Bloggers Explain CEO Hart Bonus Workaround

As originally appeared in the Troubled Company Reporter.

PICO Holdings, Inc. (Nasdaq:PICO), based in La Jolla, Calif., is a diversified holding company reporting recurring losses since 2008. PICO owns 57% of UCP, Inc. (NYSE:UCP), 100% of Vidler Water Company, Inc., a securities portfolio and various interests in small businesses. PICO has $662 million in assets and $426 million in shareholder equity. Central Square Management LLC and River Road Asset Management LLC collectively own more than 14% of PICO. Other activists at have taken to the Internet to advance the shareholder cause.

The bloggers explain in greater detail, their plan to avoid bonus payments to PICO CEO John Hart:

“The PICO Board can sell assets and return to shareholders only the proceeds that correspond to carrying value and administrative expenses. The Net Gain can be banked for corporate expenses. John ‘The Juicer’ Hart is SOL.

The PICO Board should get on its horse and start selling assets now. The Bonus Plan is based on ‘Plan Years,’ which begin January 1 and end December 31. Administrative expenses, which shield asset sale proceeds from Juicer’s greedy paws, can only be utilized in the year they are paid. Administrative Expenses paid in 2016 cannot be carried forward. Once 2016 is gone, those Administrative Expenses will be lost as a shield for asset sale proceeds.

On the latest earnings call, PICO CFO Max ‘Tangled’ Webb stated that 2016 corporate expenses would be around $10.5 million. But Tangled Webb, as a potential Bonus recipient, has a vested interest in lowering that figure. Given all the shareholder activism expenses, high-priced professionals, retention of Keith Gottfried to answer retail shareholder Books & Records Requests, we bet 2016 Administrative Expenses are around $13 million.

Final interpretation of 2016 Administrative Expenses will fall to the Compensation Committee. Check out this provision, under the heading “Administration,” lifted right from the Bonus Plan:

‘The Plan will be administered by the Compensation Committee of the Board of Directors of the Company. The Committee will have the sole discretion and authority to administer and interpret the Plan, and the decisions of the Committee will in every case be final and binding on all persons having an interest in the Plan.’

Assuming $13 million in Administrative Expenses for 2016, the ideal asset for sale before the end of the year would have a price tag that is $13 million above carrying value. That way, the entirety of the proceeds could be returned to shareholders, with no Bonus paid to Juicer and minimal cash banked at the corporate level.

Under no circumstances should the PICO Board close out 2016 without an asset sale. If it does, $13 million in Administrative Expense shield — with a value of $2.6 million given Juicer’s 20% Bonus Allocation — will be lost forever. This $13 million is scarcely different from a deferred tax asset that is poised to expire; both represent assets to shareholders that must be utilized.

Juicer’s bad faith result was not perfect and RPN found the weak link in the chain. Juicer will likely initiate litigation. But as PICO Chairman Raymond Marino advised us over and over again, Juicer entered into an iron-clad, binding contract that cannot be altered without mutual consent. So be it — Juicer has been hung by his own petard.

Since Mr. Marino has publicly affirmed of the sanctity of the Hart Compensation Scheme, we expect such finality to cut both ways. The PICO Board must meet any litigation initiated by Juicer with equal or superior force. Given the bad faith genesis of the Hart Compensation Scheme, shareholder’s Say on Pay vote, and the value destruction inflicted upon PICO shareholders at the hands of Juicer, we expect the Board to fight John Hart to the end of the earth in defense of PICO’s right to enforce the contract terms that are now advantageous to PICO owners. Anything less will be a betrayal of the owners of the business.”