building homes for delivery later in the year. Accordingly, our revenue may fluctuate significantly
on a quarterly basis, and we must maintain sufficient liquidity to meet short-term operating requirements. As a result of seasonal
variation, our quarterly results of operations and financial position at the end of a particular quarter are not necessarily representative
of the results we expect at year-end.
15
Competition
The homebuilding and land development industry is highly competitive. We compete with numerous large national and
regional homebuilding companies and with smaller local homebuilders and land developers for, among other things, home buyers,
financing, desirable land parcels, raw materials and skilled management and labor resources. We also compete with sales of
existing homes and, to a lesser extent, with the rental housing market. Our homes compete on the basis of design, quality, price
and location. In addition to home sales, we sell lots to third-party homebuilders. We compete for land buyers with other land
owners. Our land holdings compete on the basis of quality, market positioning, location and price.
The homebuilding and land development industry has historically been subject to significant volatility. We may be at a
competitive disadvantage with regard to certain of our national competitors whose operations are more geographically diversified
than ours, as these competitors may be better able to withstand any future regional downturn in the housing market.
We compete directly with a number of large national homebuilders such as D. R. Horton Inc., Pulte Group, Inc., and Lennar
Corporation who are larger than we are and may have greater financial and operational resources than we do. This may give our
competitors an advantage in marketing their products, securing materials and labor at lower prices, purchasing land and allowing
their homes to be delivered to customers more quickly and at more favorable prices. This competition could reduce our market
share and limit our ability to expand our business.
Our Corporate Segment
Our corporate segment includes investments in small businesses, typically venture capital-type situations, which are reported
in this segment until they meet the requirements for separate segment reporting. In addition, the segment includes the results from
a portfolio of equity securities in publicly traded companies, the results of deferred compensation investment assets held in trust
for the benefit of several PICO officers and non-employee directors and the corresponding and offsetting deferred compensation
liabilities, and corporate overhead expenses.
The following are the most significant investments in small businesses that we currently own:
We own common and preferred stock of, and have made a loan to Mindjet Inc. (“Mindjet”), a privately held company located
in San Francisco, California that provides software to help business innovation by providing a framework to build sustainable,
predictable, and repeatable innovation processes. The company markets its products worldwide and has offices in the United
States, Germany, France, Japan, Australia, and the United Kingdom. The investment balances in Mindjet are held at cost and
included in investments in our consolidated financial statements while the outstanding loan balance is included in other assets.
At December 31, 2015, we controlled 19.3% of the voting stock of the company and the carrying value of our total investment in
Mindjet was $2.2 million, comprised of $1.3 million in preferred stock and a loan of $886,000 that we expect to be converted into
additional preferred stock during the first quarter of 2016.
We operate Mendell Energy, LLC (“Mendell”), a wholly owned oil and gas venture which owns and operates oil and gas
leases, primarily located within the Wattenberg Field in Colorado. Currently, we own approximately 780 acres of oil and gas
leases in the Wattenburg Field and have drilled and completed four wells on our leased properties. To date, we have developed
the Wattenburg acreage by constructing additional drill sites and a production facility and we obtained permits for several additional
wells. In addition, we also own 640 acres of oil and gas leases in Wyoming. In November 2013, we entered into an administrative
service agreement with a private company that we pay to assist in the management, operation, direction, and supervision of these
oil and gas operations. At December 31, 2015, we had a net carrying value of approximately $2.5 million in this business venture.
16
We own preferred stock in Synthonics, a preclinical stage biopharmaceutical company focused on the development and
discovery of patentable small molecule drugs that incorporate a metal coordination chemistry. The company targets approved
drugs, advanced clinical candidates or previously studied compounds with pharmacokinetic properties that are believed to limit
the drugs’ clinical safety, tolerability or efficacy and can be improved through metal coordination. Metal coordination entails
attaching a pharmaceutically acceptable metal, such as magnesium, calcium, zinc or bismuth, to an active agent to create a new,
patentable compound. The company believes its approach enables more efficient and less expensive drug discovery and clinical
development than conventional drug research and development approaches. The company intends to license one or more of the
drugs to integrated pharmaceutical companies that would assist in the development of such drugs and assume responsibility for
their approval, marketing and distribution. However, they have not commercialized any products or generated any significant
revenue to date, and expect to incur operating losses into the foreseeable future. Mr. Slepicka, a director of our Company, co-
founded Synthonics and is currently their Chairman, Chief Executive Officer and acting Chief Financial Officer. Mr. Slepicka,
along with the other officers of Synthonics, own the majority of the outstanding stock of Synthonics. At December 31, 2015, we
owned 18.3% of the voting interest of the company. We made our initial investment in Synthonics during 2010 when we purchased
273,229 shares of series D convertible voting preferred stock for $2.1 million. In2013, we invested $110,000 for an additional
15,000 shares of the same series D convertible voting preferred stock. In February 2014, we initiated a $400,000 line of credit to
Synthonics which bore interest at 15% per annum and in May 2014, we increased the line to $450,000. The outstanding balance
of the line of credit and accrued interest was repaid in April 2015. The investment is held at cost and is included in investments
in our consolidated financial statements and the outstanding balance of the line of credit was included in other assets.
It is reasonably possible given the volatile nature of the oil and gas, software, and biopharmaceutical industries that
circumstances may change in the future which could require us to record impairment losses on our investments in small businesses
included in this segment.
Employees
At December 31, 2015, PICO had 220 employees.
Executive Officers
The executive officers of PICO are:
Name
John R. Hart
Maxim C. W. Webb
John T. Perri
Age
56
54
46
President, Chief Executive Officer and Director
Position
Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Vice President, and Chief Accounting Officer
Mr. Hart has served as our President and Chief Executive Officer and as a member of our board of directors since 1996. Mr.
Hart also serves as an officer and/or director of our most significant subsidiaries: Vidler Water Company, Inc. (director since 1995,
chairman since 1997 and chief executive officer since 1998); and UCP, Inc. (since May 2013). From 1997 to 2006, Mr. Hart was
a director of HyperFeed Technologies, Inc., an 80% owned subsidiary which was dissolved in 2009 following bankruptcy
proceedings, where he served as chairman of the nominating committee and as a member of the compensation committee.
Mr. Webb has served as our Chief Financial Officer and Treasurer since May 2001 and as Executive Vice President since
2008. Mr. Webb was appointed as our Secretary in May 2014. Mr. Webb serves as a director of UCP, Inc. (since May 2013) and
as an officer of Vidler Water Company, Inc. (since 2001).
Mr. Perri has served as our Vice President and Chief Accounting Officer since 2010. He has served in various capacities since
joining our company in 1998, including Financial Reporting Manager, Corporate Controller and Vice President, Controller from
2003 to 2010.
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ITEM 1A. RISK FACTORS
The following information sets out factors that could cause our actual results to differ materially from those contained in
forward-looking statements we have made in this Annual Report on Form 10-K and those we may make from time to time. You
should carefully consider the following risks, together with other matters described in this Form 10-K or incorporated herein by
reference in evaluating our business and prospects. If any of the following risks occurs, our business, financial condition or
operating results could be harmed. In such case, the trading price of our securities could decline, in some cases significantly.
General economic conditions could have a material adverse effect on our financial results, financial condition and the
demand for and the fair value of our assets.
All of our businesses are sensitive to general economic conditions, whether internationally, nationally, or locally. General
poor economic conditions and the resulting effect of non-existent or slow rates of growth in the markets in which we operate could
have a material adverse effect on the demand for both our real estate and water assets. These poor economic conditions include
higher unemployment, inflation, deflation, decreases in consumer demand, changes in buying patterns, a weakened dollar, higher
consumer debt levels, and higher tax rates and other changes in tax laws or other economic factors that may affect commercial
and residential real estate development.
Specifically, high national or regional unemployment may arrest or delay any significant recovery of the residential real estate
markets in which we operate, which could adversely affect the demand for our real estate and water assets. Any prolonged lack
of demand for our real estate and water assets could have a significant adverse effect on our revenues, results of operations, cash
flows, and the return on our investment from these assets.
Our future revenue is uncertain and depends on a number of factors that may make our revenue, profitability, cash flows,
and the fair value of our assets volatile.
Our future revenue and profitability related to our water resource and water storage operations will primarily be dependent
on our ability to develop and sell or lease water assets. In light of the fact that our water resource and water storage operations
represent a large percentage of our overall business at present, our long-term profitability and the fair value of the assets related
to our water resource and water storage operations will be affected by various factors, including the drought in the southwest,
regulatory approvals and permits associated with such assets, transportation arrangements, and changing technology. We may
also encounter unforeseen technical or other difficulties which could result in cost increases with respect to our water resource
and water storage development projects. Moreover, our profitability and the fair value of the assets related to our water resource
and water storage operations is significantly affected by changes in the market price of water. Future sales and prices of water
may fluctuate widely as demand is affected by climatic, economic, demographic and technological factors as well as the relative
strength of the residential, commercial, financial, and industrial real estate markets. Additionally, to the extent that we possess
junior or conditional water rights, during extreme climatic conditions, such as periods of low flow or drought, our water rights
could be subordinated to superior water rights holders. The factors described above are not within our control.
Our future revenue, growth, and the demand for and the fair value of our assets related to our land development and
homebuilding activities depends, in part, upon our ability to successfully identify and acquire attractive land parcels for development
of single-family homes at reasonable prices. Our ability to acquire land parcels for new single-family homes may be adversely
affected by changes in the general availability of land parcels, the willingness of land sellers to sell land prices at reasonable prices,
competition for available land parcels, availability of financing to acquire land parcels, zoning and other market conditions. If
the supply of land parcels appropriate for development of single-family homes is limited because of these factors, or for any other
reason, our ability to grow and increase the fair value of our assets related to our land development and homebuilding business
could be significantly limited, and our land development and homebuilding revenue and gross margin could remain static or decline
and it could adversely affect the return on our investment from these assets.
One or more of the above factors in one or more of our operating segments could impact our revenue and profitability,
negatively affect our financial condition and cash flows, cause our results of operations to be volatile, and could negatively impact
our rate of return on our real estate and water assets and cause us to divest such assets for less than our intended return on our
investment.
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A downturn in the recent improvement that the homebuilding and land development industry has experienced would
materially adversely affect our business, results of operations, and the demand for and the fair value of our assets.
The homebuilding industry experienced a significant and sustained downturn in recent years having been impacted by factors
that include, but are not limited to, weak general economic and employment growth, a lack of consumer confidence, large supplies
of resale and foreclosed homes, a significant number of homeowners whose outstanding principal balance on their mortgage loan
exceeds the market value of their home and tight lending standards and practices for mortgage loans that limit consumers’ ability
to qualify for mortgage financing to purchase a home. These factors resulted in an industry-wide weakness in demand for new
homes and caused a material adverse effect on the growth of the local economies and the homebuilding industry in the southwestern
United States (“U.S.”) markets where a substantial amount of our real estate and water assets are located, including the states of
Nevada, Arizona, California, Colorado, and New Mexico. However, in 2012, we noted a significant improvement in the housing
market which led to increased levels of real estate development activity. The continuation of the recent improvement in residential
and commercial real estate development process and activity is essential for our ability to generate operating income in our water
resource and water storage, and land development and homebuilding businesses. We are unable to predict whether and to what
extent this recovery will continue or its timing. Any future slow-down in real estate and homebuilding activity could adversely
impact various development projects within the markets in which our real estate and water assets are located and this could
materially affect the demand for and the fair value of these assets and our ability to monetize these assets. Declines and weak
conditions in the U.S. housing market have reduced our revenues and created losses in our water resource and water storage, and
land development and homebuilding businesses in prior years and could do so in the future.
We may not be able to realize the anticipated value of our real estate and water assets in our projected time frame, if at
all.
We expect that the current rate of growth of the economy will continue to have an impact on real estate market fundamentals.
Depending on how markets perform both in the short and long-term, the state of the economy, both nationally and locally in the
markets where our assets are concentrated, could result in a decline in the value of our existing real estate and water assets, or
result in our having to retain such assets for longer than we initially expected, which would negatively impact our rate of return
on our real estate and water assets, cause us to divest such assets for less than our intended return on investment, or cause us to
incur impairments on the book values of such assets to estimated fair value. Such events would adversely impact our financial
condition, results of operations and cash flows.
The fair values of our real estate and water assets are linked to growth factors concerning the local markets in which our
assets are concentrated and may be impacted by broader economic issues.
Both the demand and fair value of our real estate and water assets are significantly affected by the growth in population and
the general state of the local economies where our real estate and water assets are located. These local economies may be affected
by factors such as the local level of employment and the availability of financing and interest rates, where (1) our real estate and
water assets are located, primarily in Arizona and northern Nevada, but also in Colorado and New Mexico and (2) our land
development and homebuilding assets are located, primarily in California and also Washington, North Carolina, South Carolina
and Tennessee. The unemployment rate in these states, as well as issues related to the credit markets, may prolong a slowdown
of the local economies where our real estate and water assets are located. This could materially and adversely affect the demand
for and the fair value of our real estate and water assets and, consequently, adversely affect our growth and revenues, results of
operations, cash flows and the return on our investment from these assets.
The fair values of our real estate and water assets may decrease which could adversely affect our results of operations by
impairments and write-downs.
The fair value of our water resource and water storage assets and our land and homebuilding assets depends on market
conditions. We acquire water resources and land for expansion into new markets and for replacement of inventory and expansion
within our current markets. The valuation of real estate and water assets is inherently subjective and based on the individual
characteristics of each asset. Factors such as changes in regulatory requirements and applicable laws, political conditions, the
condition of financial markets, local and national economic conditions, the financial condition of customers, potentially adverse
tax consequences, and interest and inflation rate fluctuations subject valuations to uncertainties. In addition, our valuations are
made on the basis of assumptions that may not prove to reflect economic or demographic reality. If population growth and, as a
result, water and/or housing demand in our markets fails to meet our expectations when we acquired our real estate and water
assets, our profitability may be adversely affected and we may not be able to recover our costs when we sell our real estate and
water assets. We regularly review the value of our real estate and water assets. These reviews have resulted in significant
impairments to our water resource assets and /or land development assets. Such impairments have adversely affected our results
of operations and our financial condition in those years.
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If future market conditions adversely impact the anticipated timing of and amount of sales of our real estate and water assets
we may be required to record further significant impairments to the carrying value of our real estate and water assets which would
adversely affect our results of operations and our financial condition.
Our water resource and water storage operations are concentrated in a limited number of assets, making our profitability
and the fair value of those assets vulnerable to conditions and fluctuations in a limited number of local economies.
We anticipate that a significant amount of our water resource and water storage segment revenue, results of operations and
cash flows will come from a limited number of assets, which primarily consist of our water resources in Nevada and Arizona and
our water storage operations in Arizona. Water resources in this region are scarce and we may not be successful in continuing to
develop additional water assets. If we are unable to develop additional water assets, our revenues will be derived from a limited
number of assets, primarily located in Arizona and Nevada. Our two most significant assets are our water storage operations in
Arizona and our water resources to serve the northern valleys of Reno, Nevada. As a result of this concentration, our invested
capital and results of operations will be vulnerable to the conditions and fluctuations in these local economies and potentially to
changes in local government regulations.
Our Arizona Recharge Facility is one of the few private sector water storage sites in Arizona. We have approximately 251,000
acre-feet of water stored at the facility. In addition, we have approximately 157,000 acre-feet of water stored in the Phoenix Active
Management Area. We have not stored any water on behalf of any customers and have not generated any material revenue from
the recharge facility or from the water stored in the Phoenix Active Management Area. We believe that the best economic return
on the assets arises from storing water when surplus water is available and selling this water in periods when water is in more
limited supply. However, we cannot be certain that we will ultimately be able to sell the stored water at a price sufficient to provide
an adequate economic profit, if at all.
We constructed a pipeline approximately 35 miles long to deliver water from Fish Springs Ranch to the northern valleys of
Reno, Nevada. As of December 31, 2015, the total cost of the pipeline project, including our water credits, (net of impairment
losses incurred to date) carried on our balance sheet is approximately $83.9 million. To date, we have sold only a small amount
of the water credits and we cannot provide any assurance that the sales prices we may obtain in the future will provide an adequate
economic return, if at all. Furthermore, we believe the principal buyers of this water are likely real estate developers who are
contending with the effects of the current weak demand that exists for new homes and residential development in this area. Any
prolonged weak demand for new homes and residential development, and, as a result, for our assets in Nevada and Arizona, would
have a material adverse effect on our future revenues, results of operations, cash flows, and the return on our investment from
those assets.
We are subject to laws and regulations, which may increase our costs, result in liabilities, limit the areas in which we can
build homes and delay completion of our projects.
Our real estate operations are subject to a variety of local, state, federal and other laws, statutes, ordinances, rules and regulations
concerning the environment, hazardous materials, the discharge of pollutants and human health and safety. The particular
environmental requirements which apply to any given project site vary according to multiple factors, including the site’s location,
its environmental conditions, the current and former uses of the site, the presence or absence of state- or federal-listed endangered
or threatened plants or animals or sensitive habitats, and conditions at nearby properties. We may not identify all of these concerns
during any pre-acquisition or pre-development review of project sites. Environmental requirements and conditions may result in
delays, may cause us to incur substantial compliance and other costs, and can prohibit or severely restrict development and
homebuilding activity in environmentally sensitive regions or in areas contaminated by others before we commence development.
We are also subject to third-party challenges, such as by environmental groups or neighborhood associations, under environmental
laws and regulations governing the permits and other approvals for our real estate projects and operations. Sometimes regulators
from different governmental agencies do not concur on development, remedial standards or property use restrictions for a project,
and the resulting delays or additional costs can be material for a given project.
In addition, in cases where a state-listed or federally-listed endangered or threatened species is involved and related agency
rule-making and litigation are ongoing, the outcome of such rule-making and litigation can be unpredictable and can result in
unplanned or unforeseeable restrictions on, or the prohibition of, development and building activity in identified environmentally
sensitive areas.
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Our real estate operations are also subject to numerous other laws and regulations that affect the land development and
homebuilding process, including laws and regulations related to zoning, permitted land uses, levels of density, building design,
water and waste disposal and use of open spaces. We are typically required to obtain permits, entitlements and approvals from
local authorities to start and carry out residential development or home construction. Such permits, entitlements and approvals
may, from time-to-time, be opposed or challenged by local governments or other interested parties, adding delays, costs and risks
of non-approval to the process. Our obligation to comply with the laws and regulations under which we operate, and our need to
ensure that our subcontractors and other agents comply with these laws and regulations may result in delays in construction and
land development and may also cause us to incur substantial additional and unbudgeted costs.
We will face significant competition in marketing and selling new homes.
We have entered the homebuilding business by constructing, marketing and selling single-family homes on certain of our
finished residential lots that we own in California, Washington, North Carolina, South Carolina and Tennessee. We aim to build
homes only in those markets where we have identified that a sufficient demand exists for new homes. However, the homebuilding
industry is highly competitive and we will be competing with a number of national and local homebuilders in selling homes to
satisfy expected demand. These competitors, especially the national homebuilders, have greater resources and experience in this
industry than we have. Such competition could result in lower than anticipated sales volumes and/or profit margins that are below
our expectations. In addition, we will have to compete with the resale of existing homes, including foreclosed homes, which could
also negatively affect the number and price of homes we are able to sell and the time our homes remain on the market.
We use leverage to finance a portion of the cost to acquire our land development assets and to construct homes.
We currently use, and expect to continue to use, debt to finance a portion of the cost of constructing our homes and acquiring
and developing our lots. Such indebtedness is primarily comprised of project-level secured acquisition, development and
construction loans, with recourse limited to the securing collateral.
Incurring debt could subject us to many risks that, if realized, would adversely affect us, including the risk that:
•
•
our cash flow from our land development and homebuilding operations may be insufficient to make required payments
of principal of and interest on the debt which is likely to result in acceleration of the maturity of such debt;
our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment
yields will increase with higher financing cost;
• we may be required to dedicate a portion of our cash flow from our land development and homebuilding operations
to payments on our debt, thereby reducing funds available for the operations and capital expenditures; and
the terms of any refinancing may not be as favorable as the terms of the debt being refinanced.
•
If we do not have sufficient funds to repay our debt at maturity, it may be necessary to refinance the debt through additional
debt or additional equity financings which could dilute our interest in our land development and homebuilding business. If, at the
time of any refinancing, prevailing interest rates or other factors result in higher interest rates on refinancing, increases in interest
expense could adversely affect our cash flows and results of operations. If we are unable to refinance our debt on acceptable
terms, we may be forced to dispose of our land development and housing assets on disadvantageous terms, potentially resulting
in losses. To the extent we cannot meet any future debt service obligations, we will risk losing some or all of our assets that may
be pledged to secure our obligations to foreclosure. Defaults under our debt agreements used to finance a portion of the cost of
constructing homes and acquiring and developing lots could have a material adverse effect on our land development and
homebuilding business, prospects, liquidity, financial condition, results of operations, and the return on our investment from those
assets.
We may be subject to significant warranty, construction defect and liability claims in the ordinary course of our
homebuilding business.
As a homebuilder, we may be subject to home warranty and construction defect claims arising in the ordinary course of
business. We may also be subject to liability claims for injuries that occur in the course of construction activities. Due to the
inherent uncertainties in such claims, we cannot provide assurance that our insurance coverage or our subcontractors’ insurance
and financial resources will be sufficient to meet any warranty, construction defect and liability claims we may receive in the
future. If we are subject to claims beyond our insurance coverage, our profit from our homebuilding activities may be less than
we expect and our financial condition and the return on our investment from those assets may be adversely affected.
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We will be relying on the performance of our subcontractors to build horizontal infrastructure and homes according to
our budget, timetable and quality.
We rely on subcontractors to perform the actual construction of horizontal infrastructure (in the cases where we are completing
the development of entitled lots to finished lots) and of the homes we are building on certain of our finished lots. In certain cases,
we will also rely on the subcontractor to select and obtain raw materials. Our subcontractors may fail to meet either our quality
control or be unable to build and complete the horizontal infrastructure or homes in the expected timetable due to subcontractor
related issues such as being unable to obtain sufficient materials or skilled labor, or due to external factors such as delays arising
from severe weather conditions.
Any such failure by our subcontractors could lead to increases in construction costs and construction delays. Such increases
could negatively impact the price and number of finished lots and homes we are able to sell.
Our homebuilding operations may be adversely impacted by the availability of and the demand for mortgage financing
and any changes to the tax benefits associated with owning a home.
To successfully market and sell the homes we construct depends on the ability of home buyers to obtain mortgage financing
for the purchase of these new homes. Current credit requirements for mortgage financing are significantly greater than in the past
which makes it more difficult for a potential home buyer to obtain mortgage financing. In addition, any significant increase in
interest rates from current rates may also lead to increased mortgage finance costs leading to a decline in demand and availability
of mortgage financing. Any decline in the availability of mortgage financing may lead to a reduced demand for the homes we
have already constructed, or intend to construct. Furthermore, the demand for homes in general, and the homes we intend to
construct, may be affected by changes in federal and state income tax laws. Current federal, and many state, tax laws allow the
deduction of, among other homeowner expenses, mortgage interest and property taxes against an individual’s taxable income.
Any changes to the current tax laws which reduce or eliminate these deductions, or reduce or eliminate the exclusion of taxable
gain from the sale of a principal residence, would likely lead to a greatly reduced demand for homes. This would lead to a materially
adverse impact on the homebuilding business, and the fair value of those assets in general, and our revenues, cash flows, financial
condition, and the return on our investment from those assets specifically.
UCP has substantial indebtedness, which may exacerbate the adverse effect of any declines in UCP’s business, industry or
the general economy and exposes UCP to the risk of default. UCP may be unable to service their indebtedness.
As of December 31, 2015, UCP had approximately $157.5 million of outstanding debt. UCP’s substantial outstanding
indebtedness, and the limitations imposed on UCP by the instruments and agreements governing its outstanding indebtedness,
could have significant adverse consequences, including the following:
• UCP’s cash flow may be insufficient to meet its required principal and interest payments;
• UCP may use a substantial portion of their cash flows to make principal and interest payments and UCP may be unable
to obtain additional financing as needed or on favorable terms, which could, among other things, have a material adverse
effect on their ability to complete our development pipeline, capitalize upon emerging acquisition opportunities, fund
working capital or capital expenditures, or meet their other business needs;
• UCP may be unable to refinance its indebtedness at maturity or the refinancing terms may be less favorable than the
terms of their original indebtedness;
• UCP may be forced to dispose of one or more of their properties, possibly on unfavorable terms or in violation of
certain covenants to which UCP may be subject;
• UCP may be required to maintain certain debt and coverage and other financial ratios at specified levels, which may
limit their ability to obtain additional financing in the future, thereby reducing their financial flexibility to react to
changes in their business;
• UCP’s vulnerability to general adverse economic and industry conditions may be increased;
•
approximately $75.2 million of UCP’s indebtedness bears interest at variable rates, which exposes it to increased interest
expense in a rising interest rate environment;
• UCP may be at a competitive disadvantage relative to its competitors that have less indebtedness;
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• UCP’s flexibility in planning for, or reacting to, changes in their business and the markets in which UCP operates may
be limited; and
• UCP may default on its indebtedness by failure to make required payments or to comply with certain covenants, which
could result in an event of default entitling a creditor to declare all amounts owed to it to be due and payable, and
possibly entitling other creditors (due to cross-default or cross-acceleration provisions) to accelerate the maturity of
amounts owed to such other creditors or, if such indebtedness is secured, to foreclose on UCP’s assets that secure such
obligation.
The occurrence of any one of these events could have a material adverse effect on our financial condition, liquidity, results
of operations and/or business.
We may suffer uninsured losses or suffer material losses in excess of insurance limits.
We could suffer physical damage to any of our assets at one or more of our different businesses and liabilities resulting in
losses that may not be fully recoverable by insurance. In addition, certain types of risks, such as personal injury claims, may be,
or may become in the future, either uninsurable or not economically insurable, or may not be currently or in the future covered
by our insurance policies or otherwise be subject to significant deductibles or limits. Should an uninsured loss or a loss in excess
of insured limits occur or be subject to deductibles, we could sustain financial loss or lose capital invested in the affected asset(s)
as well as anticipated future income from that asset. In addition, we could be liable to repair damage or meet liabilities caused
by risks that are uninsured or subject to deductibles.
We may not receive all of the permitted water rights we expect from the water rights applications we have filed in Nevada
and New Mexico.
We have filed certain water rights applications in Nevada and New Mexico. In Nevada this is primarily as part of the water
teaming agreement with Lincoln County. We deploy the capital required to enable the filed applications to be converted into
permitted water rights over time as and when we deem appropriate or as otherwise required. We only expend capital in those
areas where our initial investigations lead us to believe that we can obtain a sufficient volume of water to provide an adequate
economic return on the capital employed in the project. These capital expenditures largely consist of drilling and engineering
costs for water production, costs of monitoring wells, legal and consulting costs for hearings with the State Engineer, and NEPA
compliance costs. Until the State Engineer in the relevant state permits the water rights we are applying for, we cannot provide
any assurance that we will be awarded all of the water that we expect based on the results of our drilling and our legal position
and it may be a considerable period of time before we are able to ascertain the final volume of water rights, if any, that will be
permitted by the State Engineers. Any significant reduction in the volume of water awarded to us from our original base expectation
of the amount of water that may be permitted may result in the write down of capitalized costs which could adversely affect the
return on our investment from those assets, our revenues, results of operations, and cash flows.
Variances in physical availability of water, along with environmental and legal restrictions and legal impediments, could
impact profitability.
We value our water assets, in part, based upon the volume (as measured in acre-feet) of water we anticipate from water rights
applications and our permitted water rights. The water and water rights held by us and the transferability of these rights to other
uses, persons, and places of use are governed by the laws concerning water rights in the states of Arizona, Colorado, Nevada, and
New Mexico. The volumes of water actually derived from the water rights applications or permitted rights may vary considerably
based upon physical availability and may be further limited by applicable legal restrictions.
As a result, the volume of water anticipated from the water rights applications or permitted rights may not in every case
represent a reliable, firm annual yield of water, but in some cases describe the face amount of the water right claims or management’s
best estimate of such entitlement. Additionally, we may face legal restrictions on the sale or transfer of some of our water assets,
which may affect their commercial value. If the volume of water yielded from our water rights applications is less than our
expectations, or we are unable to transfer or sell our water assets, we may lose some or all of our anticipated returns, which may
adversely affect our revenues, profitability and cash flows.
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Purchasers of our real estate and water assets may default on their obligations to us and adversely affect our results of
operations and cash flow.
In certain circumstances, we finance sales of real estate and water assets, and we secure such financing through deeds of trust
on the property, which are only released once the financing has been fully paid off. Purchasers of our real estate and water assets
may default on their financing obligations. Such defaults may have an adverse effect on our business, financial condition, and
the results of operations and cash flows.
Our sale of water assets may be subject to environmental regulations which would impact our revenues, profitability, and
cash flows.
The quality of the water assets we lease or sell may be subject to regulation by the United States Environmental Protection
Agency acting pursuant to the United States Safe Drinking Water Act. While environmental regulations do not directly affect us,
the regulations regarding the quality of water distributed affects our intended customers and may, therefore, depending on the
quality of our water, impact the price and terms upon which we may in the future sell our water assets. If we need to reduce the
price of our water assets in order to make a sale to our intended customers, our balance sheet, return on investment, results of
operations and financial condition could suffer.
Our water asset sales may meet with political opposition in certain locations, thereby limiting our growth in these areas.
The water assets we hold and the transferability of these assets and rights to other uses, persons, or places of use are governed
by the laws concerning water rights in the states of Arizona, Nevada, Colorado and New Mexico. Our sale of water assets is
subject to the risks of delay associated with receiving all necessary regulatory approvals and permits. Additionally, the transfer
of water resources from one use to another may affect the economic base or impact other issues of a community including
development, and will, in some instances, be met with local opposition. Moreover, municipalities who will likely regulate the use
of any water we might sell to them in order to manage growth, could create additional requirements that we must satisfy to sell
and convey water assets.
If we are unable to effectively transfer, sell and convey water resources, our ability to monetize these assets will suffer and
our return on investment, revenues and financial condition would decline.
If our businesses or investments otherwise fail or decline in value, our financial condition and the return on our investment
could suffer.
Historically, we have acquired and invested in businesses and assets that we believed were undervalued or that would benefit
from additional capital, restructuring of operations, strategic initiatives, or improved competitiveness through operational
efficiencies. If any previously acquired business, investment or asset fails or its fair value declines, we could experience a material
adverse effect on our business, financial condition, the results of operations and cash flows. If we are not successful managing
our previous acquisitions and investments, our business, financial condition, results of operations and cash flows could be materially
affected. Such business failures, declines in fair values, and/or failure to manage acquisitions or investments, could result in a
negative return on equity. We could also lose part or all of our capital in these businesses and experience reductions in our net
income, cash flows, assets and equity.
Future dispositions of our businesses, assets, operations and investments, if unsuccessful, could reduce the value of our
common shares. Any future dispositions may result in significant changes in the composition of our assets and liabilities.
Consequently, our financial condition, results of operations and the trading price of our common shares may be affected by factors
different from those historically affecting our financial condition, results of operations and trading price at the present time.
We may need additional capital in the future to fund our business and financing may not be available on favorable terms,
if at all, or without dilution to our shareholders.
We currently anticipate that our available capital resources and operating cash flows will be sufficient to meet our expected
working capital and capital expenditure requirements for at least the next 12 months. However, we cannot provide any assurance
that such resources will be sufficient to fund our business. We may raise additional funds through public or private debt, equity
or hybrid securities financings, including, without limitation, through the issuance of securities. We currently have an effective
shelf registration statement which allows us to sell up to $400 million of a variety of securities in one or more offerings in the
public markets.
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We may experience difficulty in raising necessary capital in view of the recent volatility in the capital markets and increases
in the cost of finance. Increasingly stringent rating standards could make it more difficult for us to obtain financing. If we raise
additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders could
be significantly diluted, and these newly issued securities may have rights, preferences or privileges senior to those of existing
shareholders. Indebtedness would result in increased debt service obligations and could result in operating and financing covenants
that would restrict our operations. The additional financing we may need may not be available to us, or on favorable terms. If
adequate funds are not available or are not available on acceptable terms, if and when needed, our ability to fund our operations
or otherwise execute our strategic plan would be significantly limited. In any such case, our business, operating results or financial
condition could be materially adversely affected.
Our ability to utilize net operating loss carryforwards and certain other tax attributes may be limited.
Under Section 382 of the Internal Revenue Code of 1986, as amended, if our Company undergoes an “ownership
change” (generally defined as a greater than 50% change (by value) in our equity ownership over a three year period), the ability
to use our pre-change net operating loss carryforwards and other pre-change tax attributes to offset our post-change income may
be limited. We may experience ownership changes in the future as a result of shifts in our stock ownership. As of December 31,
2015, we had federal and state net operating loss carryforwards of approximately $134.5 million and $186.3 million, respectively,
which, depending on our value at the time of any ownership changes, could be limited.
We may not be able to retain key management personnel we need to succeed, which could adversely affect our ability to
successfully operate our businesses.
To run our day-to-day operations and to successfully manage our businesses we must, among other things, continue to attract
and retain key management. We rely on the services of a small team of key executive officers. If they depart, it could have a
significant adverse effect upon our business. Mr. Hart, our CEO, is key to the implementation of our strategic focus, and our
ability to successfully execute our current strategy is dependent upon our ability to retain his services. Also, increased competition
for skilled management and staff employees in our businesses could cause us to experience significant increases in operating costs
and reduced profitability.
Because our operations are diverse, analysts and investors may not be able to evaluate us adequately, which may negatively
influence the price of our stock.
We are a diversified holding company with significant operations in different business segments. We own businesses that are
unique, complex in nature, and difficult to understand. In particular, the water resource business is a developing industry in the
United States with very little historical and comparable data, very complex valuation issues and a limited following of analysts.
Because we are complex, analysts and investors may not be able to adequately evaluate our operations and enterprise as a going
concern. This could cause analysts and investors to make inaccurate evaluations of our stock, or to overlook PICO in general. As
a result, the trading volume and price of our stock could suffer and may be subject to excessive volatility.
Fluctuations in the market price of our common stock may affect your ability to sell your shares.
The trading price of our common stock has historically been, and we expect will continue to be, subject to fluctuations. The
market price of our common stock may be significantly impacted by:
•
•
•
•
•
•
•
quarterly variations in financial performance and condition of our various businesses;
shortfalls in revenue or earnings from estimates forecast by securities analysts or others;
changes in estimates by such analysts;
the ability to monetize our assets, including assets related to our water resource and real estate businesses, for an
adequate economic return;
our competitors’ announcements of extraordinary events such as acquisitions;
litigation; and
general economic conditions and other matters described herein.
25
Our results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and our future results
of operations could fluctuate significantly from quarter to quarter and from year to year. Causes of such fluctuations may include
the inclusion or exclusion of operating earnings from sold operations, one time transactions, and impairment losses. Statements
or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the markets in which
we do business or relating to us specifically could result in an immediate and adverse effect on the market price of our common
stock. Such fluctuations in the market price of our common stock could affect the value of your investment and your ability to
sell your shares.
Litigation may harm our business or otherwise distract our management.
Substantial, complex or extended litigation could cause us to incur large expenditures and distract our management. For
example, lawsuits by employees, shareholders or customers could be very costly and substantially disrupt our business.
Additionally, from time to time we or our subsidiaries will have disputes with companies or individuals which may result in
litigation that could necessitate our management’s attention and require us to expend our resources. We may be unable to accurately
assess our level of exposure to specific litigation and we cannot provide any assurance that we will always be able to resolve such
disputes out of court or on terms favorable to us. We may be forced to resolve litigation in a manner not favorable to us, and such
resolution could have a material adverse impact on our consolidated financial condition or results of operations.
We are the subject of stockholder activism efforts that could cause a material disruption to our business.
Certain investors have taken steps to involve themselves in the governance and strategic direction of our company due to
governance and strategic-related disagreements with us. For example, Leder Holdings, LLC, and other affiliated entities controlled
by Sean M. Leder, have sought to solicit shareholder consents to call a special meeting of our shareholders to, among other things,
remove four of our current directors. In addition, we have received communications from other investors, including Central Square
Management LLC, regarding the governance and strategic direction of our company. Such stockholder activism efforts could
result in substantial costs and a further diversion of management’s attention and resources, which could harm our business and
adversely affect the market price of our common stock.
Our governing documents could prevent an acquisition of our company or limit the price that investors might be willing
to pay for our common stock.
Certain provisions of our articles of incorporation and the California General Corporation Law could discourage a third party
from acquiring, or make it more difficult for a third party to acquire, control of our company without approval of our board of
directors. For example, our bylaws require advance notice for stockholder proposals and nominations for election to our board
of directors. We are also subject to the provisions of Section 1203 of the California General Corporation Law, which requires a
fairness opinion to be provided to our shareholders in connection with their consideration of any proposed “interested party”
reorganization transaction. All or any of these factors could limit the price that certain investors might be willing to pay in the
future for shares of our common stock.
If equity analysts do not publish research or reports about our business or if they issue unfavorable commentary or
downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts publish
about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity analysts
downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
26
Our business could be negatively impacted by cyber security threats.
In the ordinary course of our business, we use our data centers and our networks to store and access our proprietary business
information. We face various cyber security threats, including cyber security attacks to our information technology infrastructure
and attempts by others to gain access to our proprietary or sensitive information. The procedures and controls we use to monitor
these threats and mitigate our exposure may not be sufficient to prevent cyber security incidents. The result of these incidents
could include disrupted operations, lost opportunities, misstated financial data, liability for stolen assets or information, increased
costs arising from the implementation of additional security protective measures, litigation and reputational damage. Any remedial
costs or other liabilities related to cyber security incidents may not be fully insured or indemnified by other means.
THE FOREGOING FACTORS, INDIVIDUALLY OR IN AGGREGATE, COULD MATERIALLY ADVERSELY AFFECT OUR
OPERATING RESULTS AND CASH FLOWS AND FINANCIAL CONDITION AND COULD MAKE COMPARISON OF
HISTORIC FINANCIAL STATEMENTS, INCLUDING RESULTS OF OPERATIONS AND CASH FLOWS AND BALANCES,
DIFFICULT OR NOT MEANINGFUL.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We lease office space in La Jolla, California for our principal executive offices. Our water resource and water storage operations
lease office space in Carson City, Nevada. Our real estate operations lease office space in San Jose, California; Fresno, California;
Valencia, California, and Bellevue, Washington; Charlotte and Raleigh, North Carolina; Myrtle Beach, South Carolina; and
Nashville, Tennessee. Our discontinued agribusiness operations lease office space in Fargo, North Dakota. We continually evaluate
our current and future space capacity in relation to our business needs. We believe that our existing facilities are suitable and
adequate to meet our current business requirements and that suitable replacement and additional space will be available in the
future on commercially reasonable terms.
We have significant holdings of real estate and water assets in the southwestern United States. For a description of our real
estate and water assets, see “Item 1 - Operating Segments and Major Subsidiary Companies.”
ITEM 3. LEGAL PROCEEDINGS
Neither we nor our subsidiaries are parties to any potentially material pending legal proceedings other than the following.
