PICO HOLDINGS INC /NEW (Form: 10-Q, Received: 11/10/2014 16:53:56)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________

FORM 10-Q

S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

£ 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)

(858) 456-6022

(Registrant’s telephone number, including area code)

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 ý 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 ý No ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer	¨	Smaller reporting company	¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No ý

On November 10, 2014 , the registrant had 22,772,800 shares of common stock, $0.001 par value per share outstanding.

PICO HOLDINGS, INC.

FORM 10-Q

For the Nine Months Ended September 30, 2014

TABLE OF CONTENTS



		Page No.

Part I: Financial Information

Item 1:	Condensed Consolidated Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	3

	Condensed Consolidated Statements of Operations and Comprehensive Income or Loss for the Three and Nine Months Ended September 30, 2014 and 2013	4

	Condensed Consolidated Statement of Shareholders' Equity for the Nine Months Ended September 30, 2014 and 2013	6

	Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2014 and 2013	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3:	Quantitative and Qualitative Disclosure About Market Risk	45

Item 4:	Controls and Procedures	46

Part II: Other Information

Item 1:	Legal Proceedings	46

Item 1A:	Risk Factors	46

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3:	Defaults Upon Senior Securities	57

Item 4:	Mine Safety Disclosures	58

Item 5:	Other Information	58

Item 6:	Exhibits	59

Signature		60

Part I: Financial Information

Item I: Condensed Consolidated Financial Statements (Unaudited)

PICO HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED (In thousands, except par value)

	September 30, 2014			December 31, 2013
Assets
Cash and cash equivalents	$	56,149		$	138,039
Investments ($39,297 and $50,600 measured at fair value at September 30, 2014, and December 31, 2013, respectively)	65,806			78,657
Real estate and tangible water assets, net of $10,679 and $10,019 of accumulated depreciation at September 30, 2014, and December 31, 2013, respectively	337,207			254,208
Property, plant and equipment, net	122,968			123,444
Intangible assets	128,575			124,880
Other assets	60,174			43,324
Total assets	$	770,879		$	762,552

Liabilities and shareholders’ equity
Debt	$	147,895		$	136,767
Accounts payable, accrued expenses and other liabilities	54,033			36,780
Deferred compensation	24,215			24,160
Total liabilities	226,143			197,707

Commitments and contingencies

Common stock, $0.001 par value; authorized 100,000 shares, 25,836 issued and 22,773 outstanding at September 30, 2014, and 25,821 issued and 22,747 outstanding at December 31, 2013	26			26
Additional paid-in capital	549,780			546,307
Retained deficit	(38,428		)	(17,083		)
Accumulated other comprehensive income	140			232
Treasury stock, at cost (common shares: 3,063 at September 30, 2014 and 3,073 at December 31, 2013)	(56,370		)	(56,593		)
Total PICO Holdings, Inc. shareholders’ equity	455,148			472,889
Noncontrolling interest in subsidiaries	89,588			91,956
Total shareholders’ equity	544,736			564,845
Total liabilities and shareholders’ equity	$	770,879		$	762,552

The accompanying notes are an integral part of the condensed consolidated financial statements.

PICO HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME OR LOSS - UNAUDITED (In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenues and other income:
Sale of real estate and water assets	$	56,742		$	23,766		$	146,168		$	86,957
Sale of canola oil and meal	41,144			55,306			124,963			139,775
Sale of software				4,402						13,649
Other income	3,869			23,312			9,380			28,419
Total revenues and other income	101,755			106,786			280,511			268,800

Cost of sales:
Cost of real estate and water assets sold	46,604			18,060			119,260			64,331
Cost of canola oil and meal sold	43,214			53,083			118,277			147,153
Cost of software sold				1,100						3,033
Total cost of sales	89,818			72,243			237,537			214,517

Expenses:
Operating and other costs	19,903			21,203			57,082			61,989
Impairment loss on real estate and water assets							2,865			1,410
Interest	1,313			1,886			4,193			5,304
Depreciation and amortization	931			608			2,236			1,906
Total costs and expenses	111,965			95,940			303,913			285,126
Income (loss) before income taxes and equity in loss of unconsolidated affiliates	(10,210		)	10,846			(23,402		)	(16,326		)
Provision (benefit) for federal, foreign, and state income taxes	(179		)	3,637			(535		)	2,739
Equity in loss of unconsolidated affiliate	(410		)	(89		)	(1,569		)	(89		)
Net income (loss)	(10,441		)	7,120			(24,436		)	(19,154		)
Net loss attributable to noncontrolling interests	504			1,046			3,091			4,636
Net income (loss) attributable to PICO Holdings, Inc.	$	(9,937	)	$	8,166		$	(21,345	)	$	(14,518	)

The accompanying notes are an integral part of the condensed consolidated financial statements.

PICO HOLDINGS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME OR LOSS - UNAUDITED, CONTINUED (In thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Other comprehensive income (loss):
Net income (loss)	$	(10,441	)	$	7,120		$	(24,436	)	$	(19,154	)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities, net of deferred income tax and reclassification adjustments	(767		)	864			(337		)	2,407
Foreign currency translation	247			(65		)	245			(108		)
Total other comprehensive income (loss), net of tax	(520		)	799			(92		)	2,299
Comprehensive income (loss)	(10,961		)	7,919			(24,528		)	(16,855		)
Comprehensive loss attributable to noncontrolling interests	504			1,046			3,091			4,636
Comprehensive income (loss) attributable to PICO Holdings, Inc.	$	(10,457	)	$	8,965		$	(21,437	)	$	(12,219	)

Net income (loss) per common share – basic:	$	(0.44	)	$	0.36		$	(0.94	)	$	(0.64	)
Weighted average shares outstanding	22,770			22,747			22,757			22,739

Net income (loss) per common share – diluted:	$	(0.44	)	$	0.36		$	(0.94	)	$	(0.64	)
Weighted average shares outstanding	22,770			23,000			22,757			22,739

The accompanying notes are an integral part of the condensed consolidated financial statements.

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY - UNAUDITED

NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(In thousands)



	Shares of Common Stock Issued	Common Stock		Additional Paid-in Capital			Retained Deficit			Accumulated Other Comprehensive Income			Shares of Treasury Stock		Treasury Stock, at Cost			Noncontrolling Interest			Total
Beginning balance, January 1, 2014	25,821	$	26	$	546,307		$	(17,083	)	$	232		3,073		$	(56,593	)	$	91,956		$	564,845
Stock-based compensation expense				4,273														1,540			5,813
Sale of treasury stock													(10	)	223						223
Exercise of restricted stock units	15
Withholding taxes paid on vested restricted stock units at UCP, Inc.				(800		)												(817		)	(1,617		)
Net loss							(21,345		)									(3,091		)	(24,436		)
Unrealized appreciation on investments, net of deferred income tax of $186 and reclassification adjustments of $1,813										(337		)									(337		)
Foreign currency translation										245											245
Ending balance, September 30, 2014	25,836	$	26	$	549,780		$	(38,428	)	$	140		3,063		$	(56,370	)	$	89,588		$	544,736



	Shares of Common Stock Issued	Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Shares of Treasury Stock	Treasury Stock, at Cost			Noncontrolling Interest			Total
Beginning balance, January 1, 2013	25,807	$	26	$	526,591	$	5,215		$	(2,014	)	3,073	$	(56,593	)	$	5,271		$	478,496
Stock-based compensation expense				3,394												395			3,789
Exercise of restricted stock units	11
Changes in ownership of noncontrolling interest				14,985												92,336			107,321
Net loss						(14,518		)								(4,636		)	(19,154		)
Unrealized appreciation on investments, net of deferred income tax of $1,165 and reclassification adjustments of $893									2,407										2,407
Foreign currency translation									(108		)								(108		)
Ending balance, September 30, 2013	25,818	$	26	$	544,970	$	(9,303	)	$	285		3,073	$	(56,593	)	$	93,366		$	572,751

The accompanying notes are an integral part of the condensed consolidated financial statements.

PICO HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)



	Nine Months Ended September 30,
	2014			2013
Operating activities:
Net cash used in operating activities	$	(82,499	)	$	(50,932	)

Investing activities:
Purchases of investments	(9,995		)	(16,112		)
Proceeds from sale of investments	21,954			20,282
Proceeds from maturity of investments				1,798
Purchases of property, plant and equipment	(7,174		)	(4,345		)
Cash acquired (used) in the acquisition of consolidated subsidiaries	(14,006		)	174
Decrease in restricted cash	25			2,460
Other investing activities, net	(1,785		)	14
Net cash provided by (used in) investing activities	(10,981		)	4,271

Financing activities:
Proceeds from subsidiary stock offering, net				105,454
Repayment of debt	(75,218		)	(50,955		)
Payment of withholding taxes on exercise of RSU	(1,619		)
Proceeds from debt	86,583			49,911
Proceeds from the sale of treasury stock	223
Net cash provided by financing activities	9,969			104,410

Effect of exchange rate changes on cash	1,621			(189		)
Increase (decrease) in cash and cash equivalents	(81,890		)	57,560
Cash and cash equivalents beginning of the period	138,039			100,115
Cash and cash equivalents end of the period	$	56,149		$	157,675

Supplemental cash flow information:
Payments (refunds) of federal, foreign, and state income taxes	$	(1,991	)	$	118
Interest paid, net of amounts capitalized	$	3,604		$	4,124
Non-cash investing and financing activities:
Issuance of common stock for vested restricted stock units	$	4,349
Mortgage incurred to purchase real estate				$	13,153
Fair value of assets acquired in Citizens acquisition	$	20,259
Cash paid for the acquisition of consolidated subsidiaries	$	(14,006	)
Contingent consideration and liabilities assumed in Citizens acquisition	$	6,253
Increase in assets from business combination with Spigit				$	21,432
Increase in liabilities from business combination with Spigit				$	20,377
Decrease in assets from disposition of Spigit				$	24,800
Decrease in liabilities from disposition of Spigit				$	18,900
Conversion of note receivable to common stock in Spigit				$	820

The accompanying notes are an integral part of the condensed consolidated financial statements.

PICO HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements of PICO Holdings, Inc. and subsidiaries (collectively, the “Company” or “PICO”) have been prepared in accordance with the interim reporting requirements of Form 10-Q, pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete consolidated financial statements.

In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation of the financial statements presented have been included and are of a normal recurring nature. Operating results presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 .

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC.

The preparation of condensed consolidated 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 condensed consolidated financial statements and the reported amounts of revenues and expenses for each reporting period. The significant estimates made in the preparation of the Company’s condensed consolidated financial statements relate to the assessment of other-than-temporary impairments, the application of the equity method of accounting, goodwill and intangibles, real estate and water assets, deferred income taxes, stock-based compensation, fair value of derivatives, and contingent liabilities. While management believes that the carrying value of such assets and liabilities are appropriate as of September 30, 2014 , and December 31, 2013 , 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 home 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 prepare real estate and water assets for their intended use are capitalized. These costs typically include direct home construction costs, legal fees, engineering, consulting, direct cost of well drilling or related construction, and any interest cost capitalized on qualifying assets during the development period. The Company expenses all maintenance and repair costs on real estate and 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. Water storage typically includes the cost of the real estate and direct construction costs to build the site. Amortization of real estate improvements is computed using the straight-line method over the estimated useful lives of the improvements ranging from five to 15 years.

Real estate and tangible water assets are classified as held for sale when management commits to a plan to sell the asset, the asset can be sold in its present condition, the asset is being actively marketed for sale, and it is probable that the asset will be sold within the next 12 months.

At September 30, 2014 , and December 31, 2013 , the Company had real estate of $31.1 million and $8.6 million , respectively, classified as held for sale.

The costs assigned to the various components of real estate and tangible water assets were as follows (in thousands):



	September 30, 2014		December 31, 2013
Real estate	$	291,446	$	208,506
Tangible water assets	45,761		45,702
	$	337,207	$	254,208

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, plant 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, equipment is depreciated over 10 to 20 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 and equipment are included in other income.

Capitalized buildings and plant include all construction costs incurred to get the asset ready for its intended use, including interest. Construction in progress is stated at cost and not depreciated until the asset is placed in service. The majority of the carrying value of the Company’s property, plant and equipment is the canola processing plant and related equipment and includes the cost of engineering and design plans, machinery and equipment, mechanical and electrical work, certain legal and consulting fees, construction contractor fees, and interest on certain qualifying assets capitalized during the development period.

The Company reviews the carrying value of property, plant and equipment for impairment whenever events or conditions indicate that the carrying amount of the asset may not be recoverable. Such indicators may include, among others, deterioration in general economic conditions, adverse changes in the markets in which an entity operates, increases in input costs that have a negative effect on earnings and cash flows or a trend of negative or declining cash flows over multiple periods. Impairment 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. 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 generated from the use and ultimate disposition of the respective asset.

Intangible Assets:

Intangible assets primarily include the costs of indefinite-lived intangible assets and are 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 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.

Goodwill:

The Company records goodwill that arises from business combinations. 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, by comparing the fair value of the asset to the carrying amount. Goodwill is reported within other assets in the accompanying condensed consolidated financial statements.

The balance of goodwill and changes for the period by reporting segment were as follows (in thousands):



	Agribusiness Segment		Real Estate Segment		Total
Balance, January 1, 2014	$	4,702			$	4,702
Goodwill acquired during the period			$	4,993	4,993
Balance, September 30, 2014	$	4,702	$	4,993	$	9,695

During the nine months ended September 30, 2014 , the Company recorded goodwill as part of the acquisition of certain assets and liabilities of Citizens Homes, Inc. (“Citizens”). The acquisition was accounted for as a business combination with the acquired assets and assumed liabilities recorded at their preliminary estimated fair values. See Note 10, Acquisition of Citizens Homes , for additional information.

Inventory:

The Company classifies its canola seed as raw material inventory and canola oil and meal as finished goods inventory, which are included in other assets in the condensed consolidated balance sheets. The Company had $9.5 million and $2.6 million of raw materials and $4.8 million and $5.3 million of finished goods at September 30, 2014 and December 31, 2013 , respectively.

Derivative Instruments:

In the normal course of business, the Company uses derivative instruments to manage its exposure to movements associated with agricultural commodity prices. The Company generally uses exchange traded futures to minimize the effects of changes in the prices of agricultural commodities in its agricultural commodity inventories and forward purchase and sale contracts. The Company recognizes each of its derivative instruments as either assets or liabilities at fair value in its consolidated balance sheets. While the Company considers exchange traded futures and forward purchase and sale contracts to be effective economic hedges, the Company does not designate or account for its commodity contracts as hedges. Changes in the fair value of these contracts and related readily marketable agricultural commodity inventories are included in cost of canola oil and meal sold in the consolidated statements of operations and comprehensive income or loss.

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 condensed consolidated financial statements. In the condensed 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.

At September 30, 2014 , noncontrolling interest reported in the condensed consolidated financial statements includes the owners of 42.8% of UCP, Inc. (“UCP”). The noncontrolling interest related to UCP increased from 42.3% during the nine months ended September 30, 2014 , due to the issuance of UCP Class A common stock related to vesting of restricted stock units (“RSU”) awarded in 2013 . The Company’s consolidated noncontrolling interest also includes the results of operations allocated to the owners of the 12.3% interest in PICO Northstar, LLC (“Northstar”).

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 (generally one to four years ) using the straight-line method.

At September 30, 2014 , PICO had one stock-based payment arrangement outstanding. 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.

In May 2014, the PICO Holdings, Inc. 2005 Long Term Incentive Plan (the “2005 Plan”) was terminated and replaced by the PICO Holdings, Inc. 2014 Equity Incentive Plan (the “2014 Plan”), which became effective upon shareholder approval at the Company’s 2014 Annual Meeting of Shareholders. At the time of its termination, the 2005 Plan provided for the issuance of up to 2.7 million shares of common stock through the issuance of incentive stock options, non-statutory stock options, free standing stock-settled stock appreciation rights (“SAR”), restricted stock awards (“RSA”), performance shares, performance units, restricted stock units (“RSU”), deferred compensation awards, and other stock-based awards to PICO employees, non-employee directors, and consultants. No further awards will be granted under the 2005 Plan.

The 2014 Plan provides for the issuance of up to 3.3 million shares of common stock, which includes 1 million shares of common stock initially authorized for issuance under the 2014 Plan, 218,000 shares of common stock previously available for issuance under the 2005 Plan that became part of the share reserve under the 2014 Plan upon termination of the 2005 Plan, and up to 2.1 million shares of common stock currently reserved for issuance upon the exercise of outstanding awards granted under the 2005 Plan that will become available for issuance under the 2014 Plan upon the termination or expiration of such awards. Similar to the 2005 Plan, the 2014 Plan provides for the issuance of incentive stock options, non-statutory stock options, SAR, RSA, performance shares, performance units, RSU, 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 SAR and RSU, 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 of an RSU can elect to pay withholding taxes in cash).

The Company recorded stock based compensation expense of $5.8 million and $3.8 million during the nine months ended September 30, 2014 , and 2013 , respectively. Of the $5.8 million in stock based compensation recorded during the nine months ended September 30, 2014 , $3 million related to RSU and stock options for UCP common stock granted to the officers of UCP, of which, $1.5 million was allocated to noncontrolling interest. Of the $3.8 million in stock based compensation recorded during the nine months ended September 30, 2013 , $935,000 related to RSU and stock options for UCP common stock granted to the officers of UCP, of which $395,000 was allocated to noncontrolling interest.

The Company recorded stock based compensation expense of $1.8 million and $1.9 million during the three months ended September 30, 2014 , and 2013 , respectively. Of the $1.8 million in stock compensation recorded during the three months ended September 30, 2014 , $806,000 related to RSU and stock options for UCP common stock granted to the officers of UCP, of which, $292,000 was allocated to noncontrolling interest. Of the $1.9 million in stock based compensation recorded during the three months ended September 30, 2013 , $935,000 related to RSU and stock options for UCP common stock granted to the officers of UCP, of which, $395,000 was allocated to noncontrolling interest.

Restricted Stock Units (RSU) :

A summary of activity of PICO Holdings, Inc. common stock RSU is as follows:



	RSU			Weighted-Average Grant Date Fair Value Per Share
Outstanding at January 1, 2014	469,435			$	30.43
Granted	13,212			$	22.70
Vested	(15,435		)	$	22.67
Outstanding at September 30, 2014	467,212			$	30.46
Unrecognized compensation cost (in thousands)	$	490

Stock-Settled Stock Appreciation Rights (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 was recognized during the three and nine months ended September 30, 2014 , and 2013 . In addition, there were no SAR granted or exercised during the three and nine months ended September 30, 2014 , or 2013 .

A summary of SAR activity is as follows:



	SAR	Weighted Average Exercise Price		Weighted Average Contractual Term in Years
Outstanding at January 1, 2014	1,616,625	$	36.45	2.5 years

Outstanding and exercisable at September 30, 2014	1,616,625	$	36.45	1.7 years

At September 30, 2014 , none of the outstanding SAR were in-the-money.

Accumulated Other Comprehensive Income:

The components of accumulated other comprehensive income are as follows (in thousands):



	September 30, 2014			December 31, 2013
Net unrealized appreciation on available-for-sale investments	$	6,529		$	6,866
Foreign currency translation	(6,389		)	(6,634		)
Accumulated other comprehensive income	$	140		$	232

The unrealized appreciation on available-for-sale investments is net of a deferred income tax liability of $3.5 million at September 30, 2014 , and $3.7 million at December 31, 2013 . The foreign currency translation is net of a deferred income tax asset of $3.3 million at September 30, 2014 , and $3.4 million at December 31, 2013 .

The following table reports amounts that were reclassified from accumulated other comprehensive income or loss and included in earnings (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Beginning balance	$	660		$	(514	)	$	232		$	(2,014	)
Unrealized gain (loss) on marketable securities, net of tax	(202		)	1,089			841			2,987
Amount reclassified and recognized in net income (loss), net of tax ⁽¹⁾	(565		)	(226		)	(1,178		)	(581		)
Accumulated foreign currency translation, net of tax	247			(64		)	245			(107		)
Net change in other comprehensive income, net of tax	(520		)	799			(92		)	2,299
Accumulated other comprehensive income	$	140		$	285		$	140		$	285

⁽¹⁾ Amounts reclassified from unrealized gain on marketable securities are included in other income in the condensed consolidated statement of operations and comprehensive income or loss.

Deferred Compensation:

At September 30, 2014 , and December 31, 2013 , the Company had $24.2 million and $24.2 million , respectively, recorded as deferred compensation payable to various members of management and certain non-employee members of the board of directors of the Company.

Compensation expense or recovery included in operating and other costs in the accompanying condensed consolidated statements of operations and comprehensive income or loss for the three and nine months ended September 30, 2014 , was a recovery of $414,000 and expense of $600,000 , respectively. Compensation expense of $589,000 and $1.5 million was recorded during the three and nine months ended September 30, 2013 , respectively.

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 condensed 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.

Sale of Canola Oil and Meal:

Sales of canola oil and meal are recognized when persuasive evidence of an arrangement exists, products are shipped, the price is fixed or determinable, the customer takes ownership and assumes risk of loss, and when collection is reasonably assured. Sales terms provide for passage of title at the time and point of shipping. Northstar has an agreement with Purina Animal Nutrition, LLC (“Purina”), which commits Purina to guarantee the sale of 100% of the canola oil and canola meal output from the Company’s canola seed crushing plant at market based prices for five years ending December 31, 2017 , at which time the contract automatically renews for successive one year periods unless canceled by either party.