We are subject to various other litigation matters that arise 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 effect on our
consolidated financial position, results of operations, or cash flows. Because litigation is inherently unpredictable and unfavorable
resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating
contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of
the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information
important to the matters. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated or unrelated
to possible outcomes, and as such are not meaningful indicators of our potential liability. We regularly review contingencies to
determine the adequacy of our accruals and related disclosures. The amount of ultimate loss may differ from these estimates, and
it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable
resolution of one or more of these contingencies. Whether any losses finally determined in any claim, action, investigation or
proceeding could reasonably have a material effect on our business, financial condition, results of operations or cash flows will
depend on a number of variables, including: the timing and amount of such losses; the structure and type of any remedies; the
significance of the impact any such losses, damages or remedies may have on our consolidated financial statements; and the unique
facts and circumstances of the particular matter that may give rise to additional factors.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
27
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ Global Select Market under the symbol “PICO.” The following table sets out
the quarterly high and low sales prices for the past two years as reported on the NASDAQ Global Select Market. These reported
prices reflect inter-dealer prices, without adjustments for retail markups, markdowns, or commissions.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
2014
High
Low
High
Low
$
$
$
$
19.04
19.20
14.88
11.27
$
$
$
$
14.97
14.61
9.68
8.95
$
$
$
$
26.36
26.18
24.45
22.48
$
$
$
$
22.80
22.05
19.72
16.83
On March 7, 2016, the closing sale price of our common stock was $9.51 and there were approximately 424 holders of record.
We have not declared or paid any dividends during the last two years. Any future decision to pay dividends on our common
stock will be at the discretion of our board of directors and will depend upon, among other factors, our ability to monetize assets,
our results of operations, financial condition, capital requirements, and other factors our board of directors may deem relevant.
The indentures under which UCP’s 8.5% notes payable due 2017 were issued contain certain restrictive covenants, including
limitations on payment of dividends by UCP. UCP has not declared or paid any dividends since its IPO, and do not expect to pay
any dividends in the foreseeable future.
Company Stock Performance Graph
This graph compares the total return on an indexed basis of a $100 investment in PICO common stock, the Standard &
Poor’s 500 Index, and the Russell 2000 Index. The measurement points utilized in the graph consist of the last trading day in
each calendar year, which closely approximates the last day of our fiscal year in that calendar year.
Comparison 5-Year Cumulative Total Return
Among PICO Holdings, Inc., the S&P 500 Index, and the Russell 2000 Index
170.00
160.00
150.00
140.00
130.00
120.00
110.00
100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
PICO Holdings
Russell 2000 Index
S&P 500 Index
Assumes $100 invested on Jan. 1, 2011
Fiscal Year Ending Dec. 31, 2015
The stock price performance shown on the graph is not necessarily indicative of future price performance.
28
ISSUER PURCHASES OF EQUITY SECURITIES
Total number of
shares purchased
—
Average Price Paid
per Share
—
Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
—
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units) that
May Yet Be
Purchased Under the
Plans or Programs
—
—
—
—
—
—
—
—
—
Period
10/1/2015 - 10/31/15
11/1/2015 - 11/30/15
12/1/2015 - 12/31/15
29
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected consolidated financial data. The information set forth below is not necessarily
indicative of the results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes thereto included
elsewhere in this document.
2015
Year Ended December 31,
2013
2012
2014
2011
Operating Results
Revenues and other income:
(In thousands, except per share data)
Sale of real estate and water assets
$ 282,681
$ 192,368
$ 116,776
$
59,020
$
55,679
Sale of software
Impairment loss on investment in unconsolidated
affiliate
Other income
13,649
(20,696)
4,678
(1,078)
1,198
29,756
5,756
9,151
Total revenues and other income
$ 266,663
$ 192,488
$ 160,181
$
64,776
$
64,830
Loss from continuing operations
Net loss from discontinued operations, net of tax
Net (income) loss attributable to noncontrolling interests
Net loss attributable to PICO Holdings, Inc.
$ (31,611) $ (45,531) $
(5,929) $ (15,855) $ (56,677)
(15,797)
(23,265)
6,875
(4,740)
2,579
6,896
$ (81,858) $ (52,425) $ (22,298) $ (29,073) $ (54,542)
(49,268)
(979)
(14,074)
7,180
Net loss per common share – basic and diluted:
Loss from continuing operations
Income (loss) from discontinued operations
Net loss per common share – basic and diluted
$
$
$
(1.49) $
(2.07) $
(3.56) $
(1.76) $
(0.54) $
(2.30) $
(0.09) $
(0.89) $
(0.98) $
(0.66) $
(0.62) $
(1.28) $
Weighted average shares outstanding – basic and diluted
23,014
22,802
22,742
22,755
(2.74)
0.33
(2.41)
22,670
Financial Condition
Total assets (1)
Debt (1)
Net assets of discontinued operations
Total liabilities (1)
Total PICO Holdings, Inc. shareholders’ equity
Book value per share (2)
(1) Excludes balances classified as discontinued operations.
2015
2014
As of December 31,
2013
2012
2011
(In thousands, except per share data)
$ 654,816
$ 651,890
$ 607,547
$ 501,213
$ 488,353
$ 157,490
$ 135,451
$
8,185
$
57,966
$
$
48,325
61,045
$ 228,997
$ 198,311
$ 103,747
$
$
$
46,508
$
47,431
66,117
$ 114,038
88,834
$
92,729
$ 346,412
$ 425,481
$ 472,889
$ 473,225
$ 501,812
$
15.04
$
18.50
$
20.79
$
20.82
$
22.10
(2) Book value per share is computed by dividing total PICO Holdings, Inc. shareholders’ equity by the net of total shares issued
less shares held as treasury shares.
30
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is
intended to help the reader understand our Company. The MD&A should be read in conjunction with our consolidated financial
statements and the accompanying notes, presented later in this Annual Report on Form 10-K. The MD&A includes the following
sections:
• Company Summary, Recent Developments, and Future Outlook — a brief description of our operations, the critical factors
affecting them, and their future prospects;
• Critical Accounting Policies, Estimates and Judgments — a discussion of accounting policies which require critical judgments
and estimates. Our significant accounting policies, including the critical accounting policies discussed in this section, are
summarized in the notes to the consolidated financial statements;
• Results of Operations — an analysis of our consolidated results of operations for the past three years, presented in our
•
consolidated financial statements; and
Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash, contractual obligations and a discussion
of factors affecting our future cash flow.
COMPANY SUMMARY, RECENT DEVELOPMENTS, AND FUTURE OUTLOOK
WATER RESOURCE AND WATER STORAGE OPERATIONS
The long-term future demand for our water assets is driven by population and economic growth relative to currently available
water supplies in the southwestern United States. Specifically, our more recent development activities have been in Arizona,
Colorado, Nevada and New Mexico.
Over the past five years, the population growth of these states also exceeded the national growth rate collectively and
individually, with the exception of New Mexico. According to the Census Bureau’s estimate of state population changes for the
period April 1, 2010 to July 1, 2015, Nevada’s growth rate was 7%, Arizona 6.8%, Colorado 8.5%, and New Mexico 1.3%. These
population growth statistics compare to the national total growth rate of 4.1% over the same period.
Historically, a significant portion of the Southwest’s water supplies have come from the Colorado River. The balance is
provided by other surface rights, such as rivers and lakes, groundwater (water pumped from underground aquifers), and water
previously stored in reservoirs or aquifers. Prolonged droughts (possibly in part due to increasing temperatures from climate
change which can lead to a decreased snow pack runoff and therefore decreased surface water) and rapid population growth in the
past twenty years have exacerbated the region’s general water scarcity.
In December 2012, the U.S. Department of the Interior released a report titled: The Colorado River Basin Water Supply and
Demand Study, examining the future water demands on the Colorado River Basin. The report projects water supply and demand
imbalances throughout the Colorado River Basin and adjacent areas over the next 50 years. The average imbalance in future
supply and demand is projected to be greater than 3.2 million acre-feet per year by 2060. The study projects that the largest increase
in demand will come from municipal and industrial users, owing to population growth. The Colorado River Basin currently
provides water to some 40 million people, and the study estimates that this number could nearly double to approximately 76.5
million people by 2060, under a rapid growth scenario.
The following is a summary of the recent developments of our water resource and water storage assets by geographical region.
Arizona
We own 157,000 LTSCs, within the Phoenix AMA and 251,000 LTSCs in the Vidler Recharge site in Harquahala Valley.
During 2015, several market catalysts with respect to our LTSCs continued to emerge including the continuing drought in the
western United States, continued structural deficits on the Colorado River system, Indian Firming and Settlement obligations by
the state of Arizona and increased water demand from overall growth in Arizona. These supply and demand dynamics have led
to increasing interest from parties contemplating buying our LTSCs and sale and purchase transactions at prices that we believe
reflect the true value of LTSCs.
31
Arizona has an obligation to “firm” Indian water supplies as negotiated through various Indian Water Settlement Agreements.
Section 105 of the Settlements Act (S. 437) titled “Firming of Central Arizona Project Indian Water,” authorizes the Secretary of
Interior and the State of Arizona to develop a firming program to ensure that 60,648 acre-feet of non-Indian Agricultural priority
water be made available for reallocation to Indian Tribes for a 100 year period, which is to be delivered during shortage years on
the Colorado River. It is estimated that the total Indian Firming obligation is approximately 550,000 acre-feet over the 100 year
period. To date approximately 105,000 acre-feet has been secured by Arizona for firming obligations. We believe our LTSCs can
be used to help Arizona meet this obligation.
A shortage on the Colorado system will be declared by the Secretary of the Interior when on January 1, of any year, Lake
Mead’s surface water elevation is at or below 1075 ft. When Lake Mead is at an elevation of 1075 ft and at or above 1050 ft,
Nevada’s share of the shortage is 13,000 acre-feet and Arizona’s cut-back to its allocation is 320,000 acre-feet. In contrast,
California suffers no loss to their allocation from the Colorado River. When Lake Mead is at an elevation of 1050 ft. and at or
above 1025 ft., Nevada will suffer a loss of 17,000 acre-feet from their allocation, Arizona will suffer a cut-back to their allocation
of 400,000 acre-feet, and California will not suffer any cut-back to their allocation. If Lake Mead’s surface water elevation level
is below 1025 ft., then Nevada will suffer a loss to its allocation of 20,000 acre-feet and Arizona will suffer a loss to its allocation
of 480,000 acre-feet. To put this in context, Arizona’s annual allocation of Colorado River water is 2.8 million acre-feet. As such,
the cut back in allocation of just 320,000 acre-feet represents over 11% of Arizona’s annual allocation.
It is not only drought which impacts the level of Lake Mead. The Colorado system has been determined to suffer from a
structural deficit of 1.2 million acre-feet annually. This means that on an average annual water year, Lake Mead will lose 1.2
million acre-feet to the system, due to evaporation, treaty obligations with Mexico and allocations of water to Arizona, Nevada
and California that exceeds what the system yields. We believe that Vidler’s LTSCs are well positioned to buffer Arizona through
times of shortage and our LTSCs could be purchased by state entities to be used directly or to help sustain levels in Lake Mead.
In January 2015, we entered into an agreement with the City of Scottsdale for the sale of 258 acres of land and our remaining
774 acre-feet of transferable water rights. The transaction closed in the third quarter of 2015 generating cash proceeds of $3.4
million.
Nevada
In September 2014, Tesla Motors, Inc. announced that its $5 billion lithium-ion battery “Gigafactory” plant would be
constructed on property known as the Tahoe Reno Industrial Center (“TRIC”), in northern Nevada. TRIC is a 107,000 acre industrial
park proximate to Interstate 80 and 15 miles east of Reno, NV. In connection with Tesla Motors’ announcement, the Nevada
Legislature approved a $1.25 billion incentive package for Tesla Motors. Tesla Motors expects the plant to be fully operational
by the end of 2016 and recently began hiring the first of what is expected to be up to 6,500 employees.
Throughout December of 2015, the plant averaged weekly employment of 583 construction workers and 82 permanent
employees generating $2.9 million in wages in the third quarter of 2015. The total invested capital in the Gigafactory plant through
December 31, 2015 was approximately $238 million.
The Economic Development Authority of Western Nevada (Reno, Sparks, Tahoe areas) estimated that the region will generate
51,000 primary and secondary jobs from 2015 to 2019. We believe that this increased employment will directly and indirectly
create the need for new residential, commercial and industrial development specifically in the greater Reno area and in Lyon
County.
Nevada’s unemployment rate averaged 6.8% during 2015, which is down a full percentage point from 2014. Through the
first half of 2015, Nevada’s private sector job growth was approximately 4% relative to the first half of 2014, which is the third
fastest rate in the country and is the fifth straight year of job growth in the state. At mid-year 2015, Nevada was just 4,000 jobs
below its 2007 employment high. Reno’s unemployment stands at 5.5% as of December 2015, down from 6.5% in December of
2014.
Current economic conditions have manifested into new business openings, fewer apartment vacancies and the greater
absorption of existing housing inventory. This activity has resulted in multiple new housing projects entering the approval process
with local governments in Reno, Sparks, Carson City, Lyon County and Fernley. Within the Reno-Sparks area of Nevada, there
has been an approximately 33% year-over-year increase in building permits for single family homes, and an approximately 18%
increase in Nevada overall. We believe this activity creates demand for our water resources as developers pursue their projects.
32
In February of 2015, we finalized an option agreement with a private developer for the sale of approximately 700 acre-feet
of municipal and industrial water rights located in Carson / Lyon. The developer owns land in proximity to the intersection of the
proposed USA Parkway and Highway 50. The initial purchase price was $30,000 per acre-foot of water and increases by 10%
per year from January 1, 2017 until the expiration of the initial option period on December 31, 2019.
REAL ESTATE OPERATIONS
Our real estate segment revenues are primarily derived from UCP’s sale of residential developments in California, Washington,
North Carolina, South Carolina and Tennessee.
During the year ended December 31, 2015, the overall U.S. housing market continued to show signs of improvement, driven
by factors such as continued supply and demand imbalance, low mortgage rates, improving employment growth, and higher
average customer sentiment. Individual markets continue to experience varying results, as local home inventories, affordability,
and employment factors strongly influence local markets.
We believe homebuilding and land development is a local business. As a result, we expect local market conditions will affect
our community count, revenue growth, and operating performance. Local market trends are the principal factors that impact our
revenue growth and revenue related costs and expenses. For example, when these trends are favorable, we expect our revenues
from homebuilding and land development, as well as the costs and expenses that vary with revenue, to generally increase; conversely,
when these trends are negative, we expect our revenue and the costs and expenses that vary with revenue to generally decline,
although in each case the impact may not be immediate. When trends are favorable, we would expect to increase our community
count by opening additional communities and expanding existing communities; conversely, when these trends are negative, we
would expect to reduce or maintain our community count or decrease the pace at which we open additional communities and
expand existing communities.
Operations within this segment reflect our continued focus on a number of initiatives, including growing our homebuilding
operations and revenues by increasing community count and units sold per community per month, improving our gross margin
percentages, and gaining higher leverage of our fixed expenses.
We continued to focus our efforts on allocating capital in order to enhance our return metrics. Each new opportunity is
evaluated on its ability to meet our risk-adjusted return thresholds. Once underway, our focus is on effectively managing our
existing communities, inventory and absorption pace in order to improve gross margins. Our approach is proactive and focused
on identifying operational efficiencies across all of our operations in this segment.
Mindjet
CORPORATE
During the third quarter of 2015, Mindjet raised additional capital from existing shareholders. We elected not to participate
in the offering and as a result, our existing investment in preferred stock was converted to common stock at five shares of preferred
stock for one share of common stock, and our investment in convertible debt was converted into nonvoting preferred stock resulting
in a decline in our voting ownership to 19.3%. In addition, we lost our right to a board seat. Given the current voting interest and
loss of board representation, we determined we no longer had significant influence over the operating and financial policies of
Mindjet and therefore discontinued the equity method of accounting and the remaining investment in common and preferred stock
was held at cost at December 31, 2015. Prior to the conversion, our share of the losses reported by Mindjet were allocated to the
carrying value of the common stock investment until it reached zero and then to the preferred stock and convertible debt.
Mendell
During the year ended December 31, 2015, we made an additional $5.3 million investment into our oil and gas operations
which was used to pay for drilling costs to complete a well in the Wattenburg Field, Colorado, and, as a result, secure certain
mineral leases by production, and certain accrued production taxes, royalties, and other operating costs.
Domestic production of oil increased from approximately 8.7 million barrels per day (“B/D”) in 2014 to approximately 9.4
million B/D in 2015. Additionally, domestic crude inventory has increased approximately 23% during 2015. The domestic
oversupply caused by increasing production and inventories has resulted in West Texas Intermediate average spot prices for crude
oil (“WTI”) to decrease by approximately 48% during 2015 from 2014 prices. Due to the deteriorating oil and gas prices during
the year, we recorded additional impairment losses on our oil and gas assets in 2015. If WTI prices continue to deteriorate in 2016
we may be required to record additional impairment losses in 2016.
33
DISCONTINUED AGRIBUSINESS OPERATIONS
In July 2015, we sold substantially all of the assets used in its agribusiness segment to CHS Inc. (“CHS”). As a result of the
transaction, the assets and liabilities of our agribusiness segment qualified as held-for-sale and have been classified as discontinued
agribusiness operations in the accompanying consolidated financial statements as of the earliest period presented. Consequently,
prior periods presented have been recast from amounts previously reported to reflect the agribusiness segment as discontinued
agribusiness operations. We recorded a loss on sale of discontinued agribusiness operations during 2015. See Note 13
“Discontinued Agribusiness Operations” in the accompanying consolidated financial statements for additional information.
CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGEMENTS
This section describes the most important accounting policies affecting our assets and liabilities, and the results of our
operations. Since the estimates, assumptions, and judgments involved in the accounting policies described below have the greatest
potential impact on our financial statements, we consider these to be our critical accounting policies:
•
•
•
•
how we determine the fair value and carrying value of our real estate, tangible and intangible water assets;
accounting for investments in unconsolidated affiliates;
how and when we recognize revenue when we sell real estate and water assets; and
how we determine our income tax provision, deferred tax assets and liabilities, and reserves for unrecognized tax benefits, as
well as the need for valuation allowances on our deferred tax assets.
We believe that an understanding of these accounting policies will help the reader to analyze and interpret our financial
statements.
Our consolidated financial statements, and the accompanying notes, are prepared in accordance with GAAP, which requires
us to make estimates, using available data and our judgment, for things such as valuing assets, accruing liabilities, recognizing
revenues, and estimating expenses. Due to the uncertainty inherent in these matters, actual results could differ from the estimates
we use in applying the critical accounting policies. We base our estimates on historical experience, and various other assumptions,
which we believe to be reasonable under the circumstances.
The following are the significant subjective estimates used in preparing our financial statements:
1. Fair value and carrying value of our real estate, tangible and intangible water assets
Our principal long-lived assets are real estate, tangible and intangible water assets. At December 31, 2015, the total carrying
value of real estate, tangible, and intangible water assets was $550.8 million, or approximately 83% of our total assets. These
assets are carried at cost, less any recorded impairments.
Real estate and tangible water assets
We review our long-lived real estate and tangible water assets as facts and circumstances change, or if there are indications
of impairment present, to ensure that the estimated undiscounted future cash flows, excluding interest charges, from the use and
eventual disposition of these assets will at least recover their carrying value. Cash flow forecasts are prepared for each discrete
asset. We engage in a rigorous process to prepare and review the cash flow models which utilize the most recent information
available to us. However, the process inevitably involves the use of significant estimates and assumptions, especially the estimated
current and future demand for these assets, the estimated future market values of our assets, the timing of the disposition of these
assets, the ongoing cost of maintenance and improvement of the assets, and the current and projected income earned and other
uncertain future events. As a result, our estimates are likely to change from period to period. In addition, our estimates may
change as unanticipated events transpire which would cause us to reconsider the current and future use of the assets.
If we use different assumptions, if our plans change, or if the conditions in future periods differ from our forecasts, our financial
condition and results of operations could be materially impacted.
During each of the three years ended December 31, 2015, 2014, and 2013, our estimates of costs and revenues on certain real
estate projects in specific markets changed due to declining prices of similar assets, unfavorable market conditions, project specific
complications, and other factors. As a result, certain undiscounted cash flow streams were less than the carrying values of the
assets and consequently, we recorded impairment losses of $1.2 million, $6.4 million, and $417,000 in 2015, 2014 and 2013,
respectively, which reduced the carrying value of the assets to their fair value.
34
Intangible water assets
Our intangible water assets are accounted for as indefinite-lived intangible assets. Accordingly, until the asset is sold, they
are not amortized, that is, their value is not charged as an expense in our consolidated statement of operations and comprehensive
income or loss over time, but the assets are carried at cost and reviewed for impairment, at least annually during the fourth quarter,
and more frequently if a specific event occurs or there are changes in circumstances which suggest that the asset may be impaired.
Such events or changes may include lawsuits, court decisions, regulatory mandates, and economic conditions, including interest
rates, demand for residential and commercial real estate, changes in population, and increases or decreases in prices of similar
assets. Once the assets are sold, the value is charged to cost of real estate and water assets sold in our consolidated statement of
operations and comprehensive income or loss.
When we calculate the fair value of intangible water assets, we use a discounted cash flow model, under which the future net
cash flows from the asset are forecasted and then discounted back to their present value using a weighted average cost of capital
approach to determining the appropriate discount rate. Preparing these cash flow models requires us to make significant assumptions
about revenues and expenses as well as the specific risks inherent in the assets. If the carrying value exceeds the fair value, an
impairment loss is recognized equal to the difference. We conduct extensive reviews utilizing the most recent information available
to us; however, the review process inevitably involves the use of significant estimates and assumptions, especially the estimated
current asset pricing, potential price escalation, discount rates, absorption rates and timing, and demand for these assets. These
models are sensitive to minor changes in any of the input variables.
In summary, the cash flow models for our most significant indefinite-lived intangible assets forecast initial sales to begin
within approximately one year, and then increase until the assets are completely sold over the next 37 years. We have assumed
sale proceeds for the assets that are based on our estimates of the likely future sales price per acre-foot. These per-unit sale prices
are estimated based on the demand and supply fundamentals in the markets which these assets serve. If we use different assumptions,
if our plans change, or if the conditions in future periods differ from our forecasts, our financial condition and results of operations
could be materially impacted.
There were no material impairment losses recorded on our intangible water assets in 2015.
In 2014, we determined that the fair values of the intangible water assets of approximately $1.1 million and $2.2 million,
respectively, were below the carrying values of $2.9 million and $2.6 million, respectively, resulting in impairment losses of $1.8
million and $438,000, respectively, recorded in our consolidated statement of operations and comprehensive income or loss. The
losses were reported as a component of our water resource and water storage operations segment results. This was the first such
impairment loss recorded on each of these assets. There were no other impairment losses on any other intangible water assets
recorded in 2014.
In 2013, we recorded a $993,000 impairment loss on the Fish Springs water credits and pipeline rights. Given a decline in
markets prices for similar assets and an increase in interest rates during the second quarter of 2013, we adjusted our assumptions
and judgments in our discounted cash flow model for the price, timing and absorption of water sales from our prior projections.
These changes in assumptions and judgments resulted in an asset fair value of approximately $83.9 million compared to its carrying
value of $84.9 million. Consequently, an impairment loss of $993,000 was recorded in the second quarter of 2013, to reduce the
carrying value to fair value. This is the second such impairment loss recorded on this asset. There were no other impairment
losses on any other intangible water assets recorded in 2013.
2. Accounting for investments in unconsolidated affiliates
Depending on the circumstances, and our judgment about the level of our involvement with an investee company, we apply
either fair value accounting or the equity method of accounting for investments in equity securities. When we own an investment
where we have the ability to exercise significant influence over the company’s operating and financial decisions, we apply the
equity method of accounting.
Apart from our equity investments in private companies which are carried at historical cost, we apply the provisions of the
fair value method to all of our other equity securities, and to all of our debt securities, unless it is impractical to estimate such fair
value. We classify such investments as held-for-sale. Fair value accounting requires us to record held-for-sale marketable
investments at their fair value, with any unrealized holding gains or losses, net of income tax effects reported in accumulated other
comprehensive income in our consolidated balance sheet. Investments in private companies are generally held at the lower of
cost or their fair value.
35
During the period that we hold an investment, the equity method of accounting may have a different impact on our financial
statements than fair value accounting would. The most significant difference between the two policies is that, under the equity
method, we include our share of the unconsolidated affiliate’s earnings or losses in our statement of operations and comprehensive
income or loss, which also increases or decreases the carrying value of the investment. In addition, any dividends received from
the affiliate reduce the carrying value of the investment. For securities classified as held-for-sale, the income recorded in the
statement of operations and comprehensive income or loss is from dividends and realized gains or losses, and other-than-temporary
impairment losses, if applicable, are reported as a realized loss and reduce revenues correspondingly and we record unrealized
gains and losses, net of related deferred income taxes, in accumulated other comprehensive income or loss in the shareholders’
equity section of our balance sheet.
The assessment of what constitutes the ability to exercise “significant influence” requires us to make significant judgments
about financial and operational control over the affiliate. We look at various factors in making this determination. These include
our percentage ownership of voting stock, whether or not we have representation on the affiliate’s board of directors, transactions
between us and the affiliate, the ability to obtain timely quarterly financial information, and whether our management can influence
the operating and financial policies of the affiliate company. When we have this kind of influence, we adopt the equity method
and change all of our previously reported results to show the investment as if we had applied the equity method of accounting
from the date of our first purchase.
The use of fair value accounting or the equity method can result in significantly different carrying values at specific balance
sheet dates, and contributions to our statement of operations in any individual year during the course of the investment. However,
over the entire life of the investment, the total impact of the investment on shareholders’ equity will be the same whichever method
is adopted.
We evaluate our investments to determine if any other-than-temporary impairment loss exists. In general, these reviews
require consideration of several factors, including the extent and duration of the decline in market value of the investee, specific
adverse conditions affecting the investee’s business and industry, the financial condition of the investee, and the long-term prospects
of the investee. Accordingly, we have to make important assumptions regarding our intent and ability to hold the security, and
our assessment of the overall worth of the security. Risks and uncertainties in our methodology for reviewing unrealized losses
for other-than-temporary declines include our judgments regarding the overall worth of the issuer and its long-term prospects, and
our ability to obtain our assessment of the overall worth of the business.
If an unrealized loss is in fact other-than-temporary, an impairment loss will be recorded. If we impair an equity method
investment or an investment held at cost, an impairment loss will affect shareholders’ equity. There will also be an impact on
reported income before and after tax, and on earnings per share, due to recognition of the unrealized loss and related tax effects.
When a loss for other-than-temporary impairment is recorded, our basis in the security is decreased. Consequently, if the market
value of the security later recovers and we sell the security, a correspondingly greater gain will be recorded in the statement of
operations and comprehensive income or loss.
During 2014 and into the third quarter of 2015, we believed that the collective attributes of our common and preferred stock
investment in Mindjet, including our right to a seat on their board of directors, enabled us to exert significant influence over the
operating and financial decisions of Mindjet. Consequently, we accounted for the investment in common stock using the equity
method of accounting. During the third quarter of 2015, our investment in the voting ownership of Mindjet decreased from 28.4%
to 19.3%, and we lost our contractual right to a seat on their board of directors. As a result, during the third quarter of 2015, we
concluded that we no longer exercised significant influence over Mindjet and consequently, we ceased accounting for our investment
in common stock using the equity method, and held the investment at cost. Recurring operational losses reported by Mindjet and
impairment losses recorded reduced the carrying value of our investment in common stock to zero at December 31, 2015. Once
the common stock was reduced to zero, we applied a portion of the losses reported by Mindjet against the carrying value of our
investment in preferred stock. Combined with the impairment loses recorded, the carrying value of our investment in preferred
stock was also reduced to zero prior to the conversion of our investment in debt security to preferred stock.
36
We tested for impairment loss on our investment in Mindjet predominately due to significantly increased, and continuing
operating losses and resulting liquidity issues the company was experiencing, actual financial results that were significantly less
than their projections, and market conditions that adversely affected the value of Mindjet. The fair value of our investment in
Mindjet was based on an analysis of the financial and operational aspects of the company, including consideration of business
enterprise value-to-revenue ratios for comparable public companies to current revenue metrics for the company. The determination
of the business enterprise value based on the foregoing was then considered in an analysis of the distribution of equity value to
the various classes of debt and equity issued by Mindjet in order to reflect differences in value due to differing liquidation
preferences, dividend and voting rights. As a result of the analysis, we recorded a $20.7 million and $1.1 million impairment loss
on our investment for the years ended December 31, 2015, and 2014, respectively, as the estimated fair value of our investment
was less than the carrying value. It is reasonably possible that given the volatile nature of software businesses that circumstances
may change in the future which could require us to record additional impairment losses on the remaining investment in Mindjet.
3. Revenue recognition
Sale of real estate and water assets
We recognize revenue when there is a legally binding sale contract, the profit is determinable (the collectability of the sales
price is reasonably assured, or any amount that will not be collectible can be estimated), the earnings process is virtually complete
(we are not obliged to perform significant activities after the sale to earn the profit, meaning we have transferred all risks and
rewards to the buyer), and the buyer’s initial and continuing investment are adequate to demonstrate a commitment to pay for the
property.
Unless all of these conditions are met, we use the deposit method of accounting. Under the deposit method of accounting,
until the conditions to fully recognize a sale are met, payments received from the buyer are recorded as a liability on our balance
sheet, and no gain is recognized.
Sale of finished homes
Revenues from sales of finished homes are recognized when the sales are closed and title passes to the new homeowner, the
new homeowners initial and continuing investment is adequate to demonstrate a commitment to pay for the home, the new
homeowners receivable is not subject to future subordination and we do not have a substantial continuing involvement with the
new home.
4. Income taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment
of estimated future taxes to be paid. We are subject to federal and various state income taxes. We have multiple state filing groups
with different income tax generating abilities. Significant judgments and estimates are required in determining the consolidated
income tax expense.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and
expense. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise we consider all
available positive and negative evidence, including scheduled reversals of deferred tax liabilities, tax planning strategies and recent
financial operating results. We consider many factors when assessing the likelihood of future realization of our deferred tax assets,
including recent cumulative earnings experience by taxing jurisdiction, expectations of future transactions, the carryforward periods
available to us for tax reporting purposes, our historical use of tax attributes, and availability of tax planning strategies. These
assumptions require significant judgment about future events however, they are consistent with the plans and estimates we use to
manage our underlying businesses. In evaluating the objective evidence that historical results provide, we consider three years
of cumulative operating income or loss.
As a result of the analysis of all available evidence as of December 31, 2011, we recorded a full valuation allowance on our
net deferred tax assets. Our evaluation at December 31, 2015 resulted in the same conclusion and we therefore continue to hold
a full valuation allowance on our net deferred tax assets. If our assumptions change and we determine we will be able to realize
these attributes, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets at December 31, 2015
will be recognized as a reduction of income tax expense. If our assumptions do not change, each year we could record an additional
valuation allowance on any increases in the deferred tax assets.
37
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We are not aware of
any such changes that would have a material effect on our results of operations, cash flows or financial position. The calculation
of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of
jurisdictions.
The accounting guidance for income taxes provides that a tax benefit from an uncertain tax position may be recognized when
it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or
litigation processes, based on the technical merits. The guidance also provides information on measurement, de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
We recognize tax liabilities in accordance with accounting guidance on income taxes and we adjust these liabilities when our
judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of
these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax
liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are
determined. Currently, we have no material unrecognized tax benefits on any open tax years.
RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 2015, 2014, AND 2013
Overview of Economic Conditions and Impact on Results of Operations
The economic environment and housing slow-down in the U.S. between 2007 and 2011 significantly decreased the rate of
growth in the Southwest and the demand for our water and real estate assets in certain markets. Numerous factors can affect the
performance of an individual market. However, we believe that trends in employment, housing inventory, affordability, interest
rates, and home prices have a particularly significant impact. We expect that these market trends will have an impact on our
operating performance. Trends in housing inventory, home affordability, employment, interest rates and home prices are the
principal factors that affect our revenue and many of our costs and expenses. For example, when these trends are favorable, we
expect our revenue, as well as our related costs and expenses, to generally increase; conversely, when these trends are negative,
we expect our revenue and cost of sales to generally decline, although in each case the impact may not be immediate. There has
been a recovery and improvement in the housing markets from levels seen during the slow-down (with seasonal fluctuations)
which has led to increased levels of real estate development activity in the past two to three years, and we believe that a continuation
of the housing recovery will lead to increased demand for our real estate, and intangible and tangible water assets (which are held
in our real estate segment and water resource and water storage segment, respectively). Individual markets continue to experience
varying results, as local home inventories, affordability, and employment factors strongly influence each local market and any
deterioration in the markets in which we operate has the potential to cause additional impairment losses on our real estate and
water assets. Due to specific conditions existing at certain of our real estate and water projects, we have recorded impairment
losses on intangible and long-lived assets of $1.5 million in 2015, $8.7 million in 2014, and $1.4 million in 2013.
The focus of our operations is building long-term shareholder value. Our revenues and results of operations can and do
fluctuate widely from period to period. For example, we recognize revenue from the sale of real estate and water assets when
specific transactions close, and as a result, sales of real estate and water assets for any individual quarter are not necessarily
indicative of revenues for future quarters or the full financial year.
PICO Holdings, Inc. Shareholders’ Equity
December 31,
Change
Shareholders’ equity
Shareholders’ equity per share
$
$
346,412
15.04
$
$
425,481
18.50
$
$
472,889
20.79
$
$
(79,069) $
(3.46) $
2015
2014
2013
2015 to 2014
2014 to 2013
(47,408)
(2.29)
The decrease in shareholders’ equity during 2015 was due to the comprehensive loss of $81.6 million. The two most significant
transactions that contributed to the loss for the period were the losses recorded on the sale of our discontinued agribusiness
operations and the impairment loss on our investment in Mindjet.
The principal factors leading to the decrease in shareholders’ equity during 2014 were a comprehensive loss of $47.9 million
and $4.9 million of taxes paid on stock-based compensation awards.
38
The principal factors leading to the decrease in shareholders’ equity during 2013 were a comprehensive loss of $20.1 million,
a $14.7 million increase in additional paid-in capital due to the accounting for the public offering of UCP, and a $2.4 million
increase in net unrealized appreciation in available-for-sale investments.
Treasury Stock
During 2014, we retired 3 million shares of our common stock that were previously classified as treasury stock, held at a cost
of $55 million, in conjunction with the liquidation of several of our wholly-owned holding companies that owned the shares of
PICO common stock. The retirement of treasury stock reduced both the number of our shares issued and the number of treasury
shares and, as a result, did not affect our net shares outstanding and had no impact on our book value per share or earnings per
share.
Total Assets and Liabilities
Total assets
Total liabilities
December 31,
2015
December 31,
2014
$
$
663,609
229,605
$
$
804,444
292,899
Change
$
$
(140,835)
(63,294)
Total assets decreased during the year ended December 31, 2015, primarily due to a decrease in the assets held in our
discontinued agribusiness operations which declined $143.8 million as a result of the sale of the assets and our investments declined
by $29.6 million primarily due to an impairment loss on our investment in Mindjet. These decreases were offset by an increase
in real estate and water assets of $37.9 million primarily due to the acquisition and development of real estate in UCP.
Total liabilities decreased primarily due to a $94 million decrease in our liabilities, primarily comprised of debt we paid off
in conjunction with the sale of our discontinued agribusiness operations, offset by an increase of $22 million in our debt balance
and $9.9 million in our accounts payable and accrued expenses balance, both of which were used primarily for the acquisition and
development of real estate.
Results of Operations
Our results of operations were as follows (in thousands):
Year Ended December 31,
2014
2013
2015
Change
2014 to 2015
2013 to 2014
Total revenue and other income
Total costs and expenses
$
$
266,663
297,813
$
$
192,488
239,457
$
$
160,181
162,348
$
$
74,175
58,356
$
$
32,307
77,109
Revenue
The majority of our recurring revenue was generated in our real estate operation, which recorded revenue from the sale of
residential homes and lots. Our revenue from real estate operations increased during 2015 and 2014 as the result of a significant
increase in the number of homes sold period-over-period. Additionally, our revenue from water resource and water storage
operations increased due to sales of real estate and water rights in Arizona with no corresponding sales in 2014. Our corporate
segment recorded an impairment loss of $20.7 million on our total investment in Mindjet, which reduced revenues significantly
during the year ended December 31, 2015.
Costs and Expenses
The majority of our costs and expenses were related to cost of real estate and water assets sold. The increase in costs and
expenses during 2015 and 2014 was primarily related to cost of real estate sold in our real estate segment due to the increased
number of homes sold year-over-year. Offsetting this increase was a decrease in our impairment loss on intangible and long-lived
assets.
39
Income Taxes
We continued to record a full valuation allowance on our net deferred tax assets, however, we also recorded a $3 million
income tax benefit during the year ended December 31, 2015. Our effective tax rate for the years ended December 31, 2015, 2014,
and 2013, was a tax benefit of 9.5%, 7.5%, and a tax provision of 147.5%, respectively. The effective tax rate differed from our
federal corporate income tax rate of 35% due primarily to the valuation allowance recorded on our net deferred tax assets in each
of the years. However, during 2015, we recorded a $2.8 million tax benefit due to the reversal of the taxable temporary difference
related to our investment in Mindjet that reversed during the year due to the impairment loss recorded on the investment. Such
temporary difference was originally recorded during 2013 which contributed to the significant effective tax rate in that year and
was not expected to reverse within a period that would have allowed us to offset with existing deductible temporary differences.
Equity in Loss of Unconsolidated Affiliates
We previously accounted for our investment in common stock of Mindjet using the equity method of accounting, which
resulted in recording our proportional share of Mindjet’s losses in the condensed consolidated statement of operations and
comprehensive income or loss for years ended December 31, 2015, 2014, and 2013. During the third quarter of 2015, we lost
significant influence over Mindjet and discontinued the equity method of accounting as our voting ownership declined in
conjunction with Mindjet issuing additional voting stock in an offering that we did not participate in and the resulting loss of our
seat on its board. Consequently, we do not anticipate recording any additional equity method losses related to our investment in
Mindjet.
Discontinued Agribusiness Operations
Our discontinued agribusiness loss increased significantly in 2015 as compared to 2014 and 2013. The loss recorded in 2015
includes loss on discontinued operations of $30.5 million and a loss on sale of $18.7 million.
Noncontrolling Interests
The results attributable to noncontrolling interest represent the share of net income or loss from our less than wholly-owned
consolidated subsidiaries that is allocated, based on relative ownership percentage, to the noncontrolling shareholders of those
entities. The 43.1% of UCP owned by noncontrolling interest is our most significant noncontrolling interest at December 31,
2015.
Comprehensive Income or Loss
We report comprehensive income or loss as well as net income or loss from the consolidated statement of operations and
comprehensive income or loss. Comprehensive income measures changes in shareholders’ equity, and includes unrealized items
which are not recorded in the consolidated statement of operations.
40
WATER RESOURCE AND WATER STORAGE OPERATIONS
Thousands of dollars
Year Ended December 31,
Change
2015
2014
2013
2014 to 2015
2013 to 2014
Revenue and other income:
Sale of real estate and water assets
$
3,856
$
1,220
$
24,050
$
2,636
$
360
1,580
1,812
25,862
116
2,752
(22,830)
(1,452)
(24,282)
Other
Segment total revenue and other income
Cost of sales and expenses:
Cost of real estate and water assets sold
Impairment loss on intangible and long-lived
assets
Depreciation and amortization
Overhead expense
Project expense
Segment total expenses
Loss before income taxes
476
4,332
1,239
269
1,037
4,675
970
8,190
$
(3,858) $
726
16,939
513
(16,213)
5,791
1,098
5,277
1,272
14,164
(12,584) $
993
1,197
5,131
2,469
26,729
(867) $
(5,522)
(61)
(602)
(302)
(5,974)
8,726
$
4,798
(99)
146
(1,197)
(12,565)
(11,717)
Historically, our water resource and water storage segment revenue and results have been volatile and infrequent. Since the
date of closing generally determines the accounting period in which the sales revenue and cost of sales are recorded, our reported
revenues and income in this segment fluctuate from period to period, depending on the dates when specific transactions close.
Consequently, revenue in any one year is not necessarily indicative of likely revenue in future years.
Segment Revenue
During 2015, we sold 258 acres of real estate and approximately 774 acre-feet of water rights in the Harquahala Valley area
of Arizona for cash proceeds of $3.4 million, which generated a gross margin of $2.4 million.
We did not generate any significant sales of real estate and water assets during 2014. The 2014 revenue was primarily the
result of the sale of 200 acres of real estate and approximately 28 acre-feet of stock water rights in Lincoln County, Nevada for
total proceeds of $940,000 and a gross margin of $488,000.
We closed two sale transactions in June 2013 which, in aggregate, contributed the majority of the segment revenue for 2013.
We sold 1,021 acres of land and 3,063 acre-feet of groundwater rights located in the Harquahala Valley, Arizona, for sale proceeds
of $10 million and a gross margin of $6.3 million. In addition, we sold two farms in Idaho for sale proceeds of $13.7 million and
a gross margin of $763,000. The two farms that were sold also generated lease revenue of $726,000 in 2013.
Other revenue for all periods presented consists largely of water and farm lease income and option payments received.
Segment Expenses
In 2015, our total expenses decreased significantly as we did not recognize any material impairment losses on intangible and
long-lived assets during the year. All other costs and expenses remained consistent year-over-year.
In 2014, our total expenses decreased primarily as a result of a decrease in cost of real estate and water assets sold. The higher
cost of real estate and water assets sold in 2013 was due to the two large sales transactions noted in Segment Revenue above. This
decrease in cost of real estate and water assets sold was partially offset by an increase in our impairment loss on intangible and
long-lived assets, as we recognized charges on three separate projects. In 2014, as a result of our annual review of indefinite-lived
intangible assets, using discounted cash flow models, we determined that the estimated fair values of other intangible assets of
approximately $3.3 million were below the carrying values of $5.6 million, resulting in an impairment loss of $2.3 million. In
addition, during 2014, certain water rights applications were denied by the New Mexico State Engineer and as a result, we recorded
an impairment loss of $3.5 million by writing down the project’s capitalized costs to zero.
41
The 2013 impairment loss of $993,000 related to our Fish Springs water asset in Washoe County. Specific events occurred
in Washoe County that caused us to update our discounted cash flow models that calculate an estimated fair value for our intangible
water credits and pipeline rights. The changes in assumptions relate to the timing of future estimated sales of our water assets as
well as inputs in to the discount rate. As a result of updating our discounted cash flow models, the fair value of this intangible
asset was estimated at $83.9 million compared to its then carrying value of $84.9 million. Consequently, we recorded the $993,000
difference as an impairment loss on intangible and long-lived assets to reflect the decrease in the estimated fair value of the asset.
Overhead expenses consist of costs which are not directly related to the development of specific water assets, such as salaries
and benefits, rent, and audit fees.
Project expenses consisted of costs related to the ongoing maintenance of our assets, such as site maintenance and professional
fees. Project costs are expensed as appropriate, and fluctuate from period to period depending on activity in our various projects.
Historically, project expenses principally related to:
• the operation and maintenance of the Vidler Arizona Recharge Facility;
• certain costs related to intangible water rights in the Tule Desert groundwater basin and the Dry Lake Valley (both part of
the Lincoln County, Nevada agreement); and
• certain costs for water resource development in Nevada & New Mexico.
During the first quarter of 2016, we expect that the Vidler Arizona Recharge Facility will be completely depreciated and we
expect to reduce our annual operation and maintenance expense related to the site. We anticipate the reduction in expenses to be
approximately $1 million annually, of which $879,000 is depreciation.
If we fail to generate revenue, incur additional expenses beyond expectations, continue to report operating losses, or if expected
prices for our water assets fall, we could be required to record additional impairment losses on our real estate, tangible and intangible
water assets owned in this segment.
REAL ESTATE OPERATIONS
Thousands of dollars
Year Ended December 31,
Change
2015
2014
2013
2014 to 2015
2013 to 2014
Revenue and other income:
Sale of real estate
Other
Segment total revenue and other income
279,196
191,440
$
278,826
$
191,148
$
92,726
$
87,678
$
370
292
546
93,272
78
87,756
98,422
(254)
98,168
Cost of sales and expenses:
Cost of real estate sold
Impairment loss on intangible and long-lived
assets
General, administrative, and other
Sales and marketing
Segment total expenses
Income (loss) before income taxes
226,476
157,474
70,518
69,002
86,956
1,197
26,434
18,695
272,802
$
6,394
$
2,865
27,990
13,642
417
20,208
6,571
201,971
(10,531) $
97,714
(4,442) $
(1,668)
(1,556)
5,053
70,831
16,925
$
2,448
7,782
7,071
104,257
(6,089)
As of December 31, 2015, our businesses in the real estate operations segment were primarily conducted through our 56.9%
owned subsidiaries UCP, Inc. and UCP, LLC and its homebuilding and land development operations in California, Washington,
North Carolina, South Carolina, and Tennessee.
42
During the previous three years, UCP sourced, underwrote, and acquired real estate in its target markets to increase its land
inventory and ability to either build and sell homes through its wholly owned subsidiary, Benchmark Communities, or develop
land and sell lots to third-party homebuilders. During 2014, UCP acquired Citizens Homes, Inc. Citizens builds and sells homes
in North Carolina, South Carolina and Tennessee. In addition to expanding its business in existing markets in these states, UCP
continues to evaluate opportunities to expand into other markets with favorable housing demand fundamentals, including, in
particular, long-term population and employment growth.
Our real estate sales are contingent upon numerous factors and, as such, the timing and volume of real estate sales in any one
quarter is unpredictable. Historically, the level of real estate sales has fluctuated from period to period. Accordingly, it should
not be assumed that the level of sales as reported will be maintained in future years.
During 2015 and 2014, in spite of interest rate volatility, the overall U.S. housing market continued to show signs of
improvement, driven by factors such as decreasing home inventories, high home affordability and improving employment.
We believe that during the prior years, the broader housing market was affected by interest rate volatility. Additionally, we
believe that seasonal factors affected the broader housing market as well as our markets. Individual markets continue to experience
varying results, as local home inventories, home affordability, and employment factors strongly influence each local market.
Summary Results of UCP Revenue and Gross Margin for Homes and Lots
Lots sold
Homes sold
Average selling communities during the period
Revenue (in thousands)
Lot revenue - total
Lot revenue - per lot
Home revenue - total
Home revenue - per home
General contracting revenue
Gross Margin (in thousands, except for percentages)
Gross margin - lots
Gross margin percentage - lots
Gross margin - homes
Gross margin percentage - homes
Gross margin total - lots and homes
Gross margin percentage total - lots and homes
Segment Revenue and Gross Margin
Year Ended December 31,
2015
2014
2013
295
701
28
348
432
16
253
196
7
$
$
21,134
72
$
$
32,513
93
$ 252,632
$ 155,382
$
$
360
$
360
5,060
3,253
$
$
$
$
20,215
80
72,511
370
$
5,844
$
7,168
$
6,625
28%
22%
33%
$
45,810
$
26,080
$
15,583
18%
17%
21%
$
51,654
$
33,248
$
22,208
19%
18%
24%
In the following discussion, gross margin is defined as sale of real estate less cost of real estate sold, and gross margin
percentage is defined as gross margin divided by sale of real estate.
In 2015, the increase in total segment revenue was primarily attributable to an increase in the number of homes sold and an
increase in the average number of selling communities during the period.
43
The gross margin percentage of homes sold increased modestly in 2015, due to an increase in the number of homes delivered
and decrease in the costs associated with cost of real estate sold. Additionally, the increase was a result of our focus on improving
gross margins in 2015 by driving efficiency in purchasing and field operations coupled with the impact of new communities
generating superior gross margins. We were able to do this by focusing on cost side management and gaining additional incremental
revenue by focusing on pre-sales and reducing the number of spec sales, increasing lot premiums where appropriate, and a more
deliberate ala carte options offering.
The gross margin percentage of lots sold increased in 2015, primarily due to a lower cost basis as compared to the sale price
of the lots we sold during the 2014.
In 2014, the increase in total segment revenue was primarily attributable to the following combination of factors:
•
•
•
•
an increase in the number of homes sold and the number of selling communities;
a decrease in the average selling price (“ASP”) of homes sold;
an increase in the number of lots sold; and
an increase in revenue per lot.
The gross margin percentage of homes sold declined primarily due to the different cost basis of the active selling communities
in 2014 as compared to 2013. In addition, an increase in year-over-year buyer incentives and interest cost also resulted in a reduced
homebuilding gross margin percentage in 2014 as compared to 2013. This decline in the gross margin percentage of homes sold
was more than offset by the increased volume of homes sold.
The increased volume of home sales was driven by a year-over-year increase in the number of selling communities and an
increased sales rate at certain of these selling communities. The increase in the number of selling communities in 2014 as compared
to 2013 was partially attributable to the acquisition of the assets from Citizens in April 2014.
The gross margin percentage of lots sold during 2014 declined as compared to 2013. The gross margin percentage of lots
sold is not necessarily directly comparable from period to period due to several factors including the stage of development and
the location of the lots as well as the cost basis in the lots. In addition, there was a significant year-over-year increase in the volume
of lots sold. The volume, revenue and gross margin of lots sold can vary considerably from period to period; such sales tend to
be driven by discrete transactions which are motivated by numerous considerations, including opportunistic conditions in the
markets in which we own lots.
Backlog
UCP’s homebuilding backlog (homes under sales contracts that have not yet closed at the end of the relevant period) at
December 31, 2015 was $108.8 million as compared to a backlog of $32.5 million at December 31, 2014. The growth in backlog
value is related to the increase in net new orders at December 31, 2015 compared to December 31, 2014, and an increase in average
sales price of homes in backlog. The significant change in backlog was attributable to a greater number of homes from the higher
cost markets of California, Central Valley and the Pacific Northwest.
Sales contracts relating to homes in backlog may be canceled by the purchaser for a number of reasons. Accordingly, backlog
may not be indicative of future segment revenue.
Segment Expenses
In 2015, segment expenses increased as the result of the following factors:
•
•
an increase in cost of real estate sold, consistent with the increase sales noted in the Segment Revenue and Gross Margin
section;
an increase in sales and marketing expense, primarily attributable to an increase in the headcount of on-site sales personnel,
the number of model homes and associated expenses as well as our marketing efforts to introduce our new communities.
In 2014, segment expenses increased as the result of the following factors:
•
an increase in cost of real estate sold, consistent with the increase sales noted in the Segment Revenue and Gross Margin
section;
44
•
an increase in operating expenses, comprised of: an increase in salaries and benefits of $4.5 million due to additional
headcount as UCP continued to grow its development and homebuilding business and as a result of the acquisition of
Citizens; an increase in stock-based compensation expense of $1.5 million; an increase in marketing and sales costs of
$3.5 million due to an increased volume of homes sold in 2014 as compared to 2013; and an increase in consulting
expense of $1.6 million, incurred primarily in connection with the Citizen’s acquisition.
The only real estate in this segment not owned by UCP is an undeveloped property in San Diego County, California and a
property in Fresno, California that is owned by Bedrock, which was purchased prior to our acquisition of UCP.
The San Diego County property was purchased several years ago in conjunction with a plan to develop an alternative energy
plant on the site. Concurrent with our purchase of the property we entered into an option to sell the property to the developer of
the project. Ultimately the developer was unsuccessful in completing the project and, as a result, the option on the property was
never exercised. Alternative development opportunities had proven unsuccessful and the property had also been impacted by
protected species issues. As a result, we decided to sell the property as-is. Accordingly, during 2014 we wrote down the carrying
value of the property to our estimate of the current undeveloped fair value of the property and recorded an impairment loss of $2.9
million, which was not included in UCP’s results.
We recorded an impairment loss of $274,000 during 2015, and $417,000 during 2013, on the carrying value of the property
owned by Bedrock, which is not part of UCP’s results of operations nor is it included in UCP’s inventory of lots. During 2013,
we wrote down the value of the property to an independent appraised value. During the year ended December 31, 2015, we
recorded an additional impairment loss on this real estate after accepting an offer from a local government agency that was lower
than our carrying value.
Based on a variety of economic factors, including unemployment and building activity in the local areas, during the year
ended December 31, 2015, we recorded an impairment loss of $923,000 on real estate located in Kern County, California and
owned by UCP. There were no impairment losses recorded in the years ended December 31, 2014 or December 31, 2013 for
UCP’s real estate.
If we report operating losses in the future, or if market conditions deteriorate, we could be required to record additional
impairment losses on our real estate.
CORPORATE
Thousands of dollars
Revenue:
Year Ended December 31,
2014
2013
2015
Change
2014 to 2015
2013 to 2014
Deferred compensation revenue
$
1,087
$
734
$
946
$
353
$
(212)
Other revenue (loss):
Impairment loss on investment in
unconsolidated affiliate
Loss on dissolution in 2014 and gain on
deconsolidation in 2013
Other
Segment total revenue (loss) and other
Costs and expenses:
Stock-based compensation expense
Deferred compensation expense
Foreign exchange (gain) loss
Impairment loss on intangible and long-lived
assets
General, administrative, and other
Segment total expenses
Income (loss) before income taxes
(20,696)
(1,078)
(19,618)
(1,078)
2,744
(16,865)
1,907
1,368
184
1,816
11,546
(9,336)
9,148
(532)
21,181
5,271
27,398
9,336
(6,404)
(16,333)
3,415
1,190
2,347
4,428
11,942
3,812
2,318
(658)
13,503
18,975
8,423
$
(1,508)
178
(2,163)
(2,612)
(396)
(6,501)
(9,832) $
(30,517)
3,877
(27,930)
(397)
(1,128)
3,005
4,428
(1,561)
4,347
(32,277)
16,821
(33,686) $
23,322
(23,854) $
$
45
The corporate segment consists of cash, fixed-income securities and equity securities, our investments in Mindjet and
Synthonics, the assets, liabilities and the results of operations of our oil and gas venture, Mendell, and other parent company assets
and liabilities which are not contained in other segments, including the assets and liabilities of the deferred compensation trusts
held for the benefit of certain officers and non-employee directors. Revenue includes sales from our oil and gas operations, and
realized gains or losses on the sale or impairment of securities and can vary considerably from year to year. The segment results
above do not include our share of the income or loss from any investments we account for using the equity method during the
respective years presented.
The expenses recorded in this segment primarily consist of parent company costs which are not allocated to our other segments,
for example, salaries and benefits, directors’ fees, shareholder costs, rent for our head office, stock-based compensation expense,
deferred compensation expense, and expenses related to the operations of our oil and gas venture, which consists primarily of our
administrative service agreement for the management and administration of the oil and gas wells.
Corporate segment results can fluctuate due to one or more individually significant revenue or expense items which occur
irregularly, for example, realized gains or losses on the sale of investments, or which can change significantly from period to
period, such as foreign currency gains or losses. Consequently, the corporate segment results are not typically comparable from
year to year.
Deferred Compensation Revenues and Expense
The participants in the deferred compensation plan bear the risk of the investment return on the deferred compensation assets,
similar to a defined contribution plan such as a 401(k) plan. The investment income and realized gains or losses from the deferred
compensation assets are recorded as revenue in the period that they are earned, and a corresponding and offsetting cost or benefit
is recorded as deferred compensation expense or recovery. The change in net unrealized appreciation or depreciation in the deferred
compensation assets is charged to compensation expense. Once the deferred compensation has been distributed, over the lifetime
of the assets, the revenue and deferred compensation expense equal and there is no net effect on segment results.
Segment Revenues
In 2015, the decrease in segment revenue was primarily due to the $20.7 million impairment loss on our investment in Mindjet
recorded during the second quarter of 2015 due to significantly increased, and continuing operating losses and resulting liquidity
issues, actual financial results significantly less than projections, and decreased market conditions that have adversely affected
the value of Mindjet. We recorded a $1.1 million impairment charge in 2014 due to similar adverse economic conditions at Mindjet,
with no corresponding charges in 2013.
In 2014, the decrease in segment revenue was primarily due to a $21.2 million gain recorded on the deconsolidation of Spigit,
Inc. (“Spigit”) in 2013, with no corresponding gain in 2014, and a loss of $9.3 million recorded in 2014 arising from the dissolution
of our subsidiary whose currency was denominated in Swiss Francs, with no corresponding loss in 2013. There was no book
value impact of the loss recorded from the dissolution of the foreign denominated entity as we had previously recorded the loss
through our foreign currency translation adjustment included as part of the accumulated other comprehensive loss.
Included in other income was revenue from our oil and gas operation of $1.3 million, $3.1 million, and $1.7 million for the
years ended December 31, 2015, 2014, and 2013, respectively. The decline in oil and gas revenue year-over-year from 2014 to
2015 was primarily due to significantly lower market prices for our oil and gas in 2015, which decreased by approximately 54%.
The increase in these revenues from 2013 to 2014 was primarily due to the completion of one well in the second quarter of 2014,
which increased average daily production.
Segment Expenses
In 2015, segment expenses decreased as compared to 2014, primarily due to reduced stock based compensation expense,
foreign exchange losses, and comparatively less impairment loss recorded on our oil and gas assets. Due to the significant declines
in crude oil and natural gas prices during 2015, and the operational expenses for each well, we completed an impairment analysis
during the year. Based on our assumptions we determined certain capitalized costs would not be recovered, which resulted in an
impairment loss for the year ended December 31, 2015 of $1.8 million. This is the second such impairment loss recorded on these
assets.
46
In 2014, segment expenses increased as compared to 2013, primarily due to an impairment loss of $4.4 million recorded on
our oil and gas wells in the Wattenburg Field in Colorado primarily due to an over 40% decline in crude oil prices during the fourth
quarter of 2014. There was no impairment losses on these assets during the year ended December 31, 2013.
In future reporting periods, due to the accelerated write down of our previously capitalized costs arising from the impairment
loss in 2015 and 2014, our depletion expense for each well will be significantly reduced over the remaining expected life of each
well.
Included within general, administrative, and other is $2.6 million, $3.4 million, and $1.9 million of expenses related to our
oil and gas operations for the years ended December 31, 2015, 2014, and 2013, respectively. The most significant expense in our
oil and gas operations is for our administrative service agreement, which totaled $1.3 million, $1.1 million, and $147,000 for the
years ended December 31, 2015, 2014, and 2013, respectfully. In addition, we recorded depletion, amortization, and depreciation
expense of $464,000, $1.1 million, and $888,000 for the years ended December 31, 2015, 2014, and 2013, respectfully.
It is reasonably possible given the volatile nature of software, biopharmaceutical, and the oil and gas industries that
circumstances may change in the future which could require us to record additional impairment losses on our investments in small
businesses included in this segment.
Foreign Exchange Gain or Loss
The foreign exchange gain or loss recorded in this segment in 2014 and 2013 primarily resulted from the effect of fluctuations
in the exchange rate between the Swiss Franc and the U.S. dollar on the amount of an intercompany loan, which was denominated
in Swiss Francs. In conjunction with the dissolution of certain wholly-owned subsidiaries during 2014, the intercompany loan
was canceled. The foreign exchange losses in 2015 primarily related to our investments in certain foreign equity securities.
Stock-Based Compensation Expense
Stock-based compensation expense is calculated based on the fair value of the award on the grant date and is recognized over
the vesting period of the awards. As of December 31, 2015, there was $3.7 million of unrecognized stock-based compensation
expense, which we expect to record ratably until the last award vests. Of the $3.7 million, $1.8 million related to Restricted Stock
Units (“RSU”) and $1.8 million related to performance-based price-contingent stock options (“PBO”).
The stock-based compensation expense consisted primarily of the following awards (in thousands):
PBO - Officers
RSU - Officers
RSU - Directors
RSU - Management
Total stock-based compensation expense
2015
Year Ended December 31,
2014
2013
$
$
1,029
$
533
269
76
1,907
$
82
2,995
$
321
17
3,415
$
3,483
329
3,812
The decrease in stock-based compensation expense during 2015 primarily related to the vesting of approximately 469,000
RSU during 2014 that were granted in 2010 and the related decrease in the compensation expense recognized during the year.
This decrease in stock-based compensation expense for RSU was partially offset by an increase in expense for PBO as 453,333
PBO were issued in November 2014, resulting in a full year of stock-based compensation expense for those awards during 2015.
47
ENTERPRISE SOFTWARE
Thousands of dollars
Revenue:
Sale of software
Cost of sales and expenses:
Cost of software sold
Interest expense
Depreciation
Operating expenses
Segment total expenses
Loss before income taxes
Year Ended
December 31, 2013
$
13,649
3,033
300
64
15,533
18,930
(5,281)
$
On September 10, 2013, Spigit was merged with Mindjet. As a result of the merger transaction, we no longer own a controlling
financial interest in Spigit, and consequently we no longer operate an enterprise software segment.
DISCONTINUED AGRIBUSINESS OPERATIONS
Thousands of dollars
Year Ended December 31,
Change
2015
2014
2013
2014 to 2015
2013 to 2014
Revenue and other income:
Sales of canola oil and meal
Other revenue (loss):
Loss on trading derivatives
Other
Segment total revenue and other
82,234
162,408
184,648
(159)
126
(1,966)
519
509
$
82,267
$
163,855
$
184,139
$
(81,588) $
(20,284)
1,807
(393)
(80,174)
(57,802)
(3,719)
(5,086)
(66,607)
(1,966)
10
(22,240)
(35,645)
(142)
1,755
(34,032)
79,763
4,360
5,938
90,061
137,565
8,079
11,024
156,668
173,210
8,221
9,269
190,700
Cost of goods sold:
Cost of canola oil and meal sold
Depreciation
Other direct costs of production
Total cost of goods sold
Expenses:
Impairment loss on intangible and long-lived
assets
Interest
Plant costs, overhead, and other
Segment total expenses
Loss before income taxes
1,875
3,259
17,578
112,773
$
(30,539) $
5,536
14,278
5,746
11,467
176,482
(14,074) $
207,913
(23,265) $
1,875
(2,277)
3,300
(63,709)
(16,465) $
(210)
2,811
(31,431)
9,191
48
We completed a sale of substantially all of the assets used in our agribusiness operations on July 31, 2015 and as a result, we
no longer operated an agribusiness segment as of that date. We have classified our agribusiness operations as a discontinued
agribusiness operation in the accompanying consolidated financial statements. Results from the operations during the seven
months ended July 31, 2015 have been included, along with certain transaction costs, in the 2015 financial results. Although there
are additional outstanding issues to resolve with respect to this sale, as of December 31, 2015, other than a $1.8 million loss related
to a waste water permit issue which was resolved in the first quarter of 2016, and will be record as an additional loss on sale in
the first quarter of 2016, we do not expect to record any other significant expenses related to the operations or sale of our discontinued
agribusiness operations. However, any future adjustments to the sale price, including resolution of possible indemnification
obligations above our initial expectations, and any other costs and expenses incurred in connection with the disposition of the
business will be reported within our discontinued agribusiness operations.
Segment Revenue and Gross Margin
The year-over-year decrease in canola oil and meal revenue for year ended December 31, 2015 was primarily the result of
there being only seven months of operations in 2015 due to the sale of our agribusiness assets. Through the first seven months of
2015, as compared to the year ended December 31, 2014, there was an 18% decrease in the average sales price per unit.
Our gross margin, which is sales of canola oil and meal less total cost of goods sold, decreased for the year ended December 31,
2015, as compared to the year ended December 31, 2014, primarily due to an $18 million unfavorable sales price variance resulting
from declines in our average sales price per unit. This decrease was partially offset by a $4.4 million favorable variance in the
cost of canola seed purchased.
The year-over-year decrease in revenue for the year ended December 31, 2014 was the result of a 17% decrease in the average
sales price per unit, partially offset by a year-over-year increase in sales volume of 4%. Our gross margin increased for the year
ended December 31, 2014, as compared to the year ended December 31, 2013, primarily due to a $45.8 million favorable variance
in the costs of canola seed purchased and a $4.3 million favorable oil sales customer mix. These increases were partially offset
by a $33.7 million unfavorable sale price variance resulting from declines in our average sales price per unit and increases in our
direct costs of production.
Our gross margins were also impacted by the result of derivative hedges (the cost or benefit of which is included in cost of
canola oil and meal sold) and the total volume of seed crushed on an annual basis. Derivative hedges were intended to stabilize
crush margins, which are defined as the sales of canola oil and meal less cost of canola oil and meal sold. In 2015, we recorded
a loss of $2 million from the settlement and valuation of our derivative contracts as compared to a loss of $5.1 million in 2014,
and a loss of $2.8 million in 2013. The average daily crush rate decreased significantly in the first seven months of 2015 to 565
tons per day, however, it was largely unchanged at 926 tons per day in 2014 as compared to 933 tons per day in 2013.
Segment Expenses
Plant costs, overhead, and other in the years ended December 31, 2015, 2014, and 2013 included corporate and administrative
salaries and benefits, consulting fees, insurance, office expenses, marketing fees, freight costs for shipping our oil and meal, and
certain due diligence expenses in 2014 and 2013 for potential expansion opportunities.
The year-over-year increase in plant costs, overhead, and other for the year ended December 31, 2015, primarily relates to
the costs resulting from the termination of our agribusiness operations of approximately $8.1 million. The costs were primarily
composed of $3 million in agribusiness management termination payments, $2 million in deferred debt financing fees that were
expensed on the date of close, and $3.1 million of rail-car lease termination charges and commission charges under our marketing
and sales contracts. These costs were partially offset by lower operational expenses as the plant was only operational for seven
months in 2015 as compared to 12 months in 2014. Additionally, during the year ended December 31, 2015, we recorded an
impairment loss on real estate and capitalized development costs related to a potential future agribusiness operation located in
Enid, Oklahoma. The property was disposed of in December 2015, for an additional loss of $451,000. There were no such
impairment losses or sales in the years ended December 31, 2014, or 2013.
The year-over-year increase in plant costs, overhead, and other for the year ended December 31, 2014, was due primarily to
increased expense associated with onetime costs associated with adding new rail cars to our fleet, salaries and benefits for additional
staffing associated with our internal commodities hedging, logistics management and Canadian canola seed storage and handling
location, and increased natural gas expenditures following a gas supply interruption in January 2014.
In 2015, 2014, and 2013, we recorded interest expense related to an outstanding revolving credit facility used to partially fund
the operations and a multi-draw term loan that was used to finance the construction of our canola crushing facility.
49
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 2015, 2014, AND 2013
Our assets primarily consist of real estate and tangible and intangible water assets, cash and cash equivalents, and investments
in publicly-traded securities. Our liquid funds are generally held in money market funds.
Our cash and cash equivalents and available-for-sale investments held in each segment at December 31, 2015 were as follows:
• Water resource and water storage operations segment held cash of $91,000.
• Real estate operations segment held cash of $40.5 million.
• Corporate segment held cash of $15.9 million, and marketable equity and debt securities with a market value of $18.1 million
and $4.5 million, respectively. Included in those totals is $2.5 million in cash, $17.6 million in equities and $4.5 million in
debt securities that are held in deferred compensation rabbi trusts accounts, which will be used to pay the related and offsetting
deferred compensation liabilities.
• Discontinued agribusiness segment held cash of $938,000.
Our primary sources of funds include existing cash, the sale of tangible and intangible water resource assets, loans and debt
or equity offerings, and sales of our businesses. We are not subject to any debt covenants which limit our ability to obtain additional
financing through debt or equity offerings. Debt covenants and restrictions in UCP limit us from transferring cash from those
operations for use elsewhere in our Company. However, we expect to receive required cash distributions from UCP for minimum
tax payments due as the underlying partnership generates taxable income. Regardless, cash flows from the majority of our real
estate operations are restricted for use in those operations.
Our cash flows fluctuate depending on the capital requirements of our operating subsidiaries. The sale of and costs incurred
to acquire and develop real estate and water assets are generally classified as operating activities in the consolidated statement of
cash flows. The cash flow profiles of our principal operating segments are as follows:
Water Resource and Water Storage Operations
A substantial portion of our revenue in this segment has come from one-time sales of real estate and water assets. The assets
are typically long-term water resource development projects to support growth for particular communities in the southwestern
U.S. The timing and amount of sales and cash flows depend on a number of factors which are difficult to project, and cannot be
directly compared from one period to another. Our project expenses are generally discretionary in nature.
Real Estate Operations
We are a homebuilder and developer in California, Washington State, North Carolina, South Carolina, and Tennessee. We
finance additional acquisitions, development and construction costs from our existing cash, proceeds of the sale of existing lots
and homes, and/or through external financing.
Certain of our debt agreements in our real estate operations contain various significant financial covenants, with each of which
we were in compliance at December 31, 2015, as follows:
1) Certain of our real estate debt include provisions that require minimum loan-to-value ratios. During the term of the loan,
the lender may require us to obtain a third-party written appraisal of the underlying real estate collateral. If the appraised fair
value of the collateral securing the loan is below the specified minimum, we may be required to make principal payments in order
to maintain the required loan-to-value ratios. As of December 31, 2015, the lenders have not requested, and we have not obtained,
any such appraisals.
50
2) UCP’s senior notes limit its ability to, among other things, incur or guarantee additional unsecured and secured indebtedness
(provided that UCP may incur indebtedness so long as UCP’s ratio of indebtedness to its consolidated tangible assets (on a pro
forma basis) would be equal to or less than 45% and provided that the aggregate amount of secured debt may not exceed the
greater of $75 million or 30% of UCP’s consolidated tangible assets); pay dividends and make certain investments and other
restricted payments; acquire unimproved real property in excess of $75 million per fiscal year or in excess of $150 million over
the term of the notes, except to the extent funded with subordinated obligations or the proceeds of equity issuances; create or incur
certain liens; transfer or sell certain assets; and merge or consolidate with other companies or transfer or sell all or substantially
all of UCP’s consolidated assets. Additionally, the notes require UCP to maintain at least $50 million of consolidated tangible
assets not subject to liens securing indebtedness; maintain a minimum net worth of $175 million; maintain a minimum of $15
million of unrestricted cash and/or cash equivalents; and not permit decreases in the amount of consolidated tangible assets by
more than $25 million in any fiscal year or more than $50 million at any time.
Discontinued Agribusiness Operations
On July 31, 2015, we closed on the sale of our agribusiness operations. After repayment of $80.9 million of outstanding debt
and approximately $5.9 million in selling and other related costs of the transaction, we received net proceeds of $18.4 million.
From these net proceeds we were required to deposit $10.2 million in two separate escrow accounts. We deposited $6 million in
escrow to secure general indemnification obligations, with any balance remaining after payment of indemnification claims released
18 months from the closing date of the sale, and we deposited $4.2 million in escrow for specified operational matters (the
“operational escrow”). After the required escrow deposits, and including cash that was left in the business and not part of the
sale, we had $12.4 million in unrestricted and available cash immediately following the sale as follows (in thousands):
Gross sales price
Less debt repayment
Selling and other costs
Net proceeds
Operational escrow
Cash in the business not part of the sale
Total unrestricted and available cash
$
$
105,293
(80,941)
24,352
(5,949)
18,403
(10,225)
8,178
4,218
12,396
Specified amounts of the operational escrow related to proposed amendments to two environmental permits that were in
process, but were not received prior to the closing of the sale. The first matter related to certain waste water issues assessed at a
value of $1.8 million and the second matter related to air quality issues assessed at a value of $2.4 million, which was resolved
and released to us in October 2015. On February 1, 2016, we were notified that the relevant regulatory authorities in Minnesota
had not yet approved a waste water permit at the levels required under the sale agreement. As such, the remaining $1.8 million
escrow account related to this matter was released to CHS and we will record such amount as a loss on sale of our discontinued
operations in the first quarter of 2016.
We have also guaranteed up to $8 million for any indemnification claims in excess of the $6 million escrow pursuant to the
terms of a guaranty agreement by and between us and CHS, which was executed at the closing. This guaranty will remain in force
for five years from the date of sale.
Corporate
Our corporate segment generates a modest amount of cash flow from the sale of oil and gas production from our wells in
Colorado. During 2015, we made an additional $5.3 million investment into such operations which was used to pay for drilling
costs to complete a well and, as a result, secured certain mineral leases by production, and certain accrued production taxes,
royalties, and other operating costs. We do not expect to fund any additional capital into our oil and gas operations. Due to the
depressed prices of oil and gas, we recorded an impairment loss on our oil and gas assets during the year ended December 31,
2015. It is reasonably possible that we will continue reporting operating and impairment losses from our oil and gas operations
until oil and gas prices sufficiently recover.
51
Consolidated Cash and Securities
At December 31, 2015, we had unrestricted and available cash of $12.5 million and available-for-sale debt and equity securities
of $540,000, which will be used for general corporate purposes. At December 31, 2014, we had unrestricted and available cash
of $14.4 million and available-for-sale debt and equity securities of $10.7 million.
We estimate that we have sufficient cash and available-for-sale securities to cover our cash needs for at least the next 12
months. In the long-term, we estimate that existing cash resources and cash from operations will provide us with adequate funding
for future operations. However, if additional funding is needed, we could defer significant expenditures, sell assets, obtain a line
of credit, or complete a debt or equity offering. Any additional equity offerings may be dilutive to our stockholders and any
additional debt offerings may include operating covenants that could restrict our business.
Cash Flow
Our cash flows from operating, investing, and financing activities were as follows (in thousands):
Year Ended December 31,
2015
2014
2013
Cash provided by (used in):
Operating activities - continuing operations
$
Operating activities - discontinued agribusiness operations
Total operating activities
(31,490) $
(17,433)
(48,923)
(146,687) $
(1,405)
(148,092)
Investing activities - continuing operations
Investing activities - discontinued agribusiness operations
Total investing activities
Financing activities
Effect of exchange rates on cash
Decrease in cash and cash equivalents
Cash Flows From Operating Activities
4,070
102,523
106,593
(63,248)
$
(5,578) $
504
(5,396)
(4,892)
76,027
1,896
(75,061) $
(42,210)
(16,354)
(58,564)
1,203
1,519
2,722
94,165
(399)
37,924
During 2015, the primary uses of operating cash for continuing operations were $264.2 million to acquire and develop our
residential homes and lots. We used $52.3 million for overhead expenses, primarily for salaries, benefits, marketing expenses,
professional fees, and various project and other expenses. Offsetting the uses of cash from operating operations were $279.2
million in cash received from the sale of residential homes and lots, $3.9 million from the sale of water assets, and $1.4 million
from sales of oil and gas. Our discontinued agribusiness operations used $74.3 million to purchase canola seed, $36.5 million for
overhead and operating expenses, and $3.3 million in cash paid for interest. Partially offsetting the uses of cash was $82.1 million
generated from the sales of canola oil and meal.
During 2014, the primary uses of operating cash for continuing operations were $282.8 million to acquire and develop our
residential homes and lots. We used $60.9 million for overhead expenses, primarily for salaries, benefits, marketing expenses,
professional fees, and various project and other expenses. Offsetting the uses of cash from operating activities were $190.7 million
in cash received from the sale of residential homes and lots, $3.9 million from realized gains on investments and sales of oil and
gas, and $1.2 million in cash received from sales of real estate and water assets. Our discontinued agribusiness operations used
$150.6 million to purchase canola seed, $12 million for overhead and operating expenses, and $4.7 million in cash paid for interest.
Offsetting the uses of cash was $168.6 million generated from the sales of canola oil and meal.
52
During 2013, the primary uses of cash for continuing operations were $105.4 million to acquire and develop our residential
homes and lots. We used $64 million for overhead expenses, primarily for salaries, benefits, marketing expenses, professional
fees, and various project and other expenses. Offsetting the uses of cash from operating activities were $93.3 million in cash
received from the sale of residential homes and lots, and $24.1 million in cash received from sales of real estate and water assets.
Our discontinued agribusiness operations used $189.9 million to purchase canola seed, $10.5 million for overhead and operating
expenses, and $5.8 million in cash paid for interest. Partially offsetting the uses of cash was $186.4 million generated from the
sales of canola oil and meal.
Cash Flows From Investing Activities
During 2015, the primary cash inflows from investing activities of continuing operations included $9.3 million from the sale
and maturity of debt and equity securities, offset by $2.3 million used to purchase debt and equity securities and $3.1 million used
to purchase property, plant, and equipment. During 2015, investing activities from our discontinued agribusiness operations
provided $97.5 million in net proceeds from the sale of our discontinued agribusiness operations, which was comprised of gross
proceeds from the sale of $105.3 million less $7.8 million currently held back in escrow, and also $5 million in cash released from
the restricted debt service reserve account.
During 2014, the primary uses of cash for continuing operations were $14 million used in the acquisition of the assets of
Citizens, $5.3 million used to purchase property, plant, and equipment, primarily in our oil and gas operations, and $11 million
to purchase additional debt and equity securities. These uses of cash from continuing operations were offset by $31 million
received from the sale of debt and equity securities. Our discontinued agribusiness operations used $6.4 million to purchase
property, plant, and equipment and generated $991,000 from the release of restricted deposits.
During 2013, our continuing operations provided cash from the sale of debt and equity securities of $22.7 million, and
maturities of debt securities provided $1.8 million. These sources of cash from continuing operations were partially offset by
$3.6 million used to purchase property, plant, and equipment, primarily in our oil and gas operations, and we purchased $20.3
million of securities, which principally reflected investing activity in our Swiss portfolio, and the deferred compensation portfolios.
Our discontinued agribusiness operations used $1.2 million to purchase property, plant, and equipment related to the plant expansion
and generated $2.7 million from the release of restricted deposits.
Cash Flows From Financing Activities
During 2015, financing activities, including discontinued agribusiness operations, used cash of $63.2 million, primarily due
to repayments of debt of $209.1 million, including $96.6 million paid on debt arrangements in our discontinued agribusiness
operations and $112.4 million of mortgage debt repaid when certain real estate properties were sold. These uses of cash were
offset by cash proceeds of $147.2 million provided from our debt arrangements, including $12.7 million from our working capital
line of credit within our discontinued agribusiness operations and $134.5 million used primarily to fund the acquisition and
development of our real estate projects.
During 2014, financing activities, including discontinued operations, provided cash of $76 million, primarily due to the cash
proceeds of $184.7 million from our debt arrangements, which includes the $75 million in notes issued by UCP during the year,
used primarily to fund the acquisition and development of our real estate projects, offset by repayments of debt of $101.5 million
comprised of $48.4 million primarily of construction debt repaid when certain real estate properties were sold, $34.5 million repaid
on our agribusiness debt, and $18.6 million in repayments of Swiss debt.
During 2013, the most significant cash inflow was from the $105.5 million raised in our IPO of UCP common stock; we also
borrowed $33.7 million to finance the acquisitions of real estate and home construction and borrowed $34.2 million on our line
of credit to finance working capital needs in our agribusiness operations. Offsetting these inflows were repayments of $38.5
million of mortgage debt on real estate that was sold during the year and $40.2 million paid on the debt in our agribusiness
operations.
Although we cannot accurately predict the effect of inflation on our operations, we do not believe that inflation has had a
material impact on our net revenues or results of operations, or is likely to in the foreseeable future.
Off-Balance Sheet Arrangements
As of December 31, 2015, 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.