Cost of Canola Oil and Meal Sold:

Subsequent to the issuance of the Company’s condensed consolidated financial statements for the three and nine months ended September 30, 2013 , the Company discovered that $4.2 million and $12.6 million , respectively, of labor and certain overhead costs related to the purchasing and production of inventory, including depreciation of plant and equipment and energy costs, which should have been presented within cost of canola oil and meal sold, were inappropriately presented as $2.1 million and $6.5 million within operating and other costs, and $2.1 million and $6.1 million as depreciation and amortization for the three and nine months ended September 30, 2013 , respectively. For the three and nine months ended September 30, 2014 , the expenses have been properly presented as costs of canola oil and meal sold in the condensed consolidated statements of operation and comprehensive income or loss for the current period, and the three and nine months ended September 30, 2013 presentation has been corrected. These errors did not affect consolidated shareholders’ equity, net income or loss on the condensed consolidated statements of operations and comprehensive income or loss, or consolidated cash flows and are not considered to be material to the Company’s previously issued condensed consolidated financial statements.

Accounting for Income Taxes:

The Company's provision for income tax expense includes federal, foreign 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.

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 50% likelihood of being sustained. The Company recognizes any interest and penalties related to uncertain tax positions in income tax expense.

The Company reported an income tax benefit of $179,000 and a provision of $3.6 million for the three months ended September 30, 2014 , and 2013 , respectively, and an income tax benefit of $535,000 and a provision of $2.7 million for the nine months ended September 30, 2014 , and 2013 , respectively. For each period presented, the effective rate differs from the statutory rate of 35% primarily due to recording a full valuation allowance on the Company’s net deferred tax assets, and during 2013, the reported provision was also impacted by a $3.8 million tax provision for the taxable temporary difference related to the Company’s investment in Mindjet which was not expected to reverse within a period that would allow it to be offset by existing deductible temporary differences. Consequently, the Company recorded a net deferred tax liability for such temporary difference, which is included in other liabilities at December 31, 2013 and September 30, 2014.

Recent Accounting Pronouncements:

In April 2014, the Financial Accounting Standards Board (“FASB”) issued accounting guidance related to reporting of discontinued operations. The guidance changes the requirements for reporting a disposal of a component of an entity or a group of components and requires the disposed component or components to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The guidance also requires an entity to provide certain disclosures about a disposal of an individually significant component of such entity that does not qualify for discontinued operations presentation in the financial statements. This guidance is effective for fiscal years beginning after December 15, 2014, with early adoption permitted. The Company is currently evaluating the effect this guidance will have on the condensed 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 is effective for the interim and annual periods beginning on or after December 15, 2016 and early adoption is not permitted. 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 condensed consolidated financial statements.

In August 2014, the FASB issued guidance on disclosure of uncertainties about an entity’s ability to continue as a going concern. The guidance will require management to assess the ability to continue as a going concern for each annual and interim reporting period, and to provide related footnote disclosure in circumstances in which substantial doubt exists. This guidance is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter and early adoption is not permitted. The Company is currently evaluating the effect this guidance will have on the condensed consolidated financial statements.

In November 2014, the FASB issued guidance on certain classes of shares that include features that entitle the holders to preferences and rights over the other shareholders. The guidance clarifies how current accounting guidance should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the guidance clarifies that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. The guidance is effective fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The effects of initially adopting the guidance will be applied on a modified retrospective basis to existing hybrid financial instruments issued in the form of a share as of the beginning of the fiscal year for which the amendments are effective. Retrospective application is permitted to all relevant prior periods. The Company is currently evaluating the effect this guidance will have on the condensed consolidated financial statements.

2. Net Income or Loss Per Share

Basic earnings or loss per share is computed by dividing net earnings attributable to PICO Holdings, Inc. by the weighted average number of shares outstanding during the period. Diluted earnings or loss per share is computed similarly to basic earnings or loss per share except the weighted average shares outstanding are increased to include additional shares from the assumed exercise of any common stock equivalents using the treasury method, if dilutive. The Company’s stock-settled SAR and 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, if dilutive.

For the three and nine months ended September 30, 2014 , and the nine months ended September 30, 2013 , the Company’s stock-settled SAR and RSU were excluded from the diluted per share calculation because their effect on the loss per share was anti-dilutive. For the three months ended September 30, 2013 , 253,000 outstanding RSU were included in the diluted per share calculation, however, the SAR were excluded because their effect on the loss per share was anti-dilutive.

3. Investments

The following tables report the cost and carrying value of available-for-sale investments at September 30, 2014 , and December 31, 2013 (in thousands):



September 30, 2014	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value

Debt securities: corporate bonds	$	8,426	$	222	$	(61	)	$	8,587
Marketable equity securities	20,835		9,921		(46		)	30,710
Total	$	29,261	$	10,143	$	(107	)	$	39,297



December 31, 2013	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Carrying Value

Debt securities: corporate bonds	$	8,988	$	213	$	(29	)	$	9,172
Marketable equity securities	31,023		10,835		(450		)	41,408
Total	$	40,011	$	11,048	$	(479	)	$	50,580

The following tables summarize the market value of those investments in an unrealized loss position for periods less than or greater than 12 months (in thousands):



	September 30, 2014				December 31, 2013
Less than 12 months	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Debt securities: corporate bonds	$	3,088	$	61
Marketable equity securities	2,015		26		$	4,453	$	254
Total	$	5,103	$	87	$	4,453	$	254



	September 30, 2014				December 31, 2013
Greater than 12 months	Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
Debt securities: corporate bonds					$	5,744	$	29
Marketable equity securities	$	241	$	20	2,368		196
Total	$	241	$	20	$	8,112	$	225

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):



	September 30, 2014				December 31, 2013
	Amortized Cost		Carrying Value		Amortized Cost		Carrying Value
Due in one year or less	$	3,165	$	3,356	$	68	$	68
Due after one year through five years	2,533		2,552		5,981		6,178
Due after five years	2,728		2,679		2,939		2,926
	$	8,426	$	8,587	$	8,988	$	9,172

Marketable Equity Securities

The Company’s investment in marketable equity securities was $30.7 million at September 30, 2014 , and principally consisted of common stock of publicly traded small-capitalization companies in the U.S. and select foreign markets. At September 30, 2014 , the Company reviewed its equity securities in an unrealized loss position and concluded certain of such 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 loss on those securities was normal market volatility. The securities that were deemed other-than-temporarily impaired were recorded as an impairment loss in the period. No material impairment losses were recorded during the three and nine months ended September 30, 2014 , and 2013 .

Debt Securities

The Company owns corporate bonds and other debt securities, which are purchased based on the maturity and yield-to-maturity of the bond and an analysis of the fundamental characteristics of the issuer. At September 30, 2014 , there were unrealized losses on certain bonds in the portfolio. 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 it expects to recover the entire amortized cost basis at maturity. There were no impairment losses recorded on debt securities during the three and nine months ended September 30, 2014 , and 2013 .

Other Investments

At September 30, 2014, the Company’s equity investment in Mindjet, Inc. (“Mindjet”) represented 28.6% of the voting interest, which was comprised of 15.1% from common shares and 13.5% from preferred shares. The Company accounts for the investment in common stock using the equity method of accounting, which resulted in a loss of $410,000 and $1.6 million for the three and nine months ended September 30, 2014 , respectively, which is reported in the condensed consolidated statement of operations and comprehensive income or loss. The equity in loss of affiliate represents the Company’s ownership the common share vote and is 15.1% of Mindjet’s net loss for the three and nine months ended September 30, 2014 . The investment in preferred stock is held at cost in the accompanying condensed consolidated balance sheet.

During the nine months ended September 30, 2014 , the Company purchased $1.9 million of convertible debt of Mindjet, and deposited $761,000 in escrow for potential future purchases of the convertible debt conditioned on the operating results achieved by Mindjet. The debt security is reported in investments and the escrowed funds are reported in other assets at September 30, 2014 . The debt is due in March 2015, bears interest at 10% per year, and will convert to additional common or preferred equity, or potentially cash equal to three times the face value of the debt depending on the nature and valuation of certain future transactions including an offering of Mindjet’s securities in a private or initial public offering, or sale of the company.

At September 30, 2014 , the total carrying value of the Company’s debt and equity investment in Mindjet is $26.2 million and is subject to impairment testing at each reporting period, or more frequently if facts and circumstances indicate the investment may be impaired. Certain financial results reported during the nine months ended September 30, 2014 indicated the investment might be impaired; however, estimates of the value of the enterprise indicated that the investment balance would be recovered. Nonetheless, it is reasonably possible that given the volatile nature of software businesses that circumstances may change in the future which could require the Company to write down the investment to fair value.

During the three months ended September 30, 2014 the Company was notified by Mindjet that they were asserting a breach in the representations and warranty made by Spigit, Inc. (“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 and the Company expects final resolution in 2015. The partial settlement was not material to the Company and was paid in shares of Mindjet. The maximum damages to the Company for the remaining claim is estimated between zero and $1.2 million and any settlement would be paid by the Company in shares of Mindjet. The Company is unable to provide a more meaningful estimate due to the ongoing development of information important to resolving the matter. Consequently, the Company has not accrued any liability related to the claim.

4. Disclosures About Fair Value of Financial Instruments

Recurring Fair Value Measurements

The following tables set forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2014 , and December 31, 2013 , by level within the fair value hierarchy. 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 consideration of factors specific to the asset or liability. There were no material transfers from level 1 to level 2 during the nine months ended September 30, 2014 or the year ended December 31, 2013 .

At September 30, 2014 (in thousands):



Assets	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at September 30, 2014
Available-for-sale equity securities ⁽¹⁾	$	14,306	$	16,405			$	30,711
Available-for-sale debt securities ⁽¹⁾	$	6,686	$	1,901			$	8,587
Readily marketable inventory ⁽²⁾	$	9,479	$	4,792			$	14,271
Derivative instruments ⁽³⁾	$	914	$	1,816			$	2,730
Liabilities
Derivative instruments ⁽³⁾	$	687	$	1,653			$	2,340
Contingent Consideration ⁽⁴⁾					$	4,644	$	4,644

At December 31, 2013 (in thousands):



Assets	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, 2013
Available-for-sale equity securities ⁽¹⁾	$	26,177	$	15,231		$	41,408
Available-for-sale debt securities ⁽¹⁾	$	9,172				$	9,172
Readily marketable inventory ⁽²⁾	$	2,396	$	5,292		$	7,688
Derivative instruments ⁽³⁾	$	346	$	2,108		$	2,454
Liabilities
Derivative instruments ⁽³⁾	$	436	$	936		$	1,372

⁽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⁾ Readily marketable inventory comprises commodity inventories that are reported at fair value based on commodity exchange quotations. Canola seed inventories are valued based on the quoted market price multiplied by the quantity of inventory and are classified as Level 1. Canola oil and meal inventories are classified as Level 2 because the inputs are directly observable, such as the quoted market price of the corresponding soybean commodity.

⁽³⁾ Included in this caption are three types of agricultural commodity derivative contracts: swaps, exchange traded futures, and forward commodity purchase and sale contracts. The exchange traded futures contracts are valued based on quoted prices in active markets multiplied by the number of contracts and are classified as Level 1. The swaps are classified as Level 2 because the inputs are directly observable, such as the quoted market prices for relevant commodity futures contracts. The swaps are valued based on the difference of the arithmetic average of the quoted market price of the relevant underlying multiplied by the notional quantities, and the arithmetic average of the prices specified in the instrument multiplied by the notional quantities. Forward commodity purchase and sale contracts classified as derivatives are valued using quantitative models that require the use of multiple inputs including quoted market prices and various other assumptions including time value. These contracts are categorized as Level 2 and are valued based on the difference between the quoted market price and the price in the contract multiplied by the undelivered notional quantity deliverable under the contract.

⁽⁴⁾ Included in this caption is the contingent consideration that the Company entered into as part of the acquisition of Citizens. 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.

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 tables set forth the Company’s non-financial assets that were measured at fair value on a non-recurring basis for the nine months ended September 30, 2014 , and for the year ended December 31, 2013 , by level within the fair value hierarchy.

Nine Months Ended September 30, 2014 (in thousands):



Asset Description	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)		Total Loss Recorded During the Nine Months Ended September 30, 2014
Real estate ⁽¹⁾			$	1,357	$	(2,865	)

⁽¹⁾ The Company had a non-recurring fair value measurement of real estate assets with a carrying value of $4.2 million that was written down to its estimated fair value of $1.4 million resulting in an impairment charge of $2.9 million , which was included in earnings for the nine months ended September 30, 2014 . There was no impairment loss recorded for the three months ended September 30, 2014 . The impairment was recorded based on the estimated sales price the Company expects to receive upon the sale of this real estate. The impairment loss relates to a property which is not part of UCP’s results of operations nor is it included in UCP’s inventory of lots.

Year Ended December 31, 2013 (in thousands):



Asset Description	Quoted Prices In Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)		Total Gain (Loss) Recorded During the Year Ended December 31, 2013
Intangible asset (exclusive right to use infrastructure and associated water credits) ⁽¹⁾			$	83,897	$	(993	)
Real estate ⁽²⁾			$	3,674	$	(417	)
Investment in unconsolidated affiliate ⁽³⁾			$	28,679	$	21,181

⁽¹⁾ The Company had a non-recurring fair value measurement for an intangible asset with a carrying amount of $84.9 million that was written down to its estimated fair value of $83.9 million resulting in an impairment charge of $993,000 , which was included in earnings for December 31, 2013 . The implied fair value was calculated using a discounted cash flow model that incorporated a wide range of assumptions including current asset pricing, price escalation, discount rates, absorption rates, timing of sales, and costs. Given the decline in market prices for similar assets, increases in interest rates, and extended timing of expected absorptions, the Company adjusted its assumptions and judgments in the model from original projections.

⁽²⁾ The Company had a non-recurring fair value measurement of real estate assets with a carrying value of $4.1 million that was written down to its estimated fair value of $3.7 million resulting in an impairment charge of $417,000 , which was included in earnings for December 31, 2013 . The impairment was recorded based on the estimated sales price the Company expects to receive upon the sale of this real estate. The impairment loss relates to a property which is not part of UCP’s results of operations nor is it included in UCP’s inventory of lots.

⁽³⁾ The Company had a non-recurring fair value measurement as a result of the merger transaction between Spigit and Mindjet. The transaction resulted in the deconsolidation of Spigit and the recording of the Company’s common and preferred stock investment in Mindjet at fair value on the date of the transaction. The transaction resulted in a gain of approximately $21.2 million before income taxes. The fair value of the investment in Mindjet was based on analysis of the financial and operational aspects of the company, including consideration of a discounted cash flow analysis which incorporated a contemporary forecast of the merged Mindjet/Spigit entity going forward. Also considered was a guideline public company analysis which compared 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 equity held by PICO in order to reflect differences in value due to differing liquidation, dividend and voting rights. The fair value approach relied primarily on Level 3 unobservable inputs, whereby expected future cash flows were discounted using a rate that includes assumptions regarding an entity’s average cost of debt and equity, incorporated expected future cash flows based on internal business plans, and applied certain assumptions about risk and uncertainties. The estimates were based upon assumptions believed to be reasonable, but which by nature are uncertain and unpredictable.

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 September 30, 2014 and December 31, 2013 , the fair values of cash and cash equivalents, accounts payable and 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.

The following table presents the carrying value and estimated fair value of the Company’s financial instruments which are not carried at fair value at September 30, 2014 and December 31, 2013 (in thousands):



	September 30, 2014				December 31, 2013
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Investments in unconsolidated affiliates held at cost	$	19,302	$	19,302	$	19,380	$	19,380

Financial liabilities:
Debt	$	147,895	$	157,981	$	136,767	$	145,924

Derivatives Notional Amounts

The following tables summarize the notional amount of open derivative positions at September 30, 2014 , and December 31, 2013 :

September 30, 2014

Exchange Traded

Non-Exchange Traded

(Short) ⁽¹⁾

Long ⁽¹⁾

(Short) ⁽¹⁾

Long ⁽¹⁾

Unit of Measure

Futures

Agricultural Commodities

(64,749

)

51,024

Tons

Natural Gas

520,000

MMBtus ⁽²⁾

Forwards

(147,586

)

55,208

Tons

December 31, 2013

Exchange Traded

Non-Exchange Traded

(Short) ⁽¹⁾

Long ⁽¹⁾

(Short) ⁽¹⁾

Long ⁽¹⁾

Unit of Measure

Futures

Agricultural Commodities

(23,038

)

34,380

Tons

Natural Gas

460,000

MMBtus ⁽²⁾

Forwards

(132,428

)

30,367

Tons

Swaps

75,000

Tons

⁽¹⁾ Exchange and non-exchange traded futures, forwards, and swaps are presented on a gross (short) and long position basis.

⁽²⁾ Million Metric British Thermal Units.

The gross derivative asset or liability is included within its respective other assets or liabilities account balance in the accompanying condensed consolidated balance sheets.

The table below summarizes the effect of derivative instruments on the condensed consolidated statements of operations and comprehensive income or loss (in thousands):



	Gain (Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,						Nine Months Ended September 30,
	Location	2014			2013			2014			2013
Futures	Cost of canola oil and meal sold	$	99		$	5,592		$	900		$	(2,458	)
Forwards	Cost of canola oil and meal sold	488			(49		)	(478		)	329
Swaps	Cost of canola oil and meal sold	(61		)	784			(3,840		)	(353		)
		$	526		$	6,327		$	(3,418	)	$	(2,482	)

Futures ⁽¹⁾	Other income	$	1,397					$	1,950

⁽¹⁾ Represents derivative transactions classified as trading.

5. Property, Plant and Equipment, Net

The major classifications of the Company’s property, plant and equipment are as follows (in thousands):



	September 30, 2014			December 31, 2013
Plant, equipment, buildings and leasehold improvements	$	134,385		$	131,141
Construction in progress	4,928			2,072
Office furniture, fixtures and equipment	7,752			6,862
	147,065			140,075
Accumulated depreciation and amortization	(24,097		)	(16,631		)
Property, plant and equipment, net	$	122,968		$	123,444

Depreciation and amortization expense for the three and nine months ended September 30, 2014 and 2013 was as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Total depreciation and amortization expense	$	2,999		$	2,670		$	8,430		$	8,026
Amount allocated to cost of canola oil and meal sold	(2,068		)	(2,062		)	(6,194		)	(6,120		)
Total reported depreciation and amortization	$	931		$	608		$	2,236		$	1,906

6. Intangible Assets

The Company owns the following intangible assets, which primarily represent indefinite-lived intangible water assets within its water resource and water storage operations segment (in thousands):



	September 30, 2014		December 31, 2013
Pipeline rights and water credits at Fish Springs Ranch	$	83,897	$	83,897
Pipeline rights and water rights at Carson-Lyon	24,804		24,804
Other, net of accumulated amortization	19,874		16,179
Total intangible assets	$	128,575	$	124,880

7. Debt

During the nine months ended September 30, 2014 , the Company negotiated new values for the debt service coverage ratio covenant on its agribusiness loans such that the debt service coverage ratio at September 30, 2014 , and at each quarter ending thereafter, will not be less than 1.25 to 1.00 . However, at September 30, 2014 , the Company breached the debt service coverage ratio primarily due to operating losses reported by Northstar and as a result, the debt is currently in default. The lenders have the option to declare all or any portion of the $88.5 million outstanding principal amounts due and payable and can also demand a deposit as cash collateral of 105% of the unused line of credit; however, to date, the lenders have not made any such declarations or demands. The Company is in discussions with the lenders to cure the default by December 31, 2014, and has no current plans to invest additional capital into the business as a result.

Certain real estate mortgage debts include provisions that require minimum loan-to-value ratios. During the term of the loan, the lender may require the Company 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, the Company may be required to make principal payments in order to maintain the required loan-to-value ratios. As of September 30, 2014 , the lenders have not requested, and the Company has not obtained, any such appraisals.

As of September 30, 2014 , the Company had unused lines of credit of approximately $67.3 million in real estate operations and $17.7 million in agribusiness operations.

The following details the Company’s consolidated debt (in thousands):



	September 30, 2014		December 31, 2013
Agribusiness term loan:
4.75% payments through 2017	$	79,058	$	83,533
Agribusiness working capital facility:
6% payments through 2017	9,350		4,750
Other agribusiness debt:
4.99% payments through 2018	135		159
Swiss debt:
3.7% payments through 2014			14,012
3.8% payments through 2014			3,363
Mortgage debt:
3.19% to 4.75% payments through 2016	49,614		17,307
5% to 5.5% payments due from 2014 - 2016	8,134		11,491
6% to 6.5% payments through 2036			548
10% payments through 2017	1,604		1,604
	$	147,895	$	136,767

8. Segment Reporting

PICO is a diversified holding company engaged in the following operating and reportable segments: Water Resource and Water Storage Operations, Real Estate Operations, Agribusiness Operations, and Corporate. The Enterprise Software segment, which started and ended during 2013, will continue to be presented in historical periods as a segment.

The accounting policies of the reportable segments are the same as those described in the Company’s 2013 Annual Report on Form 10-K filed with the SEC, and in Note 1 Basis of Presentation and Summary of Significant Accounting Policies .