53
Aggregate Contractual Obligations:
The following table provides a summary of our contractual cash obligations and other commitments and contingencies as of
December 31, 2015 (in thousands):
Contractual Obligations
Debt
Interest on debt
Operating leases
Total
Payments Due by Period
Less than
1 year
1-3 years
3-5 years
More than
5 years
$
42,419
$
115,071
9,174
1,641
6,671
3,422
$
53,234
$
125,164
$
$
231
231
$
Total
$
157,490
15,845
5,294
— $
178,629
We had no liabilities or potential interest for unrecognized tax benefits associated with uncertain tax positions at December 31,
2015.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our balance sheet includes a significant amount of assets and liabilities whose fair value is 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 debt securities, equity price risk as it relates to marketable equity securities, and foreign currency risk as it relates to
investments denominated in foreign currencies. The estimated fair value of our reported debt is based on cash flow models
discounted at the then-current interest rates and an estimate of the then-current spread above those rates at which we could borrow,
which are Level 3 inputs in the fair value hierarchy.
At December 31, 2015, we had $4.5 million of debt securities, and $18.1 million of marketable equity securities, $1.3 million
of which were denominated in foreign currencies, primarily New Zealand dollars, that were subject to market risk. At December 31,
2014, we had $6.4 million of debt securities and $22 million of marketable equity securities, $5.4 million of which were denominated
in foreign currencies, primarily Swiss Francs and New Zealand dollars, which were subject to market risk.
Our debt securities principally consist of bonds with short and medium terms to maturity. From time to time, we buy investment-
grade bonds with short and medium term maturities to earn a higher return on liquid funds than is available from money market
funds. We manage the interest risk by matching the maturity of the securities to budgeted cash requirements. The deferred
compensation accounts hold both investment-grade and below investment-grade bonds. In the deferred compensation accounts,
we manage interest rate risk by matching the maturities of the bonds to the participant’s pre-selected payout schedule.
We use two models to report the sensitivity of our assets and liabilities subject to the above risks. For debt 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, or a 1% increase in interest rates and compares that to the current price of the security. At December 31, 2015,
and 2014, the model calculated a loss in fair value of $140,000 and $202,000, respectively. For our marketable equity securities,
we use a hypothetical 20% decrease in fair value to analyze the sensitivity. For equity securities denominated in foreign currencies,
we use a hypothetical 20% decrease in the local currency of that investment. The hypothetical 20% decrease in fair value of our
marketable equity securities would produce a loss in fair value at December 31, 2015, and 2014, of $3.6 million and $4.4 million,
respectively, that would reduce the unrealized appreciation in shareholders’ equity. The hypothetical 20% decrease in the local
currency of our foreign currency-denominated investments would produce a loss at December 31, 2015, and 2014 of $267,000
and $1.1 million, respectively, that would impact the foreign currency translation in shareholders’ equity.
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 both factors related to the
individual securities (e.g. credit concerns about a bond issuer) and general market conditions.
54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31,
2015, and the Report of the Registered Independent Public Accounting Firm are included in this report as listed in the index.
SELECTED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in thousands, except per share amounts) for 2015 and 2014 are shown below.
In management’s opinion, the interim financial statements from which the following data has been derived contain all adjustments
necessary for a fair presentation of results for such interim periods and are of a normal recurring nature.
Sale of real estate and water assets
Impairment loss on investment in unconsolidated affiliate
Other
Total revenue and other income
Gross profit - real estate and water assets
Income (loss) from continuing operations
Net loss from discontinued agribusiness operations, net of
tax
Net income (loss)
Net loss attributable to PICO Holdings, Inc.
Net income (loss) per common share – basic and diluted:
Income (loss) from continuing operations
Loss from discontinued agribusiness operations
$
$
$
$
$
$
$
$
$
Three Months Ended
March 31,
2015 (2)
June 30,
2015
September
30, 2015
December
31, 2015
43,610
$
1,714
45,324
7,277
$
$
55,063
(20,696)
741
35,108
9,455
$
$
$
77,044
$
106,964
1,047
78,091
16,418
$
$
1,176
108,140
21,816
(9,327) $
(25,098) $
(865) $
3,679
(10,482) $
(19,809) $
(16,825) $
(25,716) $
(50,814) $
(49,770) $
(11,573) $
(12,438) $
(14,092) $
(1,497)
2,182
(1,171)
(0.32) $
(0.41) $
(1.08) $
(1.09) $
(0.11) $
(0.50) $
0.02
(0.07)
55
Sale of real estate and water assets
Impairment loss on investment in unconsolidated affiliate (1)
Other (1)
Total revenue and other income
Gross profit - real estate and water assets
Loss from continuing operations
Net income (loss) from discontinued agribusiness
operations, net of tax
Net income (loss)
Net income (loss) attributable to PICO Holdings, Inc.
Net income (loss) per common share – basic and diluted:
Loss from continuing operations
$
$
$
$
$
$
$
$
Income (loss) from discontinued agribusiness operations $
Three Months Ended
March 31,
2014(2)
June 30,
2014
September
30, 2014
25,646
$
63,780
$
56,742
$
763
26,409
4,591
$
$
3,783
67,563
12,179
$
$
2,416
59,158
10,138
$
$
December
31, 2014 (2)
46,200
(1,078)
(5,764)
39,358
7,260
(11,713) $
(2,543) $
(5,220) $
(26,055)
(4,192) $
(15,905) $
(13,247) $
4,451
1,908
1,837
$
$
$
(5,221) $
(10,441) $
(9,937) $
(9,112)
(35,167)
(31,078)
(0.42) $
(0.16) $
(0.09) $
$
0.17
(0.24) $
(0.20) $
(1.01)
(0.35)
(1) Impairment loss on investment in unconsolidated affiliate was previously included in other income.
(2) On July 13, 2015, we entered into an agreement with CHS Hallock, LLC, a wholly owned subsidiary of CHS Inc. (“CHS”), to
sell substantially all of the assets used in our agribusiness segment. The sale closed on July 31, 2015. We recorded a loss on the
sale of $18.7 million during the year ended December 31, 2015, to write down the assets sold to their fair values as determined
in the sale agreement. As a result of the transaction, the assets and liabilities of our agribusiness segment qualified as held-for-
sale and have been classified as discontinued agribusiness operations in the accompanying consolidated financial statements as
of the earliest period presented. Consequently, these prior periods have been recast from amounts previously reported to reflect
the agribusiness segment as discontinued agribusiness operations. See Note 13 “Discontinued Agribusiness Operations,” in the
accompanying consolidated financial statements for additional information.
56
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2015 AND 2014
AND FOR EACH OF THE
THREE YEARS IN THE PERIOD
ENDED DECEMBER 31, 2015
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Operations and Comprehensive Income or Loss for the Years Ended December
31, 2015, 2014, and 2013
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2015, 2014, and 2013
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014, and 2013
Notes to Consolidated Financial Statements
Page No.
58
59
60
62
65
67
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PICO Holdings, Inc.
La Jolla, California
We have audited the accompanying consolidated balance sheets of PICO Holdings, Inc. and subsidiaries (the "Company") as of
December 31, 2015 and 2014, and the related consolidated statements of operations and comprehensive income or loss, shareholders'
equity, and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial
statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PICO Holdings,
Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company's internal control over financial reporting as of December 31, 2015, based on the criteria established in Internal Control
- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 11, 2016, expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 11, 2016
58
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2015 and 2014
(In thousands)
Assets
Cash and cash equivalents
Investments ($22,590 and $28,370 measured at fair value at December 31, 2015 and 2014,
respectively)
Real estate and tangible water assets, net
Intangible assets, net
Other assets
Assets held-for-sale
Total assets
Liabilities and shareholders’ equity
Debt
Accounts payable and accrued expenses
Deferred compensation
Other liabilities
Liabilities held-for-sale
Total liabilities
Commitments and contingencies
Common stock, $.001 par value; authorized 100,000 shares, 23,116 issued and 23,038
outstanding at December 31, 2015, and 23,083 issued and 23,005 outstanding at December
31, 2014
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Treasury stock, at cost (common shares: 78 at December 31, 2015 and December 31, 2014)
Total PICO Holdings, Inc. shareholders’ equity
Noncontrolling interest in subsidiaries
Total equity
Total liabilities and equity
2015
2014
$
56,462
$
62,677
$
$
26,072
424,235
126,533
21,514
8,793
663,609
$
55,671
386,350
126,612
20,580
152,554
804,444
157,490
$
135,451
34,458
25,493
11,556
608
24,591
24,584
13,685
94,588
229,605
292,899
23
494,207
(151,366)
4,961
(1,413)
346,412
87,592
434,004
$
663,609
$
23
491,662
(69,508)
4,717
(1,413)
425,481
86,064
511,545
804,444
The accompanying notes are an integral part of the consolidated financial statements.
59
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME OR LOSS
For the years ended December 31, 2015, 2014, and 2013
(In thousands, except per share data)
Revenues and other income:
Sale of real estate and water assets
Sale of software
Impairment loss on investment in unconsolidated affiliate
Other income, net
Total revenues and other income
Cost of sales and expenses:
Cost of real estate and water assets sold
Cost of software sold
General, administrative, and other
Sales and marketing
Impairment loss on intangible and long-lived assets
Interest
Depreciation and amortization
Total costs and expenses
Loss from continuing operations before income taxes and equity in loss of
unconsolidated affiliates
Benefit (provision) for federal and state income taxes
Equity in loss of unconsolidated affiliate
Loss from continuing operations
Loss from discontinued agribusiness operations, net of tax
Loss on sale of discontinued agribusiness operations, net of tax
Net loss from discontinued agribusiness operations, net of tax
Net loss
Net (income) loss attributable to noncontrolling interests
Net loss attributable to PICO Holdings, Inc.
$
2015
2014
2013
$
282,681
$
192,368
$
116,776
13,649
29,756
160,181
87,457
3,033
58,101
8,594
1,410
1,135
2,618
(20,696)
4,678
266,663
(1,078)
1,198
192,488
227,715
158,200
45,780
18,824
3,282
2,212
297,813
(31,150)
2,961
(3,422)
(31,611)
(30,539)
(18,729)
(49,268)
(80,879)
(979)
(81,858) $
51,229
13,662
13,084
228
3,054
239,457
162,348
(46,969)
3,514
(2,076)
(45,531)
(14,074)
(14,074)
(59,605)
7,180
(52,425) $
(2,167)
(3,197)
(565)
(5,929)
(23,265)
(23,265)
(29,194)
6,896
(22,298)
The accompanying notes are an integral part of the consolidated financial statements.
60
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME OR LOSS, CONTINUED
(In thousands, except per share data)
Other comprehensive loss:
Net loss
Other comprehensive loss, net of tax:
Unrealized gain (loss) on securities, net of deferred income tax and
reclassification adjustments
Foreign currency translation
Total other comprehensive loss, net of tax
Comprehensive loss
Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive loss attributable to PICO Holdings, Inc.
Net loss per common share – basic and diluted:
Loss from continuing operations
Loss from discontinued agribusiness operations
Net loss per common share – basic and diluted
Weighted average shares outstanding
2015
2014
2013
$
(80,879) $
(59,605) $
(29,194)
292
(48)
244
(80,635)
(979)
(81,614) $
(2,093)
6,578
4,485
(55,120)
7,180
(47,940) $
2,411
(165)
2,246
(26,948)
6,896
(20,052)
(1.49) $
(2.07) $
(3.56) $
(1.76) $
(0.54) $
(2.30) $
23,014
22,802
(0.09)
(0.89)
(0.98)
22,742
$
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
61
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the year ended December 31, 2013
(In thousands)
Beginning balance, December 31, 2012
25,807
$
26
$526,591
$
5,215
$
(2,014)
3,073
$ (56,593) $
5,271
$
478,496
Shares of
Common
Stock Issued
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings/
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Shares of
Treasury
Stock
Treasury
Stock, at
Cost
Non-
controlling
Interest
Total
Changes in ownership of noncontrolling interest
Stock-based compensation expense
Exercise of restricted stock units
Net loss
Unrealized gain on investments, net of deferred
income tax of $1,167 and reclassification
adjustments of $1,176
Foreign currency translation
14,985
4,731
14
(22,298)
Ending balance, December 31, 2013
25,821
$
26
$546,307
$
(17,083) $
92,335
1,246
107,320
5,977
—
(6,896)
(29,194)
2,411
(165)
3,073
$ (56,593) $ 91,956
$
564,845
2,411
(165)
232
The accompanying notes are an integral part of the consolidated financial statements
62
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the year ended December 31, 2014
(In thousands)
Beginning balance, December 31, 2013
25,821
$
26
$546,307
Shares of
Common
Stock Issued
Common
Stock
Additional
Paid-in
Capital
247
(2,985)
5,228
(4,919)
(54,954)
(3)
Stock-based compensation expense
Exercise of restricted stock units
Retirement of treasury stock
Sale of treasury stock
Contributions from noncontrolling interest
Net loss
Unrealized loss on investments, net of deferred
income tax of $1,076 and reclassification
adjustments of $4,646
Foreign currency translation
Accumulated
Other
Comprehensive
Income
Accumulated
Deficit
(17,083) $
$
Shares of
Treasury
Stock
Treasury
Stock, at
Cost
Non-
controlling
Interest
Total
232
3,073
$ (56,593) $ 91,956
$
564,845
(2,985)
54,957
(10)
223
1,865
(817)
240
7,093
(5,736)
—
223
240
(52,425)
(7,180)
(59,605)
(2,093)
6,578
4,717
78
$ (1,413) $ 86,064
$
511,545
(2,093)
6,578
Ending balance, December 31, 2014
23,083
$
23
$491,662
$
(69,508) $
The accompanying notes are an integral part of the consolidated financial statements
63
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the year ended December 31, 2015
(In thousands)
Beginning balance, December 31, 2014
23,083
$
23
$491,662
Shares of
Common
Stock Issued
Common
Stock
Additional
Paid-in
Capital
Accumulated
Deficit
(69,508) $
$
Stock-based compensation expense
Exercise of restricted stock units
Withholding taxes paid on vested restricted stock
units at UCP, Inc.
Distribution to noncontrolling interest
Net loss
Unrealized gain on investments, net of deferred
income tax of $173 and reclassification
adjustments of $741
Foreign currency translation
33
2,882
(337)
(81,858)
Ending balance, December 31, 2015
23,116
$
23
$494,207
$ (151,366) $
Accumulated
Other
Comprehensive
Income
Shares of
Treasury
Stock
Treasury
Stock, at
Cost
Non-
controlling
Interest
Total
4,717
78
$ (1,413) $ 86,064
$
511,545
734
(159)
(26)
979
3,616
—
(496)
(26)
(80,879)
292
(48)
78
$ (1,413) $ 87,592
$
434,004
292
(48)
4,961
The accompanying notes are an integral part of the consolidated financial statements
64
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2015, 2014, and 2013
(In thousands)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Provision (benefit) for deferred income taxes
Depreciation and amortization expense
Stock based compensation expense
Impairment loss on investment in unconsolidated affiliate
Gain on sale of available-for-sale investments
Foreign exchange loss on liquidation of subsidiary
Loss from discontinued operations, net
Fair value adjustment of contingent consideration
Impairment loss on intangible and long-lived assets
Equity in loss of unconsolidated affiliate
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
Notes and other receivables
Real estate, water, and intangible assets
Income taxes
Other assets
Deferred compensation
Accounts payable and accrued expenses
Other operating activities, net
Cash used in operating activities - continuing operations
Cash used in operating activities - discontinued agribusiness operations
Net cash used in operating activities
Investing activities:
Proceeds from the sale of investments
Proceeds from maturity of investments
Purchases of investments
Increase in restricted deposits
Purchases of property, plant and equipment
Cash acquired (used) in the acquisition of a consolidated subsidiary
Other investing activities, net
Cash provided by investing activities - continuing operations
Cash provided by (used in) investing activities - discontinued agribusiness
operations
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from issuance of common stock of subsidiary, net of expenses
Proceeds from debt
Repayment of debt
Debt issuance costs
Payment of withholding taxes on exercise of restricted stock units
Proceeds from the sale of treasury stock
Other financing activities, net
Net cash provided by (used in) financing activities
2015
2014
2013
$
(80,879) $
(59,605) $
(29,194)
(2,913)
2,212
3,616
20,696
(1,101)
49,268
(1,195)
3,282
3,422
227
(40,235)
(204)
909
11,311
94
(31,490)
(17,433)
(48,923)
7,938
1,343
(2,316)
(3,108)
213
4,070
102,523
106,593
(3,315)
3,054
7,067
1,078
(4,733)
9,336
14,074
13,084
2,076
(785)
(132,005)
3,624
(2,613)
423
2,628
(75)
(146,687)
(1,405)
(148,092)
31,036
(11,046)
(250)
(5,270)
(14,006)
40
504
(5,396)
(4,892)
147,170
(209,068)
(827)
(496)
(27)
(63,248)
184,684
(101,462)
(1,920)
(5,737)
220
242
76,027
2,870
2,619
5,977
(23,642)
23,265
1,410
565
(1,959)
(32,375)
151
(2,150)
1,553
7,702
998
(42,210)
(16,354)
(58,564)
22,676
1,809
(20,290)
(3,568)
174
402
1,203
1,519
2,722
105,454
67,868
(79,157)
94,165
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Less cash and cash equivalents of discontinued agribusiness operations, end of year
Cash and cash equivalents of continuing operations, end of year
$
(5,578)
62,978
57,400
938
56,462
$
1,896
(75,061)
138,039
62,978
301
62,677
(399)
37,924
100,115
138,039
49
$ 137,990
65
PICO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
For the years ended December 31, 2015, 2014 and 2013
(In thousands)
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Payment (refund) of federal and state income taxes
Interest paid, net of amounts capitalized
Non-cash investing and financing activities:
Issuance of common stock for vested restricted stock units
Fair value of assets acquired in Citizens acquisition
Cash paid for the acquisition of consolidated subsidiaries
Contingent consideration and liabilities assumed in Citizens acquisition
Accrued debt issuance costs
Exercise of land purchase options acquired with acquisition of business
Unpaid liability incurred for construction costs
Mortgage incurred to purchase real estate
Increase in assets from business combination with Spigit
Increase in liabilities from business combination with Spigit
Decrease in assets from disposition of Spigit
Decrease in liabilities from disposition of Spigit
Conversion of note receivable to common stock in Spigit
$
$
$
$
$
2015
2014
2013
(67) $
$
3,295
(3,817) $
$
5,183
185
6,801
1,609
195
388
$
$
$
$
$
$
$
11,463
19,418
(14,006)
5,412
473
141
917
$
$
$
$
$
$
$
98
6,605
21,432
20,377
24,800
18,900
820
The accompanying notes are an integral part of the consolidated financial statements
66
PICO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOOTNOTE INDEX
1. Nature of Operations and Significant Accounting Policies
2. Real Estate and Tangible Water Assets, Net
3. Goodwill and Intangible Water Assets
4. Investments
5. Disclosures About Fair Value
6. Debt
7. Commitments and Contingencies
8. Stock-Based Compensation
9. Federal and State Current and Deferred Income Tax
10. Accumulated Other Comprehensive Income or Loss
11. Related-Party Transactions
12. Segment Reporting
13. Discontinued Agribusiness Operations
14. Acquisition of Citizens Homes
Page No.
67
74
74
75
78
81
82
83
86
89
89
92
94
96
1.
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations:
PICO Holdings, Inc., together with its subsidiaries (collectively, “PICO” or the “Company”), is a diversified holding company.
As of December 31, 2015, the Company has presented its consolidated financial statements and the accompanying notes to the
consolidated financial statements using the guidelines prescribed for real estate companies, as the majority of the Company’s
assets and operations are primarily engaged in real estate and related activities.
Currently PICO’s major activities include developing water resources and water storage operations in the southwestern United
States, homebuilding, and land development.
The following are the Company’s significant operating subsidiaries as of December 31, 2015. All subsidiaries are wholly-
owned except where indicated:
Vidler Water Company, Inc. (“Vidler”) is a Nevada corporation. Vidler’s business involves identifying end users, namely
water utilities, municipalities, or developers, in the southwestern United States who require water, and then locating a source and
supplying the demand, either by utilizing Vidler’s own assets or securing other sources of supply. These assets comprise water
resources in Nevada, Arizona, Colorado, and New Mexico, and a water storage facility and stored water in Arizona.
UCP, Inc. (“UCP”) is a public company homebuilder and land developer which owns and develops real estate in California,
Washington State, North Carolina, South Carolina, and Tennessee. UCP operates its homebuilder business through its subsidiary,
Benchmark Communities, LLC (“Benchmark”). PICO owns 56.9% of UCP.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned, majority-
owned and controlled subsidiaries, and have been prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”). Intercompany balances and transactions have been eliminated in consolidation.
67
Use of Estimates in Preparation of Financial Statements:
The preparation of financial statements in accordance with U.S. 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 application of the equity method of accounting,
intangibles, 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 were appropriate as of December 31, 2015 and
December 31, 2014, it is reasonably possible that actual results could differ from the estimates upon which the carrying values
were based.
Real Estate and Tangible Water Assets:
Real estate and tangible water assets include the cost of certain tangible water assets, water storage credits and related storage
facilities, real estate, including raw land and real estate being developed and any real estate improvements. The Company capitalizes
pre-acquisition costs, the purchase price of real estate, development costs and other allocated costs, including interest, during
development and construction. Pre-acquisition costs, including non-refundable land deposits, are expensed to cost of sales when
the Company determines continuation of the related project is not probable.
Additional costs to develop or otherwise get real estate and tangible water assets ready for their intended use are capitalized.
These costs typically include direct construction costs, legal fees, engineering, consulting, direct cost of well drilling or related
construction, and any interest costs capitalized on qualifying assets during the development period. The Company expenses all
maintenance and repair costs on real estate and tangible water assets. The types of costs capitalized are consistent across periods
presented. Tangible water assets consist of various water interests currently in development or awaiting permitting. Amortization
of real estate improvements is computed on the straight-line method over the estimated useful lives of the improvements ranging
from five to fifteen years.
Intangible Water Assets:
Intangible water assets include the costs of indefinite-lived intangible assets and is comprised of water rights and the exclusive
right to use two water transportation pipelines. The Company capitalizes development and entitlement costs and other allocated
costs, including interest, during the development period of the assets to tangible water assets and transfers the costs to intangible
water assets when water rights are permitted. Water rights consist of various water interests acquired or developed independently
or in conjunction with the acquisition of real estate. When the Company purchases intangible water assets that are attached to
real estate, an allocation of the total purchase price, including any direct costs of the acquisition, is made at the date of acquisition
based on the estimated relative fair values of the water rights and the real estate.
Intangible assets with indefinite useful lives are not amortized but are tested for impairment at least annually in the fourth
quarter, or more frequently if events or changes in circumstances indicate that the asset may be impaired, by comparing the fair
value of the assets to their carrying amounts. The fair value of the intangible assets is calculated using discounted cash flow
models that incorporate a wide range of assumptions including current asset pricing, price escalation, discount rates, absorption
rates, timing of sales, and costs. These models are sensitive to minor changes in any of the input variables.
Investments:
The Company’s investment portfolio at December 31, 2015 and 2014 was comprised of corporate bonds and equity securities.
Corporate bonds are purchased based on the maturity and yield-to-maturity of the bond and an analysis of the fundamental
characteristics of the issuer. The Company’s investments in equity securities consisted of common stock of publicly traded and
private small-capitalization companies in the United States (“U.S.”) and selected foreign markets.
The Company classifies its marketable securities as available-for-sale investments. Such investments are reported at fair
value, with unrealized gains and losses, net of tax effects, recorded in accumulated other comprehensive income. Investments in
private companies are generally held at the lower of cost or fair value, unless the Company has the ability to exercise significant
influence. The Company reports the amortization of premium and accretion of discount on the level yield method relating to
bonds acquired at other than par value and realized investment gains and losses in other income. The cost of any equity security
sold is determined using an average cost basis and specific identification for bond cost. Sales and purchases of investments are
recorded on the trade date.
68
Investment in Unconsolidated Affiliate:
Investments where the Company owns at least 20% but not more than 50% of the voting interest, or has the ability to exercise
significant influence, but not control, over the investee are accounted for under the equity method of accounting. Accordingly,
the Company’s share of the income or loss of the affiliate is included in the Company’s consolidated results. Any impairment
losses recorded against investments accounted for under the equity method of accounting are included in impairment loss on
investment in unconsolidated affiliates.
Other-than-Temporary Impairment:
All of the Company’s debt and equity investments are subject to a periodic impairment review. The Company recognizes an
impairment loss when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary.
Factors considered in determining whether a loss is temporary on an equity security includes the length of time and extent to
which the investments fair value has been less than the cost basis, the financial condition and near-term prospects of the investee,
extent of the loss related to credit of the issuer, the expected cash flows from the security, the Company’s intent to sell the security
and whether or not the Company will be required to sell the security before the recovery of its cost. If a security is impaired and
continues to decline in value, additional impairment losses are recorded in the period of the decline if deemed other-than-temporary.
Subsequent recoveries of the value are reported as unrealized gains and are part of other comprehensive income or loss.
The Company will recognize an impairment loss on debt securities if the Company (a) intends to sell or expects to be required
to sell the security before its amortized cost is recovered, or (b) does not expect to ultimately recover the amortized cost basis even
if the Company does not intend to sell the security. Impairment losses on debt securities that are expected to be sold before the
amortized cost is recovered are recognized in earnings. For debt securities that the Company does not expect to recover the
amortized costs basis, credit losses are recognized in earnings and the difference between fair value and the amortized cost basis
net of the credit loss is recognized in other comprehensive income.
Impairment of Long-Lived Assets:
The Company records an impairment loss when the condition exists where the carrying amount of a long-lived asset or asset
group is not recoverable. Impairment of long-lived assets is triggered when the estimated future undiscounted cash flows, excluding
interest charges, for the lowest level for which there is identifiable cash flows that are independent of the cash flows of other
groups of assets do not exceed the carrying amount. The Company prepares and analyzes cash flows at appropriate levels of
grouped assets. If the events or circumstances indicate that the remaining balance may be impaired, such impairment will be
measured based upon the difference between the carrying amount and the fair value of such assets determined using the estimated
future discounted cash flows, excluding interest charges, generated from the use and ultimate disposition of the respective long-
lived asset.
Noncontrolling Interests:
The Company reports the share of the results of operations that are attributable to other owners of its consolidated subsidiaries
that are less than wholly-owned as noncontrolling interest in the accompanying consolidated financial statements. In the
consolidated statement of operations and comprehensive income or loss, the income or loss attributable to the noncontrolling
interest is reported separately and the accumulated income or loss attributable to the noncontrolling interest, along with any changes
in ownership of the subsidiary, is reported within shareholders’ equity.
Cash and Cash Equivalents:
Cash and cash equivalents include short-term, highly liquid instruments, purchased with original maturities of three months
or less.
69
Other Assets:
Other assets include the following significant account balances:
Property, Plant and Equipment, Net:
Property, plant and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed on the straight-
line method over the estimated lives of the assets. Buildings and leasehold improvements are depreciated over the shorter of the
useful life or lease term and range from 15 to 30 years, office furniture and fixtures are generally depreciated over seven years,
and computer equipment is depreciated over three years. Maintenance and repairs are charged to expense as incurred, while
significant improvements are capitalized. Gains or losses on the sale of property, plant and equipment are included in other income.
Capitalized property, plant and equipment costs include all development costs incurred to get the asset ready for its intended
use and includes capitalized interest on qualifying assets during the development period.
The Company has elected to reclassify “Property, plant and equipment, net” balances from a separate line item on the
consolidated balance sheet to “Other assets.” Prior periods presented have been recast from amounts previously reported.
Notes and Other Receivables:
The Company’s notes and other receivables included installment notes from the sale of real estate and water assets. The
Company records a provision for doubtful accounts to allow for any specific accounts which may be unrecoverable and is based
upon an analysis of the Company’s prior collection experience, customer creditworthiness, current economic trends and underlying
value of the real estate, if applicable. Certain notes are secured by the underlying assets, which allows the Company to recover
the property if and when a buyer defaults. No significant provision for bad debts was required on any receivables or installment
notes from the sale of real estate and water assets during the years ended December 31, 2015, and 2014.
Goodwill:
The Company records goodwill that arises from costs in excess of the fair value of net assets acquired in a business combination.
The balance is not amortized but is tested for impairment at least annually in the fourth quarter, or more frequently if events or
changes in circumstances indicate that the asset may be impaired. Goodwill is tested for impairment at the reporting unit level,
which is generally the subsidiary company level. A discounted cash flow model is used to estimate the fair value of the reporting
unit, which considers forecasted cash flows discounted at an estimated weighted-average cost of capital. The Company selected
the discounted cash flow methodology as it believes it is comparable to what would be used by market participants. The weighted-
average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market participants of a
business enterprise. This analysis requires significant judgment, including discount rates, growth rates and terminal values and
the timing of expected future cash flows. Discount rate assumptions are based on an assessment of the risk inherent in the future
cash flows of the respective reporting unit. Factors which could necessitate an interim impairment assessment include a sustained
decline in our stock price, prolonged negative industry or economic trends and significant underperformance relative to expected
historical or projected future operating results.
Accounts payable and accrued expenses:
Accounts payable and accrued expenses includes trade payables and accrued construction payables.
Deferred Compensation:
The Company reports the investment returns generated in the deferred compensation accounts in other income with a
corresponding increase in the trust assets (except in the case of PICO stock, which is reported as treasury stock, at cost). There
is an increase in the deferred compensation liability when there is appreciation in the market value of the assets held, with a
corresponding expense recognized in operating and other costs. In the event the trust assets decline in value, the Company reverses
previously expensed compensation. The assets of the plan are held in rabbi trust accounts. Such accounts hold various investments
that are consistent with the Company’s investment policy, and are accounted for and reported as available-for-sale securities in
the accompanying consolidated balance sheets. Assets of the trust will be distributed according to predetermined payout elections
established by each participant.
70
Other Liabilities:
Other liabilities includes employee benefits, unearned revenues, option payments and deposits received, warranty liabilities,
deferred tax liabilities, and accrued interest, and other accrued liabilities.
Revenue Recognition:
Sale of Real Estate and Water Assets:
Revenue recognition on the sale of real estate and water assets conforms with accounting literature related to the sale of real
estate, and is recognized in full when there is a legally binding sale contract, the profit is determinable (the collectability of the
sales price is reasonably assured, or any amount that will not be collectible can be estimated), the earnings process is virtually
complete (the Company is not obligated to perform significant activities after the sale to earn the profit, meaning the Company
has transferred all risks and rewards to the buyer), and the buyer’s initial and continuing investment is adequate to demonstrate a
commitment to pay for the property. If these conditions are not met, the Company records the cash received as deferred revenue
until the conditions to recognize full profit are met.
Sale of Finished Homes:
Revenue from sales of finished homes is included in the sale of real estate and water assets in the accompanying consolidated
statement of operations and comprehensive income or loss and is recognized when the sale closes and title passes to the new
homeowner, the new homeowners initial and continuing investment is adequate to demonstrate a commitment to pay for the home,
the new homeowners receivable is not subject to future subordination and the Company does not have a substantial continuing
involvement with the new home.
Other Income, Net:
Included in other income are various transactional results including realized gains and losses from the sale of investments,
interest income, sales of oil and gas, and other sources not considered to be the core focus of the existing operating entities within
the group.
Cost of Sales:
Cost of Real Estate and Water Assets:
Cost of real estate and water assets sold includes direct costs of the acquisition of the asset less any impairment losses previously
recorded against the asset, development costs incurred to get the asset ready for use, and any capitalized interest costs incurred
during the development period.
Cost of Homes Sold:
Cost of homes sold includes direct home construction costs, closing costs, real estate acquisition and development costs,
development period interest, and common costs. Direct construction and development costs are accumulated during the period
of construction and charged to cost of homes sold under specific identification methods, as are closing costs. Estimates of costs
incurred or to be incurred but not paid are accrued at the time of closing. Real estate development for common costs are allocated
to each lot based on a relative fair value of the lots under development.
General, Administrative, and Other:
General, administrative, and other costs include general overhead expenses such as salaries and benefits, stock-based
compensation, consulting, audit, tax, legal, insurance, property taxes, and other general operating expenses. The Company has
reclassified “Operating and other costs” on the consolidated statement of operations and comprehensive income or loss to “General,
administrative, and other” and “Sales and Marketing.”
Sales and Marketing:
Sales and marketing costs include sales and marketing related salaries and benefits and sales commissions.
71
Stock-Based Compensation:
Stock-based compensation expense is measured at the grant date based on the fair values of the awards and is recognized as
expense over the period in which the share-based compensation vests using the straight-line method.
Accounting for Income Taxes:
The Company’s provision for income tax expense includes federal and state income taxes currently payable and those deferred
because of temporary differences between the income tax and financial reporting bases of the assets and liabilities. The liability
method of accounting for income taxes also requires the Company to reflect the effect of a tax rate change on accumulated deferred
income taxes in income in the period in which the change is enacted.
In assessing the realization of deferred income taxes, management considers whether it is more likely than not that any deferred
income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of
future taxable income during the period in which temporary differences become deductible. If it is more likely than not that some
or all of the deferred income tax assets will not be realized a valuation allowance is recorded. As a result of the analysis of all
available evidence the Company concluded that it was more likely than not that its deferred tax assets would not be realized and
accordingly a full valuation allowance was recorded.
The Company recognizes any uncertain income tax positions on income tax returns at the largest amount that is more-likely-
than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized
unless it has a greater than a 50% likelihood of being sustained. The Company recognizes any interest and penalties related to
uncertain tax positions in income tax expense.
Loss per Share:
Basic earnings or loss per share was computed by dividing net earnings by the weighted average number of shares outstanding
during the period. Diluted earnings or loss per share was 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. The Company’s free-standing stock appreciation rights (“SAR”), performance-based price-
contingent stock options (“PBO”), and restricted stock units (“RSU”) are considered common stock equivalents for this purpose.
The number of additional shares related to these common stock equivalents is calculated using the treasury stock method.
For the three years ended December 31, 2015, the Company’s common stock equivalents were excluded from the diluted per
share calculation because their effect on earnings per share was anti-dilutive.
Translation of Foreign Currency:
Financial statements of foreign operations were translated into U.S. dollars using average rates of exchange in effect during
the applicable year for revenues, expenses, realized gains and losses, and the exchange rate in effect at the balance sheet date for
assets and liabilities. Unrealized exchange gains and losses arising on translation were reflected within accumulated other
comprehensive income or loss. Realized foreign currency gains or losses were reported within total costs and expenses in the
consolidated statement of operations and comprehensive income or loss. Any accumulated foreign currency included in other
comprehensive income or loss that existed at a sale date or date of dissolution of a subsidiary was part of the gain or loss realized
on the transaction as reported in the consolidated statements of operations and comprehensive income or loss.
Consolidation of Variable Interest Entities:
The Company consolidates variable interest entities (“VIE”) where it has a controlling financial interest. A controlling financial
interest will have both of the following characteristics: (1) the power to direct the activities of a VIE that most significantly impact
the VIE economic performance and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE
or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company did not consolidate
any VIE at December 31, 2015 or 2014.
72
Recently Issued Accounting Pronouncements:
In April 2015, the Financial Accounting Standards Board (“FASB”) issued guidance on the balance sheet presentation
requirements for debt issuance costs. The guidance will require that debt issuance costs related to a recognized debt liability be
presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.
The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods
within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. An entity
should apply the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented should be
adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with
the applicable disclosures for a change in an accounting principle. The Company is currently evaluating the effect this guidance
will have on the consolidated financial statements.
In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue
recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to
depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those
goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized.
Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction
price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances.
The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows
arising from an entity’s contracts with customers. The guidance was originally effective for the interim and annual periods
beginning on or after December 15, 2016 and early adoption was not permitted. However, in July 2015 the FASB voted to approve
a one-year deferral of the new revenue standard to December 15, 2017. The FASB also voted to permit all entities to apply the
new revenue standard early, but not before the original effective date. Companies that choose to implement the standard early
will apply the new revenue standard to all interim reporting periods within the year of adoption. The guidance permits the use of
either a retrospective or cumulative effect transition method. The Company is currently evaluating the effect this guidance will
have on the consolidated financial statements.
In June 2015, the FASB issued accounting guidance to clarify existing codification, correct unintended application of guidance,
and make minor improvements to existing codification that is not expected to have a significant effect on current accounting
practice. This update was the result of a standing project implemented by the FASB’s chairman to address feedback received from
stakeholders on the codification and to make other incremental improvements to GAAP. The amendments in this guidance that
require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be
effective immediately. The Company is currently evaluating the effect this guidance will have on the consolidated financial
statements.
In January 2016, the FASB issued accounting guidance to enhance to reporting model for financial instruments. The guidance
amends various aspects of the recognition, measurement, presentation, and disclosure for financial instruments. The main
provisions include requiring equity investments to be measured at fair value with changes in fair value to be recognized in net
income; simplifying the impairment assessment of equity investments without readily determinable fair values by requiring an
initial qualitative assessment; eliminating the requirement to disclose the method and significant assumptions used to estimate the
fair value of financial instruments measured at amortized cost; requiring the use of the exit price notion when measuring the fair
value of certain financial instruments; requiring the separate disclosure in other comprehensive income or loss of the change in
fair value of a liability resulting from a change in the instrument-specific credit risk; requiring separate presentation of financial
assets and liabilities by measurement category and form; and finally clarifying the need for a valuation allowance on a deferred
tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The new guidance is
effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted only for certain provisions. The Company is currently evaluating the effect this guidance will
have on the consolidated financial statements.
73
2.
REAL ESTATE AND TANGIBLE WATER ASSETS, NET
The cost assigned to the various components of real estate and tangible water assets were as follows (in thousands):
Real estate and improvements held and used, net of accumulated amortization of $11,778 at
December 31, 2015 and $10,899 at December 31, 2014
Residential real estate and home construction inventories
Other real estate inventories completed or under development
Tangible water assets
Total real estate and tangible water assets
December 31,
2015
2014
$
9,694
$
10,574
362,056
9,971
42,514
322,938
10,308
42,530
$
424,235
$
386,350
Amortization of real estate improvements was approximately $879,000 in each of the three years ended December 31, 2015.
Impairment Losses during 2015:
During the year ended December 31, 2015, the Company recorded an impairment loss of $923,000 on real estate located in
Kern County, California and owned by UCP reducing the carrying value to $6 million. The loss was reported in the consolidated
statement of operations and comprehensive income or loss within impairment loss on intangible and long-lived assets and was
included in the results of operations of the real estate operations segment.
During the year ended December 31, 2015, the Company accepted an offer for $3.4 million for real estate owned near Fresno,
California. As a result, an impairment loss of $274,000 was recorded that reduced the carrying value of the real estate to the offer
price. The real estate is not part of UCP’s results of operations, nor is it included in UCP’s inventory of lots. The loss was reported
in the consolidated statement of operations and comprehensive income or loss within impairment loss on intangible and long-
lived assets and was included in the results of operations of the real estate operations segment.
Impairment Losses during 2014:
In November 2014, certain water rights applications were denied by the New Mexico State Engineer and as a result, the
Company recorded an impairment loss of $3.5 million by writing down the project’s capitalized costs to zero. The loss was
reported in the consolidated statement of operations and comprehensive income or loss within impairment loss on intangible and
long-lived assets and was included in the results of operations of the water resource and water storage operations segment.
During the year ended December 31, 2014, the Company decided to sell a property “as-is” as opposed to completing
development activities as originally planned and as a result, wrote down the carrying value of the asset to the estimated fair value.
The Company reduced the carrying value of the real estate balance to $1.4 million by recording an impairment loss of $2.9 million.
The loss was reported in the consolidated statement of operations and comprehensive income or loss within impairment loss on
intangible and long-lived assets and was included in the results of operations of the real estate operations segment. The real estate
is not part of UCP’s results of operations, nor is it included in UCP’s inventory of lots.
3.
GOODWILL AND INTANGIBLE ASSETS
Intangible Assets:
The Company’s carrying amounts of its indefinite-lived intangible assets were as follows (in thousands):
Pipeline rights and water credits at Fish Springs Ranch
Pipeline rights and water rights at Carson-Lyon
Other, net of accumulated amortization
Total intangible assets
74
December 31,
2015
2014
$
83,897
$
24,831
17,805
83,897
24,804
17,911
$
126,533
$
126,612
Fish Springs Ranch Pipeline Rights and Water Credits:
There are 13,000 acre-feet per-year of permitted water rights at Fish Springs Ranch. The existing permit allows up to 8,000
acre-feet of water per year to be exported to support the development in the Reno area. Under a settlement agreement signed in
2007, the Pyramid Lake Paiute Tribe (the “Tribe”) agreed to not oppose any permitting activities for the pumping and export of
groundwater in excess of 8,000 acre-feet of water per year, and in exchange, Fish Springs Ranch will pay the Tribe 12% of the
gross sales price for each acre-foot of additional water that Fish Springs Ranch sells in excess of 8,000 acre-feet per year, up to
13,000 acre-feet per year. The obligation to expense and pay the 12% fee is due only if and when the Company sells water in
excess of 8,000 acre-feet, and accordingly, Fish Springs Ranch will record the liability for such amounts as they become due upon
the sale of any such excess water. Currently Fish Springs Ranch does not have regulatory approval to export any water in excess
of 8,000 acre-feet per year from Fish Springs Ranch to support further development in northern Reno, and it is uncertain whether
such regulatory approval will be granted in the future.
Impairment Losses during 2015:
As a result of the Company’s annual review of indefinite-lived intangible assets, using a discounted cash flow model, the
Company recorded an impairment loss of $269,000, reducing the carrying value to $3 million. The loss was recorded in the
consolidated statement of operations and comprehensive income or loss within impairment loss on intangible and long-lived
assets. The loss was also recorded in the water resource and water storage operations segment results. This was the first such
impairment recorded on this asset. There were no other impairment losses on any other intangible assets during the year ended
December 31, 2015.
Impairment Losses during 2014:
As a result of the Company’s annual review of indefinite-lived intangible assets, using a discounted cash flow model, it was
determined that the fair value of other intangible assets of approximately $3.3 million was below the carrying value of $5.6 million,
resulting in an impairment loss of $2.3 million. The loss was recorded in the consolidated statement of operations and comprehensive
income or loss within impairment loss on intangible and long-lived assets, and was reported as part of the water resource and
water storage operations segment results. This was the first such impairment recorded on this asset.
Goodwill:
The Company had a goodwill balance of $4.2 million at December 31, 2015 and December 31, 2014. During 2014, the
Company recorded $4.2 million of goodwill as part of the acquisition of certain assets and liabilities of Citizens Homes, Inc.
(“Citizens”), as discussed in Note 14 “Acquisition of Citizens Homes.” There were no other acquisitions, disposals, or impairments
of goodwill during the years ended December 31, 2015, or December 31, 2014.
4.
INVESTMENTS
The cost and carrying value of available-for-sale investments were as follows (in thousands):
December 31, 2015
Debt securities: corporate bonds
Marketable equity securities
Total
December 31, 2014
Debt securities: corporate bonds
Marketable equity securities
Total
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Cost
4,458
10,339
14,797
$
$
46
7,879
7,925
$
$
(51) $
(81)
(132) $
4,453
18,137
22,590
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Carrying
Value
Cost
8,909
14,780
23,689
$
$
198
7,335
7,533
$
$
(65) $
(125)
(190) $
9,042
21,990
31,032
$
$
$
$
75
The Company owns marketable debt and equity securities in the U.S. and abroad. Approximately $1.5 million and $5.6
million of the Company’s available-for-sale investments at December 31, 2015, and 2014, respectively, were invested
internationally, primarily in Switzerland and New Zealand.
The amortized cost and carrying value of investments in debt securities, by contractual maturity, are shown below. Actual
maturity dates may differ from contractual maturity dates because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties (in thousands):
Due in one year or less
Due after one year through five years
Due after five years
December 31, 2015
December 31, 2014
Amortized
Cost
Carrying
Value
Amortized
Cost
Carrying
Value
$
$
38
2,603
1,817
4,458
$
$
37
2,566
1,850
4,453
$
$
3,786
3,310
1,813
8,909
$
$
3,958
3,255
1,829
9,042
Included in other income, net in the accompanying consolidated financial statements is the pre-tax net realized gain or loss
on investments (in thousands):
Year Ended December 31,
2014
2013
2015
Gross realized gains:
Debt securities
Equity securities and other investments
Total gain
Gross realized losses:
Debt securities
Equity securities and other investments (1)
Total loss
Net realized gain (loss)
$
419
$
7
$
1,010
1,429
5,545
5,552
(4)
(21,020)
(21,024)
(19,595) $
$
(116)
(1,781)
(1,897)
3,655
$
3
24,110
24,113
(152)
(319)
(471)
23,642
(1) Included within this caption for the years ended December 31, 2015, and 2014, is $20.7 million and $1.1 million, respectively,
that is reported in a separate line, impairment loss on unconsolidated affiliate, within the Company’s consolidated statements of
operations and comprehensive income or loss for the years then ended.
Significant Realized Gains and Losses:
The realized losses reported in 2015 were primarily due to the $20.7 million impairment loss on the investment in Mindjet,
Inc. (“Mindjet”) common and preferred shares discussed below. The realized gains reported in 2013 were primarily due to the
$21.2 million gain on the merger transaction between Spigit, Inc. (“Spigit”) and Mindjet.
Debt Securities
At December 31, 2015, there were unrealized losses on certain bonds held by the Company. The Company does not consider
those bonds to be other-than-temporarily impaired because the Company expects to hold, and will not be required to sell, these
particular bonds, and expects to recover the entire amortized cost basis at maturity. There were no impairment losses recorded
on debt securities during the three years ended December 31, 2015.
Marketable Equity Securities
At December 31, 2015, the Company reviewed all of its equity securities in an unrealized loss position and concluded certain
securities were not other-than-temporarily impaired as the declines were not of sufficient duration and severity, and publicly-
available financial information, collectively, did not indicate impairment. The primary cause of the losses on those securities was
normal market volatility. No material impairment losses were recorded on equity securities during the years ended December 31,
2015, 2014 and 2013.
76
Other Investments:
The Company owned the following investments that are not classified as available-for-sale (in thousands):
Investment in Synthonics
Investment in Mindjet:
Investment in common stock
Investment in preferred stock
Total
Investment in Synthonics:
December 31, 2015
December 31, 2014
Carrying
Value
Voting
Interest
Carrying
Value
Voting
Interest
2,170
18.3% $
2,170
19.6%
—
1,312
1,312
3,482
19.3% $
19.3% $
$
6,611
15,858
22,469
24,639
15.0%
13.4%
28.4%
$
$
$
$
Synthonics, Inc. (“Synthonics”) is a private company co-founded by a member of the Company’s board of directors. The
Company’s investment consists of preferred shares as discussed in Note 11 “Related-Party Transactions.”
Investment in Mindjet:
During 2015, Mindjet raised additional capital from existing shareholders. The Company elected not to participate in the
offering and as a result, the Company’s existing investment in preferred stock was converted to common stock at five shares of
preferred stock for one share of common stock, and the Company’s investment in convertible debt was converted into nonvoting
preferred stock resulting in a decline in the Company’s voting ownership to 19.3%. In addition, the Company lost its right to a
board seat. Given the resulting voting interest and loss of board representation, the Company determined it no longer had significant
influence over the operating and financial policies of Mindjet and therefore discontinued the equity method of accounting for the
investment in common stock during the third quarter of 2015. The remaining investment was held at cost at December 31, 2015.
At December 31, 2015, the Company’s carrying value in Mindjet was $2.2 million, comprised of $1.3 million in preferred stock
and a note receivable of $886,000 that is expected to be converted into additional preferred stock during the first quarter of 2016.
The Company had previously accounted for the investment in common stock using the equity method of accounting. This
resulted in recording a loss within equity in loss of unconsolidated affiliate in the consolidated statement of operations and
comprehensive income or loss of $3.4 million, $2.1 million, and $565,000 for the years ended December 31, 2015, December 31,
2014, and December 31, 2013, respectively. The Company’s share of the losses reported by Mindjet during 2015 were allocated
to the carrying value of the common stock investment until it reached zero, and then to the preferred stock and convertible debt.
During 2015, the Company recorded a $20.7 million impairment loss on the investment in Mindjet common and preferred
shares as the estimated fair value was less than the carrying value due to significantly increased, and continuing operating losses
and resulting liquidity issues, actual financial results significantly less than projections, and decreased market conditions that have
adversely affected the value of Mindjet. Such loss was recorded in impairment loss on investment in unconsolidated affiliate in
the consolidated statement of operations and comprehensive income or loss. The fair value of the investment in Mindjet was based
on an analysis of the financial and operational aspects of the company, including consideration of business enterprise value-to-
revenue ratios for comparable public companies to current revenue metrics for the company. Determination of the business
enterprise value based on the foregoing was then considered in an analysis of the distribution of equity value to the various classes
of debt and equity issued by Mindjet in order to reflect differences in value due to differing liquidation preferences, dividend and
voting rights. The fair value approach relied primarily on Level 3 unobservable inputs, whereby expected future cash flows were
determined using revenue multiples that included assumptions regarding an entity’s assumptions about risk and uncertainties. The
estimates were based upon assumptions believed to be reasonable, but which by their nature are uncertain and unpredictable.
It is reasonably possible that the Company’s ownership percentage in Mindjet will continue to decline as other shareholders
fund the ongoing operations with additional equity capital and upon conversion of notes in the first quarter of 2016. The Company
does not anticipate investing any additional capital into Mindjet.
77
The carrying value of the Company’s investment in Mindjet is subject to impairment testing at each reporting period, or more
frequently if facts and circumstances indicate the investment may be impaired. It is reasonably possible that circumstances may
continue to deteriorate which could require the Company to record additional impairment losses on the remaining investment
balances.
During 2014, the Company recorded a $1.1 million impairment loss on the preferred shares as the estimated fair value of such
shares was less than the carrying value. The fair value was determined using a 50/50 weighting of the guideline public company
method (market approach) and a discounted cash flow method (income approach).
During 2014, the Company was notified by Mindjet that it was asserting a breach in the representations and warranties made
by Spigit in the September 10, 2013 merger agreement. As part of the notification, Mindjet made a claim against the Mindjet
shares held by the former Spigit shareholders, including the Company. A partial settlement was reached by the parties in November
2014 that was not material to the Company and was paid in shares of Mindjet. During 2015, the claim period for the remaining
outstanding issue ended, and the Company was released from any additional liability for damages.
5.
DISCLOSURES ABOUT FAIR VALUE
Recurring Fair Value Measurements
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. The following tables set forth the Company’s
assets and liabilities that were measured at fair value, on a recurring basis, by level within the fair value hierarchy. There were
no significant transfers between Level 1 and Level 2 during the year ended December 31, 2015. During the year ended December 31,
2014, $5.6 million in equity securities were transferred from Level 1 to Level 2 as a result of low trading volume and a wide bid/
ask spread. There were no significant transfers from Level 2 to Level 1 during the year ended December 31, 2014. The Company’s
policy is to recognize transfers between levels at the end of the reporting period.
At December 31, 2015 (in thousands):
Assets
Available-for-sale equity securities (1)
Available-for-sale debt securities (1)
Liabilities
Contingent consideration (2)
Quoted
Prices In
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31,
2015
$
$
10,685
$
7,452
4,453
$
$
18,137
4,453
$
2,707
$
2,707
78
At December 31, 2014 (in thousands):
Assets
Available-for-sale equity securities (1)
Available-for-sale debt securities (1)
Liabilities
Contingent consideration (2)
Quoted
Prices In
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31,
2014
$
$
10,892
$
11,098
6,380
$
$
21,990
6,380
$
3,902
$
3,902
(1) 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 available-for-sale investments 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. All Level 2 available-for-sale securities
are one class because they all contain similar risks and are valued using market prices and 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.
Inputs include directly or indirectly observable inputs such as quoted prices. Level 3 available-for-sale securities would include
securities where valuation is based on unobservable inputs that are supported by little or no market activity and that are significant
to the fair value of the assets. This includes certain pricing models, discounted cash flow methodologies and similar techniques
that use significant unobservable inputs.
(2) Included in this caption is the contingent consideration that the Company potentially owes due to the acquisition of Citizens.
The contingent consideration arrangement requires the Company to pay up to a maximum of $6 million of additional consideration
based upon achievement of various pre-tax net income performance milestones of the new business (“performance milestones”)
over a five year period commencing on April 1, 2014. Payout calculations are made based on calendar year performance, except
for the sixth payout calculation, which will be calculated based on the achievement of performance milestones from January 1,
2019 through March 25, 2019. Payouts are to be made on an annual basis. The potential undiscounted amount of all future
payments that the Company could be required to make under the contingent consideration arrangement is between zero and $6
million. The estimated fair value of the contingent consideration was estimated based on applying the income approach and a
weighted probability of achievement of the performance milestones. The estimated fair value of the contingent consideration
was calculated by using a Monte Carlo simulation model. The fair value of the contingent consideration was then estimated as
the arithmetic average of all simulation paths. The model was based on forecast adjusted net income over the contingent
consideration period. The measurement is based on significant inputs that are not observable in the market, which are defined
as Level 3 inputs. Key assumptions include: (1) forecasted adjusted net income over the contingent consideration period, (2)
risk-adjusted discount rate reflecting the risk inherent in the forecasted adjusted net income, (3) risk-free interest rates, (4)
volatility of adjusted net income, and (5) UCP’s credit spread. The risk adjusted discount rate for adjusted net income was
13.5% plus the applicable risk-free rate resulting in a combined discount rate ranging from 13.5% to 14.2% over the contingent
consideration period. The volatility rate of 19.1% and a credit spread of 11% were applied to forecast adjusted net income over
the contingent consideration period. The change in estimated fair value of the contingent consideration was $1.2 million for
the year ended December 31, 2015.
Non-Recurring Fair Value Measurements
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.
The following table sets forth the Company’s non-financial assets that were measured at fair value, on a non-recurring basis,
by level within the fair value hierarchy.
79
Year Ended December 31, 2015 (in thousands):
Asset Description
Intangible water assets (1)
Oil and gas wells (2)
Real estate and development costs (3)
Real estate and development costs (3)
Investment in unconsolidated affiliate (4)
Quoted
Prices In
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Loss
$
$
$
$
$
3,023
2,542
3,400
5,960
2,163
$
$
$
$
$
(269)
(1,816)
(274)
(923)
(20,696)
(1) The Company had a non-recurring fair value measurement for intangible assets that resulted in an impairment loss discussed
in Note 3 “Goodwill and Intangible Assets.”
(2) The Company recorded an impairment loss to write down the value of capitalized development costs related to its oil and gas
wells. The estimated fair value of the wells was determined using a discounted cash flow model. The loss was reported in the
consolidated statement of operations and comprehensive income or loss within impairment loss on intangible and long-lived
assets and was included in the results of operations of the corporate segment.
(3) The Company had a non-recurring fair value measurement of a real estate asset discussed in Note 2 “Real Estate and Tangible
Water Assets, Net.”
(4) The Company had a non-recurring fair value measurement on its investment in Mindjet that resulted in an impairment loss
discussed in Note 4 “Investments.”
Year Ended December 31, 2014 (in thousands):
Asset Description
Intangible water assets (1)
Tangible water asset and other assets (2)
Oil and gas wells (3)
Real estate (4)
Investments in unconsolidated affiliates equity securities
held at cost (5)
Quoted
Prices In
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Loss
$
$
$
$
$
3,638
$
— $
1,730
1,357
15,858
$
$
$
(2,282)
(3,509)
(4,428)
(2,865)
(1,078)
(1) The Company had a non-recurring fair value measurement for intangible assets that resulted in an impairment loss discussed
in Note 3 “Goodwill and Intangible Assets.”
(2) The Company had a non-recurring fair value measurement for a tangible water asset that resulted in an impairment loss discussed
in Note 2 “Real Estate and Tangible Water Assets.”
(3) Due to the significant decline in crude oil prices during the fourth quarter of 2014, the Company completed an impairment
analysis of the oil and gas wells using a discounted cash flow model. Based on the analysis, the Company wrote down the carrying
value of oil wells capitalized to their estimated fair value, resulting in an impairment loss for the year ended December 31, 2014.
(4) The Company had a non-recurring fair value measurement of a real estate asset discussed in Note 2 “Real Estate and Tangible
Water Assets, Net.”
80
(5) The Company had a non-recurring fair value measurement of an investment in an unconsolidated affiliates equity securities
held at cost discussed in Note 4 “Investments.”
Estimated Fair Value of Financial Instruments Not Carried at Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The level within the fair value hierarchy in which the fair value measurements
are classified include measurements using quoted prices in active markets for identical assets or liabilities (Level 1), quoted prices
for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active (Level
2), and significant valuation assumptions that are not readily observable in the market (Level 3).
As of December 31, 2015 and 2014, the fair values of cash and cash equivalents, accounts payable, and accounts receivable
approximated their carrying values because of the short-term nature of these assets or liabilities. The estimated fair value of the
Company’s investments in unconsolidated affiliates approximated their carrying values. The estimated fair value of the Company's
debt is based on cash flow models discounted at the then-current interest rates and an estimate of the then-current spread above
those rates at which the Company could borrow, which are Level 3 inputs in the fair value hierarchy. The estimated fair value of
certain of the Company’s other investments, which included investments in preferred stock of private companies, cannot be
reasonably estimated on a recurring basis.
The following table presents the carrying value and fair value of the Company’s financial instruments which are not carried
at fair value (in thousands):
Financial assets:
Investments in unconsolidated affiliates equity securities
$
3,482
$
3,482
Investments in unconsolidated affiliates debt securities
$
$
18,028
2,662
$
$
18,028
7,964
December 31, 2015
December 31, 2014
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Financial liabilities:
Debt
6.
DEBT
$
157,490
$
166,769
$
135,451
$
150,143
The Company enters into acquisition, development and construction debt agreements to purchase and develop real estate and
for the construction of homes, which are generally secured primarily by the underlying real estate. Certain of the loans are funded
in full at the initial loan closing and others are revolving facilities under which the Company may borrow, repay and redraw up
to a specified amount during the term of the loan. Acquisition debt is due at various dates but is generally repaid when lots are
released from the loans based upon a specific release price, as defined in each respective loan agreement, or the loans are refinanced
at current prevailing rates. Construction and development debt is required to be repaid with proceeds from the sale of homes based
upon a specific release price, as defined in each respective loan agreement.
The following table details the Company’s outstanding debt (in thousands):
No stated interest, payments through 2017
3% to 4.75% payments through 2017
5% to 5.5% payments through 2017
8% payments through 2018
Senior notes: 8.5% payments through 2017
10% payments through 2017
Total debt
81
December 31,
2015
2014
$
1,935
67,602
$
7,639
4,000
74,710
1,604
52,379
6,918
74,550
1,604
$
157,490
$
135,451
At December 31, 2015, and 2014, the Company’s real estate debt had a weighted average interest rate of 6.4% and 6.6%,
respectively.
As of December 31, 2015, and 2014, the Company had approximately $232.6 million and $134.5 million, respectively,
available in loan commitments to draw upon, of which approximately $75.1 million and $87.3 million, respectively, was available.
Debt Provisions, Restrictions, and Covenants on Real Estate Debt
Certain of UCP’s debt agreements contain various significant financial covenants, each of which UCP was in compliance
with at December 31, 2015, and December 31, 2014.
The $75 million of senior notes issued in 2014 by UCP limit UCP’s ability to, among other things, incur or guarantee additional
unsecured and secured indebtedness (provided that UCP may incur indebtedness so long as UCP’s ratio of indebtedness to its
consolidated tangible assets (on a pro forma basis) would be equal to or less than 45% and provided that the aggregate amount of
secured debt may not exceed the greater of $75 million or 30% of UCP’s consolidated tangible assets); pay dividends and make
certain investments and other restricted payments; acquire unimproved real property in excess of $75 million per fiscal year or in
excess of $150 million over the term of the notes, except to the extent funded with subordinated obligations or the proceeds of
equity issuances; create or incur certain liens; transfer or sell certain assets; and merge or consolidate with other companies or
transfer or sell all or substantially all of UCP’s consolidated assets.
Other
The Company’s future minimum principal debt repayments were as follows (in thousands):
Year ended December 31,
2016
2017
2018
Total
$
$
42,419
111,071
4,000
157,490
The Company incurred $11.6 million, $4 million, and $4 million of interest expense during the years ended December 31,
2015, 2014, and 2013, respectively. The Company capitalized $11.6 million, $3.8 million, and $2.9 million of the interest incurred
in 2015, 2014, and 2013, respectively, related to construction and real estate development costs. Due to debt covenants and other
restrictions, the total restricted net assets of the Company’s consolidated subsidiaries was $131.2 million at December 31, 2015.
7.
COMMITMENTS AND CONTINGENCIES
The Company leases some of its offices under non-cancelable operating leases that expire at various dates through 2021. Rent
expense for the years ended December 31, 2015, 2014, and 2013, for office space was $1.8 million, $1.6 million, and $1.6 million,
respectively.
Future minimum payments under all operating leases were as follows (in thousands):
Year ended December 31,
2016
2017
2018
2019
2020
Thereafter
Total
$
1,641
1,495
1,343
584
213
18
$
5,294
82
Neither PICO nor its subsidiaries are parties to any potentially material pending legal proceedings.
The Company is subject to various litigation matters that arise in the ordinary course of its business. Because litigation is
inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires
judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate
due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories,
and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in
litigation against the Company may be unsupported, exaggerated or unrelated to possible outcomes, and as such are not meaningful
indicators of the Company’s potential liability. The Company regularly reviews contingencies to determine the adequacy of
accruals and related disclosures. The amount of ultimate loss may differ from these estimates, and it is possible that the Company’s
consolidated financial statements could be materially affected in any particular period by the unfavorable resolution of one or
more of these contingencies.
Whether any losses finally determined in any claim, action, investigation or proceeding could reasonably have a material
effect on the Company’s business, financial condition, results of operations or cash flows will depend on a number of variables,
including: the timing and amount of such losses; the structure and type of any remedies; the significance of the impact any such
losses, damages or remedies may have on the consolidated financial statements; and the unique facts and circumstances of the
particular matter that may give rise to additional factors.
8.
STOCK-BASED COMPENSATION
At December 31, 2015, the Company had one stock-based payment arrangement outstanding, the PICO Holdings, Inc. 2014
Equity Incentive Plan (the “2014 Plan”). UCP also issues stock-based compensation under its own long term incentive plan that
provides for equity-based awards, which upon vesting results in newly issued shares of UCP Class A common stock.
The 2014 Plan provides for the issuance of up to 3.3 million shares of common stock in the form of PBO, RSU, SAR, non-
statutory stock options, restricted stock awards (“RSA”), performance shares, performance units, deferred compensation awards,
and other stock-based awards to employees, directors, and consultants of the Company (or any present or future parent or subsidiary
corporation or other affiliated entity of the Company). The 2014 Plan allows for broker assisted cashless exercises and net-
settlement of income taxes and employee withholding taxes. Upon exercise of a PBO, RSU, and SAR, the employee will receive
newly issued shares of PICO common stock with a fair value equal to the in-the-money value of the award, less applicable federal,
state and local withholding and income taxes (however, the holder can elect to pay withholding taxes in cash).
The Company recorded total stock based compensation expense of $3.6 million, $7.1 million and $6 million during 2015,
2014 and 2013, respectively. Of the $3.6 million in stock based compensation expense recorded during 2015, $1.7 million related
to RSU and stock options for UCP common stock granted to the officers of UCP, of which $734,000 was allocated to noncontrolling
interest. Of the $7.1 million in stock based compensation expense recorded in 2014, $3.7 million related to RSU for UCP common
stock granted to the officers of UCP, of which $1.9 million was allocated to noncontrolling interest. Of the $6 million in stock
based compensation expense recorded in 2013, $2.2 million related to RSU for UCP common stock granted to the officers of UCP,
of which $1.2 million was allocated to noncontrolling interest.
Performance-Based Options (PBO)
At various times, the Company has awarded PBO to various members of management. All of the PBO issued contain a market
condition based on the achievement of a stock price target during the contractual term and vest monthly over a three year period.
The vested portion of the options may be exercised only if the 30-trading-day average closing sales price of the Company’s common
stock equals or exceeds 125% of the grant date stock price. The stock price contingency may be met any time before the options
expire and it only needs to be met once for the PBO to remain exercisable for the remainder of the term. Compensation expense
is amortized on a straight-line basis over the requisite service period for the entire award, which is the vesting period of the award.
83
The estimated fair value of the Company’s PBO was determined using a Monte Carlo model, which incorporated the following
assumptions:
Grant date
Expiration date
Grant date stock price
Historical volatility
Risk-free rate (annualized)
Dividend yield (annualized)
2015
10-Year
Option
2014
10-Year
Option
2014
4.58-Year
Option
8/12/2015
8/12/2025
11/14/2014
11/14/2014
11/14/2024
6/14/2019
$
13.06
$
19.51
$
35.16%
2.19%
—%
35.00%
2.38%
—%
19.51
28.85%
1.5%
—%
The determination of the fair value of PBO using an option valuation model is affected by the Company’s stock price, as well
as assumptions regarding a number of complex and subjective variables. The volatility is calculated through an analysis based
on historical daily returns of PICO’s stock over a look-back period equal to the PBO contractual term. The risk-free interest rate
assumption is based upon a risk-neutral framework using the 10-year and 4.58-year zero-coupon risk-free interest rates derived
from the treasury constant maturities yield curve on the grant date, for the 10-year PBO award and the 4.58-year PBO award,
respectively. The dividend yield assumption is based on the expectation of no future dividend payouts by the Company.
The weighted-average grant date fair value of the PBO granted during the years ended December 31, 2015 and December 31,
2014 was $5.87 and $6.51 per share, respectively. The total fair value of the 285,714 shares, 4.58-year options was $1.5 million,
the total fair value of the 167,619 shares, 2014 10-year options was $1.5 million, and the total fair value of the 75,000 shares, 2015
10-year options was $440,000. The Company did not have any PBO activity during the year ended December 31, 2013.
A summary of PBO activity was as follows:
Outstanding at December 31, 2013
Granted
Forfeited
Outstanding at December 31, 2014
Granted
Forfeited
Outstanding at December 31, 2015
Performance-
Based
Options
Weighted-
Average
Exercise
Price Per
Share
453,333
453,333
$
$
75,000
$
(75,000) $
$
453,333
19.51
19.51
13.06
13.06
19.51
Of the PBO outstanding, 285,714 are exercisable for up to 4 years, 7 months from the grant date and 167,619 are exercisable
for up to 10 years from the grant date.
84
Weighted-
Average
Exercise
Price Per
Share
Weighted-
Average
Remaining
Contractual
Term (In
Years)
Aggregate
Intrinsic
Value
Performance-
Based
Options
12,593
Vested at December 31, 2013
Vested
Forfeited
Vested at December 31, 2014
12,593
$
19.51
Vested
Forfeited
Vested at December 31, 2015
155,278
(4,167)
163,704
$
19.51
6.5
5.5
—
—
All previously recognized compensation expense related to forfeited PBO was reversed during the year and the remaining
unamortized expense was canceled. There were no PBO forfeitures during the years ended December 31, 2014 and 2013.
As of December 31, 2015 and December 31, 2014, there were no PBO exercisable as the market condition had not been met.
The unrecognized compensation cost related to unvested PBO at December 31, 2015 and 2014 was $1.8 million and $2.9 million,
respectively.
Restricted Stock Units (RSU)
RSU awards the recipient, who must be continuously employed by the Company until the vesting date, unless the employment
contracts stipulate otherwise, the right to receive one share of the Company’s common stock. RSU do not vote and are not entitled
to receive dividends. RSU are valued at the Company’s closing stock price on the date of grant and compensation expense is
recognized ratably over the vesting period for each grant.
A summary of RSU activity was as follows:
Outstanding and unvested at December 31, 2012
Granted
Vested
Forfeited
Outstanding and unvested at December 31, 2013
Granted
Vested
Forfeited
Outstanding and unvested at December 31, 2014
Granted
Vested
Forfeited
Outstanding and unvested at December 31, 2015
Weighted-
Average
Grant Date
Fair Value
Per Share
RSU Shares
467,716
$
15,435
$
(13,716) $
469,435
$
142,131
$
(469,435) $
142,131
$
23,300
$
(45,753) $
(11,020) $
$
108,658
30.43
22.67
21.87
30.43
19.81
30.43
19.81
15.68
20.43
15.72
19.07
The unrecognized compensation cost related to unvested RSU for the years ended December 31, 2015 and 2014 was $1.8
million and $2.5 million, respectively.
In August of 2015, the Company issued 5,000 RSU to a member of management that vest over a three year period and in June
of 2015, the Company issued 3,050 RSU to each of the six non-employee directors of the Company for a total of 18,300 awards
that vest one year from the date of grant.
85
When an award vests, the recipient receives a new share of PICO common stock for each RSU, less that number of shares of
common stock equal in value to applicable withholding taxes. During 2015, 13,212 RSU held by directors and 32,539 RSU held
by various officers and members of management vested, which resulted in the delivery of 33,758 newly issued shares of PICO
common stock, net of applicable withholding taxes.
During the year ended December 31, 2015, 11,020 RSU were forfeited. All previously recognized expense was reversed
during the year and the remaining unamortized expense was canceled. There were no RSU forfeited during the years ended
December 31, 2014 and 2013.
Stock-Settled Stock Appreciation Right (SAR)
Upon exercise, a SAR entitles the recipient to receive a newly issued share of the Company’s common stock equal to the in-
the-money value of the award, less applicable federal, state and local withholding and income taxes. SAR do not vote and are not
entitled to receive dividends. Compensation expense for SAR was recognized ratably over the vesting period for each grant.
There were no unvested SAR, and therefore no compensation expense recognized, during the three years ended December 31,
2015. In addition, there were no SAR granted or exercised during the three years ended December 31, 2015.
A summary of SAR activity is as follows:
Outstanding and exercisable at December 31, 2012
Expired
Outstanding and exercisable at December 31, 2013
Expired
Outstanding and exercisable at December 31, 2014
Expired
Outstanding and exercisable at December 31, 2015
Weighted
Average
Exercise
Price
Weighted
Average
Contractual
Term
Remaining
(Years)
36.16
33.76
36.45
33.76
36.49
33.76
42.71
3.5
2.5
1.5
1.5
SAR Shares
1,812,079
$
(195,454) $
$
1,616,625
(20,000) $
1,596,625
$
(1,110,155) $
$
486,470
At December 31, 2015, none of the outstanding SAR were in-the-money.
9.
FEDERAL AND STATE CURRENT AND DEFERRED INCOME TAX
The Company and its subsidiaries file a consolidated federal income tax return. Companies that are less than 80% owned
corporations, or entities that are treated as partnerships for federal income tax purposes, file separate federal income tax returns.
All of the Company’s pre-tax loss from continuing operations in each of the three years ended December 31, 2015, 2014 and 2013
was generated in the U.S. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
86
The significant components of deferred income tax assets and liabilities were as follows (in thousands):
Deferred tax assets:
Deferred compensation
Impairment loss on securities
Impairment loss on water assets
Impairment loss on real estate
Capitalized expenses
Net operating losses, capital losses, and tax credit carryforwards
Employee benefits, including stock-based compensation
Excess tax basis in affiliate
Fixed assets
Other, net
Total deferred tax assets
Deferred tax liabilities:
Unrealized appreciation on securities
Revaluation of real estate and water assets
Fixed assets
Excess book basis in affiliate
Other, net
Total deferred tax liabilities
Valuation allowance
Net deferred income tax liability
December 31,
2015
2014
$
10,199
$
1,292
17,252
1,423
8,629
65,680
5,818
14,675
2,312
2,975
130,255
3,118
5,254
6,646
2,118
17,136
(113,119)
$
— $
9,936
2,237
16,856
1,327
9,451
61,081
5,416
5,659
2,312
114,275
2,950
5,249
13,077
10,809
4,007
36,092
(80,940)
(2,757)
The Company reported no net deferred taxes at December 31, 2015 and a $2.8 million net deferred liability at December 31,
2014 related to the taxable temporary difference attributable to its investment in Mindjet, which was not expected to reverse within
a period that would allow it to be offset by existing deductible temporary differences. This investment balance was determined
to be impaired and was written off during 2015 such that it is no longer a taxable temporary difference.
Deferred tax assets and liabilities and federal income tax expense in future years can be significantly affected by changes in
circumstances that would influence management’s conclusions as to the ultimate realization of deferred tax assets. Valuation
allowances are established and maintained for deferred tax assets on a “more likely than not” threshold. At December 31, 2011,
the Company considered it more likely than not that the deferred tax assets would not be realized and a full valuation allowance
was provided. At December 31, 2015, after evaluating the positive and negative evidence, management concluded to maintain a
full valuation allowance against its deferred tax assets. The Company has considered the following possible sources of taxable
income when assessing the realization of the deferred tax assets: (1) future reversals of existing taxable temporary differences;
(2) taxable income in prior carryback years; (3) tax planning strategies; and (4) future taxable income exclusive of reversing
temporary differences and carryforwards. Reliance on future U.S. taxable income as an indicator that a valuation allowance is
not required is difficult when there is negative evidence such as the Company's cumulative losses in recent years. In considering
the evidence as to whether a valuation allowance is needed, the existence, magnitude and duration of such cumulative losses are
factors that are accorded significant weight in the Company's assessment. As a result, a determination was made that there was
not sufficient positive evidence to enable the Company to conclude that it was “more likely than not” that these deferred tax assets
would be realized. Therefore, the Company has provided a full valuation allowance against the Company's net deferred tax assets.
This assessment will continue to be undertaken in the future. The Company's results of operations may be impacted in the future
by the Company's inability to realize a tax benefit for future tax losses or for items that will generate additional deferred tax assets.
The Company's results of operations might be favorably impacted in the future by reversals of valuation allowances if the
Company is able to demonstrate sufficient positive evidence that the Company's deferred tax assets will be realized.
87
The Company had operating loss carryforwards, federal tax credit carryforwards, and state capital loss carryforwards as of
December 31, 2015, that will expire if not utilized. The following table summarizes such carryforwards and their expiration as
follows (in thousands):
Expire 2016 through 2019
Expire 2020 through 2024
Expire 2025 through 2029
Expire 2030 through 2035
Total
Federal Net
Operating
Losses
Federal Tax
Credits
State Net
Operating
Losses
State
Capital
Losses
$
1,412
$
4,998
$
8,500
2,106
15
4,299
16,879
7,689
156,693
134,504
134,504
$
7,832
$
186,259
$
8,500
$
$
Utilization of the Company's U.S. federal and certain state net operating loss and tax credit carryovers may be subject to
substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state
provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards before utilization. As
of December 31, 2015, the Company believes that utilization of its federal net operating losses and federal tax credits are not
limited under any ownership change limitations provided under the Internal Revenue Code.
Income tax provision or benefit for federal and state income taxes consisted of the following (in thousands):
Current tax benefit (provision)
Deferred tax benefit (provision)
Total income tax benefit (provision)
$
$
48
2,913
2,961
$
$
199
3,315
3,514
$
$
(326)
(2,871)
(3,197)
The difference between income taxes provided at the Company’s federal statutory rate and effective tax rate was as follows
(in thousands):
Year Ended December 31,
2014
2013
2015
Year Ended December 31,
2014
2013
2015
Federal income tax provision at statutory rate
$
Change in valuation allowance
State taxes, net of federal benefit
Nondeductible compensation
Equity in loss of unconsolidated affiliate
Research and development credit
Other
Total income tax benefit (provision)
$
10,902
(13,601)
36
(530)
2,766
2,248
1,140
$
2,961
$
$
16,439
(11,784)
184
(1,567)
816
758
(4,347)
1,255
(1,370)
198
(574)
3,514
$
309
(3,197)
The Company is subject to taxation in the U.S. and various state jurisdictions. As of December 31, 2015, the Company's
statute is open from 2012 and 2010 forward for federal and for state tax purposes, respectively. During 2014, the U.S. Internal
Revenue Service initiated an examination of the Company’s 2011 and 2012 federal income tax returns, which was settled in the
first quarter of 2015 without any material adjustments. The Company's 2006 through 2008 California income tax returns were
examined by the California Franchise Tax Board and an adjustment was proposed, which the Company is contesting in an
administrative proceeding. The Company believes that the results of the proceedings will not materially affect its financial position,
results of operations, or cash flows.
88
10.
ACCUMULATED OTHER COMPREHENSIVE INCOME OR LOSS
The components of accumulated other comprehensive income or loss were as follows (in thousands):
Net unrealized gain on available-for-sale investments
Foreign currency translation
Accumulated other comprehensive income
December 31,
2015
2014
$
$
5,065
(104)
4,961
$
$
4,773
(56)
4,717
The unrealized gain on available-for-sale investments is net of a deferred income tax liability of $2.8 million at December 31,
2015 and $2.6 million at December 31, 2014.
The following table reports amounts that were reclassified from accumulated other comprehensive income or loss and included
in earnings (in thousands):
Year Ended December 31,
2015
2014
2013
Beginning balance - January 1
$
Unrealized gain reclassified and recognized in net loss, net of tax(1)
Foreign exchange reclassified and recognized in net loss, net of tax(1)
Total reclassified and recognized in net loss, net of tax
Unrealized gain on marketable securities, net of tax
Accumulated currency, net of tax
Net change in other comprehensive income, net of tax
$
4,717
(481)
361
(120)
773
(409)
244
232
(3,020)
6,567
3,547
927
11
4,485
Accumulated other comprehensive income
$
4,961
$
4,717
$
$
(2,014)
(764)
(764)
3,175
(165)
2,246
232
(1) Amounts reclassified from this category are included in other income in the consolidated statement of operations and
comprehensive income or loss.
During 2014, the Company substantially liquidated several wholly-owned subsidiaries, one of which conducted business and
maintained its financial statements in a foreign denominated local currency. The translation of such financial statements into the
Company’s U.S. reporting currency created a cumulative translation loss of $9.3 million, which was reported net of a $3.1 million
tax benefit in accumulated other comprehensive income or loss. In conjunction with the liquidation, the balance of the accumulated
foreign currency adjustment was reclassified from accumulated other comprehensive loss and was reported as a loss on liquidation
within other income, net in the consolidated statement of operations and comprehensive income or loss for the year ended
December 31, 2014.
11.
RELATED-PARTY TRANSACTIONS
Employment, Severance, and Executive Bonus Plan Agreements
Effective March 11, 2016, the Company entered into 1) an amended employment agreement with John R. Hart, the Company’s
President and Chief Executive Officer (“CEO”), 2) amended severance agreements with Maxim C. W. Webb, the Company’s
Executive Vice President, Chief Financial Officer, Treasurer and Secretary, and John T. Perri, Vice President and Chief Accounting
Officer, and 3) an executive bonus plan with these same individuals.
The Amended Employment Agreement:
The amended agreement superseded and replaced Mr. Hart’s previous employment agreement entered into in 2014 and provides
the following:
• a five year term ending on March 11, 2021;
89
• an annual base salary of $1 million including the standard benefits package made available to other full time employees
of the Company;
• certain termination benefits:
If terminated without cause, Mr. Hart is entitled to 1) a lump-sum payment of $10 million, 2) payment of family
health benefits through the earlier of Mr. Hart’s death or his acceptance of health coverage from another employer
although the Company could pay Mr. Hart a one-time payment of $540,000 as satisfaction of this obligation under
certain circumstances, 3) payment of all accrued vacation and other time off, including an additional $389,000
which is the amount of the difference between (a) the value of such accrued vacation and time off at December 31,
2015 calculated using his annual base salary on such date and (b) the value of that benefits using his revised base
salary under the new agreement, 4) immediate vesting of any outstanding unvested stock-based awards, and 5)
any bonus earned as described below.