Management analyzes segments using the following information:

Segment assets (in thousands):



	September 30, 2014		December 31, 2013
Total assets:
Water resource and water storage operations	$	191,828	$	193,105
Real estate operations	315,991		276,954
Agribusiness operations	162,257		155,005
Corporate	100,803		137,488
	$	770,879	$	762,552

Segment revenues and income (loss) before taxes (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue and other income:
Water resource and water storage operations	$	1,087		$	510		$	1,464		$	25,542
Real estate operations	55,794			23,712			145,212			63,641
Agribusiness operations	42,597			55,308			127,380			139,788
Enterprise software				4,402						13,649
Corporate	2,277			22,854			6,455			26,180
Total revenues and other income	$	101,755		$	106,786		$	280,511		$	268,800

Income (loss) before income taxes:
Water resource and water storage operations	$	(1,131	)	$	(1,799	)	$	(4,965	)	$	737
Real estate operations	(795		)	(231		)	(6,251		)	(2,701		)
Agribusiness operations	(5,221		)	(2,216		)	(4,962		)	(20,691		)
Enterprise software				(2,572		)				(5,281		)
Corporate	(3,063		)	17,664			(7,224		)	11,610
Total income (loss) before income taxes	$	(10,210	)	$	10,846		$	(23,402	)	$	(16,326	)

9. Commitments and Contingencies

Neither PICO nor its subsidiaries are parties to any potentially material pending legal proceedings other than the following:

Fish Springs Ranch, LLC

In September 2007 , the Company reached a $7.3 million financial settlement with the Pyramid Lake Paiute Tribe of Indians (the “Tribe”) relating to the exportation of water from the properties owned by Fish Springs Ranch, LLC. During the three months ended September 30, 2014, the settlement was ratified by the United States Congress and signed into law. The Company had previously paid $3.7 million to the Tribe and accrued $3.6 million for the balance owed. The Company paid the $3.6 million outstanding balance plus accrued interest during the fourth quarter of 2014 resolving the matter.

The Company is subject to various other 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, 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 condensed consolidated financial statements; and the unique facts and circumstances of the particular matter that may give rise to additional factors.

10. Acquisition of Citizens Homes

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. Accordingly, the results of Citizens are included in the Company’s consolidated financial statements from the date of the acquisition. For the three and nine months ended September 30, 2014 , the revenues and net loss attributable to the assets acquired in the acquisition were $9.2 million and $204,000 , and $19.4 million and $119,000 , respect ively.

The acquisition was accounted for as a business combination with the acquired assets, assumed liabilities, and contingent consideration recorded by the Company at their preliminary estimated fair values. The assets that the Company acquired primarily included real estate and various other assets. The acquisition date fair value of the consideration transferred totaled $18.7 million , which consisted of the following (in thousands):



Cash	$	14,006
Contingent consideration	4,644
Total consideration	$	18,650

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. 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 of $4.6 million 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 15.7% plus the applicable risk-free rate resulting in a combined discount rate ranging from 15.8% to 17% over the contingent consideration period. The volatility rate of 28.2% and a credit spread of 3.11% were applied to forecast adjusted net income over the contingent consideration period.

The following table summarizes the calculation of the preliminary estimated fair value of the assets and liabilities assumed at the acquisition date (in thousands):



Assets Acquired
Real estate	$	13,832
Other assets	1,433
	15,265
Less: Liabilities assumed	1,608
Net assets acquired	13,657
Goodwill	4,993
Consideration transferred	$	18,650

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.

The Company determined the fair value of real estate on a lot-by-lot basis primarily using a combination of market comparable land transactions, where available, and discounted cash flow models. These estimated cash flows are significantly impacted by estimates related to expected average home selling prices and sales incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities.

The following table outlines the key assumptions used to determine the fair value of the real estate:



Real Estate: Methodology and Significant Input Assumptions

Method	Home comparable sales and discounted cash flow models
Home comparable range of base price per square foot	$77- $118 per square foot
Average discount rate applied	15%
Range of builder profit margin	18-24%
Builder profit margin applied	20%

As of the acquisition date, goodwill largely consisted of the expected economic value attributable to the assembled workforce of the acquired company as well as estimated economic value attributable to expected synergies resulting from the acquisition. The acquisition provides increased scale and presence in established markets with immediate revenue opportunities through an established backlog. Furthermore, the Company expects to achieve significant savings in corporate and divisional overhead costs as well as interest costs. Additional synergies are expected in the areas of purchasing leverage and integrating the best practices in operational effectiveness.

The Company has presented its preliminary estimates of the fair values of the assets acquired, liabilities assumed, and the contingent consideration transferred, in the acquisition as of September 30, 2014. The Company is in the process of finalizing its review and evaluation of the appraisal and related valuation assumptions supporting its fair value estimates for all of the assets acquired and liabilities assumed and, therefore, the estimates used herein are subject to change. This may result in adjustments to the values presented above for assets and liabilities and a corresponding adjustment to goodwill. As such, the Company has not completed the assignment of goodwill to reporting units or its determination of the amount of goodwill that is expected to be deductible for tax purposes at this time.

Transaction costs directly related to the acquisition totaled approximately $138,000 and $778,000 for the three and nine months ended September 30, 2014 , respectively, which were expensed and included in the condensed consolidated statements of operations and comprehensive income (loss) within operating and other costs. There were no acquisition-related costs incurred during the three and nine months ended September 30, 2013 .

Pro Forma Financial Information

The pro forma financial information in the table below summarizes the results of operations for the Company as though the acquisition was completed as of the beginning of fiscal year 2013. The pro forma financial information for all periods presented includes additional amortization charges from acquired intangible assets (certain of which are preliminary). The unaudited pro forma results do not reflect any cost savings, operating synergies or revenue enhancements that the Company may achieve as a result of the acquisition, the costs to integrate the operations of the assets acquired, or the costs necessary to achieve these cost savings, operating synergies and revenue enhancements. Certain other adjustments, including those related to conforming accounting policies and adjusting acquired inventory to fair value, have not been reflected in the supplemental pro forma operating results due to the impracticability of estimating such impacts.

The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal 2013, or indicative of the results that will be attained in the future (in thousands):



	Three Months Ended					Nine Months Ended
	September 30, 2014			September 30, 2013		September 30, 2014			September 30, 2013
Total revenues	$	110,966		$	115,646	$	310,547		$	293,251
Net income (loss)	$	(10,294	)	$	6,976	$	(23,885	)	$	(20,359	)
Net income (loss) per common share – basic:	$	(0.45	)	$	0.31	$	(1.05	)	$	(0.90	)
Net income (loss) per common share – diluted:	$	(0.45	)	$	0.30	$	(1.05	)	$	(0.90	)

Pro forma net income or loss for the three and nine months ended September 30, 2014 , were adjusted to exclude approximately $138,000 and $778,000 of acquisition-related costs incurred in the three and nine months ended September 30, 2014 , respectively. The pro forma net income or loss for three and nine months period ended September 30, 2013 , were adjusted to include these acquisition-related costs.

11. Subsequent Events

On October 21, 2014, UCP completed a private offering of $75 million in 8.5% Senior Notes due 2017 (the “Notes”). The net proceeds to UCP from the offering were approximately $72.5 million , after paying the initial purchaser’s discount and other estimated offering expenses. The net proceeds to UCP from the offering will be used by UCP for general corporate purposes, including financing for the construction of homes, acquisition of entitled land, development of lots, and working capital.

The Notes were offered and sold by UCP only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Notes have not been and will not be registered under the Securities Act, or the securities laws of any other jurisdiction. Unless they are registered, the Notes may be offered and resold only in transactions that are exempt from registration under the Securities Act and applicable state securities laws.

The Notes were issued under an Indenture, dated as of October 21, 2014 (the “Indenture”), by and among UCP, the guarantors named therein, and Wilmington Trust, National Association, as trustee.

Interest is payable at 8.5% per annum on the principal amount of the Notes, payable March 31, June 30, September 30 and December 31 of each year, commencing December 31, 2014. Interest will accrue from October 21, 2014, and the first interest payment will be December 31, 2014. The Notes mature on October 21, 2017, unless redeemed or repurchased earlier.

The Notes are guaranteed on an unsecured senior basis by UCP and each of its subsidiaries (the “Subsidiary Guarantors”). The Notes and the guarantees will be UCP’s and the Subsidiary Guarantors’ senior unsecured obligations and will rank equally in right of payment with UCP’s and the Subsidiary Guarantors’ existing and future senior unsecured debt and senior in right of payment to UCP’s and the Subsidiary Guarantors’ future subordinated debt. The Notes and the guarantees will be effectively subordinated to any of UCP’s and the Subsidiary Guarantors’ existing and future secured debt, to the extent of the value of the assets securing such debt.

UCP may redeem the Notes, in whole but not in part, at a price equal to 100% of the principal amount, plus accrued and unpaid interest, plus a “make-whole” premium. Upon the occurrence of a change of control of UCP, UCP must offer to repurchase the Notes for cash at a price equal to 101% of the principal amount repurchased plus accrued and unpaid interest to, but excluding, the repurchase date. Under the Indenture, a “change of control” of UCP generally means (i) any person or group of related persons acquires more than 35% of the voting stock of UCP or (ii) UCP transfers all or substantially all of its consolidated assets to any person or group of related persons, in each case other than PICO and its affiliates.

The Indenture provides for customary “events of default” involving UCP which could cause, or permit, the acceleration of the Notes. Such events include (i) a default by UCP in any payment of principal or interest; (ii) failure of UCP to comply with certain covenants contained in the Indenture; (iii) defaults by UCP in failure to pay certain other indebtedness or the acceleration of certain other indebtedness prior to maturity; (iv) the failure of UCP to pay certain final judgments; and (vi) certain events of bankruptcy or insolvency involving UCP.

The Indenture limits UCP’s and its subsidiaries’ 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 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 its consolidated assets. Additionally, the Indenture requires 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 after the issuance of the Notes.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read together with the Unaudited Condensed Consolidated Financial Statements and accompanying Notes included elsewhere in this report, and the Consolidated Financial Statements and accompanying Notes included in our Annual Report on Form 10-K for the year ended December 31, 2013 .

Note About “Forward-Looking Statements”

This Quarterly Report on Form 10-Q (including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section) contains “forward-looking statements,” as defined in Section 21E of the United States Securities Exchange Act of 1934, as amended, regarding our business, financial condition, results of operations, and prospects, including, without limitation, statements about our expectations, beliefs, intentions, anticipated developments, and other information concerning future matters. Words such as “may,” “will,” “could,” “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “should,” “target,” “projects,” “contemplates,” “predicts,” “potential,” “continue,” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements in this Quarterly Report on Form 10-Q. Although forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on current expectations and assumptions. Consequently, forward-looking statements are inherently subject to risks and uncertainties, and the actual results and outcomes could differ from what is expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those discussed under the headings “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 , in “Item 1A Risk Factors” of Part II of this Quarterly Report on Form 10-Q, and in other filings made from time to time with the United States Securities and Exchange Commission (“SEC”) after the date of this Quarterly Report on Form 10-Q. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to (and we expressly disclaim any obligation to) revise or update any forward-looking statement, whether as a result of new information, subsequent events, or otherwise (except as may be required by law), in order to reflect any event or circumstance which may arise after the date of this Quarterly Report on Form 10-Q. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K and other filings with the SEC.

BUSINESS STRATEGY AND GOALS

PICO Holdings, Inc. is a diversified holding company. In this Quarterly Report, PICO and its subsidiaries are collectively referred to as “PICO,” “the Company,” or by words such as “we” and “our.” We seek to build and operate businesses where we believe significant value can be created from the development of unique assets and to acquire businesses which we identify as undervalued and where our management participation in operations can aid in the recognition of the business’s fair value, as well as create additional value.

Our objective is to maximize long-term shareholder value and to manage our operations to achieve a superior return on net assets over the long term, as opposed to short-term earnings. We own and operate several diverse businesses and assets. Our portfolio of businesses is designed to provide a mix of revenues and income from both long-term assets that may require several years to develop and monetize and shorter-term operations that should generate recurring revenue each quarter.

As of September 30, 2014 our business is separated into the following operating segments:



•	Water Resource and Water Storage Operations;
•	Real Estate Operations;
•	Agribusiness Operations; and
•	Corporate

As of September 30, 2014 , our major consolidated subsidiaries are (wholly–owned unless 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;
•	UCP, Inc. (“UCP”), a 57.2% 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; and
•	PICO Northstar Hallock, LLC, an 87.7% owned subsidiary, doing business as Northstar Agri Industries (“Northstar”), which operates a canola seed crushing facility in Hallock, Minnesota.

RESULTS OF OPERATIONS — THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

Overview of Economic Conditions, Other Recent Events, 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.

In addition, during the first quarter of 2014 , we experienced weather-related disruptions in our agribusiness operation, which is located in Hallock, Minnesota. These disruptions negatively impacted our results of operations during the first nine months of 2014.

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 Shareholders’ Equity

Our shareholders’ equity decrease d $17.7 million , or $0.80 per share, during the nine months ended September 30, 2014 , from $472.9 million , or $20.79 per share, at December 31, 2013 , to $455.1 million , or $19.99 per share, at September 30, 2014 . The decrease in our shareholders’ equity was primarily due to the comprehensive loss of $21.4 million incurred during the period.

Total Assets and Liabilities

Total assets increase d by $8.3 million from $762.6 million at December 31, 2013 to $770.9 million at September 30, 2014 . The Company’s real estate and water assets increase d $83 million primarily due to acquisition and development of real estate by UCP. Approximately $62.1 million of the acquisition and development costs were financed with debt. Canola seed inventory increased by $7.1 million as a result of utilizing additional storage options. Offsetting these increases was a decrease in cash and cash equivalents of $81.9 million due to cash used for purchases of real estate and overhead. During the first nine months of 2014 , total liabilities increase d by $28.4 million , from $197.7 million at December 31, 2013 to $226.1 million at September 30, 2014 primarily due to a $13.9 million increase in construction cost related accruals and a net increase in debt of $11.1 million, which increased primarily due to the borrowings for real estate acquisition and development.

Third Quarter Loss or Income Before Income Taxes, and Net Income or Loss, and Income Taxes

Our reported loss before income taxes for the three months ended September 30, 2014 , was $10.2 million compared to income of $10.8 million for the same period in 2013 . For the three months ended September 30, 2014 , we reported a net loss of $9.9 million , or $0.44 per share, compared to net income of $8.2 million , or $0.36 per share, that we reported for the three months ended September 30, 2013 . The year-over-year decrease in income was primarily due to the $21.2 million gain recognized on the deconsolidation of Spigit, Inc. (“Spigit”) in 2013.

For the three and nine months ended September 30, 2014 , our investment in Mindjet common stock, which represents 15.1% of the common stock voting interest in that company, resulted in recording a loss of $410,000 and $1.6 million , respectively, in the statement of operations within equity in loss of affiliate. During the three and nine months ended September 30, 2014 , certain financial results indicated that our investment might be impaired, however estimates of the value of the enterprise indicated that our total investment balance of $26.2 million , which included common and preferred equity and $1.9 million of debt securities acquired during the nine months ended September 30, 2014 , would be recovered. Nonetheless, it is reasonably possible that given the volatile nature of software businesses that circumstances may change in the future which could require us to write down the investment to fair value.

We continue to record a full valuation allowance on our net deferred tax assets, which resulted in minimal income tax benefit reported during the third quarter of 2014 . During the third quarter of 2013 we also maintained a full valuation allowance on our net deferred tax assets; however, that was offset by a taxable temporary difference primarily related to our investment in Mindjet which resulted in tax expense of $3.6 million reported in the period.

Noncontrolling Interests

Noncontrolling interests reported a net loss of $504,000 and $1 million for the three months ended September 30, 2014 and 2013 , respectively, and a net loss of $3.1 million and $4.6 million for the nine months ended September 30, 2014 and 2013 . Of the loss reported during the nine months ended September 30, 2014, $2.2 million is attributable to the loss reported by UCP. During 2013, $2.5 million of the loss for the nine months ended is a due to losses reported in our agribusiness segment.

Comprehensive Income or Loss

For the third quarter of 2014 , we reported comprehensive income of $10.5 million , primarily due to the reported net income of $9.9 million for the period.

For the third quarter of 2013 , we reported comprehensive income of $9 million . The income consisted of net income of $8.2 million , due primarily from the $21.2 million gain on the deconsolidation of Spigit.

Segment Results of Operations

Our segment revenue and income (loss) before income taxes for the third quarter and first nine months of 2014 and 2013 were as follows (in thousands):



	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			Change			2014			2013			Change
Revenue:
Water resource and water storage operations	$	1,087		$	510		$	577		$	1,464		$	25,542		$	(24,078	)
Real estate operations	55,794			23,712			32,082			145,212			63,641			81,571
Agribusiness operations	42,597			55,308			(12,711		)	127,380			139,788			(12,408		)
Enterprise software				4,402			(4,402		)				13,649			(13,649		)
Corporate	2,277			22,854			(20,577		)	6,455			26,180			(19,725		)
Total revenue	$	101,755		$	106,786		$	(5,031	)	$	280,511		$	268,800		$	11,711

Income (loss) before income taxes:
Water resource and water storage operations	$	(1,131	)	$	(1,799	)	$	668		$	(4,965	)	$	737		$	(5,702	)
Real estate operations	(795		)	(231		)	(564		)	(6,251		)	(2,701		)	(3,550		)
Agribusiness operations	(5,221		)	(2,216		)	(3,005		)	(4,962		)	(20,691		)	15,729
Enterprise software				(2,572		)	2,572						(5,281		)	5,281
Corporate	(3,063		)	17,664			(20,727		)	(7,224		)	11,610			(18,834		)
Income (loss) before income taxes	$	(10,210	)	$	10,846		$	(21,056	)	$	(23,402	)	$	(16,326	)	$	(7,076	)

Third Quarter Revenue

The majority of our recurring revenue is generated in our agribusiness and real estate operations. Both of these segments generate revenue from volume sales of their products. Our third quarter revenue decreased primarily due to a $20.6 million decrease in corporate segment revenues resulting from the $21.2 million gain on the deconsolidation of Spigit recognized in 2013 and a $12.7 million decrease in our agribusiness operation caused by year-over-year reduction in the pricing of our canola oil, offset by a $32.1 million increase in real estate operations revenue resulting primarily from an increase in the number of residential homes and lots sold.

Third Quarter Costs and Expenses

Our year-over-year third quarter costs and expenses increased primarily due to a $28.2 million increase in cost of real estate sold caused by increased sales of residential real estate and lots year-over-year. Offsetting the increase in costs from our real estate segment was a decrease of $10.5 million in cost of sales of canola oil and meal primarily from a reduction in the price we paid for canola seed and reduction in the volume of canola meal sold.

Nine Months Revenue

Our revenue reported increased year-over-year for the first nine months of 2014 primarily due to an $81.6 million increase in the volume of residential real estate during the period, offset by several decreases. We reported a $24.1 million decrease in revenue in our water resource and water storage operations due to one time sales of real estate and water assets during 2013, a decrease of $19.7 million in our corporate segment primarily from the $21.2 million gain on the deconsolidation of Spigit in 2013, a decrease of $13.6 million in revenue reported by our enterprise software operations from 2013, prior to the deconsolidation of the segment, and a $12.4 million decrease in sale of canola oil and meal due primarily to reductions in pricing.

Nine Months Costs and Expenses

Our costs and expenses for the first nine months of 2014 increased $18.8 million year-over-year primarily due to an increase of $85.1 million in our real estate segment which included a $71 million increase in the cost of real estate sold. This increase was offset by several reductions in costs in expenses including a $31.1 million decrease in the cost of canola oil and meal sold due to reduced input costs, an $18.4 million decrease in our water resource and water storage operations primarily due to the cost of real estate and water sold during 2013 only, and an $18.9 million decrease in costs and expenses reported in our enterprise software segment during the first nine months of 2013, prior to being sold and deconsolidated in September 2013.

Nine Months Loss Before Taxes, Net Loss and Income Taxes

Our reported net loss before income taxes for the nine months ended September 30, 2014 was $23.4 million compared to a loss of $16.3 million for the same period in 2013 . For the nine months ended September 30, 2014 , we reported a net loss of $21.3 million , compared to a net loss of $14.5 million that we reported for the nine months ended September 30, 2013 . The year-over-year increase in the loss before income taxes and net loss was due primarily to an $18.8 million year-over-year decrease in the income reported by our corporate segment, offset by a decrease of $15.7 million in the loss reported by our agribusiness segment.

We continue to record a full valuation allowance on our net deferred tax assets, which resulted in minimal income tax benefit reported for the nine months ended September 30, 2014 . During the first nine months of 2013, we also maintained a full valuation allowance on our net deferred tax assets; however, that was offset by a taxable temporary difference primarily related to our investment in Mindjet which resulted in tax expense of $2.7 million reported in the period.

WATER RESOURCE AND WATER STORAGE OPERATIONS



Thousands of dollars	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			Change			2014			2013			Change
Revenues and other income:
Sale of real estate and water assets	$	992		$	147		$	845		$	1,196		$	23,813		$	(22,617	)
Other	95			363			(268		)	268			1,729			(1,461		)
Total revenues and other income	1,087			510			577			1,464			25,542			(24,078		)

Costs and expenses:
Cost of real estate and water assets sold	(470		)	(117		)	(353		)	(717		)	(16,756		)	16,039
Impairment of water assets													(993		)	993
Interest expense	(5		)	(167		)	162			(16		)	(189		)	173
Depreciation and amortization	(274		)	(270		)	(4		)	(825		)	(928		)	103
Overhead	(1,300		)	(1,101		)	(199		)	(4,060		)	(3,841		)	(219		)
Project expenses	(169		)	(654		)	485			(811		)	(2,098		)	1,287
Segment total expenses	(2,218		)	(2,309		)	91			(6,429		)	(24,805		)	18,376
Income (loss) before income taxes	$	(1,131	)	$	(1,799	)	$	668		$	(4,965	)	$	737		$	(5,702	)

Historically, our water and water resource segment revenue and results have been volatile. Since the date of closing generally determines the accounting period in which the sales revenue and cost of sales are recorded, reported revenue and income or loss 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

We did not generate any significant sales of real estate and water assets in the third quarter or first nine months of 2014 . The third quarter year-over-year increase in revenue of $577,000 is due primarily to the sale in the third quarter of 2014 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.