If Mr. Hart terminates his employment for good reason as defined in the agreement, the lump-sum payment noted
above is reduced to $5 million unless such termination is in connection with an approval by the Company’s Board
of Directors to materially change the Company’s current business plan.
If Mr. Hart’s employment with the Company is terminated due to the expiration of the term of the amended
employment agreement, Mr. Hart will be entitled to all benefits payable under a termination without cause, except
for the bonus; provided, however, that the lump-sum payment will be reduced to $5 million.
• In the event that Mr. Hart’s employment with the Company is terminated due to death or disability, Mr. Hart’s beneficiary
will be entitled to the benefits payable under a termination without cause; provided, however, that the lump-sum payment
will also be reduced to $5 million.
The Amended Severance Agreements:
The amended and restated five year severance agreements with Mr. Webb and Mr. Perri superseded similar agreements entered
into during 2012. Each agreement provides for the payment of the lower of two years base salary or the base salary of the then -
remaining portion of the term, participation in the Company’s executive bonus plan as described below, and payment of up to one
year of COBRA expenses, in the event of an involuntary termination of employment (other than for “cause”) or a resignation for
“good reason.”
Concurrently with the execution of his amended severance agreement, Mr. Webb voluntarily reduced his annual base salary
to $496,000, which reflects an approximately 15% reduction from his previous base salary of $583,550.
Executive Bonus Plan:
The revised executive bonus plan is effective from January 1, 2016 through December 31, 2020 and replaced and superseded
the previous bonus plan maintained by the Company for Mr. Hart, Mr. Webb and Mr. Perri. Such arrangement awards an annual
bonus only if 1) there is a net gain derived from a sale or other disposal of assets, as defined, and 2) cash proceeds from such
transactions are distributed directly to the Company’s shareholders during the same year.
90
The agreement establishes a bonus pool that is calculated as 20% of the adjusted total net gain from assets sold or otherwise
disposed. The plan defines the total net gain as the difference between the cash received in sale or other disposal transactions less
(a) the book value of each such asset as of December 31, 2015, as determined in accordance with U.S. GAAP, subject to adjustment
by the compensation committee to the extent necessary to reflect the capitalization of costs with respect to such assets as required
by GAAP after December 31, 2015; (b) any bonus paid or payable to the Company’s management for the sale or other disposition
of each such asset, other than any bonus under the bonus plan; and (c) administrative expenses specified in the bonus plan. Such
total net gain is then also multiplied by an adjustment factor resulting in an adjusted total net gain. The adjustment factor is a
fraction, the numerator of which is the total amount of cash distributed or committed to be distributed to the Company’s shareholders
with respect to all such assets sold or otherwise disposed of during the year, and the denominator, which is the total amount of
cash received after payment of all selling costs, including any fees and commissions for which all such assets were sold or otherwise
disposed of during the year. For assets distributed directly to the Company’s shareholders, the adjustment factor is 100%. The
resulting bonus pool is allocated 75% to Mr. Hart, 15% to Mr. Webb and 10% to Mr. Perri. Each individual will be entitled to his
allocated portion of the bonus pool for the year if employed by the Company on the last day of the year. However, in the event
that Mr. Hart’s, Mr. Webb’s or Mr. Perri’s employment with the Company is terminated in certain circumstances as provided in
their amended agreements such terminated individual will be entitled to payment of an amount under the bonus plan for a portion
of the year in which such termination occurs.
For assets sold or otherwise disposed of entirely or partially for non-cash consideration by the Company, the calculation of
total net gain with respect to the non-cash consideration will instead be made in the year in which the non-cash consideration is
ultimately sold or otherwise disposed of for cash by the Company. For assets distributed directly to the Company’s shareholders,
other than an asset resulting from a previous sale or other disposal of an asset for non-cash consideration as described in the
preceding sentence, the total net gain will be determined by deducting items (a) through (c) above from the value of such assets
upon such distribution, as determined in accordance with GAAP.
Deferred Compensation
The Company has agreements with its CEO, and certain other officers and non-employee directors, to defer compensation
into Rabbi Trust accounts held in the name of the Company. The total value of the deferred compensation obligation for all
participants at December 31, 2015, and 2014, was $25.5 million and $24.6 million, respectively, and is included in the accompanying
consolidated balance sheets. These totals include a fair value of $805,000 and $1.5 million of the Company’s common stock, for
each of the respective years, with the balance in various publicly traded equities and bonds. Within these accounts, the following
officers and non-employee directors are the beneficiaries of the following number of PICO common shares:
Mr. Hart
Mr. Webb
Mr. Campbell, a non-employee director
December 31,
2015
December 31,
2014
53,996
1,375
2,644
58,015
53,996
1,375
2,644
58,015
The trustee for the accounts is U.S. Bank. The accounts are subject to the claims of outside creditors, and the cost of the
shares of PICO common stock held in the accounts are reported as treasury stock in the consolidated financial statements.
On January 20, 2015, the Company sold equity securities with a cost basis of $2.3 million to certain deferred compensation
Rabbi Trust accounts held by the Company, for the benefit of the Company’s CEO, for total proceeds of $5 million, which
represented the market value of these securities on the date of sale.
Incentive Compensation
Certain officers of Vidler are eligible to receive an annual incentive award based on the combined net income, after certain
adjustments, of Vidler. No compensation was earned under this plan during the years ended December 31, 2015, 2014, and 2013.
Certain officers of UCP are eligible to receive an annual incentive compensation award which is paid in cash. Compensation
of $350,000 and $919,000 was earned under the plan for the years ended December 31, 2015 and 2013, respectively. No
compensation was earned under this plan for the year ended December 31, 2014.
91
Investment in Synthonics
The Company has an investment in preferred stock and an outstanding line of credit with Synthonics, a company co-founded
by Mr. Slepicka, a non-employee director of the Company, who is currently the Chairman, Chief Executive Officer and acting
Chief Financial Officer of Synthonics. As of December 31, 2015, the Company had invested $2.2 million for 18.3% of the voting
interest in Synthonics. In addition, the Company extended a $450,000 line of credit to Synthonics during 2014, which bore interest
at 15% per annum. The outstanding balance and accrued interest was repaid in April 2015.
12.
SEGMENT REPORTING
PICO Holdings, Inc. is a diversified holding company. The Company accounts for its segments consistent with the significant
accounting policies described in Note 1.
The Company organizes its reportable segments by line of business. Currently, the major businesses that constitute operating
and reportable segments are: developing water resources and water storage operations, developing land and homebuilding,
corporate, which included investments in public and private debt and equity securities, deferred compensation plans, and oil and
gas operations, and the discontinued operations of a canola seed processing plant.
Segment performance is measured by revenues and segment profit before income tax. In addition, assets identifiable with
segments are disclosed as well as capital expenditures, and depreciation and amortization. The Company’s reported revenue for
the three years ended December 31, 2015 was earned in the United States and therefore no geographic region disclosure is presented.
Water Resources and Water Storage Operations
The Company is engaged in the development of water for end-users in the southwestern United States, namely water utilities,
municipalities, developers, or industrial users.
Real Estate Operations
The Company is engaged in land development and homebuilding operations primarily in California, Washington, North
Carolina, South Carolina, and Tennessee. The ongoing revenues in this segment are primarily from sales in UCP, although the
Company does have other real estate holdings that could be sold from time to time.
Corporate
This segment consists of cash and fixed-income securities, the 19.3% voting interest in Mindjet, the Company’s oil and gas
venture, which owns and operates oil and gas leases in the Wattenberg Field in Colorado, deferred compensation assets and
liabilities held in trust for the benefit of several officers and non-employee directors of the Company, and other parent company
assets and liabilities.
Discontinued Agribusiness Operations
On July 13, 2015, the Company entered into an agreement to sell substantially all of the assets used in its agribusiness segment
for a net selling price of $105.3 million. The transaction closed on July 31, 2015.
Enterprise Software
The enterprise software segment was discontinued following Spigit’s merger with Mindjet, however, it will continue to be
presented in historical periods as a segment.
92
Segment information by major operating segment follows (in thousands):
2015
Total revenues (losses)
Impairment loss on
intangible and long-
lived assets
Depreciation and
Amortization
Income (loss) from
continuing operations
before income taxes and
equity in loss of
unconsolidated affiliate
Equity in loss of
unconsolidated affiliate
Total assets
Capital expenditure
2014
Total revenues (losses)
Interest expense
Impairment loss on
intangible and long-
lived assets
Depreciation and
amortization
Loss from continuing
operations before income
taxes and equity in loss
of unconsolidated
affiliate
Equity in loss of
unconsolidated affiliate
Total assets
Capital expenditure
2013
Total revenues
Interest expense
Impairment loss on
intangible and long-lived
assets
Depreciation and
amortization
Income (loss) from
continuing operations
before income taxes and
equity in loss of
unconsolidated affiliate
Equity in loss of
unconsolidated affiliate
Total assets
Capital expenditure
Water
Resources
and Water
Storage
Operations
Real Estate
Operations
Corporate
Discontinued
Agribusiness
Operations
Enterprise
Software
Consolidated
$
$
$
4,332 $
279,196 $
(16,865)
$
266,663
269 $
1,197 $
1,816
1,037 $
552 $
623
$
3,282
2,212
$
(3,858) $
6,394 $
(33,686)
$
(31,150)
$ 185,037 $ 422,935 $
$
$
76
$
330 $
(3,422)
46,844 $
2,702
8,793
$
$
$
$
$
1,580
18
191,440 $
$
(532)
210
5,791
$
2,865 $
4,428
1,098 $
669 $
1,287
$ (12,584)
$
(10,531) $
(23,854)
$
186,294
$
230 $
$
$ 25,862 $
$
384,855 $
1,004 $
2,076
80,741 $
4,036
152,554
93,272 $
27,398
$
$
$
206
$
629
993 $
417
1,197
$
271 $
1,086
(3,422)
663,609
3,108
192,488
228
13,084
3,054
(46,969)
2,076
804,444
5,270
$
$
$
$
$
$
$
$
$
$
$
$
$
13,649 $
160,181
300 $
1,135
$
64 $
1,410
2,618
$
(867) $
$ 193,105 $
$
271 $
(4,442) $
8,423
$
(5,281) $
(2,167)
$
276,954 $
650 $
(565)
137,488 $
2,647
155,005
$
$
$
(565)
762,552
3,568
93
13.
DISCONTINUED AGRIBUSINESS OPERATIONS
On July 13, 2015, the Company entered into an agreement to sell substantially all of the assets used in its agribusiness segment
to CHS for a net selling price of $105.3 million. The transaction closed on July 31, 2015. The selling price was determined
primarily as an amount equal to $127 million, less a $20.9 million working capital balance adjustment. After repayment of $80.9
million of outstanding debt and $5.9 million in selling and other related costs of the sale, the Company received net proceeds of
$18.4 million on the date of close.
The Company was required to deposit $10.2 million of such net proceeds in two separate escrow accounts, which is presented
within accounts receivable in the table below. The first escrow account required $6 million to secure general indemnification
obligations and for refund of any difference in the final working capital balance. Any balance remaining after payment of
indemnification claims will be released 18 months from the closing date of the sale. The second escrow account required $4.2
million for specified operational matters (“operational escrow”). Specified amounts of the operational escrow related to proposed
amendments to two environmental permits related to plant operations that are in process, but were not received prior to the closing
date of the sale. The first matter related to certain waste water issues at the plant that required a deposit of $1.8 million and the
second matter relates to plant air quality issues that required a $2.4 million deposit.
During October 2015, the air quality issue was resolved and the Company received the entire $2.4 million deposit. However,
during January 2016, the waste water permit amendment was not approved by the deadline stipulated in the sale agreement and
the deposit in the operational escrow was released to CHS in satisfaction of the matter in February 2016. Consequently, the $1.8
million escrowed amount will be recorded as additional loss on sale of discontinued operations in the Company’s results for the
three months ended March 31, 2016.
The Company also guaranteed up to $8 million for any indemnification claims in excess of the $6 million escrow pursuant
to the terms of a guaranty agreement with CHS, which was executed at the closing. This guaranty will remain in force for five
years from the date of sale. The guaranty has been recorded at estimated fair value that reflects the Company’s expectation that
no significant amounts will be paid out under the guaranty. However, any amounts paid by the Company to CHS in excess of the
estimate will result in additional loss on the sale.
During the year ended December 31, 2015, the Company recorded a loss of $18.7 million on the sale of discontinued
agribusiness operations. Such loss was included in loss on sale of discontinued agribusiness operations in the accompanying
consolidated statement of operations and comprehensive income or loss. The assets of the Company’s discontinued agribusiness
presented in the table below at December 31, 2015, were comprised primarily of the operational escrowed funds discussed above
and cash. Any assets in excess of the resolution of the outstanding matters, and after payment of remaining liabilities, are available
to the Company for any corporate purposes.
The Company’s agribusiness segment qualified as held-for-sale at December 31, 2015 and has been classified as discontinued
agribusiness operations in the accompanying consolidated financial statements as of the earliest period presented. Consequently,
prior periods presented have been recast from amounts previously reported to reflect the agribusiness segment as discontinued
agribusiness operations.
94
The following table presents the details of the Company’s results from discontinued agribusiness operations included in the
consolidated statement of operations and comprehensive income or loss (in thousands):
Revenue and other income:
Sales of canola oil and meal
Other revenue (loss):
Loss on trading derivatives
Other
Total revenue and other income
Cost of goods sold:
Cost of canola oil and meal sold
Depreciation
Other direct costs of production
Total cost of goods sold
Impairment loss on intangible and long-lived assets
Interest
Plant costs and overhead
Segment total expenses
Loss from discontinued agribusiness operations, net of tax
Loss on sale of discontinued agribusiness operations, net of tax (1)
Net loss from discontinued agribusiness operations, net of tax
Net loss from discontinued agribusiness operations attributable to
noncontrolling interests
2015
2014
2013
$
82,267
$
163,855
$
184,139
(159)
126
(1,966)
519
509
82,234
162,408
184,648
79,763
4,360
5,938
90,061
1,875
3,259
17,578
112,773
(30,539)
(18,729)
(49,268)
137,565
8,079
11,024
156,668
5,536
14,278
176,482
(14,074)
173,210
8,221
9,269
190,700
5,746
11,467
207,913
(23,265)
(14,074)
(23,265)
1,720
1,718
2,905
Net loss from discontinued agribusiness operations attributable to PICO
Holdings, Inc.
$
(47,548) $
(12,356) $
(20,360)
(1) Included within the loss on sale of discontinued agribusiness operations, net of tax for the year ended December 31, 2015 is a
$16.9 million impairment loss on classification of assets as held-for-sale, which was recorded during the second quarter of 2015.
95
The following table presents the details of the Company’s discontinued agribusiness assets and liabilities classified as held-
for-sale in the condensed consolidated balance sheets (in thousands):
December 31,
2015
December 31,
2014
Assets
Cash and cash equivalents
Accounts receivable
Inventory
Real estate, net
Property, plant and equipment, net
Goodwill
Other assets
Total assets held-for-sale
Liabilities
Debt
Accounts payable and accrued expenses
Other liabilities
Total liabilities held-for-sale
14. Acquisition of Citizens Homes
$
$
$
$
938
7,800
$
55
8,793
608
608
301
3,311
11,663
5,889
116,793
4,702
9,895
$
152,554
$
$
84,045
8,186
2,357
94,588
On April 10, 2014, the Company completed the acquisition of the assets and liabilities of Citizens used in the purchase of real
estate and the construction and marketing of residential homes in North Carolina, South Carolina and Tennessee, pursuant to a
purchase and sale agreement, dated March 25, 2014 between UCP, LLC and Citizens. The acquisition was accounted for as a
business combination with the acquired assets, assumed liabilities, and contingent consideration recorded by the Company at their
estimated fair values.
The fair value of the consideration transferred totaled $17.9 million, which consisted of the following (in thousands):
Cash
Contingent consideration (1)
Total consideration
$
$
14,006
3,902
17,908
(1) See Note 5 “Disclosures About Fair Value” for additional information regarding the contingent consideration.
The assets that the Company acquired primarily included real estate and various other assets. The following table summarizes
the estimated fair value of the assets and liabilities assumed (in thousands):
Assets Acquired
Real estate
Other assets
Less: liabilities assumed
Net assets acquired
Goodwill
Consideration transferred
96
$
$
13,832
1,363
15,195
1,510
13,685
4,223
17,908
The acquired assets and assumed liabilities were recorded by the Company at their estimated fair values, with certain limited
exceptions. The Company determined the estimated fair values with the assistance of appraisals or valuations performed by
independent third party specialists, discounted cash flow analysis, quoted market prices, where available, and estimates made by
management. To the extent the consideration transferred exceeded the fair value of net assets acquired, such excess was assigned
to goodwill.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act)
designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the
SEC’s rules and forms.
These include controls and procedures designed to ensure that this information is accumulated and communicated to the
Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Management, with the participation of the Chief Executive and Chief Financial Officers, evaluated
the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2015. Based on this evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2015.
Management’s Annual Report on Internal Control over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes of accounting principles generally accepted in the United States and includes those policies and procedures
that:
•
•
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of the Company’s assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and directors of the Company; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of
the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework (2013). Based on this assessment, management, with the participation of the Chief Executive Officer and
Chief Financial Officer, concluded that, as of December 31, 2015, the Company’s internal control over financial reporting was
effective based on the COSO criteria (2013).
Deloitte & Touche LLP, the independent registered public accounting firm who audited the Company’s consolidated financial
statements included in this Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting,
which is included herein.
97
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act)
during the quarter ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
98
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PICO Holdings, Inc.
La Jolla, California
We have audited the internal control over financial reporting of PICO Holdings, Inc. and subsidiaries (the "Company") as of
December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject
to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2015, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2015 of the Company
and our report dated March 11, 2016, expressed an unqualified opinion on those financial statements and financial statement
schedule.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 11, 2016
99
ITEM 9B. OTHER INFORMATION
On March 11, 2016, the Company (i) entered into an amended and restated employment agreement with John R. Hart, the
Company’s President and Chief Executive Officer (the “Amended Employment Agreement”), which supersedes and replaces the
amended and restated employment agreement entered into by and between the Company and Mr. Hart dated December 24, 2014,
(ii) entered into an amended and restated severance agreement with each of Maxim C.W. Webb, the Company’s Executive Vice
President and Chief Financial Officer, and John T. Perri, the Company’s Vice President and Chief Accounting Officer (the “Amended
Severance Agreements”), which amend and supersede the severance agreements entered into by and between the Company and
each of Mr. Webb and Mr. Perri, dated August 6, 2012, and (iii) adopted the PICO Holdings, Inc. Executive Bonus Plan (the
“Bonus Plan”) to provide for the payment of bonuses to Mr. Hart, Mr. Webb and Mr. Perri, which replaces and supersedes any
bonus plans or programs previously maintained by the Company with respect to such individuals. Copies of the Amended
Employment Agreement, Amended Severance Agreements and Bonus Plan have been filed as exhibits to this Annual Report. See
Note 11 “Related-Party Transactions,” in the accompanying consolidated financial statement for additional information.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item regarding directors will be set forth in the section headed “Election of Directors” in
our definitive proxy statement with respect to our 2016 annual meeting of shareholders (the “2016 proxy statement”), to be filed
on or before April 29, 2016 and is incorporated herein by reference. The information required by this item regarding the Company’s
code of ethics will be set forth in the section headed “Code Of Ethics” in the 2016 proxy statement and is incorporated herein by
reference. Information regarding executive officers is set forth in Item 1 of Part 1 of this Report under the caption “Executive
Officers.” Other information required by this item will be set forth in the sections headed “Corporate Governance” and “Section
16(a) Beneficial Ownership Reporting Compliance” in the 2016 proxy statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the section headed “Executive Compensation” in the 2016 proxy
statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED
STOCKHOLDER MATTERS
The information required by this item will be set forth in the sections headed “Security Ownership of Certain Beneficial
Owners and Management” and “Equity Compensation Plan Information” in the 2016 proxy statement and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be set forth in the section headed “Certain Relationships and Related Transactions”
and “Compensation Committee, Interlocks and Insider Participation” in the 2016 proxy statement and is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be set forth in the sections headed “Independent Registered Public Accounting
Firm Fees” and “Audit Committee Pre-Approval Policy” in the 2016 proxy statement and is incorporated herein by reference.
100
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL SCHEDULES AND EXHIBITS
1. Financial Statement Schedules
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31, 2015 and 2014
(In thousands)
Assets
Cash and cash equivalents
Investments in subsidiaries
Debt and equity securities
Other assets (intercompany receivable of $19,974 in 2015 and $21,982 in 2014)
Total assets
Liabilities and shareholders’ equity
2015
2014
$
11,429
$
419,285
540
20,648
13,474
482,495
10,671
23,523
$
451,902
$
530,163
Accounts payable, accrued expenses and other liabilities (intercompany payable of $102,697
in 2015 and $101,767 in 2014)
$
104,077
$
103,269
Common stock, $.001 par value; authorized 100,000 shares, 23,116 issued and 23,038
outstanding at December 31, 2015, and 23,083 issued and 23,005 outstanding at December
31, 2014
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
23
494,207
(151,366)
4,961
347,825
$
451,902
$
23
491,662
(69,508)
4,717
426,894
530,163
This statement should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Form 10-K.
101
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
For the years ended December 31, 2015, 2014 and 2013
(In thousands, except per share data)
Revenues:
Investment income (intercompany interest and dividends of $142 in 2015,
$75,589 in 2014, and $952 in 2013)
$
948
$
77,124
$
1,035
2015
2014
2013
Expenses:
Expenses (intercompany interest of $2,468 in 2015, $7,389 in 2014, and
$7,204 in 2013)
Income (loss) from continuing operations before income taxes
Equity in loss of subsidiaries
Net loss
12,735
(11,787)
(70,071)
(81,858) $
20,551
56,573
(108,998)
(52,425) $
17,676
(16,641)
(5,657)
(22,298)
$
This statement should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Form 10-K.
102
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2015, 2014 and 2013
(In thousands)
Operating activities:
Cash used in operating activities
Investing activities:
Proceeds from the sale of debt and equity securities
Purchases of debt and equity securities
Purchases of and advances to subsidiaries
Cash received from the repayment of loans and advances to subsidiaries
Dividends received from subsidiaries
Purchases of property, plant and equipment
Cash received for sale of property, plant and equipment
Net cash provided by (used in) investing activities
Financing activities:
Payment of withholding taxes on exercise of restricted stock units
Cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Cash during the year for:
Refund of federal and state income taxes
Non-cash investing and financing activities:
Issuance of common stock for vested restricted stock units
Dividend received from subsidiaries
2015
2014
2013
$
(5,997) $
(3,439) $
(14,823)
10,153
(18,563)
12,496
(8)
6,027
(264)
(8,376)
8,909
12,088
(39)
4,078
18,345
(126)
(126)
(2,045)
13,474
(4,118)
(4,118)
10,788
2,686
3,162
(1,144)
(35,118)
4,348
(37)
24
(28,765)
—
(43,588)
46,274
$
11,429
$
13,474
$
2,686
$
$
(3) $
(4,127)
559
$
$
7,464
62,600
This statement should be read in conjunction with the notes to the consolidated financial statements included in the Company’s Form 10-K.
103
2. Exhibits
Exhibit
Number
Description
2.1 Asset Purchase Agreement dated July 13, 2015, by and between PICO Northstar Hallock, LLC and CHS Hallock,
LLC. (1)
3.1 Amended and Restated Articles of Incorporation of PICO Holdings, Inc. (2)
3.2 Amended and Restated Bylaws of PICO Holdings, Inc. (3)
4.1
Indenture, dated October 21, 2014, among UCP, Inc., the guarantors named therein, and Wilmington Trust,
National Association, as trustee. (4)
10.1 Guaranty, dated July 31, 2015, between PICO Holdings, Inc. and CHS Hallock, LLC. (5)
10.2 Restrictive Covenant Agreement, dated July 31, 2015, between CHS Hallock, LLC and PICO Holdings, Inc. (5)
10.3† PICO Holdings, Inc. 2014 Equity Incentive Plan, Stock Option Grant Notice, Stock Option Award Agreement,
Stock Option Notice of Exercise, Restricted Stock Unit Grant Notice, Restricted Stock Unit Award Agreement,
and Restricted Stock Deferral Election Form. (6)
10.4† PICO Holdings, Inc. Executive Bonus Plan.
10.5† Trust for PICO Deferred Holdings, LLC Executive Deferred Compensation dated November 25, 2008 between
PICO Deferred Holdings, LLC and U.S. Bank (as successor to Union Bank of California, N.A.) relating to a
Deferred Compensation Plan originally established in December 31, 1997. (7)
10.6† Trust for PICO Deferred Holdings, LLC Executive Deferred Compensation dated November 25, 2008 between
PICO Deferred Holdings, LLC and U.S. Bank (as successor to Union Bank of California, N.A.) relating to a
Deferred Compensation Plan originally established in December 7, 2004. (7)
10.7† Trust for PICO Deferred Holdings, LLC Non-Employee Director Deferred Compensation dated November 25,
2008 between PICO Deferred Holdings, LLC and U.S. Bank (as successor to Union Bank of California, N.A.)
relating to a Deferred Compensation Plan originally established in September 25, 2001. (7)
10.8† PICO Deferred Holdings, LLC Deferred Compensation Plan. (7)
10.9†
Infrastructure Dedication Agreement between Fish Springs Ranch, LLC, and Washoe County, Nevada dated
October 16, 2007. (2)
10.10† Amended and Restated Employment Agreement, dated March 11, 2016, by and between PICO Holdings, Inc.
and John R. Hart.
10.11† Amended and Restated Severance Agreement, dated March 11, 2016, by and between PICO Holdings, Inc. and
Maxim C.W. Webb.
10.12† Amended and Restated Severance Agreement, dated March 11, 2016, by and between PICO Holdings, Inc. and
John T. Perri.
10.13 Form of Indemnity Agreement with directors and executive officers of PICO Holdings, Inc. and each of its
subsidiaries.(8)
10.14† Directorship Letter Agreement with Eric Speron dated December 18, 2015. (9)
21.1 Subsidiaries of PICO Holdings, Inc.
23.1 Consent of Independent Registered Public Accounting Firm - Deloitte & Touche LLP.
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley
Act of 2002).
32.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-
Oxley Act of 2002).
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104
Exhibit
Number
Description
†
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Indicates compensatory plan, contract or arrangement in which directors or executive officers may participate.
Incorporated by reference to Form 8-K filed with the SEC on July 17, 2015.
Incorporated by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 7, 2007.
Incorporated by reference to Form 8-K filed with the SEC on May 19, 2009.
Incorporate by reference to Form 8-K filed with the SEC on October 24, 2014.
Incorporated by reference to Form 8-K filed with the SEC on August 6, 2015.
Incorporated by reference to the Quarterly Report on Form 10-Q filed with the SEC on November 10, 2014.
Incorporated by reference to the Annual Report on Form 10-K filed with the SEC on March 1, 2010.
Incorporated by reference to Form 8-K filed with the SEC on March 5, 2013.
Incorporated by reference to Form 8-K filed with the SEC on December 22, 2015.
105
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 11, 2016
PICO Holdings, Inc.
By: /s/ John R. Hart
John R. Hart
Chief Executive Officer
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on March 11, 2016
by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ John R. Hart
John R. Hart
Interim Chairman of the Board, Chief Executive Officer, President and Director
(Principal Executive Officer)
/s/ Maxim C. W. Webb
Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Maxim C. W. Webb
(Principal Financial Officer)
/s/ John T. Perri
John T. Perri
Vice President, Chief Accounting Officer
(Principal Accounting Officer)
/s/ Carlos C. Campbell
Director
Carlos C. Campbell
/s/ Michael J. Machado
Director
Michael J. Machado
/s/ Kenneth J. Slepicka
Director
Kenneth J. Slepicka
/s/ Eric Speron
Eric Speron
Director
/s/ Howard B. Brownstein
Director
Howard B. Brownstein
/s/ Raymond V. Marino II
Director
Raymond V. Marino II
106
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K/A
(AMENDMENT NO. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
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 033-36383
PICO HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
California
(State or other jurisdiction of incorporation)
94-2723335
(IRS Employer Identification No.)
7979 Ivanhoe Avenue, Suite 300 La Jolla, California 92037
(Address of Principal Executive Offices, including Zip Code)
Registrant’s Telephone Number, Including Area Code
(888) 389-3222
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, Par Value $0.001
Name of Each Exchange On Which Registered
NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Acts
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the 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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12-b of the Act). Yes
No
At June 30, 2015, the aggregate market value of shares of the registrant’s common stock held by non-affiliates of the registrant (based upon the closing sale price
of such shares on the NASDAQ Global Select Market on June 30, 2015) was $266.7 million, which excludes shares of common stock held in treasury and shares
held by executive officers, directors, and stockholders whose ownership exceeds 10% of the registrant’s common stock outstanding at June 30, 2015. This calculation
does not reflect a determination that such persons are deemed to be affiliates for any other purposes.
On April 22, 2016, the registrant had 23,037,587 shares of common stock, $0.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
EXPLANATORY NOTE
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
SIGNATURES
Page No.
3
4
10
25
28
29
31
32
2
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (the “Amended Report”) amends the Annual Report on Form 10-K of PICO Holdings,
Inc. (the “Company” or the “Registrant”) for the year ended December 31, 2015, that was originally filed with the Securities and
Exchange Commission (the “SEC”) on March 14, 2016 (the “Original Report”), to add certain information required by the following
items of Form 10-K:
Item
Description
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Item 11. EXECUTIVE COMPENSATION
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
This information was previously omitted from the Original Report in reliance on SEC general instructions to Form 10-K, which
permits the information in the above referenced items to be incorporated in a Form 10-K by reference from a definitive proxy
statement if such statement is filed no later than 120 days after a company’s fiscal year end. The Company is filing this Amended
Report to add this information because the definitive proxy statement containing this information will not be filed before that date.
As such, the Company hereby amends Items 10, 11, 12, 13, and 14 of Part III of the Original Report by deleting the text of such
Items 10, 11, 12, 13, and 14 in their entirety and replacing them with the information provided below under the respective headings.
As a result of this amendment, the Company is also filing as exhibits to this Amended Report the certifications pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. Because no financial statements are contained in this Amended Report, the Company is
not including certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Except as described above, no other changes have been made to the Original Report. Accordingly, this Amended Report does not
reflect events occurring after the filing of the Original Report or modify or update those disclosures affected by subsequent events.
Information not affected by this Amended Report remains unchanged and reflects the disclosures made at the time the Original
Report was filed. Therefore, this Amended Report should be read in conjunction with any documents incorporated by reference
therein and the Company’s filings made with the SEC subsequent to the Original Report.
As used in this Amended Report, the terms “we,” “us,” “our,” and “PICO” refer to PICO Holdings, Inc. and its subsidiaries, unless
the context indicates otherwise.
3
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
PART III
Directors
Our Board of Directors is divided into three classes, with the terms of office of each class ending in successive years. The total
number of authorized directors is nine.
Class II Directors with terms ending in 2016:
Director Name
Howard Brownstein
Business Experience
Howard Brownstein was appointed to our Board of Directors in February 2016. Mr. Brownstein
has been the president of The Brownstein Corporation, a turnaround and crisis management
consulting, advisory and investment banking firm, since 2010. From 1999 through 2009, Mr.
Brownstein was a Principal of NachmanHaysBrownstein, Inc., a management consulting firm.
Since 2010, Mr. Brownstein has served on the board of directors of P&F Industries, Inc., a
publicly-held manufacturer/importer of air-powered tools and various residential hardware
products and joined that board after being recommended by a significant shareholder of P&F.
From 2003 through 2006, he served on the boards of directors and audit committees of Special
Metals Corporation, a privately held nickel alloy producer (where he also chaired the audit
committee) and Magnatrax Corporation, a privately held manufacturer of metal buildings. In
2010, he served on the board of directors of Betsey Johnson, a privately held apparel designer
and retailer. Additionally, from January 2014 through April 2015, Mr. Brownstein served on the
board of directors of LMG2, a privately-held Chicago-based parking facility operator.
Additionally, Mr. Brownstein is a Board Leadership Fellow of the National Association of
Corporate Directors (“NACD”), through which he completed NACD’s comprehensive program
of study for corporate directors and continues to supplement his director skill sets through ongoing
engagement with the director community, and access to leading practices. Mr. Brownstein is a
graduate of Harvard University, where he obtained J.D. and M.B.A. degrees, and of the University
of Pennsylvania, where he obtained B.S. and B.A. degrees from the Wharton School and the
College of Arts and Sciences. Mr. Brownstein is admitted to the bars of Pennsylvania,
Massachusetts and Florida, but does not actively practice law.
Age
65
We believe that Mr. Brownstein’s broad financial and management consulting background,
including his extensive experience in finance, restructurings and turnarounds, strategic planning,
valuing and selling businesses and corporate governance, as well as his public company board
experience makes him a valuable member of our Board of Directors. This experience provides
him keen insight into both the management and operations of a business and the governance and
oversight matters facing companies and led to our conclusion that he should serve on our Board
of Directors.
4
Director Name
Carlos C. Campbell
Kenneth J. Slepicka
Business Experience
Carlos C. Campbell has served as a member of our Board of Directors since 1998. He is Chair
of the Compensation Committee and a member of the Audit Committee and the Corporate
Governance and Nominating Committee. He is the president of Global 21, LLC, a strategic
advisory company, (Formerly C.C. Campbell & Co., 1985-2011) and Initiative Films, LLC (2011-
Present). Mr. Campbell has served as a director of Resource America, Inc. since 1990. Mr.
Campbell has also previously served as a director of eight other public corporations. Mr. Campbell
has completed over two dozen seminars on director training. He has a Certificate of Director
Education from the National Association of Corporate Directors and is a graduate of the Director’s
Institute, University of California Los Angeles, where he was designated a Certified Corporate
Director. He has completed seminars in corporate governance, auditing, and compensation at
the Harvard Business School. Mr. Campbell is a member of the National Association of Corporate
Directors and a member of the 2011 inaugural class of Board Leadership Fellows. He was also
elected to the NACD Directorship 100, which recognizes the most influential directors of U.S.
corporations. Mr. Campbell has participated in numerous professional forums with the NACD
on governance, compensation, and mergers and acquisitions.
Mr. Campbell served as the Assistant Secretary of Commerce for Economic Development, U.S.
Department of Commerce (1981-1984) where he was the final authority for an annual program
budget of $300 million and a loan portfolio in excess of $1 billion. Mr. Campbell has a B.S. in
Construction Management from Michigan State University, a Certificate in Engineering Science
from the U.S. Naval Post Graduate School, and a Master of City & Regional Planning from the
School of Engineering & Architecture, Catholic University of America. Mr. Campbell served
on active duty as a Naval Flight Officer and Intelligence Officer. He has traveled to over fifty
countries mainly on government business.
We believe that Mr. Campbell’s extensive directorship training, strategic advisory and
government experience, two areas of expertise that are important to certain of our operating
segments, enrich the makeup of our Board of Directors and provide keen insight into our
businesses. Mr. Campbell’s record of service as a director on public boards and with government
agencies also gives him substantial experience on financial, governance and risk oversight matters
leading to our conclusion that he should serve on our Board of Directors.
Kenneth J. Slepicka has served as a member of our Board of Directors since 2005. Mr. Slepicka
is currently the chairman, chief executive officer, and acting chief financial officer of Synthonics,
Inc., an early stage biotechnology company, and has served in such capacity since 2006. Mr.
Slepicka received a Master of Business Administration from Kellogg School of Management,
Northwestern University. Mr. Slepicka has also received a Master Director Certification from
the National Association of Corporate Directors (NACD), is a member, and has earned certificates
of director education in 2007, 2008, and 2009, as well as the status of Leadership Fellow from
the NACD. In addition, Mr. Slepicka served as president and treasurer of SBC Warburg Futures
Inc. from 1994 to 1998, as executive director of Fixed Income Trading for O’Connor & Associates
from 1985 to 1994, and has held risk advisor, consultant and strategic planning positions in the
financial and healthcare industries. Mr. Slepicka has served as a member of the FIA Steering
Committee, the Federal Reserve FCM Working Group, and as a Governor of the Board of Trade
Clearing Corporation. He is also a former member of the Chicago Board of Trade, Chicago
Mercantile Exchange, Chicago Board of Options Exchange, and Pacific Options Exchange. In
addition, Mr. Slepicka currently serves and has served on the boards of directors of several not-
for-profit entities.
Mr. Slepicka’s management and operational experience leads to our conclusion that he should
serve on our Board of Directors.
Age
78
60
5
Class III Directors with terms ending in 2017:
Director Name
John R. Hart
Business Experience
John R. Hart has served as President, Chief Executive Officer and as a member of our Board of
Directors since 1996. Mr. Hart also serves as an officer and/or director of our most significant
subsidiaries: Vidler Water Company, Inc. (director since 1995, chairman since 1997 and chief
executive officer since 1998); and UCP, Inc. (since May 2013). From 1997 to 2006, Mr. Hart
was a director of HyperFeed Technologies, Inc., an 80% owned subsidiary which was dissolved
in 2009 following bankruptcy proceedings, where he served as chairman of the nominating
committee and as a member of the compensation committee. Mr. Hart received a B.A. in
Economics from Pomona College.
Age
56
Michael J. Machado
Andrew F. Cates
Mr. Hart has been our President, Chief Executive Officer and a member of our Board of Directors
for almost twenty years and his leadership and strategic guidance over these years have been
critical to our success. Mr. Hart also brings the knowledge of the operations of our Company
to the Board of Directors, which provides invaluable insight to our Board of Directors as it
reviews our strategic and financial plans leading to our conclusion that he should serve on our
Board of Directors.
Michael J. Machado has served as a member of our Board of Directors since 2013. Mr. Machado
was a member of the California State Assembly from 1992 - 2000, a California State Senator
from 2000 - 2008, and was appointed in 2015 to the Council of Economic Advisors on Tax Policy
for the California State Controller. Since 2008 Mr. Machado has been the owner and operator
of a diversified farming operation in California’s Central Valley. Mr. Machado is a board member
of the California State Compensation Insurance Fund (2008 to present) where he chairs the
investment committee and serves on the audit committee. He also serves on the board of directors
of P & M Farms (1985 to present) and is also a member of the non-profit boards for the San
Joaquin Historical Society Board of Trustees (2012 to present) and Restore the Delta (since
2014). He is a member of the National Association of Corporate Directors and is a Board
Leadership Fellow. Mr. Machado received an undergraduate degree in Economics from Stanford
University and a Master’s degree in Agricultural Economics from the University of California,
Davis. In addition he attended Harvard University’s Agribusiness Executive Education Program.
As a state legislator in California, Mr. Machado was heavily involved in numerous issues,
including water policy, agricultural policy and regulation of financial institutions.
We believe that Mr. Machado’s extensive educational and legislative experience, and his
continuing involvement in owning and operating a diversified farming operation, as well as his
involvement in water policy issues make him a valuable addition to our Board of Directors.
Andrew F. Cates was appointed to our Board of Directors in March 2016. Mr. Cates is the general
partner and chief executive officer of RVC Outdoor Destinations and managing member of Value
Acquisition Fund, an acquisition, development, and asset management company he founded in
2004. In 1999, Mr. Cates relocated to his hometown of Memphis, Tennessee, to develop the
Soulsville Revitalization Project as its project developer and to serve as its initial board chairman.
The state of the art, six-acre campus continues to serve as an anchor for what is now one of the
largest inner city revitalization projects in the country. In the summer of 2000, Mr. Cates began
working with a team of business and civic leaders to attract the Vancouver Grizzlies National
Basketball Association franchise to Memphis, Tennessee, and to get public support for the team’s
arena (FedExForum). The “Pursuit Team” was successful in its efforts, and Mr. Cates became
a member of the original local ownership group. In 1996, Mr. Cates was a founding partner in
Viceroy Investments, LLC based in Dallas, Texas. Since 1998, Mr. Cates has continued his
affiliation with Viceroy and is currently a partner in two Viceroy sponsored partnerships. Mr.
Cates began his real estate career in Dallas, Texas, where he worked as an analyst at Trammell
Crow Company Capital Markets Group and later an associate for Crow Investment Trust (now
called Crow Family Holdings) as a member of a team responsible for partnership and loan
workouts, office and industrial acquisitions, asset management, and commercial development.
Mr. Cates earned a Bachelor of Business Administration (Finance) degree at the University of
Texas at Austin. In 2001, he was inducted into Lambda Alpha International, an honorary land
economics society. Since 2009, he has served on the board of directors of Pioneer Natural
Resources (NYSE:PXD). Mr. Cates also serves on the board of the Myelin Repair Foundation
based in Saratoga, California.
We believe that Mr. Cates' broad financial and management background, including extensive
experience in real estate, partnerships, asset management, finance, strategic planning, valuing
and selling businesses and corporate governance, as well as his public company board
experience makes him a valuable member of our Board of Directors. This experience provides
him valuable insight into both the management and operations of a business and the governance
and oversight matters facing companies and led to our conclusion that he should serve on our
Board of Directors.
68
45
6
Class I Directors with terms ending in 2018:
Director Name
Business Experience
Age
Raymond V. Marino II Raymond V. Marino II was appointed to our Board of Directors in February 2016 and elected
Chair of our Board of Directors in March 2016. Since 2013, Mr. Marino has been in the investment
advisory business where he is involved in researching, evaluating and negotiating a variety of
investments for personal portfolio and third party investors involving real estate and non-real
estate investments and has completed buy-side and sell-side real estate advisory assignments for
third parties in excess of $130 million. From 2001 to 2013, Mr. Marino was the president and
chief operating officer as well as a member of the board of directors of Mission West Properties,
Inc., a publicly traded real estate investment trust involved in the development, investment and
management of a portfolio that exceeded 9 million square feet. From November 1996 to August
2000, he was president, chief executive officer and a member of the board of directors of Pacific
Gateway Properties, Inc. Earlier in his career, Mr. Marino, who is Certified Public Accountant
in the State of California (inactive), worked at Coopers & Lybrand LLP, a predecessor firm to
PriceWaterhouse Coopers LLP, where he serviced clients in the real estate investment and
development, construction, energy, technology, and insurance industries, among others. Mr.
Marino is a graduate of Golden Gate University, where he obtained an M.S. degree, and of Santa
Clara University, where he obtained a B.S. degree.
57
Eric H. Speron
Daniel B. Silvers
We believe that Mr. Marino brings extensive experience in real estate, investment management,
executive-level management, risk oversight, strategic planning, financial reporting and corporate
governance, as well as public company board experience. Mr. Marino’s service for more than
a decade as the president and chief operating officer and a member of the board of directors of
Mission West Properties, Inc. and his experience in the investment advisory business gives him
substantial experience on financial, governance and risk oversight matters leading to our
conclusion that he should serve on our Board of Directors.
Eric H. Speron was appointed to our Board of Directors in January 2016. Mr. Speron is currently
an analyst and portfolio manager of three portfolios managed for clients of First Foundation. He
also serves as a member of the investment committee of First Foundation Advisors and, as a
member of the First Foundation Advisors investment committee, assists in shaping the portfolio
investment process and overall asset allocations. Mr. Speron joined First Foundation Advisors
in 2007 from JPMorgan’s Institutional Equity division. Mr. Speron is currently a member of the
CFA Institute and the Orange County Society of Financial Analysts. He earned a Bachelor of
Arts Degree with a double major from Georgetown University where he was also voted Academic
All-American, Mid-Atlantic, for his academic and athletic accomplishments.
36
We believe that Mr. Speron’s extensive familiarity with our Company gained from being an
investor in our stock, his understanding of our business model, his experience analyzing
investments and making investment decisions, and his perspective as a large shareholder can
greatly benefit us and makes him a valuable addition to our Board of Directors.
Daniel B. Silvers was appointed to our Board of Directors in March 2016. Mr. Silvers currently
serves as managing member of Matthews Lane Capital Partners LLC, an investment firm, and
has done so since June 2015. From March 2009 to June 2015, Mr. Silvers served as president
of SpringOwl Asset Management LLC, an investment management firm (including predecessor
entities). From April 2009 to October 2010, Mr. Silvers also served as president of Western
Liberty Bancorp, an acquisition-oriented holding company that acquired and recapitalized a
community bank in Las Vegas, Nevada. Mr. Silvers joined a predecessor of SpringOwl from
Fortress Investment Group, a leading global alternative asset manager, where he worked from
2005 to 2009. At Fortress, Mr. Silvers' primary focus was to originate, oversee due diligence
on and asset management for real estate and gaming investments in Fortress' Drawbridge Special
Opportunities Fund. Prior to joining Fortress, Mr. Silvers was a senior member of the real estate,
gaming and lodging investment banking group at Bear, Stearns & Co. Inc., where he was from
1999 to 2005. Mr. Silvers holds a B.S. in Economics and an M.B.A. in Finance from The Wharton
School of the University of Pennsylvania. Mr. Silvers also serves on the board of directors of
Forestar Group, Inc. and India Hospitality Corp. Mr. Silvers previously has served on the board
of directors of International Game Technology, Universal Health Services, Inc. and bwin.party
digital entertainment plc.
We believe that Mr. Silvers' broad financial and management background, including extensive
experience in investment and asset management, real estate, finance, valuing and selling
businesses as well as his public company board experience makes him a valuable member of
our Board of Directors. This experience provides him valuable insight into both the management
and operations of a business and the governance and oversight matters facing companies and
led to our conclusion that he should serve on our Board of Directors.
39
7
Executive Officers
The executive officers of PICO are:
Name
John R. Hart
Maxim C. W. Webb
John T. Perri
Age
56
55
46
President, Chief Executive Officer and Director
Position
Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Vice President and Chief Accounting Officer
Mr. Hart has served as our President and Chief Executive Officer and as a member of our Board of Directors since 1996. Mr. Hart
also serves as an officer and/or director of our most significant subsidiaries: Vidler Water Company, Inc. (director since 1995,
chairman since 1997 and chief executive officer since 1998); and UCP, Inc. (director since May 2013). From 1997 to 2006, Mr.
Hart was a director of HyperFeed Technologies, Inc., an 80% owned subsidiary which was dissolved in 2009 following bankruptcy
proceedings, where he served as chairman of the nominating committee and as a member of the compensation committee.
Mr. Webb has served as our Chief Financial Officer and Treasurer since May 2001 and as Executive Vice President since 2008.
Mr. Webb was appointed as our Secretary in May 2014. Mr. Webb serves as a director of UCP, Inc. (since May 2013) and as an
officer of Vidler Water Company, Inc. (since 2001).
Mr. Perri has served as our Vice President and Chief Accounting Officer since 2010. He has served in various capacities since
joining our company in 1998, including Financial Reporting Manager, Corporate Controller and Vice President, Controller from
2003 to 2010.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the executive officers, directors,
and persons who beneficially own more than 10% of our common stock to file initial reports of ownership on Form 3 and reports
of changes in beneficial ownership of our common stock on Form 4 with SEC. Such persons are required by SEC regulations to
furnish us with copies of all Section 16(a) forms filed by such persons.
Based upon a review of the copies of these reports received and written representations from certain reporting persons that they
have complied with the relevant filing requirements, we believe that all reports required to be filed by the directors, officers, and
holders of more than 10% of our common stock, pursuant to Section 16 of the Exchange Act since January 1, 2015, were filed on
a timely basis, other than (i) a Form 3 for Mr. Howard Brownstein that reported his initial beneficial ownership of the Company's
securities that was inadvertently filed late on February 19, 2016 and (ii) a Form 3 for Mr. Raymond V. Marino, II that reported his
initial beneficial ownership of the Company's securities that was inadvertently filed late on February 19, 2016.
Committees of the Board of Directors
Corporate Governance
Our Board of Directors has three standing committees: an Audit Committee, a Compensation Committee, and a Corporate
Governance and Nominating Committee. In addition, the Board of Directors has established a Strategy Committee. The committees
operate pursuant to written charters, of which the Audit Committee, Compensation Committee, and Corporate Governance and
Nominating Committee charters are available on our website under “Corporate Governance” at http://investors.picoholdings.com.
The information on our website is not incorporated by reference into this Annual Report on Form 10-K/A.
8
The following table sets forth the current members of each committee, and the number of meetings held in 2015:
Name of Director
Carlos C. Campbell*
Kenneth J. Slepicka
John R. Hart
Michael J. Machado*
Raymond V. Marino II*
Daniel B. Silvers*
Howard B. Brownstein*
Andrew F. Cates*
Eric H. Speron*
Number of meetings held in 2015
* Independent Director
** Financial Expert
Audit
Member
Compensation
Chair
Corporate
Governance
and
Nominating
Member
Member
Chair**
Member
7
Member
Member
5
Chair
Member
Member
Member
Member
4
Strategy
Member
Member
Member
Chair
—
Audit Committee. The Audit Committee consists of Mr. Brownstein (Chair), Mr. Campbell, Mr. Machado, and Mr. Cates, none
of whom has been or is an officer or employee of our Company. Each member of the Audit Committee, in the judgment of our
Board of Directors, is independent within the meaning set forth under applicable rules of the NASDAQ stock market and Rule
10A-3(b)(1)(ii) of the Exchange Act.
The functions of the Audit Committee include: (a) overseeing our accounting and financial reporting processes; (b) meeting with
the independent registered public accounting firm to review their reports on their audits of our financial statements, their comments
on our internal control over financial reporting and the action taken by management with regard to such comments; (c) reviewing
and approving all related persons transactions; (d) reviewing auditor independence; (e) issuing an Audit Committee report to the
shareholders; and (f) the appointment of our independent registered public accounting firm and pre-approving all auditing and
non-auditing services to be performed by such firm.
The Audit Committee has the authority, in its discretion, to order interim and unscheduled audits to investigate any matter brought
to its attention and to perform such other duties as may be assigned to it from time to time by our Board of Directors. In fulfilling
its oversight responsibilities, the Audit Committee (with the exception of Mr. Cates who was appointed after the filing of our
Annual Report on Form 10-K for the year ended December 31, 2015) reviewed and discussed with management the audited
consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2015, its accounting
principles, the reasonableness of significant judgments and the clarity of disclosures in the financial statements. A copy of the
Audit Committee’s Charter is posted on our website under “Corporate Governance” at http://investors.picoholdings.com. The
information on our website is not incorporated by reference into this Annual Report on Form 10-K/A.
Audit Committee Financial Experts. Our Board of Directors has determined that Mr. Brownstein qualified as an audit committee
financial expert as defined in SEC rules.
Compensation Committee. The Compensation Committee consists of Mr. Campbell (Chair), Mr. Machado, Mr. Silvers, and Mr.
Speron. None of its members is or has been an officer or employee of our Company, and our Board of Directors has determined
that each member of the Compensation Committee is independent within the meaning set forth under applicable rules of the
NASDAQ stock market and an outside director within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as
amended.
9
The functions of the Compensation Committee include: (a) evaluating the performance of, and setting compensation for, our Chief
Executive Officer (“CEO”) and other senior management; (b) reviewing and approving the overall executive compensation program
for our executives and the executives of our subsidiaries; (c) considering and reviewing compensation levels for service as a
member of our Board of Directors and its committees; (d) making recommendations to our Board of Directors with respect to
new cash-based incentive compensation plans and equity-based compensation plans; and (e) administering and granting awards
under our equity incentive plan. The Compensation Committee’s goals are to attract and retain qualified directors and key executives
critical to our long-term success, to reward executives for our long-term success and the enhancement of shareholder value, and
to integrate executive compensation with both annual and long-term financial results. Additional information on the Compensation
Committee’s processes and procedures for consideration of executive compensation are addressed in the Compensation Discussion
and Analysis (“CD&A”) below. A copy of the Compensation Committee’s Charter is posted on our website under “Corporate
Governance” at http://investors.picoholdings.com. The information on our website is not incorporated by reference into this
Annual Report on Form 10-K/A.
Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committee members consist
of Mr. Machado (Chair), Mr. Brownstein, Mr. Cates, Mr. Marino, and Mr. Silvers. None of its members is or has been an officer
or employee of our Company. In the judgment of our Board of Directors, each committee member is independent within the
meaning set forth under applicable rules of the NASDAQ stock market. The functions of the Corporate Governance and Nominating
Committee include: (a) identifying, reviewing, evaluating and selecting candidates to be nominated for election to our Board of
Directors; (b) identifying and recommending members of the Board of Directors to committees; (c) overseeing and implementing
the system of the corporate governance of the Company; and (d) overseeing the plans and process to monitor, control and minimize
our risks and exposures. A copy of the Corporate Governance and Nominating Committee’s Charter is posted on our website
under “Corporate Governance” at http://investors.picoholdings.com. The information on our website is not incorporated by
reference into this Annual Report on Form 10-K/A.
Strategy Committee. The Strategy Committee members consist of Mr. Speron (Chair), Mr. Cates, Mr. Slepicka, and Mr. Silvers.
None of its members is or has been an officer or employee of our Company. The primary responsibilities of the Strategy Committee
include monitoring our previously announced plans to return capital to shareholders as assets are monetized with such capital
being returned through stock repurchases or special dividends.
Director Nomination Process
There have been no changes to the procedures by which shareholders may recommend nominees to the Board of Directors within
the past twelve months.
Code of Ethics
We have a Code of Business Conduct and Ethics that applies to all directors, officers, and employees. A copy may be obtained
without charge by writing to our Corporate Secretary. It is also posted on our web site under “Corporate Governance” at http://
investors.picoholdings.com. The information on our website is not incorporated by reference into this Annual Report on Form
10-K/A.
Amendments to or waivers of our Code of Business Conduct and Ethics granted to any of the directors or executive officers will
be published promptly on our web site.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview
This Compensation Discussion and Analysis describes our executive compensation policies and how and why our Compensation
Committee arrived at specific compensation decisions for the year ended December 31, 2015, for the following named executive
officers, or “NEOs”, whose compensation is set forth in the Summary Compensation Table and other compensation tables contained
in this Amended Report:
John R. Hart
Maxim C.W. Webb
John T. Perri
President and Chief Executive Officer
Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Vice President and Chief Accounting Officer
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We present our Compensation Discussion and Analysis in the following sections:
1. Executive Compensation Overview. In this section, we highlight our business model, how we align our executive program
to our business model, our response to the 2015 say-on-pay vote and certain governance aspects of our executive
compensation program.
2. Executive Compensation Program. In this section, we describe our executive compensation philosophy and process and
the material elements of our executive compensation program.
3. 2015 and 2016 Executive Compensation Decisions. In this section, we provide an overview of our Compensation
Committee’s executive compensation decisions for 2015 and certain actions taken in 2016 when doing so enhances the
understanding of our executive compensation program.
4. Other Executive Compensation Matters. In this section, we review certain governance aspects of our executive
compensation program, the accounting and tax treatment of compensation and the relationship between our compensation
program and risk.
Executive Compensation Overview
Our Business Model
As a diversified holding company, we believe that we have a business model that is unique for a public company. Our strategic
mission has been to maximize long-term shareholder value by selecting and developing undervalued assets to achieve a superior
return on net assets. To do this we have:
(i)
(ii)
(iii)
sought to evaluate, acquire and develop undervalued assets in strategic asset classes at valuations that we believed
provided significant downside risk protection;
sought to enhance the value of those assets through our operational expertise, development activities, transaction
structure and efficient use of capital; and
attempted to achieve gains in book value per share through both operating returns and disposition of assets at
appropriate times.
2016 Changes to Our Business Model
In November 2015, we announced a revision to our business plan. With our share price trading at a discount to its book value,
we believe the highest potential return to shareholders at this time is a return of capital. Therefore, as assets are monetized,
rather than reinvest, we intend to return capital back to shareholders through a stock repurchase program or by other means
such as special dividends.
Our Business Model Drives our Compensation Philosophy and Programs
Our business strategy requires a management team that functions within an entrepreneurial culture with demonstrated expertise
in asset and business disposals and financial management and business operations of a variety of different entities. Our management
team must review, operate and manage (prior to asset monetization) a broad and diversified range of businesses, investments,
assets, and operations that currently include water resources and storage, real estate, and oil and gas ventures.
Asset dispositions frequently occur several years following our acquisition of such assets. Although we may pay out on our
incentive compensation awards in a particular year, this compensation is often a result of years of cumulative efforts that are
recognized when there is a monetization event. For example, none of our NEOs have received cash incentive award payouts since
2009 (however, our Chief Accounting Officer received a discretionary cash bonus due to his contributions to the successful initial
public offering of our subsidiary UCP, Inc. in 2013). This practice seeks to closely align the compensation of our executive officers
with our long-term corporate objectives and risk tolerance and the long-term interests of our shareholders.
Because our business model has always focused on long-term objectives rather than short-term earnings, our compensation
arrangements have principally been driven by increases in shareholder equity over the long-term. For example, our cash incentive
awards have historically been based on our relative increase in book value per share over a multi-year performance period - in
order to a receive a payment, annual growth in book value per share had to exceed a threshold level of 80% of the Standard &
Poor’s annualized total return for the previous five years.
11
When we revised our business model, we also modified our executive compensation program to seek to align our executive
compensation with the objective of returning capital to shareholders as assets are monetized. Starting in 2016, our cash incentive
awards are based on the value created from assets that are monetized in excess of their respective book values as of December 31,
2015 and are tied to the return of capital to shareholders. At the same time, we made certain other changes to our executive
compensation program in response to feedback we received from our shareholders in connection with our 2015 say-on-pay vote,
such as reducing the base salary of our CEO by 54%.
2015 Say-on-Pay Vote and Shareholder Engagement
At our 2015 Annual Shareholder Meeting, 44.4% of the shares voted regarding say-on-pay voted in favor of our non-binding,
advisory vote on our executive compensation program. During 2015 our Board Chair or our Compensation Committee Chair
spoke with key shareholders, who collectively owned approximately 36.4% of our shares at the time of the conversations, to
understand the reasons for their vote on our 2015 say-on-pay proposal as well as any comments they had on our executive
compensation program. Our Compensation Committee considered the results of the vote and reviewed feedback we have received
on our executive compensation program from this shareholder outreach along with the reports of Institutional Shareholder Services
(“ISS”) and Glass Lewis. Our Compensation Committee took this feedback into account when we modified our executive
compensation program to seek to align our executive compensation with our revised business model and specifically the objective
of returning capital to shareholders as assets are monetized. Starting in 2016, our cash incentive awards are based on the value
created from assets that are monetized in excess of their respective book values as of December 31, 2015 and are tied to the return
of capital to shareholders. In response to feedback we received from our shareholders in connection with our 2015 say-on-pay
vote, we also made certain other changes to our executive compensation program, such as reducing the base salary of our CEO
by 54%.
Corporate Governance Highlights
What we do
Design executive compensation programs to seek to align
pay with performance so that a significant portion of
compensation is "at-risk" based on corporate
performance
What we don't do
No guaranteed bonuses
Use multi-year performance periods
No hedging or pledging by executive officers or directors
Provide "double-trigger" change in control benefits
No tax gross-ups
Maintain stock ownership guidelines
Maintain claw back policy
No excessive perquisites
No repricing of underwater stock options
Executive Compensation Program
Our Compensation Philosophy
We have a simple compensation philosophy, which is to hire good people, pay them for performance that is measured by increases
in shareholder value and retain the team that is instrumental to our success. We define “good people” as individuals who are smart,
resourceful, experienced, hardworking, and ethical. A relatively small number of people have been part of the core team of
executives responsible for driving our performance over the long-term. Our CEO and CFO have been employed with us for over
19 years and our CAO for nearly 18 years.
We consider retention of our key executives important because it could be very disruptive and costly for our business if we needed
to replace any of our key executives. Our CEO was instrumental in restructuring the Company and developing and implementing
our prior and revised business models. Our other NEOs (as well as the senior executives of our businesses) are his handpicked
team that has assisted our CEO in successfully executing our business strategy, in many cases for over a decade. They have
acquired a valuable and specific skill set over the years with us that we would have a difficult time replacing. Our small management
team provides for more efficient decision making and greater accountability.
In line with our philosophy to reward our executive officers for successful performance, historically, we have structured our cash
incentive programs to reward them for achieving superior growth in book value per share with moderate risk. We used the growth
in our book value per share because that metric focused our management team on overall business growth and long-term profitability,
which directly influences shareholder value. Starting in 2016, our cash incentive awards will be tied to the return of capital to
shareholders.
12
We have also used changes in our stock price as a metric for measuring our long-term performance. Our CEO and other NEOs
have been awarded stock-based compensation in the form of service vesting restricted stock units (“RSU”), performance-based
price-contingent stock options (“PBO”), and prior to 2007 in the form of stock-settled appreciation rights (“SAR”). Their
compensation is, therefore, closely aligned to the long-term growth in our stock price. However, in conjunction with our revised
business model, we do not anticipate granting any additional stock-based compensation to our NEO's in the foreseeable future.
The Role of the Compensation Committee in Determining Executive Compensation
Our executive compensation program is subject to a thorough process that includes Compensation Committee review and approval
of program design and practices; the advice of an independent third-party compensation consultant engaged by the Compensation
Committee; and a consistently applied philosophy with respect to incentive compensation. Our compensation program is intended
to be equitable, accountable, transparent and shareholder-centric.
Our Compensation Committee is composed of “outside directors” within the meaning of Section 162(m) of the Internal Revenue
Code and “non-employee directors” within the meaning of Exchange Act Rule 16b-3, who also meet the independence requirements
of the NASDAQ Global Market. The Compensation Committee is responsible for assuring that all of our executive compensation
decisions are developed, implemented and administered in a way that supports our fundamental philosophy that a significant
portion of executive compensation is linked to our performance. To this end, the Compensation Committee oversees and administers
all of our executive compensation plans and policies, administers our 2014 Equity Incentive Plan (including reviewing and
approving grants of awards under the 2014 Equity Incentive Plan), and annually reviews and approves the individual elements of
the NEOs’ total compensation packages.
Management Interaction with Committee
In carrying out its responsibilities, our Compensation Committee works with members of our management team, including our
CEO. The management team assists our Compensation Committee by providing information on Company and individual
performance, market data, and management’s perspective and recommendations on compensation matters. Our Compensation
Committee solicits and reviews the CEO’s recommendations and proposals with respect to annual cash compensation adjustments,
equity incentive awards, program structures, and other compensation-related matters (other than for the CEO). Our Compensation
Committee uses the CEO’s recommendations and proposals as one of many factors in reviewing and approving the compensation
for our other NEOs and direct reports to the CEO. Our Compensation Committee meets in executive session to set the compensation
of our CEO.
Use of Independent Compensation Consultant
Our Compensation Committee engages an independent compensation consultant to provide the Committee with information,
recommendations, and other advice relating to executive compensation. For fiscal 2015, the Committee engaged Compensia to
serve as the independent compensation advisor. Compensia serves at the discretion of the Committee and regularly meets with
the Committee, both with and without management present.
In fiscal 2015, Compensia regularly participated in Committee meetings and provided assistance to the Committee, including:
Refresh peer groups for the executive compensation analysis;
Review and analysis related to our executive officers’ base salaries, annual cash incentive compensation, and equity
incentive compensation levels and plan structures;
Assessment of industry trends, corporate governance and legislative environment;
Develop “tally sheets” to provide a comprehensive view of our executive officers’ total compensation arrangements,
including cash compensation (fixed and variable), equity incentive compensation (past awards and the current and
projected values of these awards), and post-employment obligations (severance and change-of control-benefits);
Review of equity compensation design and strategy; and
Review of our compensation discussion and analysis disclosure.
In fiscal 2015, Compensia did not provide any services to management. The Committee reviewed Compensia’s independence in
fiscal 2015 and found that there were no conflicts of interest.
13
Use of Market Data
For purposes of comparing our executive compensation against the competitive market, our Compensation Committee utilizes
two sets of peer groups. Our primary peer group consists of 12 companies that we believe most closely match us in terms of
business structure and were within our desired range for gross assets and market capitalization. Our secondary peer group consists
of 20 companies from the broader financial industry that were within our desired range for gross assets and market capitalization.
We use the primary peer group to provide us compensation information for companies which we believe are most like us. However,
because of the limited number of companies we could identify, we use the broader group to provide a more general understanding
of compensation levels and design for financial companies. We limit peer companies to a range of between 50% and 200% of
our gross assets and market capitalization at the time we review the peers. The Committee reviews our peer groups annually and
makes adjustments to its composition as it deems necessary, taking into account changes in our business and the businesses of the
companies in the peer group. Based on Compensia’s market analysis in late 2014, the Committee decided no changes were required
to our primary peer group or our secondary peer group.
Our primary peer group consisted of the following 12 companies:
Biglari Holdings
Hercules Technology Growth Cap
Blackstone Mortgage Trust
Capital Southwest
Harris & Harris Group
ICG Group
KCAP Capital
Main Street Capital
MCG Capital
Otter Tail
Safeguard Scientifics
Triangle Capital
Our secondary peer group consisted of the following 20 companies:
Biglari Holdings
Calamos Asset Management
GFI Group
Green Dot
Capital Southwest
Cowen Group
Encore Capital Group
Evercore Partners
FBR & Co
Greenhill & Co
Hercules Technology Growth Cap
HFF
Ladenburg Thalmann Financial
Main Street Capital
MCG Capital
Otter Tail
Piper Jaffray
Safeguard Scientifics
Triangle Capital
World Acceptance
To analyze the compensation practices of the peer group companies, Compensia gathered data from public filings. This market
data, consisting of the peer proxy data was then used as a reference point for the Committee to assess our current compensation
levels in the course of its deliberations on compensation forms and amounts. Our Compensation Committee also considered how
much hedge funds or private equity groups would receive as fees if it had the same amount of assets under management as our
gross assets, because our key executives may have opportunities in the hedge fund and private equity industry. Understanding
the fee structure of hedge funds and private equity provides the Committee an additional data point on the competitiveness of our
executive compensation program.
Determining the Amount of Compensation for Our NEOs
The amount of compensation we provide our NEOs is intended to be:
Reasonable and appropriate for our business needs and circumstances. Our Compensation Committee considers as reference
points for comparative purposes compensation practices of other public companies as well as hedge funds and private equity funds
where our executives may be able to find employment. While we develop peer groups for reviewing market practices, because
of our unique business model, we use the peer groups for informational purposes and do not target specific benchmark percentiles.
Internally fair and equitable relative to roles, responsibilities and work relationships. Management and the Compensation
Committee may consider certain business and individual factors to evaluate internal fairness and equity. We do not attempt to
establish specific internal relationships among the NEOs.
14
Variable from year-to-year based on our performance (“pay-for-performance”). Our historic annual cash incentive program and
equity incentive awards deliver compensation to our NEOs when we achieve our financial objective of growing book value per
share and the price of our stock appreciates above the value of the equity based award. Starting in 2016, our cash incentive awards
are based on the value created from asset monetizations in excess of their book value and will be tied to the return of capital to
shareholders.
Reflective of the lean management structure we employ. We have a limited set of executives and staff running our operations.
This keeps our overall corporate overhead at reasonable levels, but also demands more from our team. The Compensation
Committee takes into account the overall cost savings of our model when considering compensation.
Focused on retaining the core team of executives. Retention of our core team of executives is critical to our business strategy,
because the loss of any executive could require significant resources to replace. The Compensation Committee considers the
retention of the executives when designing the executive compensation program.
Components of Our NEO Compensation Program
The following table includes the various components that have been part of our executive compensation program:
Form
Cash
Cash
Component Purpose
Base salary
Provide sufficient
competitive pay to
attract and retain
experienced and
successful executives.
Cash
incentive
Encourage and reward
contributions to our
financial results.
Engage executives in
execution of our
business strategy.
Emphasize
accountability for
results.
Equity
incentive
RSU and
PBO
Encourage and reward
building long-term
shareholder value,
employment retention
and company stock
ownership. Align
executives with
shareholder interests
and retain executive
officers through long-
term vesting.
Comment
Annual fixed cash compensation. Base
salary reflects the employee's level of
responsibility, expertise, skills,
knowledge and experience. For our
CEO, base salary is fixed for the term
of his employment agreement, subject
to annual cost of living adjustments.
For our other NEOs, base salary is
reviewed on an annual basis.
Annual variable cash compensation.
The Compensation Committee
determines and approves the actual
amount earned after the close of the
fiscal year.
The Compensation Committee, at its
sole discretion, determines whether to
grant stock-based awards in any year.
We require stock ownership through
stock ownership guidelines applicable
to our CEO, CFO and other designated
executive officers. The Compensation
Committee did not grant any equity
incentives to our NEO's in 2015 or
2016 and we do not anticipate granting
any further equity incentives to our
NEOs for the foreseeable future.
Pay-for-Performance
Adjustments to base
salary generally consider
individual performance,
contributions to the
business, competitive
practices and internal
comparisons.
The potential award
amount varies with the
degree to which we
increase our book value
per share in comparison
to the performance of the
S&P 500 over a five-year
period. Starting in 2016,
our cash incentive awards
are based on the value
created from asset
monetizations in excess of
their book value and will
be tied to the return of
capital to shareholders.
RSU retain executives
and align them with
shareholders’ interests by
awarding a fixed number
of shares upon vesting.
PBO reward building
long-term shareholder
value (see equity
compensation section for
a more detailed
description of PBO).
15
We also provide the following compensation and benefit programs to our executives, many of which are broadly available to all
of our employees:
Component
Retirement benefits
Objectives and Basis
Retain and recruit our executive
officers.
Deferred compensation
opportunity
Retain and recruit our executive
officers by offering them an
opportunity to defer income tax on
amounts deferred.
Insurance and other benefits
Provide for the safety and wellness of
all of our employees, including our
executive officers.
Form
401(k) plan. Provides a tax-deferred means to save
for retirement. The NEOs have the opportunity to
participate in this Section 401(k) plan on the same
basis as all of our other employees.
Non-qualified deferred compensation plan. We do
not make any matching or other contributions to the
nonqualified deferred compensation plan. The
amounts deferred under the plan are credited with
interest, earnings, appreciation, losses and
depreciation based on the performance of equities,
bonds or cash selected by the participants, and are
held in a grantor trust, the assets of which are
subject to the claims of our creditors.
These benefits include health insurance, life
insurance, dental insurance, vision insurance, and
disability insurance, which are available to all
employees, including our NEOs, on a
nondiscriminatory basis.
Termination and severance
benefits
Retain and recruit our executive
officers.
Various, including cash and accelerated vesting of
equity incentives in certain circumstances.
2015 and 2016 Executive Compensation Decisions
Assessment of 2015 Executive Officer Compensation
During 2015, the Compensation Committee performed a formal assessment of our executive compensation program with assistance
from its independent executive compensation consulting firm, Compensia. As explained in greater detail in the following section,
we took the following actions regarding executive compensation in 2015:
• Our CEO received a base salary increase of 3% to reflect cost of living adjustments effective as of January 1, 2015;
• Our CFO and Chief Accounting Officer (“CAO”) each received a 10% increase in base salary effective January 1, 2015.
Our CFO's increase in salary was due to his increased responsibilities by assuming the position of Corporate Secretary
when our previous Corporate Secretary retired and our CAO's increase in salary was a merit based increase;
• None of our executive officers earned a cash incentive award in 2015 under our incentive plan; and
• None of our executive officers were granted any stock-based compensation in 2015 in contemplation of the modified
executive compensation plan that was adopted in March 2016 to align with the revision to our business model.
2015 Cash Compensation
Base Salary: At the beginning of 2015, we increased the base salaries of our CEO, CFO, and CAO by the following amounts as
shown below. As noted above, the Compensation Committee and Board of Directors approved modifications to our executive
compensation plan in February 2016. These modifications included reducing the base salaries of our CEO and CFO as shown in
the following table.
Officer
John R. Hart
Maxim C.W. Webb
John T. Perri
2014 Salary
2015 Change
2015 Salary
2016 Change
2016 Salary
$
$
$
2,113,000
530,500
400,000
3% $
2,176,390
10% $
10% $
583,550
440,000
(54)% $
(15)% $
— % $
1,000,000
496,000
440,000
Cash Incentive Awards: Historically and in 2015, we provided cash incentive award opportunities based on our increase in book
value in comparison to a five-year annualized total return of the Standard & Poor’s 500. While we would evaluate performance
annually, the metrics related to our long-term performance, rather than a short-term focus on annual earnings. This is because
changes in our book value may only be realized when we sell an investment after many years of work in developing it. Accordingly,
these awards were designed to motivate our executive officers and align their interests with our business strategy and thus, the
interests of our shareholders.
16
In order to receive a payment, annual growth in our book value per share had to exceed a threshold level of 80% of the Standard
& Poor’s 500’s annualized total return for the previous five calendar years. We tied our cash incentive awards to the five-year
average of the Standard & Poor’s 500 index in order to emphasize long-term performance and to pay for relative performance that
is better than the general market. We believe that this approach closely aligned our executive officers’ pay with our corporate
objectives and risk tolerance.
Our CEO’s employment agreement in effect in 2015 provided that if our growth in book value per share in a fiscal year exceeded
80% of the Standard & Poor’s 500’s annualized total return for the previous five calendar years he would receive 7.5% of the
increase in book value per share multiplied by the number of shares of our common stock outstanding at the beginning of the fiscal
year.
Messrs. Webb and Perri had an annual incentive award equal to each of their base salaries multiplied by the ratio of the annual
incentive compensation payments paid to our CEO to our CEO’s base salary. For example, if our CEO’s total incentive compensation
payments equal 50% of his base salary, each of these NEOs is eligible to receive an incentive compensation award equal to 50%
of his base salary. As a result, the incentive compensation opportunity for each of these two NEOs is based on the same growth
in book value per share metric that is applicable to our CEO.
In 2015, our book value per share declined and as a result, none of our NEOs received an annual incentive compensation award
for 2015.
As noted above, the Compensation Committee and Board of Directors approved modifications to our executive compensation
program in February 2016 to align with our revised business plan. These modifications included revising the cash incentive
plan to be based on the value created from assets monetized in excess of their respective book value as of December 31, 2015
and after deducting annual costs and taxes. In addition, such cash incentive-based compensation is tied to the return of capital
to shareholders through a stock repurchase program or by other means such as special dividends.
2015 Equity Incentives
Due to the revised business plan that we announced in November 2015 and the related modifications to our executive compensation
program, we did not grant any stock-based compensation to our NEOs in 2015 and we do not anticipate granting any further stock-
based compensation to our NEOs for the foreseeable future.
Other Executive Compensation Matters
Claw Back Policy
In 2012 we adopted a policy that would require our CEO, CFO and other designated executive officers, to repay to us the amount
of any annual cash incentive received to the extent that:
• The amount of such payment was based on the achievement of certain financial results that were subsequently the subject
of a restatement that occurs within 12 months of such payment;
• The executive officer had engaged in theft, dishonesty or intentional falsification of our documents or records that resulted
in the obligation to restate our financial results; and
• A lower annual cash incentive would have been paid to the executive officer based upon the restated financial results.
The Compensation Committee is responsible for the interpretation and enforcement of this repayment policy. We intend to amend
our repayment policy to comply with any additional requirements of the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 after the SEC adopts regulations implementing those requirements.
Stock Ownership Guidelines
Our stock ownership guidelines for our CEO, CFO and other executive officers designated by the Compensation Committee help
ensure that those officers maintain an equity stake in our Company, and by doing so, appropriately link their interests with those
of other shareholders. We also have stock ownership guidelines for our non-employee directors, which are addressed below with
the discussion of director compensation. These ownership guidelines count shares actually owned, vested deferred stock units,
and 50% of the vested stock options and SAR towards the equity ownership requirement. Until the applicable stock ownership
guideline is met, the officer is required to retain 25% of the net shares received as a result of the exercise of stock options or SAR
and receipt of RSU. Each of our executive officers are in compliance with the guidelines.
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The guidelines are as follows:
Role
CEO
CFO
Ownership Guideline
lesser of 275,000 shares or 3x base salary
lesser of 18,000 shares or 1x base salary
Other designated executive officers
lesser of 10,000 shares or 1x base salary
Termination and Change in Control
We provide certain termination of employment payments and benefits to our NEOs. We provide these payments and benefits to
help retain and recruit our NEOs, which is one of the primary objectives of our executive compensation program. We believe that
providing these benefits allows our NEOs to focus on our business and what is in the best interests of our shareholders regardless
of the potential impact on them personally. Our Compensation Committee determined the level of benefits based on a review of
the market by our independent compensation consultant, the recommendations of management and considering the nature of our
business and executive compensation program.
All stock-based awards for our executives provide that the unvested equity awards assumed by a buyer in the event of a change
of control would not automatically accelerate at the close of the transaction (that is, we have no “single trigger” benefits) and
instead the vesting would only accelerate if there was a qualifying termination following the change in control (i.e., “double
trigger” treatment of unvested awards).
See “Potential Payments upon Termination or Change in Control” for a more detailed description of our termination and change
in control benefits for the NEOs.
Tax and Accounting Treatment of Compensation
Under Section 162(m) of the Internal Revenue Code, annual compensation in excess of $1 million to each of a company’s CEO
and three other most highly compensated executive officers, not including the CFO, (the “covered employees”) is not deductible
as compensation expense for United States federal income tax purposes. However, certain types of compensation, including
performance-based compensation, may be exempt from this limit if the material terms of the performance goals under which the
compensation is to paid have been disclosed to, and subsequently approved by the shareholders, and the additional requirements
for exemption have been satisfied. In structuring the annual and equity incentive awards for our NEOs, we consider Section 162
(m) and how compensation must be structured in order to qualify as “performance-based compensation.” In our discretion, we
may try to qualify compensation as “performance-based,” but may also pay compensation that does not qualify as “performance-
based” if the Compensation Committee determines that form of compensation is in the best interest of the Company and its
shareholders.
To enable us to provide incentive compensation to our covered employees that may qualify for full federal income tax deductibility,
we submitted a Performance Incentive Plan (“Plan”) to our shareholders in 2013, which shareholders approved. By approving
the Plan, shareholders approved, among other things, the participant eligibility requirements, the performance criteria upon which
incentive awards may be based, and the maximum dollar amount of compensation that may be paid to any participant for each
fiscal year contained in the performance period applicable to an incentive award.
Under Internal Revenue Code Section 409A, a nonqualified deferred compensation plan, must comply with certain requirements
related to the timing of deferral and distribution decisions, otherwise amounts deferred under the plan could be included in gross
income when earned and be subject to additional penalty taxes. We administer our equity plans and equity awards in accordance
with Section 409A requirements.