We closed two sale transactions in June 2013 which, in aggregate, contributed the majority of the segment revenue for the first nine months of 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 also 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 for the first nine months of 2013. From the third quarter of 2013, we no longer recorded any lease revenue or operating costs associated with the two farms that were sold.

Segment Expenses

In the third quarter of 2014 our total expenses decrease d by $91,000 compared to 2013 and decrease d by $18.4 million in the first nine months of 2014 as compared to the same period in 2013 . The primary reason for the decrease in total expenses for the first nine months was the reduction in the cost of real estate and water assets of $16 million in the first nine months of 2014 as compared to 2013 . The reduction in cost of sales was due to the two sale transactions that closed in June 2013 as noted in Segment Revenue above.

Project expenses consist of costs related to the development of existing water resources, such as maintenance and professional fees. Project costs are expensed as appropriate and fluctuate from period to period depending on activity in our water resource projects. Project expenses principally relate 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);
•	the operation and sale of our farm properties in Idaho (ceased with the sale of these properties in June 2013); and
•	certain costs for water resource development in Nevada and New Mexico.

Project expenses decrease d by $485,000 in the third quarter of 2014 as compared to the third quarter of 2013 and the year-over-year project costs for the first nine months of the 2014 decrease d by $1.3 million . The reduction in project expenses in both periods presented is primarily due to the reduction in operating expenses associated with the farm properties in Idaho, which were sold in September 2013 .

The impairment loss of $993,000 , recorded in the first nine months of 2013 , related to our Fish Springs water asset in Washoe County, Nevada. During the second quarter of 2013, specific events occurred in Washoe County that caused us to update our discounted cash flow models that calculate an estimated fair value for our Fish Springs Ranch 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 the discount rate. As a result of updating our discounted cash flow models, the fair value of our Fish Springs water asset was estimated at $83.9 million compared to its then carrying value of $84.9 million. Consequently, in the first nine months of 2013, we recorded the $993,000 difference as an impairment loss to reflect the decrease in the estimated fair value of the asset.

The year-over-year segment results of operations increase d by $668,000 for the third quarter of 2014 and decrease d by $5.7 million for the first nine months of 2014. The increase in the year-over-year results of operations for the third quarter was due primarily to the gross margin of $488,000 generated in the third quarter of 2014 from the sale of real estate and stock water rights in Lincoln County, Nevada. The decrease in the year-over-year results of operations for the first nine months was due primarily to the gross margin of $6.3 million generated in the first nine months of 2013 from the sale of land and water rights in the Harquahala Valley, Arizona.

REAL ESTATE OPERATIONS



Thousands of dollars	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			Change			2014			2013			Change
Revenues and other income:
Sale of real estate	$	55,750		$	23,619		$	32,131		$	144,973		$	63,144		$	81,829
Other	44			93			(49		)	239			497			(258		)
Total revenues and other income	55,794			23,712			32,082			145,212			63,641			81,571

Costs and expenses:
Cost of real estate sold	(46,134		)	(17,943		)	(28,191		)	(118,543		)	(47,575		)	(70,968		)
Impairment charges										(2,865		)	(418		)	(2,447		)
Operating expenses	(10,455		)	(6,000		)	(4,455		)	(30,055		)	(18,349		)	(11,706		)
Segment total expenses	(56,589		)	(23,943		)	(32,646		)	(151,463		)	(66,342		)	(85,121		)
Income (loss) before income taxes	$	(795	)	$	(231	)	$	(564	)	$	(6,251	)	$	(2,701	)	$	(3,550	)

As of September 30, 2014 , our businesses in the real estate operations segment are primarily conducted through our 57.2% owned subsidiaries UCP and UCP, LLC and its homebuilding and land development operations in California, Washington State, North Carolina, South Carolina and Tennessee.

On April 10, 2014, UCP, LLC acquired the assets and liabilities of Citizens Homes, Inc. (“Citizens”) for $14 million. Citizens builds and sells homes in North Carolina, South Carolina and Tennessee. The owners of Citizens are eligible to receive earn-out payments from UCP, LLC of up to $6 million, in the aggregate, based on various pre-tax net income performance milestones over a five year period commencing on April 1, 2014.

During the three and nine months ended September 30, 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 year, the broader housing market was affected by interest rate volatility and the partial federal government shutdown and the events leading up to it. Additionally, we believe that seasonal factors affected the broader housing market as well as our markets (see “Seasonality” below). Individual markets continue to experience varying results, as local home inventories, home affordability, and employment factors strongly influence each local market.

Numerous factors can affect the performance of an individual market, however, we believe that trends in employment, housing inventory, home 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 and community count. Trends in housing inventory, home affordability, employment, interest rates and home prices are the principal factors that affect our revenues and many of our costs and expenses. For example, when these trends are favorable, we expect our revenues from homebuilding and land development, as well as our related costs and expenses, to generally increase; conversely, when these trends are negative, we expect our revenue and costs and expenses 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 maintain our community count or decrease the pace at which we open additional communities and expand existing communities.

Owned and Controlled Lots

As of September 30, 2014 , and December 31, 2013 , UCP owned or controlled, pursuant to purchase or option contracts, an aggregate of 5,964 and 5,380 lots, respectively. The following tables present certain information with respect to our owned and controlled lots as of September 30, 2014 and December 31, 2013 .



	As of September 30, 2014
	Owned	Controlled ⁽¹⁾	Total
Central Valley Area - California	1,617	43	1,660
Monterey Bay Area - California	1,451		1,451
South San Francisco Bay Area - California	104	435	539
Southern California	268	104	372
Puget Sound Area - Washington	893	25	918
North Carolina	189	110	299
South Carolina	51	404	455
Tennessee	64	206	270
Total	4,637	1,327	5,964



	As of December 31, 2013
	Owned	Controlled ⁽¹⁾	Total
Central Valley Area - California	1,658	322	1,980
Monterey Bay Area - California	1,517	154	1,671
South San Francisco Bay Area - California	19	465	484
Southern California		251	251
Puget Sound Area - Washington	836	158	994
Total	4,030	1,350	5,380

⁽¹⁾ Controlled lots are those subject to a purchase or option contract and we cannot provide any assurances that these will pass our rigorous due diligence process.

Our wholly-owned subsidiary, Bedrock Land Development, Inc. (“Bedrock”) also owns real estate in Fresno, California that is tentatively approved for the development of 167 lots. Bedrock is not a part of UCP’s operations.

Third Quarter Segment Revenue and Gross Margin

In the following discussion, gross margin is defined as sale of real estate less cost of sales, and gross margin percentage is defined as gross margin divided by revenues.

In the third quarter of 2014 , total segment revenue increase d by 135% to $55.8 million as compared to total segment revenue of $23.7 million in the third quarter of 2013 . This increase in revenue of $32.1 million was primarily attributable to the following combination of factors:


•	an increase in the number of homes sold to 111 homes in the third quarter of 2014 as compared to 62 homes in the third quarter of 2013 . The average number of selling communities in the period increased from seven in the third quarter of 2013 to 27 in the third quarter of 2014 ;

•

a decrease in the average selling price (“ASP”) of homes sold of approximately $29,000 to $316,000 per home in the third quarter of 2014 as compared to $345,000 per home in the third quarter of 2013 . The decrease in average selling price was due to the change in geographic mix of homes delivered including 41 homes delivered in the Southeast with an average selling price of approximately $236,000 during the third quarter of 2014;


•	an increase in the number of lots sold to 197 units in the third quarter of 2014 as compared to 30 units in the third quarter of 2013 ; and


•	an increase in the ASP of lots sold to $103,000 per lot in the third quarter of 2014 as compared to $75,000 per lot in the third quarter of 2013 .

Total gross margin increase d by approximately $3.9 million to $9.6 million in the third quarter of 2014 , as compared to the third quarter of 2013 . This increase in gross margin was primarily due to the year-over-year increase in volume of homes and lots sold.

The gross margin percentage of homes sold declined to 16% in the third quarter of 2014 as compared to 23% in the third quarter of 2013 . This gross margin percentage change was primarily attributable 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 the third quarter of 2014 as compared to the third quarter of 2013 . This decline in the gross margin percentage of homes sold was more than offset by the increased volume of homes sold in the third quarter of 2014 ( 111 homes) as compared to the third quarter of 2013 ( 62 homes).

The increase d 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 the third quarter of 2014 as compared to the third quarter of 2013 was partially attributable to the acquisition of the assets from Citizens in April 2014. The acquisition added 15 new selling communities to our total number of selling communities in the third quarter of 2014.

The gross margin percentage of lots sold in the third quarter of 2014 was 21% , as compared to 35% in the third quarter of 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 in the third quarter of 2014 ( 197 units) as compared to the third quarter of 2013 ( 30 units). 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.

UCP’s homebuilding backlog (homes under sales contracts that have not yet closed at the end of the relevant period) at September 30, 2014 was $38.9 million as compared to a backlog of $25.5 million at September 30, 2013 . 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.

First Nine Months Segment Revenue and Gross Margin

In the first nine months of 2014 , total segment revenue increase d by 128% to $145.2 million as compared to total segment revenue of $63.6 million in the first nine months of 2013 . This increase in revenue of $81.6 million was primarily attributable to an increase in the volume of homes and lots sold and an increase in the ASP of homes sold in the first nine months of 2014 as compared to the first nine months of 2013 as follows:


•	an increase in the number of homes sold to 301 homes in the first nine months of 2014 as compared to 131 homes in the first nine months of 2013 ;


•	an increase in the ASP of homes sold of approximately $11,000 to $367,000 per home in the first nine months of 2014 as compared to $356,000 per home in the first nine months of 2013 ; and


•	an increase in the quantity of lots sold to 348 units in the first nine months of 2014 as compared to 138 units in the first nine months of 2013 , but revenue per lot decrease d by approximately $27,000 to $93,000 per lot in the first nine months of 2014 as compared to $120,000 per lot in the first nine months of 2013 .

Total gross margin increase d by approximately $10.9 million to $26.4 million in the first nine months of 2014 as compared to $15.6 million in the first nine months of 2013 . This increase in gross margin was primarily due to the increased volumes of both lots and homes sold in the first nine months of 2014 as compared to the first nine months of 2013 , which was partially offset by year-over-year declines in the gross margin percentage of both homes and lots sold. The gross margin percentage of lots sold in the first nine months of 2014 was 22% as compared to 32% in the same period of 2013 . As noted above, 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. The gross margin percentage of homes sold declined to 17% in the first nine months of 2014 as compared to 22% in the first nine months of 2013 . The homebuilding gross margin percentage decline was primarily attributable to the favorable cost basis of the active selling communities in the first nine months of 2013 as well as an increase in year-over-year buyer incentives and interest cost.

Summary Results of UCP Revenue and Gross Margin for Homes and Lots



	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			Change			2014			2013			Change
Lots sold	197			30			167			348			138			210
Homes sold	111			62			49			301			131			170

Revenue (in thousands)
Lot revenue - total	$	20,264		$	2,250		$	18,014		$	32,513		$	16,535		$	15,978
Lot revenue - per lot	$	103		$	75		$	28		$	93		$	120		$	(27	)

Home revenue - total	$	35,086		$	21,369		$	13,717		$	110,542		$	46,609		$	63,933
Home revenue - per home	$	316		$	345		$	(29	)	$	367		$	356		$	11

General contracting revenue	$	400					$	400		$	1,918					$	1,918

Gross Margin (in thousands, except for percentages)
Gross margin - lots	$	4,192		$	786		$	3,406		$	7,173		$	5,320		$	1,853
Gross margin percentage - lots	21		%	35		%	(14		)%	22		%	32		%	(10		)%

Gross margin - homes	$	5,580		$	4,890		$	690		$	19,020		$	10,249		$	8,771
Gross margin percentage - homes	16		%	23		%	(7		)%	17		%	22		%	(5		)%

Gross margin total - lots and homes	$	9,772		$	5,676		$	4,096		$	26,193		$	15,569		$	10,624
Gross margin percentage total - lots and homes	18		%	24		%	(6		)%	18		%	25		%	(7		)%

Segment Results of Operations

The year-over-year third quarter segment loss increase d by $564,000 from a net loss of $231,000 in 2013 to a net loss of $795,000 in 2014 . There was an increase in the gross margin of approximately $4.1 million generated by the sale of lots and homes at UCP. In addition, there was an increase in operating costs of $4.5 million in the third quarter of 2014 as compared to the third quarter of 2013 . The year-over-year increase in costs is due primarily to (1) increased selling and marketing costs of $1.9 million as a result of the increased volume of lot and home sales in the third quarter of 2014 as compared to the third quarter of 2013 ; and (2) increased general and administrative expenses of $2.2 million as UCP continues to expand its operations and increases its headcount.

The nine months segment net loss before income taxes increase d by $3.6 million from 2013 to 2014 . There was an increase in the gross margin of approximately $10.6 million generated by the sale of lots and homes at UCP, primarily due to the higher volume of lots and homes sold in the firsts nine months of 2014 as compared to the first nine months of 2013 . However, this increase d gross margin was offset by an increase in operating costs of $11.7 million in the first nine months 2014 as compared to the first nine months of 2013 . The increase in costs is due primarily to (1) increased selling and marketing costs of $5.1 million as a result of the increased volume of lot and home sales in the first nine months of 2014 as compared to the first nine months of 2013 ; (2) increased salaries and benefits and stock-based compensation as UCP continues to expand its operations and increases its headcount, resulting in an overall increase in general and administrative expenses of $6.6 million; and (3) non-recurring transaction costs of approximately $778,000 related to the Citizens acquisition.

Included in operating costs for the three and nine months ended September 30, 2014 , is stock-based compensation expense of $806,000 and $3 million , respectively. In the three and nine months ended September 30, 2013 there was stock-based compensation expense of $935,000 .

Not part of the UCP results for the nine months ended September 30, 2014 , is a $2.9 million impairment loss recorded on undeveloped property owned in San Diego County, California. The only real estate in this segment not owned by UCP is the undeveloped property in San Diego County, California and a property in Fresno, California that is owned by Bedrock. The 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 have proven unsuccessful and the property has also been impacted by protected species issues. As a result we have decided to sell the property as-is. Accordingly, we have written down the carrying value of the property to our estimate of the current undeveloped fair value of the property. There was an impairment charge of $417,000 in the first nine months of 2013 related to the property owned by Bedrock.

AGRIBUSINESS OPERATIONS



Thousands of dollars	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			Change			2014			2013			Change
Revenues and other income:
Sales of canola oil and meal	$	41,144		$	55,306		$	(14,162	)	$	124,963		$	139,775		$	(14,812	)
Other	1,453			2			1,451			2,417			13			2,404
Total revenues and other income	42,597			55,308			(12,711		)	127,380			139,788			(12,408		)

Cost of goods sold:
Cost of canola oil and meal sold	(38,319		)	(48,859		)	10,540			(103,501		)	(134,599		)	31,098
Depreciation	(2,068		)	(2,062		)	(6		)	(6,194		)	(6,121		)	(73		)
Other direct costs of production	(2,828		)	(2,162		)	(666		)	(8,581		)	(6,434		)	(2,147		)
Total cost of goods sold	(43,215		)	(53,083		)	9,868			(118,276		)	(147,154		)	28,878

Depreciation	(37		)	(28		)	(9		)	(110		)	(150		)	40
Interest	(1,312		)	(1,452		)	140			(3,964		)	(4,347		)	383
Plant costs and overhead	(3,254		)	(2,961		)	(293		)	(9,992		)	(8,828		)	(1,164		)
Segment total expenses	(47,818		)	(57,524		)	9,706			(132,342		)	(160,479		)	28,137
Income (loss) before income taxes	$	(5,221	)	$	(2,216	)	$	(3,005	)	$	(4,962	)	$	(20,691	)	$	15,729

Segment Revenue and Gross Margin

We generated revenue from sales of canola oil and meal of $41.1 million in the third quarter of 2014 and $125 million for the nine months ended September 30, 2014 , as compared to revenue of $55.3 million in the third quarter of 2013 and $139.8 million for the nine months ended September 30, 2013 . The change in revenue for the third quarter was the result of a year-over-year decrease in sales volume of 12%, combined with a 21% decrease in the average sales price per unit. The decrease in revenue for the first nine months of 2014 was primarily due to a 17% decrease in the average sales price per unit, partially offset by a year-over-year increase in sales volume of 5%.

Our year-over-year gross margin, which is sales of canola oil and meal less total cost of goods sold, decreased by $4.3 million to a loss of $2.1 million in the third quarter of 2014 from a gross margin of $2.2 million in the third quarter of 2013 . Our gross margin for the nine months ended September 30, 2014 , increased $14.1 million to $6.7 million from a gross margin loss of $7.4 million for the nine months ended September 30, 2013 .

We manage our canola seed crushing operations by reference to the crush margin, which is sales of canola oil and meal less cost of canola oil and meal sold. Our crush margin decreased by $3.6 million to $2.8 million in the third quarter of 2014 from $6.4 million in the third quarter of 2013 . For the nine months ended September 30, 2014 , our crush margin increased by $16.3 million to $21.5 million from $5.2 million for the nine months ended September 30, 2013 .

The improvement in the gross margin and crush margin for the first nine months of 2014 is due to both the overall improvement in canola board crush margin (the margin produced by the quoted market price of soybean oil and soybean meal factored for appropriate canola product yields and protein content less the quoted market price of canola seed as factored for the foreign exchange rate between the Canadian dollar and the U.S. dollar) and the increased volume of crushing in the first nine months of 2014 as compared to the same period in 2013 . The average board crush margin was $204 per ton for the first nine months of 2014 as compared to $79 per ton for the first nine months of 2013 . This board margin improvement was primarily due to the relatively greater decline in price of our main input cost, canola seed, versus our product pricing for canola meal and oil. Seed pricing was driven by high canola yields and a plentiful harvest for the 2013 crop. Our average volume of tons crushed per day was 963 in the first nine months of 2014 as compared to 857 tons per day in the first nine months of 2013 .

The year-over-year third quarter gross margin and crush margin decrease is due to both a year-over-year decline in the canola board crush margin and the reduction in average daily volume of canola seed crushed. The average board crush margin in the third quarter of 2014 was approximately $144 per ton as compared to approximately $149 per ton in the third quarter of 2013 . Our average volume of tons crushed per day was 1,007 for the third quarter of 2014 as compared to 1,025 in the third quarter of 2013 .

Due to the year-over-year decrease in our gross and crush margins for the third quarter, we reported a net loss before taxes of $5.2 million for the first nine months of 2014 , an increase in loss of $3 million as compared to the $2.2 million net loss incurred in the third quarter of 2013 . The year-over-year increase in gross and crush margins for the first nine months resulted in a net loss of $5 million in the first nine months of 2014 as compared to a net loss of $20.7 million in the first nine months of 2013 .

Canola board crush margins declined in the third quarter of 2014 primarily due to concerns that the 2014 / 2015 canola crop would be significantly lower than the prior year crop. The harvest of the canola crop is now largely complete and, as a result of the actual crop being in excess of initial expectations, canola board crush margins increased subsequent to the third quarter of 2014.

In addition, in November 2014, as a result of the completion of the planned expansion, our plant’s expected average capacity will increase to 1,400 tons per day, an increase of 16.7% over its previous average capacity.

Our hedging strategy is designed to lock in historically attractive board crush margins and we entered in to certain derivative contracts prior to the commencement of the first quarter of 2014 . However, the actual spot board crush margins in the first nine months of 2014 exceeded historical levels. As a result, we recorded a loss in the first nine months of 2014 of $3.4 million for both realized and unrealized losses on our derivative contracts that is included in our total cost of goods sold.

In addition, readily marketable inventory at September 30, 2014 is carried at net realizable value on our consolidated balance sheet based on quoted market prices in active markets. Changes in the value of our readily marketable inventory are recognized in cost of canola oil and meal sold each period. However, we aim to minimize the effects of changing prices in our inventory primarily through the use of traded futures contracts.

Segment Expenses

Plant costs and overhead in the third quarter of 2014 and 2013 included corporate and administrative salaries and benefits, consulting fees, insurance, office expenses, marketing fees paid to Purina Animal Nutrition, LLC (formerly Land O Lakes Purina Feed, LLC), freight costs for shipping our oil and meal, and certain due diligence expenses for potential expansion opportunities. The increase in these costs year-over-year for the first nine months of 2014 was due to an increase in variable costs driven by the increase in crushing volumes in 2014 as compared to 2013 .

As of September 30, 2014 , we had total debt of $88.5 million , principally comprised of a $79.1 million term loan and $9.4 million outstanding on a revolving credit facility.

CORPORATE



Thousands of dollars	Three Months Ended September 30,									Nine Months Ended September 30,
	2014			2013			Change			2014			2013			Change
Revenue:
Deferred compensation revenue	$	(53	)	$	274		$	(327	)	$	494		$	672		$	(178	)
Other revenue	2,330			22,580			(20,250		)	5,961			25,508			(19,547		)
Total revenue	2,277			22,854			(20,577		)	6,455			26,180			(19,725		)

Costs and expenses:
Interest expense	4			(159		)	163			(213		)	(468		)	255
Stock-based compensation expense	(946		)	(958		)	12			(2,858		)	(2,854		)	(4		)
Deferred compensation (expense) recovery	414			(589		)	1,003			(600		)	(1,456		)	856
Foreign exchange gain (loss)	(2,029		)	1,029			(3,058		)	(1,811		)	291			(2,102		)
Other	(2,783		)	(4,513		)	1,730			(8,197		)	(10,083		)	1,886
Segment total expenses	(5,340		)	(5,190		)	(150		)	(13,679		)	(14,570		)	891
Income (loss) before income taxes	$	(3,063	)	$	17,664		$	(20,727	)	$	(7,224	)	$	11,610		$	(18,834	)

The corporate segment consists of cash, fixed-income securities and equity securities, including the portfolio of Swiss equity securities and our investment in Mindjet. The corporate segment also includes the assets, liabilities and the results of operations of our oil and gas venture 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 consists of our share of revenue generated from oil and gas sales, interest earned on cash balances and securities 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.

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.

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 Revenue 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 Revenue

The corporate segment recorded revenue of $2.3 million and $6.5 million in the three and nine months ended September 30, 2014 , respectively, compared to $22.9 million and $26.2 million in the three and nine months ended September 30, 2013 , respectively. The year-over-year decreases of $20.6 million and $19.7 million for the three and nine months, respectively, were primarily due to the gain of $21.2 recorded in the third quarter of 2013 on the deconsolidation of Spigit.

Segment Expenses

Third quarter year-over-year segment expenses increase d by $150,000 to $5.3 million in the third quarter of 2014 as compared to $5.2 million in the third quarter of 2013 .

The first nine months year-over-year segment expenses decrease d by $891,000 with $13.7 million recorded in the first nine months of 2014 as compared to $14.6 million recorded in the first nine months of 2013 . The year-over-year decrease in total segment costs was primarily due to a combination of a decrease in costs associated with the deconsolidation of Spigit of $2.2 million and deferred compensation of $856,000 , which was partially offset by an increase in the foreign exchange loss of $2.1 million .

Stock-Based Compensation Expense

Stock-based compensation expense is calculated based on the closing price of PICO common stock on the date the awards were granted and is recognized over the vesting period of the awards. As of September 30, 2014 , there was $490,000 of unrecognized stock-based compensation expense, which we expect to record ratably until the awards are fully vested.

Foreign Exchange Gain or Loss

The foreign exchange gain or loss recorded in this segment 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 inter-company loan, which is denominated in Swiss Francs.

ENTERPRISE SOFTWARE



Thousands of dollars	Three Months Ended			Nine Months Ended
	September 30, 2013			September 30, 2013
Revenue:
Software and services revenue	$	4,402		$	13,649

Costs and expenses:
Cost of software and services sold	(1,100		)	(3,033		)
Interest expense	(108		)	(300		)
Depreciation	(19		)	(64		)
Operating expenses	(5,747		)	(15,533		)
Segment total expenses	(6,974		)	(18,930		)
Loss before income taxes	$	(2,572	)	$	(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.

LIQUIDITY AND CAPITAL RESOURCES— NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

Cash Flow

Our assets primarily consist of real estate and tangible and intangible water assets, property, plant and equipment, 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 September 30, 2014 were as follows:



•	our water resource and water storage operations held cash of $285,000:
•	our real estate operations segment held cash of $30.3 million;
•	our agribusiness operations segment held cash of $482,000; and
•	our corporate segment held cash of $25 million, and marketable equity and debt securities with a market value of $30.7 million and $8.6 million, respectively. Included in those totals is $5.1 million in cash, $10.7 million in equities and $6.7 million in debt securities that are held in deferred compensation rabbi trusts accounts that will be used to pay the related and offsetting deferred compensation liabilities.

Our primary sources of funds include existing cash, cash flows from our real estate and agribusiness operations, the sale of tangible and intangible water assets, loans and debt or equity offerings. We are not subject to any debt covenants which limit our ability to obtain additional financing through debt or equity offerings.

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 condensed consolidated statement of cash flows. The cash flow profile of our principal operating subsidiaries is as follows:

Water Resource and Water Storage Operations

A substantial portion of revenue in this segment has come from the one-time sale 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 value of sales and cash flows depend on a number of factors which are difficult to forecast, 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. On April 10, 2014, UCP, LLC acquired the assets and liabilities of Citizens for $14 million in cash and contingent consideration of $6 million . Citizens builds and sells homes in North Carolina, South Carolina, and Tennessee. The contingent consideration arrangement requires the Company to pay the owners of Citizens up to $6 million , in the aggregate, based on various pre-tax net income performance milestones over a five year period commencing on April 1, 2014. The preliminary estimated fair value of the contingent consideration based on a weighted probability of achievement of the performance milestones is $4.6 million.

On October 21, 2014, UCP completed a private offering of $75 million of 8.5% senior notes due in 2017. The net proceeds from the offering were approximately $72.5 million, after paying the initial purchaser’s discount and other estimated offering expenses. The net proceeds will be used for general corporate purposes, including financing the construction of homes, acquisition of entitled land, development of lots and working capital.

Agribusiness Operations

We recorded $125 million in sales of canola oil and meal and $118.3 million in cost of sales of such products for the nine months ended September 30, 2014. During the first nine months of 2014, prices for canola seed generally declined which eases our working capital requirement needed for the purchase of seed inventories and to fund daily settlement requirements on exchange traded futures that we use to minimize price risk related to our inventories. We have generally financed operations with cash received from sales of canola products, and cash from our revolving credit facility. However, PICO also invested an additional $4.6 million of preferred capital, with a 10% rate of return, during the first quarter of 2014 to fund planned capital expenditure that will increase the crushing capacity of our canola see crushing facility.

We reported a loss from operations during the three and nine months ended September 30, 2014 which caused us to breach the debt service coverage ratio covenant and as a result, the debt is currently in default. The lenders have the right to declare all or any portion of the $88.5 million outstanding principal amounts due and payable and demand that Northstar deposit, as cash collateral, 105% of the unused line of credit; however, to date, the lenders have not made any such declarations or demands. We are in discussions with the lenders to cure the default by December 31, 2014 without having to invest additional capital into the business.

If our canola business generates losses in the future, it is possible we could breach one or more of our debt covenants which would require us to obtain a waiver from our lenders, or it could require us to provide additional capital into the business.

At September 30, 2014 , Northstar had borrowed a total of $88.5 million under a $116.5 million credit agreement which consisted of:

• $79.1 million borrowed under non-recourse senior secured multi-draw term loans; and


•	$9.4 million borrowed under a $27 million non-recourse senior secured revolving credit facility to provide working capital on completion of construction. The revolving credit facility will be available until August 14, 2017.

The credit agreement contains the following significant financial covenants.

1) Debt to Adjusted Capitalization Ratio: Northstar will not permit its debt to adjusted capitalization ratio as of the last day of any quarter to be more than 0.60 to 1.00. At September 30, 2014 , Northstar’s ratio was approximately 0.59.

2) Debt Service Coverage Ratio: Northstar will not permit its debt service coverage ratio to be less than 1.25 to 1.00 as of September 30, 2014 , and at each quarter ending thereafter. At September 30, 2014 , Northstar’s ratio of approximately 0.98 to 1.00 was below the minimum allowable ratio.

3) Minimum Net Worth of Borrower: Northstar will not permit its net worth on any date to be less than $60 million. At September 30, 2014 , Northstar’s net worth was approximately $61 million.

The working capital loan includes certain restrictions as follows:

1) The proceeds of the working capital loan cannot be used to finance the payment of any construction expenses, payment of any dividends or distributions, finance inventory located in Canada having a cost basis in excess of $1 million, or to finance inventory located in any province in Canada other than Manitoba or Saskatchewan.

2) Northstar cannot declare or pay any dividends or distributions (in cash, property or obligations), provided, however, that so long as no event of default has occurred and is continuing, Northstar is in compliance with all financial covenants, and after giving effect to such distribution, Northstar’s liquidity is not less than $3 million.

3) The restricted cash balance of $5 million is primarily a debt service reserve and the remaining amount can only be used to pay swap liabilities, debt payments or margin calls.

Corporate

Our corporate segment generates investment returns and cash flow with a portfolio of small-capitalization value stocks publicly traded in Switzerland and in the U.S. and from the sale of oil and gas production from our wells in Colorado. The Swiss portfolio was partially financed with a loan denominated in Swiss Franc to provide a natural hedge against fluctuation in the U.S. dollar-Swiss Franc exchange rate. This loan, which had a balance of $17.4 million at December 31, 2013, was repaid during the nine months ending September 30, 2014.

Consolidated Cash and Securities

At September 30, 2014 , we had unrestricted and available cash of $20.2 million, and available-for-sale debt and equity securities of $20 million, which could be used for general corporate purposes, or used to finance new or existing projects in any of our segments. At December 31, 2013 , we had unrestricted and available cash of $48.3 million, and available-for-sale debt and equity securities of $13.5 million.

We estimate that we have sufficient cash and available-for-sale investments 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 debt or equity offerings. 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 for the nine months ended September 30, 2014 and 2013 were as follows (in thousands):



Cash provided by (used in):	2014			2013
Operating activities	$	(82,499	)	$	(50,932	)
Investing activities	(10,981		)	4,271
Financing activities	9,969			104,410
Effect of exchange rates on cash	1,621			(189		)
Increase (decrease) in cash and cash equivalents	$	(81,890	)	$	57,560

Cash Flows From Operating Activities

Our operating activities used $82.5 million in cash during the first nine months of 2014. The principal operating cash outflows were $183.4 million used to acquire and develop real estate and residential lots and housing and $121.2 million in purchases of canola seed. We also used $55.1 million for overhead and various project expenses. Our cash inflows were $144.6 million in sales of residential real estate and lots, $124.4 million from sales of canola oil and meal, and $7.6 million from sales of oil and gas and other operational income.

Our operating activities used $50.9 million in cash during the first nine months of 2013. The principal operating cash outflows were $133.8 million in purchases of canola seed and $79.3 million used to acquire and develop real estate and residential lots and housing. Other operating cash outflows included $64.7 million in overhead and various project expenses and payments of accounts payable of $3.7 million. Our positive cash inflows were $63.1 million in sales of residential real estate and lots, $139.5 million from sales of canola oil and meal, and $23.7 million from the sale of water assets in Arizona and our farm properties in Idaho.

Cash Flows From Investing Activities

Our investing activities used $11 million of cash in the first nine months of 2014. The primary uses of cash were $14 million used in the acquisition of the assets of Citizens, $10 million in cash used to purchase additional debt and equity securities, and $7.2 million used to purchase property, plant, and equipment in our agribusiness segment and oil and gas venture. The uses of cash were offset by $22 million received from the sale of debt and equity securities.

Our investing activities used $4.3 million of cash in the first nine months of 2013. The primary sources of cash were $20.3 million from the sale of debt and equity securities, and we also received $2.5 million of cash from the release of restricted deposits used for our derivatives trading. We used $16.1 million in cash to purchase additional debt and equity securities.

Cash Flows From Financing Activities

Financing activities provided cash of $10 million during the first nine months of 2014, primarily due to cash proceeds of $86.6 million from our debt arrangements used primarily to fund the acquisition and development of our real estate projects, offset by repayments of debt of $75.2 million comprised of $33.7 million of primarily construction debt repaid when certain real estate properties were sold, $18.9 million in repayments of Swiss debt, and $22 million repaid on our agribusiness debt.

During 2013, financing activities provided $104.4 million of cash during the first nine months of 2013, primarily due to net proceeds of $105.5 million from the initial public offering of UCP, Inc. We also received cash of $49.9 million from our debt arrangements, including $28.5 million drawn on our working capital line of credit in our agribusiness operations that was used to purchase canola seed and to fund operating expenses and $34.5 million in debt used to fund the acquisition and development of our real estate projects. We repaid $51 million of our debt, including $4.5 million of principal paid on our senior secured loan facility, $27.8 million on our working capital line of credit, and $18.7 million repaid when certain real estate properties were sold.

Our outstanding debt at September 30, 2014 consisted primarily of the $79.1 million non-recourse senior secured construction loan facility, $9.4 million under our agribusiness working capital facility, and $59.4 million in mortgage notes on real estate and real estate development, substantially all of which are non-recourse. As of September 30, 2014 we no longer have Swiss debt outstanding and do not expect to incur any additional amounts under that facility in the foreseeable future. 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.

Seasonality

Historically, the homebuilding industry experiences seasonal fluctuations in quarterly operating results and capital requirements. We typically experience the highest new home order activity in spring and summer, although this activity is also highly dependent on the number of active selling communities, timing of new community openings and other market factors. As it typically takes four to six months to construct a new home, we generally deliver more homes in the second half of the year as spring and summer home orders convert to home deliveries. Due to this seasonality, home starts, construction costs and related cash outflows have historically been highest in the second and third quarters, and the majority of cash receipts from home deliveries occur during the second half of the year. We expect this seasonal pattern to continue over the long term, although it may be affected by volatility in the homebuilding industry.

Off-Balance Sheet Arrangements

As of September 30, 2014 , 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 expenditure, or capital resources.

Item 3. Quantitative and Qualitative Disclosure 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 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.

At September 30, 2014 , we had $8.6 million of debt securities, and $30.7 million of marketable equity securities, $14.6 million of which were denominated in foreign currencies, primarily Swiss Francs, that were subject to market risk. At December 31, 2013 , we had $9.2 million of debt securities, and $41.4 million of marketable equity securities, $23.1 million of which were denominated in foreign currencies, primarily Swiss Francs, that 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 September 30, 2014 , and 2013, the model calculated a loss in fair value of $216,000 and $158,000, 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 September 30, 2014 and 2013 of $6.1 million and $8.3 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 September 30, 2014 and 2013 of $2.9 million and $1.2 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.

Item 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15(d)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q.

During the period covered by this report, UCP, our 57.2% owned consolidated subsidiary, implemented a new accounting system. During the implementation, an appropriate level of employee training, testing of the system, and monitoring of the financial results recorded in the system was conducted. We believe that this implementation constitutes a change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Accordingly, our system of internal control over financial reporting has been updated.

Changes in Internal Control Over Financial Reporting

Other than the foregoing, there were no other changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2014 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II: Other Information

Item 1: Legal Proceedings

See Note 9 in Notes to Condensed Consolidated Financial Statements for a discussion of material updates to previously reported legal proceedings, which information is incorporated by reference into this Item 1.

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 Quarterly Report on Form 10-Q and those we may make from time to time. You should carefully consider the following risks, together with other matters described in this Form 10-Q or incorporated herein by reference in evaluating our business and prospects. If any of the following risks occurs, our business, financial condition or operating results could be harmed. In such case, the trading price of our securities could decline, in some cases significantly.

The risk factors in this report have been revised to incorporate changes to our risk factors from those included in our Annual Report on Form 10-K for the year ended December 31, 2013. The risk factors set forth below with an asterisk (*) next to the title are new risk factors or risk factors containing changes, including any material changes, from the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC.

General economic conditions could have a material adverse effect on our financial results, financial condition and our ability to grow our businesses.

All of our businesses are sensitive to general economic conditions, both nationally and locally, as well as international economic conditions. 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 and the canola oil and meal products from our canola seed crushing business. These poor economic conditions include higher unemployment, inflation, deflation, increased commodity costs, decreases in consumer demand, changes in buying patterns, a weakened dollar, higher transportation and fuel costs, higher consumer debt levels, higher tax rates, and other changes in tax laws or other economic factors that may affect commercial and residential real estate development and consumer demand for vegetable oil and meal products.

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, and cash flows. Poor economic conditions could also lead to a decrease in consumer demand for canola oil products and/or a decline in canola seed crushing margins which could have a material adverse effect on our future cash flows, results of operations and financial condition.

*Our future revenue is uncertain and depends on a number of factors that may make our revenue, profitability, and cash flows volatile.

Our future revenue and profitability related to our water resource and water storage operations will primarily be dependent on our ability to acquire, 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 will be affected by various factors, including the availability and timing of water resource acquisitions, regulatory approvals and permits associated with such acquisitions, 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 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 and the growth of 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 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.

Our canola seed crushing facility only commenced full scale operations in the third quarter of 2012 and therefore has, to date, a limited operating history. Our canola crushing plant’s future revenue and ability to operate profitably and to generate positive cash flows is primarily dependent on future market prices and conditions for canola seed, canola oil and canola meal as well as operating at or near maximum crushing capacity.

The operation of a canola crushing plant involves many risks which include: poor operating margins due to high commodity prices for canola seed; not obtaining and maintaining adequate canola seed supplies; cost overruns in excess of budgeted operational costs; an inability to maintain the crushing facility at efficient operating levels sufficient to generate positive cash flows including, but not limited to, factors such as inadequate supplies of canola seed, logistical issues in transporting seed to the plant and delivering canola and meal to customers, and breakdowns in the plant itself that will require repairs; and not maintaining and managing product price-risk efficiently. Critically, we will need to sell the plant’s products (canola oil and meal) at market prices that are sufficient to generate adequate cash flows to service the debt financing used to partly fund the construction of the facility and to provide working capital for our operations. Additionally, we must be able to sell the plant’s products at prices that will allow us to generate an adequate and appropriate rate of return on our equity investment. Our canola crushing operations has a limited operating history and to date has not generated consistent operating income or positive cash flows.

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, and cause our results of operations to be volatile.

A downturn in the recent improvement that the homebuilding and land development industry has experienced would materially adversely affect our business and results of operations.

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 U.S. markets where 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 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 slow 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 further 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, which are 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 Nevada, but also in Colorado and New Mexico and (2) our land development and homebuilding assets are located, primarily in California and to a lesser extent, Washington. 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 in 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 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.

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 growth and profitability vulnerable to conditions and fluctuations in a limited number of local economies.

In the future, 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 acquire and 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. To date, we have stored approximately 251,000 acre-feet at the facility for our own account. 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 as yet generated any significant 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 have constructed a pipeline approximately 35 miles long to deliver water from Fish Springs Ranch to the northern valleys of Reno, Nevada. As of September 30, 2014 , the total cost of the pipeline project, including our water credits (net of impairment charges incurred to date), carried on our balance sheet was 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 and cash flows.

*The operation of our canola seed crushing facility may not generate sufficient cash flow to repay the debt that is secured on the facility.

Our canola crushing operations has a limited operating history and to date has not generated annual operating income or positive cash flows. As a result, the facility may be unable to fund principal and interest payments under its debt service obligations or may continue to operate at a loss. In certain situations, if the facility performs below certain operating levels leading to inadequate or negative cash flows, certain covenants in the agreements governing the facility’s debt financing may be breached, rendering all of the facility’s debt immediately due and payable. As a result, we may be forced to provide additional capital to our canola seed crushing operation to cure any breach of certain debt covenants which could lead to a material adverse effect on our financial condition and cash flows. As of September 30, 2014 we had invested an additional $37.1 million to fund the operating losses to date of our canola seed crushing facility to ensure certain debt covenants were not breached and to fund capital expenditure that will increase the plant’s crushing capacity. If we are unable to cure any breach of certain debt covenants, our canola seed crushing plant may be foreclosed on by our debt providers and we may lose our entire investment in this operation which would lead to a material adverse effect on our financial condition, results of operations and cash flows.

We may not be able to procure sufficient quantities of canola seed to efficiently operate our proposed canola seed crushing facility due to adverse weather conditions and/or logistical constraints.

The supply and price of canola seed may be subject to extreme volatility due to adverse weather conditions and/or logistical constraints. If the supply of canola seed becomes limited due to significantly reduced harvests or transportation is unavailable to bring canola seed to our plant at desired times and acceptable prices, we may not be able to procure sufficient quantities of canola seed to achieve optimal crushing capacity at our facility. Significantly reduced crushing operations from our current capacity of approximately 1,200 tons per day would lead to significantly reduced revenue, and may result in further losses and negative cash flows from operations and may cause us to breach our debt covenants. As a result, our canola seed crushing plant may be foreclosed on by our debt providers and we may lose our entire investment in this operation which would lead to a material adverse effect on our financial condition, results of operations and cash flows.

We may not be able to successfully penetrate the canola oil and meal markets.

The canola processing business is highly competitive and other companies presently in the market, some of which are larger and have greater financial resources than we have, or companies that could enter the market, could adversely affect profit margins for the products we sell. In addition, prices for canola seed, canola oil and canola meal are often volatile and may be affected by factors beyond our control such as global inventory levels, farmer planting decisions, weather and canola crop conditions, demand for and supply of competing products for canola oil and meal and demand for biofuels. While we have agreements in place with an end user of both canola oil and meal for 100% of the products we produce from our facility, we compete with other canola seed processors who may be capable of producing significantly greater quantities of canola products than us, and who may achieve higher operating efficiencies and lower costs due to their scale as well as have greater financial resources than we have to endure any prolonged adverse conditions.

We may fail to implement an effective risk management program at our canola seed crushing facility.

Our canola seed crushing facility is exposed to many commodity and financial risks including canola seed, canola oil and canola meal prices, interest rates, foreign currency exchange rates and transportation and energy costs. To attempt to manage certain of these risks, we have implemented, and intend to continue entering into, various hedging transactions with respect to future canola crush margins and the interest rate on the debt financing used to construct the facility. However, our hedging transactions may not fully minimize our exposure to these risks and we may not always be fully hedged.

In addition, a major component of our risk management program is the maintenance of a comprehensive insurance program. Our business interruption insurance or other insurance policies may not cover all losses arising from natural disasters or other events that would impair or terminate our ability to process canola seed into revenue generating products.

*We are subject to environmental 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.

Climate change, or legal, regulatory, or market measures to address climate change, may negatively affect our business and operations.