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Compensation Risk Management
The Compensation Committee considered the risk in our compensation programs and practices and determined:
Our focus is on long-term growth with reasonable leverage, and this philosophy is conducive to minimizing compensation
related risks;
Our incentive plans are well designed, effectively administered, focused on relevant performance measures;
Our plans are reasonable with respect to potential compensation levels;
The elements of our compensation plan are appropriately weighted in our overall mix that achieves a balance of focus between
operating results and strategic results;
Base salaries for executive officers are sufficiently competitive to eliminate the need for them to take unnecessary risk in
order to earn large incentives necessary to provide adequate cash compensation;
Equity-based compensation levels are competitive and sufficient to provide a balanced focus between short- and long-term
priorities and results and does not encourage the taking of short-term risks at the expense of long-term results; and
Our insider trading policies, independent oversight by the Compensation Committee, and our stock ownership guidelines
and “claw back policy” mitigate any potential risks in our compensation programs.
Based on this review, the Compensation Committee concluded that our compensation policies, plans, and practices do not encourage
unnecessary or unreasonable risk-taking and do not encourage executives or employees to take risks that are reasonably likely to
have a material adverse effect on us.
Compensation Committee Report
The following report of the Compensation Committee shall not be deemed to be “soliciting material” or to otherwise be considered
“filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of
1933, as amended, or the Exchange Act except to the extent that we specifically incorporate it by reference into such filing.
The Compensation Committee has reviewed and discussed the foregoing CD&A with management. Based on that review and
discussion, the Compensation Committee has recommended to the Board of Directors, and the Board of Directors has approved,
that the CD&A be included in this Amendment No. 1 on Form 10-K/A for the fiscal year ended December 31, 2015 and incorporated
by reference into our proxy statement for our 2016 Annual Meeting of Stockholders.
Compensation Committee:
Carlos C. Campbell, Chair
Michael J. Machado
Compensation Committee Interlocks and Insider
Participation in Compensation Decisions
No current member of our Compensation Committee was at any time during the year ended December 31, 2015 or any other time,
an officer or employee of our Company, and no current member had any relationship with us requiring disclosure of certain
relationships and related person transaction. None of our executive officers has served on the board of directors or compensation
committee (or other committee serving an equivalent function) of any other entity that has or has had one or more executive officers
who served as a member of our Board of Directors or Compensation Committee during the year ended December 31, 2015.
Compensation Tables and Narrative Disclosures
The following tables, narrative disclosures and footnotes describe the total compensation and benefits for our NEOs for fiscal
2015. The values presented in the tables do not always reflect the actual compensation received by our NEOs during the fiscal
year because some portion of an NEO's compensation may have been deferred pursuant to our nonqualified deferred compensation
plan.
19
Summary Compensation Table
The following table presents information concerning the compensation of the NEOs for services during 2015, 2014, and 2013.
The SEC’s current executive compensation disclosure rules require us to value stock awards and option awards reported in the
following table using the grant date fair value of the awards, rather than using the amount recognized for financial statement
reporting purposes to value these awards.
Name and Principal
Position
Year
Salary
Bonus
Stock
Awards (1)
Option
Awards(1)
Non-Equity
Incentive Plan
Compensation
All Other
Compensation(2)
Total
Compensation
John R. Hart, CEO
2015
$ 2,176,390
President & Chief
Executive Officer
2014
$ 2,113,000
2013
$ 2,094,482
$ 1,393,580
$ 1,475,705
Maxim C. W. Webb, CFO
2015
Executive Vice President,
Chief Financial Officer,
Treasurer & Secretary
John T. Perri, CAO
Vice President &
Chief Accounting Officer
2014
2013
2015
2014
2013
$
$
$
$
$
$
583,550
530,500
525,789
440,000
400,000
297,413
$ 125,000
$
464,533
$
837,881
$
353,033
$
636,791
$
$
$
$
$
$
$
$
$
19,800
40,300
39,700
19,800
40,300
47,949
19,800
40,300
41,016
$
$
$
$
$
$
$
$
$
2,196,190
5,022,585
2,134,182
603,350
1,873,214
573,738
459,800
1,430,124
463,429
(1)
The reported values reflect the aggregate grant date fair value computed in accordance with Financial Accounting Standards Board,
Accounting Standards Codification Topic 718. As these values reflect the aggregate grant date fair value, they do not necessarily correspond
to the actual value that may be recognized. The assumptions that we made to determine the value of our awards for accounting purposes
are described in detail in Note 8 titled Stock-Based Compensation in the notes to consolidated financial statements included in our Annual
Report on Form 10-K filed with the SEC on March 14, 2016.
(2) Amounts in this column include contributions made by us on behalf of the NEOs to the 401(k) plan, health savings account, and any
expense reimbursements.
There were no equity or non equity-based awards granted to the NEOs during 2015.
Grants of Plan-Based Awards
Pension Benefits and Non-qualified Deferred Compensation Plans
We do not maintain any qualified or non-qualified defined benefit pension plans. Our executive officers, however, may make
voluntary deferrals of salary, bonus and other cash compensation through our non-qualified deferred compensation plan. We do
not make any matching or other contributions to the non-qualified deferred compensation plan. Amounts deferred under the plan
therefore have already been earned, but participating executive officers have chosen to defer receipt of the cash payment under
the terms of the plan.
Each NEO who chooses to defer compensation under our non-qualified deferred compensation plan may elect, in accordance with
Section 409A of the Internal Revenue Code, to receive payment in the form of a lump sum on a date certain or on separation from
service, or in the form of up to 10 substantially equal annual installments beginning on a certain date or separation from service.
Payment will automatically be made in a lump sum upon an executive officer’s death. Payment under the plan may also be made
in connection with an unforeseeable emergency or certain terminations of the plan.
Amounts deferred under the non-qualified deferred compensation plan are credited with interest, earnings, appreciation, losses
and depreciation based on the performance of the investments held in the plan. Each individual participant bears their own market
risk and reward for their own deferrals under the plan.
20
Non-qualified Deferred Compensation
The following table presents contributions to, earnings or losses from, and the aggregate deferred compensation balance for each
NEO at and for the year ended December 31, 2015:
Executive
Contributions
In 2015
Registrant
Contributions
In 2015
Name
John R. Hart
Maxim C.W. Webb
John T. Perri
Aggregate
Earnings
(Losses) In
2015(1)
1,651,803
(24,463)
28,193
$
$
$
—
— $
1,655,533
Aggregate
Withdrawals/
Distributions
$
$
250,433
250,433
Aggregate
Balance at
December 31,
2015(1)
20,241,912
3,003,269
323,237
23,568,418
$
$
$
$
(1)
The balances shown in this table represent compensation previously reported in the Summary Compensation Table, except for amounts
attributable to aggregate earnings, which are not reportable in the Summary Compensation Table because we do not provide above market
or preferential earnings on non-qualified deferred compensation.
The following tables provide information on the outstanding equity awards for the NEOs as of December 31, 2015.
Outstanding Equity Awards at Fiscal Year-End
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
Exercisable
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
Option
Exercise
Price
Option
Expiration
Date
Number of
Shares or
Units of Stock
That Have
Not Vested
Market Value of
Shares or Units
of Stock That
Have Not Vested
419,178
285,714
17,292
30,000
95,238
72,381
$
$
$
$
$
$
42.71
19.51
8/2/2017
6/14/2019
42.71
19.51
8/2/2017
11/14/2024
42.71
19.51
8/2/2017
11/14/2024
53,572
$
552,863
17,857
$
184,284
13,571
$
140,053
Name
John R. Hart
SAR (1)
PBO (2)
RSU (3)
Maxim. C.W. Webb
SAR (1)
PBO (2)
RSU (3)
John T. Perri
SAR (1)
PBO (2)
RSU (3)
(1) Represents SAR held by each NEO as of December 31, 2015. The actual number of shares to be issued to an NEO who exercises a SAR
will be based on the net exercise value (that is, the market price per share of our stock on the date of exercise, minus the exercise price)
times the number of SAR exercised, minus applicable taxes withheld in the form of shares. At December 31, 2015, none of the outstanding
SAR held by our NEOs were in-the-money.
(2) Represents PBO granted on November 14, 2014, pursuant to our 2014 Equity Incentive Plan. The PBO include a market condition based
on the achievement of a stock price target during the contractual term and vest monthly over a three year period. Any vested portion of
the options may be exercised only if the 30-trading-day average closing sales price of our common stock equals or exceeds 125% of the
grant date stock price. The stock price contingency may be met any time before the options expire and it only needs to be met once for
the PBO to remain exercisable for the remainder of the term. Of the total unexercisable PBO, 103,175 for Mr. Hart, 34,391 for Mr.
Webb, and 26,138 for Mr. Perri were vested but unexercisable as the stock price contingency had not been met as of December 31, 2015.
(3) Represents RSU granted on November 14, 2014, pursuant to our 2014 Equity Incentive Plan. These RSU are subject to the NEOs
continued employment or service with us. The RSU will vest annually in four equal installments beginning on November 14, 2015, and
may also vest earlier in connection with certain terminations of employment. The market value of the RSU reported above is based on
$10.32 per share, which was the closing market price of our common stock on December 31, 2015.
21
Potential Payments upon Termination or Change in Control
The following section describes the payments and benefits that our NEOs may receive in connection with their termination of
employment with us, or in connection with a change in control of our Company. In addition to the amounts presented below, our
NEOs may be entitled to the benefits quantified and described above under “Nonqualified Deferred Compensation.” The NEOs
may also be entitled to additional severance payments and benefits under our severance benefit plan, which is generally available
to all salaried employees and provides for two weeks of base salary for each full year of employment with us upon a termination
of employment by us for any reason other than cause.
Please see our “Compensation Discussion and Analysis” for a discussion of how the payments and benefits presented below were
determined.
2014 Equity Incentive Plan:
Upon a change in control of our Company, the plan administrator has the discretion to take any of the following actions with
respect to stock awards:
•
•
•
provide for acceleration of the exercisability, vesting and/or settlement of any outstanding stock award or portion thereof;
provide for the assumption, continuation or substitution of an outstanding stock award or portion thereof by a surviving,
continuing, successor, or purchasing corporation or other business entity or parent thereof; or
provide for any outstanding stock award or portion thereof denominated in shares of common stock to be canceled in
exchange for a payment with respect to each vested share (and each unvested share, if so determined) of common stock
subject to such canceled stock award in (i) cash, (ii) stock of our Company or of a corporation or other business entity a
party to the change in control, or (iii) other property which, in any such case, shall be in an amount having a fair market
value equal to the fair market value of the consideration to be paid per share of common stock in the change in control,
reduced (but not below zero) by the exercise or purchase price per share, if any, under such stock award.
Under the 2014 Equity Incentive Plan, a “change in control” is generally the consummation of (i) the acquisition by a person or
entity, directly or indirectly, of securities of our Company representing more than 50% of the total fair market value or total
combined voting power of our Company’s
securities entitled to vote generally in the election of directors, (ii) a
transaction or series of related transactions in which the shareholders of our Company immediately before the transaction do not
retain immediately after the transaction direct or indirect beneficial ownership of more than 50% of the total combined voting
power of the outstanding securities entitled to vote generally in the election of directors, or (iii) a date specified by the plan
administrator following approval by the shareholders of a plan of complete liquidation or dissolution of our Company.
As indicated in the Outstanding Equity Awards at Fiscal Year-End table above, the only awards held by our NEOs at the end of
2015 were RSU, PBO, and SAR. Using the “in-the-money” value model, the value of the SAR and PBO awarded to our NEOs
(assuming a change in control of our Company had occurred as of December 31, 2015) would be zero because the exercise price
of all SAR and PBO granted before December 31, 2015 was greater than $10.32, the closing market price of our common stock
on the NASDAQ Global Market on December 31, 2015.
Mr. Hart. Pursuant to the operation of the terms of his employment agreement, in effect on December 31, 2015, if our CEO was
terminated other than “for cause” or if he resigned for “good reason” or his employment ended due to death or disability, he was
entitled to receive a separation package consisting of (i) the greater of (a) his base salary for the remaining term of this employment
agreement or (b) two times his base salary at the date of termination; (ii) immediate vesting of all unvested equity interests; (iii)
continuation of health care benefits until his death or he accepts health coverage from another employer; and (iv) payment of the
pro rata portion of any earned annual incentive award with respect to the year in which his employment is terminated. The amended
employment agreement also permits us to pay a single lump sum amount of $540,000 in lieu of continued health benefits if we
determine that the benefits cannot be provided without incurring financial costs or penalties. Additionally, the RSU, PBO, and
SAR awards held by Mr. Hart will fully vest upon his termination of employment without cause, excluding death or disability,
and on a change in control transaction if the buyer does not assume or substitute for all equity awards.
Messrs. Webb and Perri. We have severance agreements with both Messrs. Webb and Perri. As in effect on December 31, 2015,
these agreements provided that, in the event of involuntary termination of the executive without cause, the executive would receive
a lump sum cash payment equal to the sum of (1) twenty-four months of the executive’s base salary then in effect and (2) an
amount equal to the executive’s pro-rata share of any annual cash incentive award earned for the year in which involuntary
termination occurred.
22
Estimated Potential Payments for our NEOs. The following table lists the estimated value of the RSU awarded to Messrs. Hart,
Webb, and Perri assuming a change in control of our Company occurred on December 31, 2015. The amount of severance listed
below for Mr. Hart is pursuant to his employment agreement and the amount of severance listed below for Messrs. Webb and Perri
is pursuant to their severance agreements, in each case as in effect on December 31, 2015. PBO and SAR have been excluded as
they were out-of-the-money at December 31, 2015.
Severance Benefits on Termination
Name & Triggering Event
Cash Payments (1)
Cash Payments
for Standard
Severance
RSU that would
Vest
Total
John R. Hart
Termination with cause
Termination without cause (3)
Change in control
Death / disability
Maxim C. W. Webb
Termination with cause
Termination without cause
Change in control
Death / disability
John T. Perri
Termination with cause
Termination without cause
Change in control
Death / disability
$
$
$
$
$
$
$
$
$
719,883
5,612,663
5,912,663
204,243
1,399,470
504,243
144,851
1,052,978
444,851
$
$
$
$
$
$
$
552,863
552,863
552,863
(2)
$
$
$
$
$
$
184,284
184,284 (2) $
$
$
140,053
$
140,053 (2) $
$
719,883
6,165,526
552,863
6,465,526
204,243
1,583,754
184,284
504,243
144,851
1,193,031
140,053
444,851
(1) Cash payments include accrued vacation and personal days, payment of salary as stipulated by agreement, and life insurance in the case
of death.
(2) Assumes that the award is neither assumed or continued by the new controlling owner, nor replaced by a substituted award with respect
to the new controlling owner’s stock.
(3) Also represents payments due upon a change in control and a subsequent termination without cause.
Revised Employment and Severance Agreements Effective in 2016
In connection with the changes we made to our executive compensation program to align with the revision to our business plan
that we announced in November 2015, on March 11, 2016, we entered into 1) an amended employment agreement with Mr. Hart,
2) amended severance agreements with Messrs. Webb and Perri and 3) an executive bonus plan covering Messrs. Hart, Webb and
Perri.
Mr. Hart’s Amended Employment Agreement
The amended employment agreement with Mr. Hart superseded and replaced his previous employment agreement and provides
the following:
•
•
•
•
a five year term ending on March 11, 2021;
an annual base salary of $1 million including the standard benefits package made available to other full time employees
of our Company;
certain termination benefits, as described below; and
participation in the revised executive bonus plan (described below).
23
If terminated without cause, Mr. Hart is entitled to 1) a lump-sum payment of $10 million, 2) payment of family health benefits
through the earlier of Mr. Hart’s death or his acceptance of health coverage from another employer, although we could pay Mr.
Hart a one-time payment of $540,000 as satisfaction of this obligation under certain circumstances, 3) payment of all accrued
vacation and other time off, including an additional $389,000 which is the amount of the difference between (a) the value of such
accrued vacation and time off at December 31, 2015 calculated using his annual base salary on such date and (b) the value of that
benefit using his revised base salary under the new agreement, 4) immediate vesting of any outstanding unvested stock-based
awards, and 5) any bonus earned as described below.
If Mr. Hart terminates his employment with us for good reason as defined in the agreement, the lump-sum payment noted above
is reduced to $5 million unless such termination is in connection with an approval by our Board of Directors to materially change
our current business plan.
If Mr. Hart’s employment with us is terminated due to the expiration of the term of the amended employment agreement, Mr. Hart
will be entitled to all benefits payable under a termination without cause, except for the bonus; provided, however, that the lump-
sum payment will be reduced to $5 million.
In the event that Mr. Hart’s employment with us is terminated due to death or disability, Mr. Hart’s beneficiary will be entitled to
the benefits payable under a termination without cause; provided, however, that the lump-sum payment will also be reduced to
$5 million.
The Amended Severance Agreements
The amended and restated five year severance agreements with Messrs. Webb and Perri superseded similar agreements entered
into during 2012. Each agreement provides for the payment of the lower of two years base salary or the base salary of the then-
remaining portion of the term, participation in our revised executive bonus plan as described below, and payment of up to one
year of COBRA expenses, in the event of an involuntary termination of employment (other than for “cause”) or a resignation for
“good reason.”
Concurrently with the execution of his amended severance agreement, Mr. Webb voluntarily reduced his annual base salary to
$496,000, which reflects an approximately 15% reduction from his previous base salary of $583,550.
Revised Executive Bonus Plan
Our revised executive bonus plan is effective from January 1, 2016 through December 31, 2020 and replaced and superseded the
previous bonus plan maintained by us for Mr. Hart, Mr. Webb and Mr. Perri. Such arrangement awards an annual bonus only if
1) there is a net gain derived from a sale or other disposal of assets, as defined, and 2) cash proceeds from such transactions are
distributed directly to our shareholders during the same year.
The agreement establishes a bonus pool that is calculated as 20% of the adjusted total net gain from assets sold or otherwise
disposed. The plan defines the total net gain as the difference between the cash received in sale or other disposal transactions less
(a) the book value of each such asset as of December 31, 2015, as determined in accordance with U.S. GAAP, subject to adjustment
by the Compensation Committee to the extent necessary to reflect the capitalization of costs with respect to such assets as required
by GAAP after December 31, 2015; (b) any bonus paid or payable to management for the sale or other disposition of each such
asset, other than any bonus under the bonus plan; and (c) administrative expenses specified in the bonus plan. Such total net gain
is then also multiplied by an adjustment factor resulting in an adjusted total net gain. The adjustment factor is a fraction, the
numerator of which is the total amount of cash distributed or committed to be distributed to our shareholders with respect to all
such assets sold or otherwise disposed of during the year, and the denominator, which is the total amount of cash received after
payment of all selling costs, including any fees and commissions for which all such assets were sold or otherwise disposed of
during the year. For assets distributed directly to our shareholders, the adjustment factor is 100%. The resulting bonus pool is
allocated 75% to Mr. Hart, 15% to Mr. Webb and 10% to Mr. Perri. Each individual will be entitled to his allocated portion of the
bonus pool for the year if employed by us on the last day of the year. However, in the event that Mr. Hart’s, Mr. Webb’s or Mr.
Perri’s employment with us is terminated in certain circumstances as provided in their amended agreements such terminated
individual will be entitled to payment of an amount under the bonus plan for a portion of the year in which such termination occurs.
24
For assets sold or otherwise disposed of entirely or partially for non-cash consideration, the calculation of total net gain with
respect to the non-cash consideration will instead be made in the year in which the non-cash consideration is ultimately sold or
otherwise disposed of for cash. For assets distributed directly to our shareholders, other than an asset resulting from a previous
sale or other disposal of an asset for non-cash consideration as described in the preceding sentence, the total net gain will be
determined by deducting items (a) through (c) above from the value of such assets upon such distribution, as determined in
accordance with GAAP.
Director Compensation
Our non-employee director compensation program provided for the following during 2015: (1) all of our non-employee directors
received annual cash compensation of $80,000 and $50,000 of RSU, which vest annually from the date of grant (2) our Chair of
the Board of Directors received additional annual cash compensation of $45,000; (3) the Chairs of our Audit, Compensation, and
Corporate Governance and Nominating Committees each received additional annual cash compensation of $20,000, $15,000, and
$10,000, respectively; (4) a daily fee paid in cash for attendance at educational activities or seminars, which has an annual maximum
of $5,000; and (5) no annual cost of living increase in board and committee fees.
Pursuant to the Compensation Committee’s recommendation each non-employee director received 3,050 RSU on June 3, 2015.
These awards will vest in their entirety on June 3, 2016 for those directors who are serving on our Board of Directors at that time.
The following table sets forth compensation earned during 2015 for each non-employee director who served during 2015.
Kristina M. Leslie (2)
Carlos C. Campbell
Julie H. Sullivan, PhD (2)
Kenneth J. Slepicka
Robert G. Deuster (2)
Michael J. Machado
Name
Fees Earned Or
Paid In Cash
$
$
$
$
$
$
$
136,103
109,949
106,235
88,866
81,542
81,370
604,065
Stock Awards(1)
49,990
$
$
$
$
$
$
$
49,990
49,990
49,990
49,990
49,990
299,940
Total
186,093
159,939
156,225
138,856
131,532
131,360
904,005
$
$
$
$
$
$
$
(1) Each director was granted 3,050 RSU in June 2015. The total value of the stock awards is based on the closing market
price of our common stock on the date of grant. The directors held no other stock-based awards as of December 31, 2015.
(2) Ms. Leslie and Mr. Deuster resigned as members of our Board of Directors and as members of all committees effective
February 3, 2016. Dr. Sullivan resigned as a member of our Board of Directors and as a member of all committees effective
December 31, 2015. The stock awards granted in June 2015 to each of these members of our Board of Directors were
terminated upon each of their resignations and therefore such awards will not vest in June 2016.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth information, as of April 1, 2016, with respect to the beneficial ownership of our common stock by
(i) each person whom we know to be the beneficial owner of more than 5% of our common stock based upon Schedule 13G and
Schedule 13D reports filed with the SEC, (ii) each of our directors, (iii) each NEO listed in our Summary Compensation Table,
and (iv) all of our current executive officers and directors as a group.
Unless otherwise indicated, the business address for each person is 7979 Ivanhoe Avenue, Suite 300, La Jolla, CA 92037. The
amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the
determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner”
of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security,
or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed
to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under
these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial
owner of securities as to which he has no economic interest.
25
Except as otherwise noted, we believe, based on the information furnished to us, that the persons named in the table below have
sole voting and investment power with respect to all shares of common stock reflected as beneficially owned, subject to applicable
community property laws. As of April 1, 2016, 23,037,587 shares of our common stock were outstanding.
Name and Address of Beneficial Owner
Named Executive Officers and Directors
John R. Hart(1) (14) (15)
Maxim C. W. Webb (2) (14) (15)
John T. Perri (3) (14) (15)
Raymond V. Marino II (16)
Carlos C. Campbell (4) (6)
Howard Brod Brownstein (16)
Michael J. Machado (6)
Kenneth J. Slepicka (6)
Eric Speron (5)
Daniel B. Silvers(16)
Andrew F. Cates(16)
Number of Shares
and Nature of
Beneficial Ownership
Percentage
Ownership
296,289
1.3%
76,676
28,073
5,000
4,407
10,100
4,407
9,493
920,683
—
—
*
*
*
*
*
*
*
*
*
4.0%
Current Executive Officers and Directors as a Group (11 persons)
1,355,128
5.9%
5% Shareholders
RHJ International SA (7)
Avenue Louise 326 1050 Brussels, Belgium
River Road Asset Management, LLC(8)
462 S. 4th St., Ste 1600 Louisville, KY 40202
Royce & Associates, LLC (9)
745 Fifth Avenue, New York, NY 10151
Van Den Berg Management I, Inc. (17)
805 Las Cimas Parkway, Suite 430, Austin, TX 78746
BlackRock, Inc. (10)
55 East 52nd Street, New York, NY 10055
Central Square Management, LLC (11)
1813 N. Mill Street, Suite F, Naperville, IL 60563
Bank of Montreal(12)
1 First Canadian Place Toronto, Ontario, Canada M5X 1A1
The Vanguard Group (13)
100 Vanguard Blvd. Malvern, PA 19355
2,663,180
11.6%
1,908,618
1,542,389
1,424,634
1,408,573
1,407,498
1,269,263
1,184,593
8.3%
6.7%
6.2%
6.1%
6.1%
5.5%
5.1%
* Represents less than 1% of the issued and outstanding shares of common stock as of the date of this table.
(1)
(2)
(3)
(4)
(5)
(6)
Represents 37,152 shares held in our 401(k) plan and 259,137 shares held directly. The number of shares shown above does not include
53,996 shares held in a deferred compensation trust account. U.S. Bank, N.A., as trustee of the grantor trust, has sole voting power over
such shares. This number also does not include 53,572 shares of RSU that will not vest within 60 days.
Represents 1,290 shares held in our 401(k) plan and 75,386 shares held directly. The number of shares shown above does not include
1,375 shares held in a deferred compensation trust account. U.S. Bank, N.A., as trustee of the grantor trust, has sole voting power over
such shares. This number also does not include 17,857 shares of RSU that will not vest within 60 days.
Represents 263 shares held in our 401(k) plan and 27,810 shares held directly. This number does not include 13,571 shares of RSU that
will not vest within 60 days.
Represents 4,407 shares held directly. The number of shares shown above does not include 2,644 shares held in a deferred compensation
trust account. U.S. Bank, N.A., as trustee of the grantor trust, has sole voting power over such shares.
Represents 20,900 shares held in a personal IRA account, 39,100 shares held directly and 190 shares held by Mr. Speron's spouse in a
personal IRA. This number also includes 860,493 shares held on behalf of clients of First Foundation Advisors for which Mr. Speron
has voting and dispositive power.
The number of shares does not include 3,050 shares of RSU that will not vest within 60 days.
26
(7)
Beneficial ownership of shares as reported on Schedule 13G/A filed with the SEC on February 11, 2016. Kleinwort Benson Investors
Dublin Limited (“Kleinwort Investors”) and Calvert Investment Management Inc. ("Calvert") beneficially owned 2,663,180 shares, and
1,174,101 shares respectively, with shared voting and dispositive power over such shares. Kleinwort Investors is a wholly owned
subsidiary of Kleinwort Benson Group Limited (“Kleinwort Group”), which is a wholly owned subsidiary of RHJ International SA
(“RHJ”). Calvert is a wholly owned subsidiary of RHJI. As such, RHJ, Kleinwort Group, and Calvert may be deemed to beneficially
own all shares beneficially owned by Kleinwort Investors and Calvert.
(8)
(9)
Beneficial ownership of shares as reported on Schedule 13G/A filed with the SEC on February 12, 2016. River Road Asset Management,
LLC beneficially owned 1,908,618 shares, with sole voting power over 1,566,081 shares and sole dispositive power over 1,908,618
shares.
Beneficial ownership of shares as reported on Schedule 13G/A filed with the SEC on January 20, 2016.
(10) Beneficial ownership of shares as reported on Schedule 13G/A filed with the SEC on January 27, 2016. BlackRock, Inc. beneficially
owned 1,408,573 shares, with sole voting power over 1,342,445 shares, and sole dispositive power over 1,408,573 shares, which shares
are reported by BlackRock, Inc. as a parent holding company of its subsidiaries.
(11) Beneficial ownership of shares as reported on Schedule 13D/A filed with the SEC on March 21, 2016. Central Square Capital LP
(“Central Square Capital”) beneficially owned 972,642 shares, with shared voting and dispositive power over 972,642 shares. Central
Square Capital Master LP (“Central Square Master”) beneficially owned 434,856 shares, with shared voting and dispositive power over
434,856 shares. Central Square GP LLC (“Central Square GP”) as the general partner of Central Square Capital, may be deemed the
beneficial owner of the 972,642 shares owned by Central Square Capital. Central Square GP II LLC (“Central Square GP II”), as the
general partner of Central Square Master, may be deemed the beneficial owner of the 434,856 shares owned by Central Square Master.
Central Square Management LLC (“Central Square Management”), as the investment manager of each of Central Square Capital and
Central Square Master, may be deemed the beneficial owner of the (i) 972,642 shares owned by Central Square Capital and (ii) 434,856
shares owned by Central Square Master. Mr. Cardwell, as the managing member of each of Central Square GP, Central Square GP II
and Central Square Management, may be deemed the beneficial owner of the (i) 972,642 shares owned by Central Square Capital and
(ii) 434,856 shares owned by Central Square Master.
(12) Beneficial ownership of shares as reported on Schedule 13G/A filed with the SEC on February 16, 2016. BMO Asset Management
Corp. beneficially owned 1,255,869 shares, with sole voting power over 1,093,320 shares, shared voting power over 4,348 shares, sole
dispositive power over 1,250,146 shares, and shared dispositive power over 3,170 shares. BMO Harris Bank N.A. beneficially owned
13,394 shares, with sole voting power over 12,855 shares, and shared dispositive power over 13,394 shares. Bank of Montreal is the
ultimate parent company of BMO Asset Management, Corp., an investment adviser registered under Section 203 of the Investment
Advisers Act of 1940, and BMO Harris Bank N.A., a bank as defined in section 3(a)6 of the Securities Exchange Act of 1934, as amended.
As parent company, Bank of Montreal is deemed to beneficially own 1,269,263 shares held by its subsidiaries, with sole voting power
over 1,106,205 shares, shared voting power over 4,348 shares, sole dispositive power over 1,250,146 shares, and shared dispositive
power over 16,564 shares.
(13) Beneficial ownership of shares as reported on Schedule 13G/A filed with the SEC on February 11, 2016. The Vanguard Group, Inc.
beneficially owned 1,184,593 shares, with sole voting power over 28,759 shares, sole dispositive power over 1,157,134 shares, and
shared dispositive power over 27,459 shares. Vanguard Fiduciary Trust Company, a wholly-owned subsidiary of The Vanguard Group,
Inc., is the beneficial owner of 27,459 shares as a result of its serving as investment manager of collective trust accounts. Vanguard
Investments Australia, Ltd., a wholly-owned subsidiary of The Vanguard Group, Inc., is the beneficial owner of 1,300 shares as a result
of its serving as investment manager of Australian investment offerings.
(14) Shares shown as beneficially owned by the NEO do not include shares issuable upon exercise of SAR, which are exercisable or may be
exercised within 60 days of April 1, 2016, because none of the outstanding SAR were in-the-money as of April 1, 2016. As of April 1,
2016, the total number of SAR held by NEOs were 466,470 and held as follows: (a) 419,178 SAR for Mr. Hart, (b) 17,292 SAR for Mr.
Webb, and (c) 30,000 SAR for Mr. Perri. The actual number of shares to be issued to an NEO who exercises a SAR will be based on
the net exercise value (that is, the market price per share of our stock on the date of exercise, minus the exercise price) times the number
of SAR exercised, minus applicable taxes withheld in the form of shares.
(15) Shares shown as beneficially owned by the NEO do not include shares issuable upon exercise of PBO (Performance Based Option),
which may be exercisable within 60 days of April 1, 2016, because none of the vested PBO had met the stock price contingency as of
April 1, 2016. As of April 1, 2016, the total number of PBO held by NEOs was 453,333, of which 201,482 had vested. The PBO were
held as follows: (a) 285,714 total PBO (126,984 vested) for Mr. Hart, (b) 95,238 total PBO (42,328 vested) for Mr. Webb, and (c) 72,381
total PBO (32,170 vested) for Mr. Perri.
(16) The number of shares does not include 4,868 RSU that will not vest within 60 days.
(17) Beneficial ownership of shares as reported on Schedule 13G filed with the SEC on February 16, 2016. Van Den Berg Management I,
Inc. beneficially owned 1,424,634 shares, with sole voting and dispositive power over such shares.
27
EQUITY COMPENSATION PLAN INFORMATION
We currently maintain one equity compensation plan, the 2014 Equity Incentive Plan, which was approved by our shareholders
in 2014. The following table sets forth information with respect to the number of shares of common stock subject to outstanding
awards and remaining available for issuance under the 2014 Equity Incentive Plan as of December 31, 2015.
(a)
(b)
Number of Securities
To Be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
1,048,463
$
28.25
1,974,902
Plan Category
Equity compensation plans approved by
security holders(1)
Equity compensation plans not approved
by security holders(2)
(1) Column (a) represents the total number of underlying shares that could be issued upon the exercise of SAR, the vesting of
RSU granted, the exercise of vested PBO, the vesting of PBO granted, and column (c) represents awards available for future
issuances under our 2014 Equity Incentive Plan. In accordance with SEC disclosure rules, the weighted-average exercise
price reported in column (b) does not take into account RSU because they have no exercise price. The actual number of
shares to be issued to a grantee who exercises each SAR will be based on the net exercise value (that is, the market value
price per share of our stock on the date of exercise, minus the exercise price) times the number of SAR exercised, minus
applicable taxes withheld in the form of shares. The actual number of shares to be issued to an employee upon vesting of
an RSU will be based on the total number of shares of stock issued at vesting, minus applicable taxes withheld in the form
of shares. The actual number of shares to be issued to an employee who exercises vested PBO, after the price contingency
has been met, will be based on the exercise value times the number of PBO exercised, minus applicable taxes withheld in
the form of shares. At December 31, 2015, none of the outstanding SAR issued were in-the-money and therefore no additional
shares would be issued upon assumed exercise of the SAR. As of December 31, 2015, there were no PBO exercisable as
the market condition had not been met and therefore no additional shares would be issued upon assumed exercise of the
PBO. Of the 1 million shares of stock to be issued upon exercise of outstanding awards in column (a), 486,470 shares are
underlying outstanding SAR that are fully vested and 163,703 shares are underlying PBO that are fully vested.
(2) We have no equity compensation plans that have not been approved by our shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Related Persons Transactions
Kenneth J. Slepicka, a Director of our Company, is currently the chairman, chief executive officer and acting chief financial officer
of Synthonics, Inc. (“Synthonics”). In 2010 and 2013, the Audit Committee approved investments by the Company of $2.1 million
and $110,000, respectively, in shares of Series D Convertible Voting Preferred Stock of Synthonics. In addition, the Audit
Committee approved a $450,000 line of credit to Synthonics during 2014, which bore interest at 15% per annum. The outstanding
balance and accrued interest was repaid in April 2015.
On January 20, 2015, we sold two equity securities with a cost basis of $2.3 million to certain deferred compensation Rabbi Trust
accounts held by us, for the benefit of our CEO John R. Hart for total proceeds of $5 million, which represented the market value
of these securities on the date of sale. The equity securities sold were classified as Level 2 securities and possess limited liquidity.
The sale of these securities to the deferred compensation Rabbi Trust accounts was to provide us with additional liquidity. The
transaction was approved by our Audit Committee on January 19, 2015.
Procedures for Approval of Related Persons Transactions
To ensure the broadest possible compliance with the NASDAQ Stock Market listing standards and Regulation S-K, Item 404, our
Audit Committee charter provides that the Audit Committee will review and approve, in accordance with written procedures
adopted by the Board of Directors, all transactions between us and persons or entities affiliated with our officers, directors or
principal common stockholders.
After reviewing a particular transaction or proposed transaction, management and the Audit Committee will determine if disclosure
in our public filings is necessary and appropriate under Item 404.
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Director Independence
Our Board of Directors has determined that Carlos C. Campbell, Michael J. Machado, Raymond V. Marino II, Daniel B. Silvers,
Howard B. Brownstein, Andrew F. Cates, and Eric H. Speron were “independent directors” within the meaning set forth under
applicable rules of the NASDAQ Stock Market. John R. Hart and Kenneth J. Slepicka were not “independent directors” under
those standards. John R. Hart and Kenneth J. Slepicka were not independent Directors in 2015 as the term “independent” is defined
by Nasdaq Listing Rule 5605 (a) (2). John R. Hart is an employee of our Company. Kenneth J. Slepicka has a relationship with
us as described under “Related Persons Transactions” above. The independent directors have regularly scheduled executive session
meetings at which only the independent directors are present. During 2015, executive sessions were led by Kristina M. Leslie,
who was an independent director and served as Chair of the Board prior to her resignation from the Board of Directors in February
2016. In March 2016, Mr. Marino, an independent director, was appointed Chair of the Board and has led executive sessions
following his appointment. An executive session is held in conjunction with each regularly scheduled quarterly meeting and other
sessions may be called by the Chair of the Board in his own discretion or at the request of our Board of Directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed by our independent registered public accounting firm, Deloitte & Touche
LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates for the fiscal years ended December 31, 2015
and December 31, 2014:
Audit Fees
Tax Fees
Audit-Related Fees
Total
2015
2014
1,816,902
$
385,484
1,754
2,204,140
$
1,975,290
446,386
137,172
2,558,848
$
$
Audit Fees consist of fees we paid for (i) the audit of our annual financial statements included in our Annual Reports on Forms
10-K and reviews of our quarterly financial statements included in our Quarterly Reports on Forms 10-Q; (ii) services that are
normally provided by Deloitte & Touche LLP in connection with statutory and regulatory audits or consents; and (iii) the audit of
our internal control over financial reporting with the objective of obtaining reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects.
Tax Fees consist of fees for professional services for tax compliance, which totaled $352,164 in 2015 and $276,766 in 2014 and
tax planning and advice services, which totaled $33,320 in 2015 and $169,620 in 2014. These services included assistance regarding
United States federal, state, and local tax return preparation, tax audits and appeals, advice on structuring potential transactions,
and intra-group restructuring.
Audit-Related Fees consist of fees we paid for services related to proposed or consummated transactions and attestation services
not required by statute or regulation and the related accounting or disclosure treatment for such transactions or events.
The Audit Committee has determined that the provision of non-audit services listed above is compatible with the independence
of Deloitte & Touche LLP. All services above were pre-approved by the Audit Committee.
Audit Committee Pre-Approval Policy
Consistent with SEC policies regarding independence, the Audit Committee has responsibility for appointing, setting compensation
and overseeing the work of the independent registered public accounting firm. In recognition of this responsibility, the Audit
Committee has recommended, and the Board of Directors has approved, pre-approval guidelines for all audit and non-audit services
to be provided by the independent registered public accounting firm.
29
These pre-approval guidelines are:
1.
2.
3.
4.
At the earliest possible date, management shall inform the Audit Committee of each audit or non-audit service which
management desires our independent registered public accounting firm to perform;
Management shall promptly provide to the Audit Committee detailed information about the particular services to be
provided by our independent registered public accounting firm;
The supporting documentation provided to the Audit Committee by management shall be sufficiently detailed so that the
Audit Committee knows precisely what services it is being asked to pre-approve; and
The Audit Committee has delegated pre-approval authority to the Chair of the Audit Committee. All such pre-approvals
shall be presented to the full Audit Committee at the Audit Committee’s next scheduled meeting.
30
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.
Financial Statement Schedules
PART IV
No financial statement schedules are filed with this Amended Report. These items were included as part of the Original Report.
2.
Exhibits
The exhibits listed in the Original Report are required by Item 601 of Regulation S-K. A list of the exhibits filed with this Amended
Report is provided below.
Exhibit
Number
Description
31.3 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.4 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: April 22, 2016
PICO Holdings, Inc.
By: /s/ John R. Hart
John R. Hart
President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below on April 22, 2016
by the following persons on behalf of the Registrant and in the capacities indicated.
/s/ Raymond V. Marino II
Chair of the Board
Raymond V. Marino II
/s/ John R. Hart
John R. Hart
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Maxim C. W. Webb
Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Maxim C. W. Webb
(Principal Financial Officer)
/s/ John T. Perri
John T. Perri
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Howard B. Brownstein
Director
Howard B. Brownstein
/s/ Carlos C. Campbell
Director
Carlos C. Campbell
/s/ Andrew F. Cates
Andrew F. Cates
Director
/s/ Michael J. Machado
Director
Michael J. Machado
/s/ Daniel B. Silvers
Daniel B. Silvers
Director
/s/ Kenneth J. Slepicka
Director
Kenneth J. Slepicka
/s/ Eric Speron
Eric Speron
Director
32