Due to climate change, we may be subject to decreased availability or less favorable pricing for the canola seed we use to produce canola oil and meal. In addition, natural disasters and extreme weather conditions may disrupt the productivity of our facilities or the operation of our supply chain. The increasing concern over climate change also may result in more regional, federal, and/or global legal and regulatory requirements. In the event that such regulation is enacted, we may experience significant increases in our costs of operation and delivery. In particular, increasing regulation of fuel emissions could substantially increase the distribution and supply chain costs associated with our products. As a result, climate change could negatively affect our business and operations.

We are a recent entrant to the homebuilding business and 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. 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 and results of operations.

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 may be adversely affected.

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.

Compliance with federal, state and local regulations related to our real estate operations may result in substantial delays and costs.

Our real estate operations are subject to numerous 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 also are subject to a variety of federal, state and local laws and regulations concerning the protection of the environment. 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.

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 in general and our revenues, cash flows and financial condition specifically.

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, and legal and consulting costs for hearings with the State Engineer, and National Environmental Protection Act, or “NEPA”, compliance costs. Until the State Engineer permits the water rights, 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 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 could adversely affect 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 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.

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, 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 including Native American tribes. 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 revenues and financial condition would decline.

If we do not successfully identify, select and manage acquisitions and investments, or if our acquisitions or investments otherwise fail or decline in value, our financial condition could suffer.

We acquire and invest in businesses and assets that we believe are undervalued or that will benefit from additional capital, restructuring of operations, strategic initiatives, or improved competitiveness through operational efficiencies. If an 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. Additionally, we may not be able to find sufficient opportunities to make our business strategy successful. If we fail to successfully identify, select and manage acquisition and investment opportunities, 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 successfully identify, select and 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 acquisitions and dispositions of our businesses, assets, operations and investments are possible, and, if unsuccessful, could reduce the value of our common shares. Any future acquisitions or 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 affecting our financial condition, results of operations and trading price at the present time.

Failure to successfully manage newly acquired companies could adversely affect our business.

Our management of the operations of acquired businesses requires significant efforts, including the coordination of personnel, information technologies, research and development, sales and marketing, operations, taxation, regulatory matters, and finance. These efforts result in additional expenses and involve significant amounts of our management’s time and could distract our management from the day-to-day operations of our business. The diversion of our management’s attention from the day-to-day operations, or difficulties encountered in the integration process, could have a material adverse effect on our business, financial condition, and the results of operations and cash flows. If we fail to integrate acquired businesses, personnel, resources, or assets into our operations successfully, we may be unable to achieve our strategic goals or an economic return and the value of your investment could suffer.

We operate in a variety of industries and market sectors, all of which are very competitive and susceptible to economic downturns and would be adversely affected by a recession. We also look for opportunities in industries and market sectors in which we do not have any operating history. For example, in 2010, we completed a business combination for a canola seed crushing operation, an agribusiness in which we had no previous operating experience. A worsening of general economic or market conditions may require us to devote more of our management resources to newly acquired companies and may result in lower valuations for our businesses or investments or have a negative impact on the credit quality of our assets.

Our acquisitions may result in dilution to our shareholders and increase our exposure to additional liabilities.

We make selective acquisitions of companies that we believe could benefit from our resources of additional capital, business expertise, management direction and oversight, or existing operations. We endeavor to enhance and realize additional value to these acquired companies through our influence and control. Any acquisition could result in the use of a significant portion of our available cash, significant dilution to you, and significant acquisition-related charges. Acquisitions may also result in the assumption of liabilities, including liabilities that are unknown or not fully known to us at the time of the acquisition, which could have a material adverse financial effect on us. Moreover, we may need to incur debt obligations, in order to finance new acquisitions. Additionally, our acquisitions and investments may yield low or negative returns for an extended period of time, which could temporarily or permanently depress our return on shareholders’ equity, and we may not realize the value of the funds invested.

We generally make acquisitions and investments that tend to be long term in nature, and for the purpose of realizing additional value by means of appropriate levels of influence and control. We acquire businesses that we believe to be undervalued or may benefit from additional capital, restructuring of operations or management or improved competitiveness through operational efficiencies with our existing operations or through appropriate and strategic management input. We may not be able to develop acceptable revenue streams and investment returns through the businesses we acquire, and as a result we may lose part or all of our investment in these assets.

Additionally, when any of our acquisitions do not achieve acceptable rates of return or we do not realize the value of the funds invested, we may write down the value of such acquisitions or sell the acquired businesses at a loss. Some of our prior acquisitions have lost either part or all of the capital we invested. Unsuccessful acquisitions could have negative impacts on our cash flows, income, assets and shareholders’ equity, which may be temporary or permanent. Moreover, the process we employ to enhance value in our acquisitions and investments can consume considerable amounts of time and resources. Consequently, costs incurred as a result of these acquisitions and investments may exceed their revenues and/or increases in their values, if any, for an extended period of time.

Our ability to achieve an acceptable rate of return on any particular investment is subject to a number of factors which may be beyond our control, including increased competition and loss of market share, the ability of management to implement their strategic and operational directives, cyclical or uneven financial results, technological obsolescence, foreign currency risks and regulatory delays.

We may need additional capital in the future to fund the growth of our business and acquisitions, 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 the long-term growth of our business and acquisitions. We may raise additional funds through public or private debt, equity or hybrid securities financings, including, without limitation, through the issuance of securities.

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, take advantage of unanticipated opportunities, respond to competitive pressures 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 September 30, 2014 , we estimated that we had federal and state net operating loss carryforwards of approximately $111.4 million and $124.8 million , respectively, which, depending on our value at the time of any ownership changes, could be limited.

Our acquisitions of and investments in non-U.S. companies subject us to additional market, liquidity, tax and foreign exchange risks which could affect the value of our stock.

We have acquired, and may continue to acquire, businesses and securities in non-U.S. public companies and other assets or businesses not located in the U.S. Typically, these non-U.S. securities are not registered with the SEC and regulation of these companies is under the jurisdiction of the relevant non-U.S country. The respective non-U.S. regulatory regime may limit our ability to obtain timely and comprehensive financial information for the non-U.S. companies in which we have invested. In addition, if a non-U.S. company in which we invest were to take actions which could be deleterious to its shareholders, non-U.S. legal systems may make it difficult or time-consuming for us to challenge such actions. These factors may affect our ability to acquire controlling stakes, or to dispose of our non-U.S. investments, or to realize the full fair value of our non-U.S. investments. In addition, investments in non-U.S. countries may give rise to complex cross-border tax issues. We aim to manage our tax affairs efficiently, but given the complexity of dealing with U.S. and non-U.S. tax jurisdictions, we may have to pay tax in both the U.S. and in non-U.S. countries, and we may be unable to offset any U.S. tax liabilities with non-U.S. tax credits. If we are unable to manage our non-U.S. tax issues efficiently, our financial condition and the results of operations and cash flows could be adversely affected. In addition, our base currency is United States dollars. Accordingly, we are subject to foreign exchange risk through our acquisitions of stocks in non-U.S. public companies.

We attempt to mitigate a portion of this foreign exchange risk by borrowing funds in the same currency to purchase the equities. Significant fluctuations in the non-U.S. currencies in which we hold investments or consummate transactions could negatively impact our financial condition and the results of operations and cash flows. We also may be unable to effectively and efficiently repatriate funds into the U.S. upon monetization of assets, securities, or businesses not located in the U.S., which could have an impact on our liquidity.

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 newly acquired companies 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 develop 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 a variety of business segments. Each of these areas is 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;


•	shortfalls in revenue or earnings from estimates forecast by securities analysts or others;


•	changes in estimates by such analysts;


•	product introductions;


•	the availability of economically viable acquisition or investment opportunities, including water resources and real estate, which will return an adequate economic return;


•	our competitors’ announcements of extraordinary events such as acquisitions;


•	litigation; and


•	general economic conditions and other matters described herein.

Our results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and our future results of operations could fluctuate significantly from quarter to quarter and from year to year. Causes of such fluctuations may include the inclusion or exclusion of operating earnings from newly acquired or sold operations, 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. In addition, some investors favor companies that pay dividends, particularly in market downturns. We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and, therefore, we do not currently anticipate paying cash dividends on our common stock.

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.

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.

Our business could be negatively impacted by cybersecurity 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 cybersecurity threats, including cybersecurity 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 cybersecurity 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 cybersecurity 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 2: Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3: Defaults Upon Senior Securities

At September 30, 2014 , Northstar, our 87.7% owned subsidiary, breached the debt service coverage ratio as set forth in the Credit Agreement dated June 13, 2011, as amended, by and among PICO Northstar Hallock, LLC, PICO Northstar, LLC, various lenders, and ING Capital LLC, primarily due to operating losses incurred by Northstar and consequently the debt is currently in default. The lenders have the option to declare all or any portion of the $88.5 million outstanding principal amounts due and payable and can also demand a deposit as cash collateral of 105% of the unused line of credit; however, to date, the lenders have not made any such declarations or demands. Northstar is in discussions with the lenders to cure the default by December 31, 2014, however, we have no plans to invest additional capital into the business as a result.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

None.

Item 6. Exhibits



Exhibit Number			Description
3(i)			Amended and Restated Articles of Incorporation of PICO ⁽¹⁾
3(ii)			Amended and Restated By-laws of PICO ⁽²⁾
4.1			Indenture, dated October 21, 2014, among UCP, Inc., the guarantors named therein, and Wilmington Trust, National Association, as trustee ⁽³⁾
10.1			Ninth Amendment to Credit Agreement dated July 30, 2014, by and among PICO Northstar Hallock, LLC, PICO Northstar, LLC, ING Capital, LLC and other lenders ⁽⁴⁾
10.2			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.
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 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
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 Chief 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



⁽¹⁾	Incorporated by reference to the Quarterly Report on Form 10-Q (No. 033-36383) filed with the Securities and Exchange Commission on November 7, 2007.
⁽²⁾	Incorporated by reference to the Current Report on Form 8-K (No. 033-36383) filed with the Securities and Exchange Commission on May 19, 2009.
⁽³⁾	Incorporate by reference to the Current Report on Form 8-K (No. 033-36383) filed with the Securities and Exchange Commission on October 24, 2014.
⁽⁴⁾	Incorporated by reference to the Quarterly Report on Form 10-Q (No. 033-36383) filed with the Securities and Exchange Commission on August 11, 2014.

PICO HOLDINGS, INC. AND SUBSIDIARIES

SIGNATURE

Pursuant to the requirements of the United States Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		PICO HOLDINGS, INC.


Date:	November 10, 2014	By: /s/ Maxim C. W. Webb
		Maxim C. W. Webb
		Executive Vice President, Chief Financial Officer,
		Treasurer, and Secretary
		( Principal Financial Officer and Authorized Signatory)

PICO HOLDINGS, INC.

2014 EQUITY INCENTIVE PLAN



Table of Contents
			Page
1.	Establishment, Purpose and Term of Plan		4
	1.1	Establishment	4
	1.2	Purpose	4
	1.3	Term of Plan	4
2.	Definitions and Construction		4
	2.1	Definitions	4
	2.2	Construction	10
3.	Administration		10
	3.1	Administration by the Committee	10
	3.2	Authority of Officers	10
	3.3	Administration with Respect to Insiders	10
	3.4	Committee Complying with Section 162(m)	10
	3.5	Powers of the Committee	10
	3.6	Option or SAR Repricing	11
	3.7	Indemnification	11
4.	Shares Subject to Plan		12
	4.1	Maximum Number of Shares Issuable	12
	4.2	Adjustment for Unissued or Forfeited Predecessor Plan Shares	12
	4.3	Share Counting	12
	4.4	Adjustments for Changes in Capital Structure	12
	4.5	Assumption or Substitution of Awards	13
5.	Eligibility, Participation and Award Limitations		13
	5.1	Persons Eligible for Awards	13
	5.2	Participation in the Plan	13
	5.3	Incentive Stock Option Limitations	13
	5.4	Section 162(m) Award Limits	14
	5.5	Nonemployee Director Award Limit	14
6.	Stock Options		14
	6.1	Exercise Price	14
	6.2	Exercisability and Term of Options	14
	6.3	Payment of Exercise Price	14
	6.4	Effect of Termination of Service	15
	6.5	Transferability of Options	16
7.	Stock Appreciation Rights		16
	7.1	Types of SARs Authorized	16



	7.2	Exercise Price	16
	7.3	Exercisability and Term of SARs	16
	7.4	Exercise of SARs	17
	7.5	Deemed Exercise of SARs	17
	7.6	Effect of Termination of Service	17
	7.7	Transferability of SARs	17
8.	Restricted Stock Awards		17
	8.1	Types of Restricted Stock Awards Authorized	18
	8.2	Purchase Price	18
	8.3	Payment of Purchase Price	18
	8.4	Payment of Purchase Price	18
	8.5	Vesting and Restrictions on Transfer	18
	8.6	Voting Rights; Dividends and Distributions	18
	8.7	Effect of Termination of Service	19
	8.8	Nontransferability of Restricted Stock Award Rights	19
9.	Restricted Stock Units		19
	9.1	Grant of Restricted Stock Unit Awards	19
	9.2	Purchase Price	19
	9.3	Vesting	19
	9.4	Voting Rights, Dividend Equivalent Rights and Distributions	19
	9.5	Effect of Termination of Service	20
	9.6	Settlement of Restricted Stock Unit Awards	20
	9.7	Nontransferability of Restricted Stock Unit Awards	20
10.	Performance Awards		20
	10.1	Types of Performance Awards Authorized	20
	10.2	Initial Value of Performance Shares and Performance Units	21
	10.3	Establishment of Performance Period, Performance Goals and Performance Award Formula	21
	10.4	Measurement of Performance Goals	21
	10.5	Settlement of Performance Awards	22
	10.6	Voting Rights; Dividend Equivalent Rights and Distributions	23
	10.7	Effect of Termination of Service	24
	10.8	Nontransferability of Performance Awards	24
11.	Cash-Based Awards and Other Stock-Based Awards		24
	11.1	Grant of Cash-Based Awards	24
	11.2	Grant of Other Stock-Based Awards	24
	11.3	Value of Cash-Based and Other Stock-Based Awards	24
	11.4	Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards	25
	11.5	Voting Rights; Dividend Equivalent Rights and Distributions	25
	11.6	Effect of Termination of Service	25
	11.7	Nontransferability of Cash-Based Awards and Other Stock-Based Awards	25



12.	Standard Forms of Award Agreement		26
	12.1	Award Agreements	26
	12.2	Authority to Vary Terms	26
13.	Change in Control		26
	13.1	Effect of Change in Control on Awards	26
	13.2	Effect of Change in Control on Nonemployee Director Awards	27
	13.3	Federal Excise Tax Under Section 4999 of the Code	27
14.	Compliance with Securities Law		27
15.	Compliance with Section 409A		27
	15.1	Awards Subject to Section 409A	27
	15.2	Deferral and/or Distribution Elections	28
	15.3	Subsequent Elections	28
	15.4	Payment of Section 409A Deferred Compensation	28
16.	Tax Withholding		30
	16.1	Tax Withholding in General	30
	16.2	Withholding in or Directed Sale of Shares	30
17.	Amendment, Suspension or Termination of Plan		30
18.	Miscellaneous Provisions		31
	18.1	Repurchase Rights	31
	18.2	Forfeiture Events	31
	18.3	Provision of Information	31
	18.4	Rights as Employee, Consultant or Director	31
	18.5	Rights as a Shareholder	31
	18.6	Delivery of Title to Shares	32
	18.7	Fractional Shares	32
	18.8	Retirement and Welfare Plans	32
	18.9	Beneficiary Designation	32
	18.10	Severability	32
	18.11	No Constraint on Corporate Action	32
	18.12	Unfunded Obligation	32
	18.13	Choice of Law	32

PICO Holdings, Inc.

2014 Equity Incentive Plan

1. Establishment, Purpose and Term of Plan .

1.1 Establishment . The PICO Holdings, Inc. 2014 Equity Incentive Plan (the “ Plan ” ) is hereby established effective as of May 14, 2014, the date of its approval by the shareholders of the Company (the “ Effective Date ” ).

1.2 Purpose . The purpose of the Plan is to advance the interests of the Participating Company Group and its shareholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. The Plan seeks to achieve this purpose by providing for Awards in the form of Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Performance Shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards.

1.3 Term of Plan. The Plan shall continue in effect until its termination by the Committee; provided, however, that all Awards shall be granted, if at all, within ten (10) years from the Effective Date.

2. Definitions and Construction .

2.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

(a) “ Affiliate ” means (i) a parent entity, other than a Parent Corporation, that directly, or indirectly through one or more intermediary entities, controls the Company or (ii) a subsidiary entity, other than a Subsidiary Corporation, that is controlled by the Company directly or indirectly through one or more intermediary entities. For this purpose, the terms “parent,” “subsidiary,” “control” and “controlled by” shall have the meanings assigned such terms for the purposes of registration of securities on Form S-8 under the Securities Act.

(b) “ Award ” means any Option, Stock Appreciation Right, Restricted Stock Purchase Right, Restricted Stock Bonus, Restricted Stock Unit, Performance Share, Performance Unit, Cash-Based Award or Other Stock-Based Award granted under the Plan.

(c) “ Award Agreement ” means a written or electronic agreement between the Company and a Participant setting forth the terms, conditions and restrictions applicable to an Award.

(d) “ Board ” means the Board of Directors of the Company.

(e) “ Cash-Based Award ” means an Award denominated in cash and granted pursuant to Section 11.

(f) “ Cashless Exercise ” means a Cashless Exercise as defined in Section 6.3(b)(i).

(g) “ Cause ” means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between a Participant and a Participating Company applicable to an Award, any of the following: (i) the Participant’s theft, dishonesty, willful misconduct, breach of fiduciary duty for personal profit, or falsification of any Participating Company documents or records; (ii) the Participant’s material failure to abide by a Participating Company’s code of conduct or other policies (including, without limitation, policies relating to confidentiality and reasonable workplace conduct); (iii) the Participant’s unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of a Participating Company (including, without limitation, the Participant’s improper use or disclosure of a Participating Company’s confidential or proprietary information); (iv) any intentional act by the Participant which has a material detrimental effect on a Participating Company’s reputation or business; (v) the Participant’s repeated failure to perform any reasonable assigned duties after written notice from a Participating Company of, and a reasonable opportunity to cure, such failure; (vi) any material breach by the Participant of any employment,

service, non-disclosure, non-competition, non-solicitation or other similar agreement between the Participant and a Participating Company, which breach is not cured pursuant to the terms of such agreement; or (vii) the Participant’s conviction (including any plea of guilty or nolo contendere ) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or which impairs the Participant’s ability to perform his or her duties with a Participating Company.

(h) “ Change in Control ” means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between the Participant and a Participating Company applicable to an Award, the occurrence of any one or a combination of the following:

(i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as such term is defined in Rule 13d‑3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total Fair Market Value or total combined voting power of the Company’s then‑outstanding securities entitled to vote generally in the election of Directors; provided, however, that a Change in Control shall not be deemed to have occurred if such degree of beneficial ownership results from any of the following: (A) an acquisition by any person who on the Effective Date is the beneficial owner of more than fifty percent (50%) of such voting power, (B) any acquisition directly from the Company, including, without limitation, pursuant to or in connection with a public offering of securities, (C) any acquisition by the Company, (D) any acquisition by a trustee or other fiduciary under an employee benefit plan of a Participating Company or (E) any acquisition by an entity owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company; or

(ii) an Ownership Change Event or series of related Ownership Change Events (collectively, a “ Transaction ” ) in which the shareholders of the Company immediately before the Transaction do not retain immediately after the Transaction direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding securities entitled to vote generally in the election of Directors or, in the case of an Ownership Change Event described in Section 2.1(ee)(iii), the entity to which the assets of the Company were transferred (the “ Transferee ” ), as the case may be; or

(iii) a date specified by the Committee following approval by the shareholders of a plan of complete liquidation or dissolution of the Company;

provided, however, that a Change in Control shall be deemed not to include a transaction described in subsections (i) or (ii) of this Section 2.1(h) in which a majority of the members of the board of directors of the continuing, surviving or successor entity, or parent thereof, immediately after such transaction is comprised of Incumbent Directors.

For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, as the case may be, either directly or through one or more subsidiary corporations or other business entities. The Committee shall determine whether multiple events described in subsections (i), (ii) and (iii) of this Section 2.1(h) are related and to be treated in the aggregate as a single Change in Control, and its determination shall be final, binding and conclusive.

(i) “ Code ” means the Internal Revenue Code of 1986, as amended, and any applicable regulations and administrative guidelines promulgated thereunder.

(j) “ Committee ” means the Compensation Committee and such other committee or subcommittee of the Board, if any, duly appointed to administer the Plan and having such powers in each instance as shall be specified by the Board. If, at any time, there is no committee of the Board then authorized or properly constituted to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.

(k) “ Company ” means PICO Holdings, Inc., a California corporation, and any successor corporation thereto.

(l) “ Consultant ” means a person engaged to provide consulting or advisory services (other than as an Employee or a Director) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on registration on Form S‑8 under the Securities Act.

(m) “ Covered Employee ” means, at any time the Plan is subject to Section 162(m), any Employee who is or may reasonably be expected to become a “covered employee” as defined in Section 162(m), or any successor statute, and who, with respect to a Performance Award, is designated, either as an individual Employee or a member of a class of Employees, by the Committee no later than the earlier of (i) the date that is ninety (90) days after the beginning of the Performance Period, or (ii) the date on which twenty-five percent (25%) of the Performance Period has elapsed, as a “Covered Employee” under this Plan for such applicable Performance Period.

(n) “ Director ” means a member of the Board.

(o) “ Disability ” means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between the Participant and a Participating Company applicable to an Award, the permanent and total disability of the Participant, within the meaning of Section 22(e)(3) of the Code.

(p) “ Dividend Equivalent Right ” means the right of a Participant, granted at the discretion of the Committee or as otherwise provided by the Plan, to receive a credit for the account of such Participant in an amount equal to the cash dividends paid on one share of Stock for each share of Stock represented by an Award held by such Participant.

(q) “ Employee ” means any person treated as an employee (including an Officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a Director’s fee shall be sufficient to constitute employment for purposes of the Plan. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual’s employment or termination of employment, as the case may be. For purposes of an individual’s rights, if any, under the terms of the Plan as of the time of the Company’s determination of whether or not the individual is an Employee, all such determinations by the Company shall be final, binding and conclusive as to such rights, if any, notwithstanding that the Company or any court of law or governmental agency subsequently makes a contrary determination as to such individual’s status as an Employee.

(r) “ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

(s) “ Fair Market Value ” means, as of any date, the value of a share of Stock or other property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:

(i) Except as otherwise determined by the Committee, if, on such date, the Stock is listed or quoted on a national or regional securities exchange or quotation system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock as quoted on the national or regional securities exchange or quotation system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or quotation system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded or quoted prior to the relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion.

(ii) Notwithstanding the foregoing, the Committee may, in its discretion, determine the Fair Market Value of a share of Stock on the basis of the opening, closing, or average of the high and low sale prices of a share of Stock on such date or the preceding trading day, the actual sale price of a share of Stock received by a Participant, any other reasonable basis using actual transactions in the Stock as reported on a national or regional securities exchange or quotation system, or on any other basis consistent with the requirements of Section 409A. The Committee may vary its method of determination of the Fair Market Value as provided in this Section for different purposes under the Plan to the extent consistent with the requirements of Section 409A.

(iii) If, on such date, the Stock is not listed or quoted on a national or regional securities exchange or quotation system, the Fair Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse, and in a manner consistent with the requirements of Section 409A.

(t) “ Full Value Award ” means any Award settled in Stock, other than (i) an Option, (ii) a Stock Appreciation Right, or (iii) a Restricted Stock Purchase Right or an Other Stock-Based Award under which the Company will receive monetary consideration equal to the Fair Market Value (determined on the effective date of grant) of the shares subject to such Award.

(u) “ Incentive Stock Option ” means an Option intended to be (as set forth in the Award Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code.

(v) “ Incumbent Director ” means a director who either (i) is a member of the Board as of the Effective Date or (ii) is elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but excluding a director who was elected or nominated in connection with an actual or threatened proxy contest relating to the election of directors of the Company).

(w) “ Insider ” means an Officer, a Director or other person whose transactions in Stock are subject to Section 16 of the Exchange Act.

(x) “ Net Exercise ” means a Net Exercise as defined in Section 6.3(b)(iii).

(y) “ Nonemployee Director ” means a Director who is not an Employee.

(z) “ Nonemployee Director Award ” means any Award granted to a Nonemployee Director.

(aa) “ Nonstatutory Stock Option ” means an Option not intended to be (as set forth in the Award Agreement) or which does not qualify as an incentive stock option within the meaning of Section 422(b) of the Code.

(bb) “ Officer ” means any person designated by the Board as an officer of the Company.

(cc) “ Option ” means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan.

(dd) “ Other Stock-Based Award ” means an Award denominated in shares of Stock and granted pursuant to Section 11.

(ee) “ Ownership Change Event ” means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the shareholders of the Company of securities of the Company representing more than fifty percent (50%) of the total combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of Directors; (ii) a merger or consolidation in which the Company is a party; or (iii) the sale, exchange, or transfer of

all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company).

(ff) “ Parent Corporation ” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(gg) “ Participant ” means any eligible person who has been granted one or more Awards.

(hh) “ Participating Company ” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.

(ii) “ Participating Company Group ” means, at any point in time, the Company and all other entities collectively which are then Participating Companies.

(jj) “ Performance Award ” means an Award of Performance Shares or Performance Units.

(kk) “ Performance Award Formula ” means, for any Performance Award, a formula or table established by the Committee pursuant to Section 10.3 which provides the basis for computing the value of a Performance Award at one or more levels of attainment of the applicable Performance Goal(s) measured as of the end of the applicable Performance Period.

(ll) “ Performance-Based Compensation ” means compensation under an Award that satisfies the requirements of Section 162(m) for certain performance-based compensation paid to Covered Employees.

(mm) “ Performance Goal ” means a performance goal established by the Committee pursuant to Section 10.3.

(nn) “ Performance Period ” means a period established by the Committee pursuant to Section 10.3 at the end of which one or more Performance Goals are to be measured.

(oo) “ Performance Share ” means a right granted to a Participant pursuant to Section 10 to receive a payment equal to the value of a Performance Share, as determined by the Committee, based upon attainment of applicable Performance Goal(s).

(pp) “ Performance Unit ” means a right granted to a Participant pursuant to Section 10 to receive a payment equal to the value of a Performance Unit, as determined by the Committee, based upon attainment of applicable Performance Goal(s).

(qq) “ Predecessor Plan ” means the Company’s 2005 Long-Term Incentive Plan.

(rr) “ Restricted Stock Award ” means an Award of a Restricted Stock Bonus or a Restricted Stock Purchase Right.

(ss) “ Restricted Stock Bonus ” means Stock granted to a Participant pursuant to Section 8.

(tt) “ Restricted Stock Purchase Right ” means a right to purchase Stock granted to a Participant pursuant to Section 8.

(uu) “ Restricted Stock Unit ” means a right granted to a Participant pursuant to Section 9 to receive on a future date or occurrence of a future event a share of Stock or cash in lieu thereof, as determined by the Committee.

(vv) “ Rule 16b‑3 ” means Rule 16b‑3 under the Exchange Act, as amended from time to time, or any successor rule or regulation.

(ww) “ SAR ” or “ Stock Appreciation Right ” means a right granted to a Participant pursuant to Section 7 to receive payment, for each share of Stock subject to such Award, of an amount equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the Award over the exercise price thereof.

(xx) “ Section 162(m) ” means Section 162(m) of the Code.

(yy) “ Section 409A ” means Section 409A of the Code.

(zz) “ Section 409A Deferred Compensation ” means compensation provided pursuant to an Award that constitutes nonqualified deferred compensation within the meaning of Section 409A.

(aaa) “ Securities Act ” means the Securities Act of 1933, as amended.

(bbb) “ Service ” means a Participant’s employment or service with the Participating Company Group, whether as an Employee, a Director or a Consultant. Unless otherwise provided by the Committee, a Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders Service or a change in the Participating Company for which the Participant renders Service, provided that there is no interruption or termination of the Participant’s Service. Furthermore, a Participant’s Service shall not be deemed to have been interrupted or terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company. However, unless otherwise provided by the Committee, if any such leave taken by a Participant exceeds ninety (90) days, then on the ninety-first (91st) day following the commencement of such leave the Participant’s Service shall be deemed to have terminated, unless the Participant’s right to return to Service is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, an unpaid leave of absence shall not be treated as Service for purposes of determining vesting under the Participant’s Award Agreement. A Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the business entity for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Participant’s Service has terminated and the effective date of and reason for such termination.

(ccc) “ Stock ” means the common stock of the Company, as adjusted from time to time in accordance with Section 4.4.

(ddd) “ Stock Tender Exercise ” means a Stock Tender Exercise as defined in Section 6.3(b)(ii).

(eee) “ Subsidiary Corporation ” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

(fff)

“ Ten Percent Owner ” means a Participant who, at the time an Option is granted to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company (other than an Affiliate) within the meaning of Section 422(b)(6) of the Code.

(ggg) “ Trading Compliance Policy ” means the written policy of the Company pertaining to the purchase, sale, transfer or other disposition of the Company’s equity securities by Directors, Officers, Employees or other service providers who may possess material, nonpublic information regarding the Company or its securities.

(hhh) “ Vesting Conditions ” mean those conditions established in accordance with the Plan prior to the satisfaction of which an Award or shares subject to an Award remain subject to forfeiture or a repurchase option in favor of the Company exercisable for the Participant’s monetary purchase price, if any, for such shares upon the Participant’s termination of Service or failure of a performance condition to be satisfied.

2.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

3. Administration .

3.1 Administration by the Committee. The Plan shall be administered by the Committee. All questions of interpretation of the Plan, of any Award Agreement or of any other form of agreement or other document employed by the Company in the administration of the Plan or of any Award shall be determined by the Committee, and such determinations shall be final, binding and conclusive upon all persons having an interest in the Plan or such Award, unless fraudulent or made in bad faith. Any and all actions, decisions and determinations taken or made by the Committee in the exercise of its discretion pursuant to the Plan or Award Agreement or other agreement thereunder (other than determining questions of interpretation pursuant to the preceding sentence) shall be final, binding and conclusive upon all persons having an interest therein. All expenses incurred in connection with the administration of the Plan shall be paid by the Company.

3.2 Authority of Officers. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election that is the responsibility of or that is allocated to the Company herein, provided that the Officer has apparent authority with respect to such matter, right, obligation, determination or election. To the extent permitted by applicable law, the Committee may, in its discretion, delegate to a committee comprised of one or more Officers the authority to grant one or more Awards, without further approval of the Committee, to any Employee, other than a person who, at the time of such grant, is an Insider or a Covered Employee, and to exercise such other powers under the Plan as the Committee may determine; provided, however, that (a) such Officers may not grant Awards for more than 10,000 shares to any single Employee in any fiscal year of the Company, (b) each such Award shall be subject to the terms and conditions of the appropriate standard form of Award Agreement approved by the Board or the Committee and shall conform to the provisions of the Plan, and (c) each such Award shall conform to such other limits and guidelines as may be established from time to time by the Committee.

3.3 Administration with Respect to Insiders. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b‑3.

3.4 Committee Complying with Section 162(m). If the Company is a “publicly held corporation” within the meaning of Section 162(m), the Board may establish a Committee of “outside directors” within the meaning of Section 162(m) to approve the grant of any Award intended to result in the payment of Performance-Based Compensation.

3.5 Powers of the Committee . In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Committee shall have the full and final power and authority, in its discretion:

(a) to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of shares of Stock, units or monetary value to be subject to each Award;

(b) to determine the type of Award granted;

(c) to determine whether an Award granted to a Covered Employee shall be intended to result in Performance-Based Compensation;

(d) to determine the Fair Market Value of shares of Stock or other property;

(e) to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and any shares acquired pursuant thereto, including, without limitation, (i) the exercise or purchase price of shares pursuant to any Award, (ii) the method of payment for shares purchased pursuant to any Award, (iii) the method for satisfaction of any tax withholding obligation arising in connection with any Award, including by the withholding or delivery of shares of Stock, (iv) the timing, terms and conditions of the exercisability or vesting of any Award or any shares acquired pursuant thereto, (v) the Performance Measures, Performance Period, Performance Award Formula and Performance Goals applicable to any Award and the extent to which such Performance Goals have been attained, (vi) the time of expiration of any Award, (vii) the effect of any

Participant’s termination of Service on any of the foregoing, and (viii) all other terms, conditions and restrictions applicable to any Award or shares acquired pursuant thereto not inconsistent with the terms of the Plan;

(f) to determine whether an Award will be settled in shares of Stock, cash, other property or in any combination thereof;

(g) to approve one or more forms of Award Agreement;

(h) to amend, modify, extend, cancel or renew any Award or to waive any restrictions or conditions applicable to any Award or any shares acquired pursuant thereto;

(i) to accelerate, continue, extend or defer the exercisability or vesting of any Award or any shares acquired pursuant thereto, including with respect to the period following a Participant’s termination of Service;

(j) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt sub-plans or supplements to, or alternative versions of, the Plan, including, without limitation, as the Committee deems necessary or desirable to comply with the laws of, or to accommodate the tax policy, accounting principles or custom of, foreign jurisdictions whose residents may be granted Awards; and

(k) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement and to make all other determinations and take such other actions with respect to the Plan or any Award as the Committee may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law.

3.6 Option or SAR Repricing. Without the affirmative vote of holders of a majority of the shares of Stock cast in person or by proxy at a meeting of the shareholders of the Company at which a quorum representing a majority of all outstanding shares of Stock is present or represented by proxy, the Committee shall not approve a program providing for either (a) the cancellation of outstanding Options or SARs having exercise prices per share greater than the then Fair Market Value of a share of Stock (“ Underwater Awards ”) and the grant in substitution therefore of new Options or SARs having a lower exercise price, Full Value Awards or payments in cash, or (b) the amendment of outstanding Underwater Awards to reduce the exercise price thereof. This Section shall not be construed to apply to (i) “issuing or assuming a stock option in a transaction to which Section 424(a) applies,” within the meaning of Section 424 of the Code, (ii) adjustments pursuant to the assumption of or substitution for an Option or SAR in a manner that would comply with Section 409A, or (iii) an adjustment pursuant to Section 4.4.

3.7 Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Committee or as officers or employees of the Participating Company Group, to the extent permitted by applicable law, members of the Board or the Committee and any officers or employees of the Participating Company Group to whom authority to act for the Board, the Committee or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.

4. Shares Subject to Plan .

4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided in Sections 4.2, 4.3 and 4.4, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be equal to one million (1,000,000) shares and shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof.

4.2 Adjustment for Unissued or Forfeited Predecessor Plan Shares. The maximum aggregate number of shares of Stock that may be issued under the Plan as set forth in Section 4.1 shall be cumulatively increased from time to time by:

(a) the aggregate number of shares of Stock that remain available for the future grant of awards under the Predecessor Plan immediately prior to its termination as of the Effective Date;

(b) the number of shares of Stock subject to that portion of any option or other award outstanding pursuant to the Predecessor Plan as of the Effective Date which, on or after the Effective Date, expires or is terminated or canceled for any reason without having been exercised or settled in full; and

(c) the number of shares of Stock acquired pursuant to the Predecessor Plan subject to forfeiture or repurchase by the Company for an amount not greater than the Participant’s purchase price which, on or after the Effective Date, is so forfeited or repurchased;

provided, however, that the aggregate number of shares of Stock authorized for issuance under the Predecessor Plan that may become authorized for issuance under the Plan pursuant to this Section 4.2 shall not exceed two million three hundred thousand (2,300,000) shares.

4.3 Share Counting.

(a) Each share of Stock subject to an Award other than a Full Value Award shall be counted against the limit set forth in Section 4.1 as one (1) share. Each one (1) share of Stock subject to a Full Value Award granted pursuant to the Plan or forfeited or repurchased pursuant to Section 4.3(b) shall be counted for purposes of the limit set forth in Section 4.1 as 2.25 shares.

(b) If an outstanding Award for any reason expires or is terminated or canceled without having been exercised or settled in full, or if shares of Stock acquired pursuant to an Award subject to forfeiture or repurchase are forfeited or repurchased by the Company for an amount not greater than the Participant’s purchase price, the shares of Stock allocable to the terminated portion of such Award or such forfeited or repurchased shares of Stock shall again be available for issuance under the Plan. Shares of Stock shall not be deemed to have been issued pursuant to the Plan with respect to any portion of an Award that is settled in cash. Upon payment in shares of Stock pursuant to the exercise of an SAR, the number of shares available for issuance under the Plan shall be reduced by the gross number of shares for which the SAR is exercised. If the exercise price of an Option is paid by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant, or by means of a Net-Exercise, the number of shares available for issuance under the Plan shall be reduced by the gross number of shares for which the Option is exercised. Shares withheld or reacquired by the Company in satisfaction of tax withholding obligations pursuant to the exercise or settlement of Options or SARs pursuant to Section 16.2 shall not again be available for issuance under the Plan. Shares withheld or reacquired by the Company in satisfaction of tax withholding obligations pursuant to the vesting or settlement of Full Value Awards pursuant to Section 16.2 shall again become available for issuance under the Plan.

4.4 Adjustments for Changes in Capital Structure . Subject to any required action by the shareholders of the Company and the requirements of Sections 409A and 424 of the Code to the extent applicable, in the event of any change in the Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the shareholders of the Company in a form other than Stock (excepting regular, periodic cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate and proportionate adjustments shall be made in the number and kind of shares subject to the Plan and to any outstanding Awards, the Award limits set forth in Section 5.3 and Section 5.4, and in the exercise or purchase price per share under any outstanding Award in order to prevent dilution

or enlargement of Participants’ rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” If a majority of the shares which are of the same class as the shares that are subject to outstanding Awards are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the “ New Shares ” ), the Committee may unilaterally amend the outstanding Awards to provide that such Awards are for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise or purchase price per share of, the outstanding Awards shall be adjusted in a fair and equitable manner as determined by the Committee, in its discretion. Any fractional share resulting from an adjustment pursuant to this Section shall be rounded down to the nearest whole number and the exercise or purchase price per share shall be rounded up to the nearest whole cent. In no event may the exercise or purchase price, if any, under any Award be decreased to an amount less than the par value, if any, of the stock subject to such Award. The Committee in its discretion, may also make such adjustments in the terms of any Award to reflect, or related to, such changes in the capital structure of the Company or distributions as it deems appropriate, including modification of Performance Goals, Performance Award Formulas and Performance Periods. The adjustments determined by the Committee pursuant to this Section shall be final, binding and conclusive.

4.5 Assumption or Substitution of Awards. The Committee may, without affecting the number of shares of Stock reserved or available hereunder, authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate, subject to compliance with Section 409A and any other applicable provisions of the Code.

5. Eligibility, Participation and Award Limitations .

5.1 Persons Eligible for Awards. Awards may be granted only to Employees, Consultants and Directors.

5.2 Participation in the Plan. Awards are granted solely at the discretion of the Committee. Eligible persons may be granted more than one Award. However, eligibility in accordance with this Section shall not entitle any person to be granted an Award, or, having been granted an Award, to be granted an additional Award.

5.3 Incentive Stock Option Limitations.

(a) Maximum Number of Shares Issuable Pursuant to Incentive Stock Options. Subject to adjustment as provided in Section 4.4, the maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to the exercise of Incentive Stock Options shall not exceed four million (4,000,000) shares. The maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to all Awards other than Incentive Stock Options shall be the number of shares determined in accordance with Section 4.1, subject to adjustment as provided in Sections 4.2, 4.3, and 4.4.

(b) Persons Eligible. An Incentive Stock Option may be granted only to a person who, on the effective date of grant, is an Employee of the Company, a Parent Corporation or a Subsidiary Corporation (each being an “ ISO-Qualifying Corporation ” ). Any person who is not an Employee of an ISO-Qualifying Corporation on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option.

(c) Fair Market Value Limitation. To the extent that options designated as Incentive Stock Options (granted under all stock plans of the Participating Company Group, including the Plan) become exercisable by a Participant for the first time during any calendar year for stock having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a limitation different from that set forth in this Section, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If

an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section, the Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Upon exercise of the Option, shares issued pursuant to each such portion shall be separately identified.

5.4 Section 162(m) Award Limits. Subject to adjustment as provided in Section 4.4, no Covered Employee shall be granted within any fiscal year of the Company one or more Awards intended to qualify for treatment as Performance-Based Compensation which in the aggregate are for more than 1,000,000 shares or, if applicable, which could result in such Covered Employee receiving more than $15,000,000 for each full fiscal year of the Company contained in the Performance Period for such Award.

5.5 Nonemployee Director Award Limit. No Nonemployee Director shall be granted within any fiscal year of the Company one or more Nonemployee Director Awards pursuant to the Plan which in the aggregate are for more than a number of shares of Stock determined by dividing $250,000 by the Fair Market Value of a share of Stock determined on the last trading day immediately preceding the date on which the applicable Nonemployee Director Award is granted.

6. Stock Options .

Options shall be evidenced by Award Agreements specifying the number of shares of Stock covered thereby, in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

6.1 Exercise Price. The exercise price for each Option shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option and (b) no Incentive Stock Option granted to a Ten Percent Owner shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price less than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner that would qualify under the provisions of Section 409A or Section 424(a) of the Code.

6.2 Exercisability and Term of Options. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option and (c) no Option granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable until at least six (6) months following the date of grant of such Option (except in the event of such Employee’s death, disability or retirement, upon a Change in Control, or as otherwise permitted by the Worker Economic Opportunity Act). Subject to the foregoing, unless otherwise specified by the Committee in the grant of an Option, each Option shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions.

6.3 Payment of Exercise Price.

(a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or in cash equivalent; (ii) if permitted by the Committee and subject to the limitations contained in Section 6.3(b), by means of (1) a Cashless Exercise, (2) a Stock Tender Exercise or (3) a Net Exercise; (iii) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (iv) by any combination thereof. The Committee may at any time or from time to time grant

Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration.

(b) Limitations on Forms of Consideration.

(i) Cashless Exercise. A “ Cashless Exercise ” means the delivery of a properly executed notice of exercise together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise, including with respect to one or more Participants specified by the Company notwithstanding that such program or procedures may be available to other Participants.

(ii) Stock Tender Exercise. A “ Stock Tender Exercise ” means the delivery of a properly executed exercise notice accompanied by a Participant’s tender to the Company, or attestation to the ownership, in a form acceptable to the Company of whole shares of Stock owned by the Participant having a Fair Market Value that does not exceed the aggregate exercise price for the shares with respect to which the Option is exercised. A Stock Tender Exercise shall not be permitted if it would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. If required by the Company, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Participant for a period of time required by the Company (and not used for another option exercise by attestation during such period) or were not acquired, directly or indirectly, from the Company.

(iii) Net Exercise. A “ Net Exercise ” means the delivery of a properly executed exercise notice followed by a procedure pursuant to which (1) the Company will reduce the number of shares otherwise issuable to a Participant upon the exercise of an Option by the largest whole number of shares having a Fair Market Value that does not exceed the aggregate exercise price for the shares with respect to which the Option is exercised, and (2) the Participant shall pay to the Company in cash the remaining balance of such aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued.

6.4 Effect of Termination of Service.

(a) Option Exercisability. Subject to earlier termination of the Option as otherwise provided by this Plan and unless otherwise provided by the Committee, an Option shall terminate immediately upon the Participant’s termination of Service to the extent that it is then unvested and shall be exercisable after the Participant’s termination of Service to the extent it is then vested only during the applicable time period determined in accordance with this Section and thereafter shall terminate.

(i) Disability. If the Participant’s Service terminates because of the Disability of the Participant, the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal representative) at any time prior to the expiration of twelve (12) months (or such longer or shorter period provided by the Award Agreement) after the date on which the Participant’s Service terminated, but in any event no later than the date of expiration of the Option’s term as set forth in the Award Agreement evidencing such Option (the “ Option Expiration Date ” ).

(ii) Death. If the Participant’s Service terminates because of the death of the Participant, the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by the Participant’s legal representative or other person who acquired the right to exercise the Option by reason of the Participant’s death at any time prior to the expiration of twelve (12) months (or such longer or shorter period provided by the Award Agreement) after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date. The Participant’s Service shall be deemed to have terminated on account of death if the Participant dies within three (3) months (or such longer or shorter period provided by the Award Agreement) after the Participant’s termination of Service.

(iii) Termination for Cause. Notwithstanding any other provision of the Plan to the contrary, if the Participant’s Service is terminated for Cause or if, following the Participant’s termination of Service and during any period in which the Option otherwise would remain exercisable, the Participant engages in any act that would constitute Cause, the Option shall terminate in its entirety and cease to be exercisable immediately upon such termination of Service or act.

(iv) Other Termination of Service. If the Participant’s Service terminates for any reason, except Disability, death or Cause, the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the expiration of three (3) months (or such longer or shorter period provided by the Award Agreement) after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.

(b) Extension if Exercise Prevented by Law. Notwithstanding the foregoing, other than termination of Service for Cause, if the exercise of an Option within the applicable time periods set forth in Section 6.4(a) is prevented by the provisions of Section 14 below, the Option shall remain exercisable until the later of (i) thirty (30) days after the date such exercise first would no longer be prevented by such provisions or (ii) the end of the applicable time period under Section 6.4(a), but in any event no later than the Option Expiration Date.

6.5 Transferability of Options. During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the Participant’s guardian or legal representative. An Option shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Option, an Option shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S‑8 under the Securities Act or, in the case of an Incentive Stock Option, only as permitted by applicable regulations under Section 421 of the Code in a manner that does not disqualify such Option as an Incentive Stock Option.

7. Stock Appreciation Rights .

Stock Appreciation Rights shall be evidenced by Award Agreements specifying the number of shares of Stock subject to the Award, in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

7.1 Types of SARs Authorized. SARs may be granted in tandem with all or any portion of a related Option (a “ Tandem SAR ” ) or may be granted independently of any Option (a “ Freestanding SAR ” ). A Tandem SAR may only be granted concurrently with the grant of the related Option.

7.2 Exercise Price. The exercise price for each SAR shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share subject to a Tandem SAR shall be the exercise price per share under the related Option and (b) the exercise price per share subject to a Freestanding SAR shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the SAR. Notwithstanding the foregoing, an SAR may be granted with an exercise price lower than the minimum exercise price set forth above if such SAR is granted pursuant to an assumption or substitution for another stock appreciation right in a manner that would qualify under the provisions of Section 409A of the Code.

7.3 Exercisability and Term of SARs.

(a) Tandem SARs. Tandem SARs shall be exercisable only at the time and to the extent, and only to the extent, that the related Option is exercisable, subject to such provisions as the Committee may specify where the Tandem SAR is granted with respect to less than the full number of shares of Stock subject to the related Option. The Committee may, in its discretion, provide in any Award Agreement evidencing a Tandem SAR that such SAR may not be exercised without the advance approval of the Company and, if such approval is not given, then the Option shall nevertheless remain exercisable in accordance with its terms. A Tandem SAR shall terminate and cease to be exercisable no later than the date on which the related Option expires or is terminated or canceled. Upon the exercise of a Tandem SAR with respect to some or all of the shares subject to such SAR, the

related Option shall be canceled automatically as to the number of shares with respect to which the Tandem SAR was exercised. Upon the exercise of an Option related to a Tandem SAR as to some or all of the shares subject to such Option, the related Tandem SAR shall be canceled automatically as to the number of shares with respect to which the related Option was exercised.

(b) Freestanding SARs. Freestanding SARs shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such SAR; provided, however, that (i) no Freestanding SAR shall be exercisable after the expiration of ten (10) years after the effective date of grant of such SAR and (ii) no Freestanding SAR granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable until at least six (6) months following the date of grant of such SAR (except in the event of such Employee’s death, disability or retirement, upon a Change in Control, or as otherwise permitted by the Worker Economic Opportunity Act). Subject to the foregoing, unless otherwise specified by the Committee in the grant of a Freestanding SAR, each Freestanding SAR shall terminate ten (10) years after the effective date of grant of the SAR, unless earlier terminated in accordance with its provisions.

7.4 Exercise of SARs. Upon the exercise (or deemed exercise pursuant to Section 7.5) of an SAR, the Participant (or the Participant’s legal representative or other person who acquired the right to exercise the SAR by reason of the Participant’s death) shall be entitled to receive payment of an amount for each share with respect to which the SAR is exercised equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the SAR over the exercise price. Payment of such amount shall be made (a) in the case of a Tandem SAR, solely in shares of Stock in a lump sum upon the date of exercise of the SAR and (b) in the case of a Freestanding SAR, in cash, shares of Stock, or any combination thereof as determined by the Committee, in a lump sum upon the date of exercise of the SAR. When payment is to be made in shares of Stock, the number of shares to be issued shall be determined on the basis of the Fair Market Value of a share of Stock on the date of exercise of the SAR. For purposes of Section 7, an SAR shall be deemed exercised on the date on which the Company receives notice of exercise from the Participant or as otherwise provided in Section 7.5.

7.5 Deemed Exercise of SARs. If, on the date on which an SAR would otherwise terminate or expire, the SAR by its terms remains exercisable immediately prior to such termination or expiration and, if so exercised, would result in a payment to the holder of such SAR, then any portion of such SAR which has not previously been exercised shall automatically be deemed to be exercised as of such date with respect to such portion.

7.6 Effect of Termination of Service. Subject to earlier termination of the SAR as otherwise provided herein and unless otherwise provided by the Committee, an SAR shall be exercisable after a Participant’s termination of Service only to the extent and during the applicable time period determined in accordance with Section 6.4 (treating the SAR as if it were an Option) and thereafter shall terminate.

7.7 Transferability of SARs. During the lifetime of the Participant, an SAR shall be exercisable only by the Participant or the Participant’s guardian or legal representative. An SAR shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Award, a Tandem SAR related to a Nonstatutory Stock Option or a Freestanding SAR shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S‑8 under the Securities Act.

8. Restricted Stock Awards .

Restricted Stock Awards shall be evidenced by Award Agreements specifying whether the Award is a Restricted Stock Bonus or a Restricted Stock Purchase Right and the number of shares of Stock subject to the Award, in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

8.1 Types of Restricted Stock Awards Authorized. Restricted Stock Awards may be granted in the form of either a Restricted Stock Bonus or a Restricted Stock Purchase Right. Restricted Stock Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either the grant of or satisfaction of Vesting Conditions applicable to a Restricted Stock Award is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 10.3 through 10.5(a).

8.2 Purchase Price. The purchase price for shares of Stock issuable under each Restricted Stock Purchase Right shall be established by the Committee in its discretion. No monetary payment (other than applicable tax withholding) shall be required as a condition of receiving shares of Stock pursuant to a Restricted Stock Bonus, the consideration for which shall be services actually rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, if required by applicable state corporate law, the Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than the par value of the shares of Stock subject to a Restricted Stock Award.

8.3 Purchase Period. A Restricted Stock Purchase Right shall be exercisable within a period established by the Committee, which shall in no event exceed thirty (30) days from the effective date of the grant of the Restricted Stock Purchase Right.

8.4 Payment of Purchase Price. Except as otherwise provided below, payment of the purchase price for the number of shares of Stock being purchased pursuant to any Restricted Stock Purchase Right shall be made (a) in cash, by check or in cash equivalent, (b) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (c) by any combination thereof.

8.5 Vesting and Restrictions on Transfer. Shares issued pursuant to any Restricted Stock Award may (but need not) be made subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. During any period in which shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Conditions, such shares may not be sold, exchanged, transferred, pledged, assigned or otherwise disposed of other than pursuant to an Ownership Change Event or as provided in Section 8.8. The Committee, in its discretion, may provide in any Award Agreement evidencing a Restricted Stock Award that, if the satisfaction of Vesting Conditions with respect to any shares subject to such Restricted Stock Award would otherwise occur on a day on which the sale of such shares would violate the provisions of the Trading Compliance Policy, then satisfaction of the Vesting Conditions automatically shall be determined on the next trading day on which the sale of such shares would not violate the Trading Compliance Policy. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

8.6 Voting Rights; Dividends and Distributions. Except as provided in this Section, Section 8.5 and any Award Agreement, during any period in which shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Conditions, the Participant shall have all of the rights of a shareholder of the Company holding shares of Stock, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares; provided, however, that if so determined by the Committee and provided by the Award Agreement, such dividends and distributions shall be subject to the same Vesting Conditions as the shares subject to the Restricted Stock Award with respect to which such dividends or distributions were paid, and otherwise shall be paid no later than the end of the calendar year in which such dividends or distributions are paid to shareholders (or, if later, the 15th day of the third month following the date such dividends or distributions are paid to shareholders). In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.4, any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant is entitled by reason of the Participant’s Restricted Stock Award shall be immediately subject to the

same Vesting Conditions as the shares subject to the Restricted Stock Award with respect to which such dividends or distributions were paid or adjustments were made.

8.7 Effect of Termination of Service. Unless otherwise provided by the Committee in the Award Agreement evidencing a Restricted Stock Award, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then (a) the Company shall have the option to repurchase for the purchase price paid by the Participant any shares acquired by the Participant pursuant to a Restricted Stock Purchase Right which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service and (b) the Participant shall forfeit to the Company any shares acquired by the Participant pursuant to a Restricted Stock Bonus which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company.

8.8 Nontransferability of Restricted Stock Award Rights. Rights to acquire shares of Stock pursuant to a Restricted Stock Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or the laws of descent and distribution. All rights with respect to a Restricted Stock Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

9. Restricted Stock Units .

Restricted Stock Unit Awards shall be evidenced by Award Agreements specifying the number of Restricted Stock Units subject to the Award, in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

9.1 Grant of Restricted Stock Unit Awards. Restricted Stock Unit Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either the grant of a Restricted Stock Unit Award or the Vesting Conditions with respect to such Award is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 10.3 through 10.5(a).

9.2 Purchase Price. No monetary payment (other than applicable tax withholding, if any) shall be required as a condition of receiving a Restricted Stock Unit Award, the consideration for which shall be services actually rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, if required by applicable state corporate law, the Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than the par value of the shares of Stock issued upon settlement of the Restricted Stock Unit Award.

9.3 Vesting. Restricted Stock Unit Awards may (but need not) be made subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. The Committee, in its discretion, may provide in any Award Agreement evidencing a Restricted Stock Unit Award that, if the satisfaction of Vesting Conditions with respect to any shares subject to the Award would otherwise occur on a day on which the sale of such shares would violate the provisions of the Trading Compliance Policy, then the satisfaction of the Vesting Conditions automatically shall be determined on the first to occur of (a) the next trading day on which the sale of such shares would not violate the Trading Compliance Policy or (b) the last day of the calendar year in which the original vesting date occurred.

9.4 Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Restricted Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing

any Restricted Stock Unit Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date such Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date the Award is settled or the date on which it is terminated. Dividend Equivalent Rights, if any, shall be paid by crediting the Participant with a cash amount or with additional whole Restricted Stock Units as of the date of payment of such cash dividends on Stock, as determined by the Committee. The number of additional Restricted Stock Units (rounded to the nearest whole number), if any, to be credited shall be determined by dividing (a) the amount of cash dividends paid on the dividend payment date with respect to the number of shares of Stock represented by the Restricted Stock Units previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. If so determined by the Committee and provided by the Award Agreement, such cash amount or additional Restricted Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time as the Restricted Stock Units originally subject to the Restricted Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.4, appropriate adjustments shall be made in the Participant’s Restricted Stock Unit Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Vesting Conditions as are applicable to the Award

9.5 Effect of Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement evidencing a Restricted Stock Unit Award, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then the Participant shall forfeit to the Company any Restricted Stock Units pursuant to the Award which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service.

9.6 Settlement of Restricted Stock Unit Awards. The Company shall issue to a Participant on the date on which Restricted Stock Units subject to the Participant’s Restricted Stock Unit Award vest or on such other date determined by the Committee in compliance with Section 409A, if applicable, and set forth in the Award Agreement one (1) share of Stock (and/or any other new, substituted or additional securities or other property pursuant to an adjustment described in Section 9.4) for each Restricted Stock Unit then becoming vested or otherwise to be settled on such date, subject to the withholding of applicable taxes, if any. If permitted by the Committee, the Participant may elect, consistent with the requirements of Section 409A, to defer receipt of all or any portion of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section, and such deferred issuance date(s) and amount(s) elected by the Participant shall be set forth in the Award Agreement. Notwithstanding the foregoing, the Committee, in its discretion, may provide for settlement of any Restricted Stock Unit Award by payment to the Participant in cash of an amount equal to the Fair Market Value on the payment date of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section.

9.7 Nontransferability of Restricted Stock Unit Awards. The right to receive shares pursuant to a Restricted Stock Unit Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Restricted Stock Unit Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

10. Performance Awards .

Performance Awards shall be evidenced by Award Agreements in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

10.1 Types of Performance Awards Authorized. Performance Awards may be granted in the form of either Performance Shares or Performance Units. Each Award Agreement evidencing a Performance Award shall specify the number of Performance Shares or Performance Units subject thereto, the Performance Award Formula, the Performance Goal(s) and Performance Period applicable to the Award, and the other terms, conditions and restrictions of the Award.

10.2 Initial Value of Performance Shares and Performance Units. Unless otherwise provided by the Committee in granting a Performance Award, each Performance Share shall have an initial monetary value equal to the Fair Market Value of one (1) share of Stock, subject to adjustment as provided in Section 4.4, on the effective date of grant of the Performance Share, and each Performance Unit shall have an initial monetary value established by the Committee at the time of grant. The final value payable to the Participant in settlement of a Performance Award determined on the basis of the applicable Performance Award Formula will depend on the extent to which Performance Goals established by the Committee are attained within the applicable Performance Period established by the Committee.

10.3 Establishment of Performance Period, Performance Goals and Performance Award Formula. In granting each Performance Award, the Committee shall establish in writing the applicable Performance Period, Performance Award Formula and one or more Performance Goals which, when measured at the end of the Performance Period, shall determine on the basis of the Performance Award Formula the final value of the Performance Award to be paid to the Participant. Unless otherwise permitted in compliance with the requirements under Section 162(m) with respect to each Performance Award intended to result in the payment of Performance-Based Compensation, the Committee shall establish the Performance Goal(s) and Performance Award Formula applicable to each Performance Award no later than the earlier of (a) the date ninety (90) days after the commencement of the applicable Performance Period or (b) the date on which 25% of the Performance Period has elapsed, and, in any event, at a time when the outcome of the Performance Goals remains substantially uncertain. Once established, the Performance Goals and Performance Award Formula applicable to a Performance Award intended to result in the payment of Performance-Based Compensation to a Covered Employee shall not be changed during the Performance Period. The Company shall notify each Participant granted a Performance Award of the terms of such Award, including the Performance Period, Performance Goal(s) and Performance Award Formula.

10.4 Measurement of Performance Goals. Performance Goals shall be established by the Committee on the basis of targets to be attained ( “ Performance Targets ” ) with respect to one or more measures of business or financial performance (each, a “ Performance Measure ” ), subject to the following:

(a) Performance Measures. Performance Measures shall be calculated in accordance with the Company’s financial statements, or, if such measures are not reported in the Company’s financial statements, they shall be calculated in accordance with generally accepted accounting principles, a method used generally in the Company’s industry, or in accordance with a methodology established by the Committee prior to the grant of the Performance Award. As specified by the Committee, Performance Measures may be calculated with respect to the Company and each Subsidiary Corporation consolidated therewith for financial reporting purposes, one or more Subsidiary Corporations or such division or other business unit of any of them selected by the Committee. Unless otherwise determined by the Committee prior to the grant of the Performance Award, the Performance Measures applicable to the Performance Award shall be calculated prior to the accrual of expense for any Performance Award for the same Performance Period and excluding the effect (whether positive or negative) on the Performance Measures of any change in accounting standards or any extraordinary, unusual or nonrecurring item, as determined by the Committee, occurring after the establishment of the Performance Goals applicable to the Performance Award. Each such adjustment, if any, shall be made solely for the purpose of providing a consistent basis from period to period for the calculation of Performance Measures in order to prevent the dilution or enlargement of the Participant’s rights with respect to a Performance Award. Performance Measures may be based upon one or more of the following, as determined by the Committee:

(i) revenue;

(ii) sales;

(iii) expenses;

(iv) operating income;

(v) gross margin;

(vi) operating margin;

(vii) earnings before any one or more of: stock-based compensation expense, interest, taxes, depreciation and amortization;

(viii) pre-tax profit;

(ix) net operating income;

(x) net income;

(xi) economic value added;

(xii) free cash flow;

(xiii) operating cash flow;

(xiv) balance of cash, cash equivalents and marketable securities;

(xv) stock price;

(xvi) earnings per share;

(xvii) return on shareholder equity;

(xviii) return on capital;

(xix) return on assets;

(xx) return on investment;

(xxi) total shareholder return;

(xxii) employee satisfaction;

(xxiii) employee retention;

(xxiv) market share;

(xxv) customer satisfaction;

(xxvi) product development;

(xxvii) research and development expenses;

(xxviii) completion of an identified special project; and

(xxix) completion of a joint venture or other corporate transaction.

(b) Performance Targets. Performance Targets may include a minimum, maximum, target level and intermediate levels of performance, with the final value of a Performance Award determined under the applicable Performance Award Formula by the Performance Target level attained during the applicable Performance Period. A Performance Target may be stated as an absolute value, an increase or decrease in a value, or as a value determined relative to an index, budget or other standard selected by the Committee.

10.5 Settlement of Performance Awards.

(a) Determination of Final Value. As soon as practicable following the completion of the Performance Period applicable to a Performance Award, the Committee shall certify in writing the extent to which the applicable Performance Goals have been attained and the resulting final value of the Award earned by the Participant and to be paid upon its settlement in accordance with the applicable Performance Award Formula.

(b) Discretionary Adjustment of Award Formula. In its discretion, the Committee may, either at the time it grants a Performance Award or at any time thereafter, provide for the positive or negative adjustment of the Performance Award Formula applicable to a Performance Award granted to any Participant who is not a Covered Employee to reflect such Participant’s individual performance in his or her position with the Company or such other factors as the Committee may determine. If permitted under a Covered Employee’s Award Agreement, the Committee shall have the discretion, on the basis of such criteria as may be established by the Committee, to reduce some or all of the value of the Performance Award that would otherwise be paid to the

Covered Employee upon its settlement notwithstanding the attainment of any Performance Goal and the resulting value of the Performance Award determined in accordance with the Performance Award Formula. No such reduction may result in an increase in the amount payable upon settlement of another Participant’s Performance Award that is intended to result in Performance-Based Compensation.

(c) Effect of Leaves of Absence. Unless otherwise required by law or a Participant’s Award Agreement, payment of the final value, if any, of a Performance Award held by a Participant who has taken in excess of thirty (30) days in unpaid leaves of absence during a Performance Period shall be prorated on the basis of the number of days of the Participant’s Service during the Performance Period during which the Participant was not on an unpaid leave of absence.

(d) Notice to Participants. As soon as practicable following the Committee’s determination and certification in accordance with Sections 10.5(a) and (b), the Company shall notify each Participant of the determination of the Committee.

(e) Payment in Settlement of Performance Awards. As soon as practicable following the Committee’s determination and certification in accordance with Sections 10.5(a) and (b), but in any event within the Short-Term Deferral Period described in Section 15.1 (except as otherwise provided below or consistent with the requirements of Section 409A), payment shall be made to each eligible Participant (or such Participant’s legal representative or other person who acquired the right to receive such payment by reason of the Participant’s death) of the final value of the Participant’s Performance Award. Payment of such amount shall be made in cash, shares of Stock, or a combination thereof as determined by the Committee. Unless otherwise provided in the Award Agreement evidencing a Performance Award, payment shall be made in a lump sum. If permitted by the Committee, the Participant may elect, consistent with the requirements of Section 409A, to defer receipt of all or any portion of the payment to be made to the Participant pursuant to this Section, and such deferred payment date(s) elected by the Participant shall be set forth in the Award Agreement. If any payment is to be made on a deferred basis, the Committee may, but shall not be obligated to, provide for the payment during the deferral period of Dividend Equivalent Rights or interest.

(f) Provisions Applicable to Payment in Shares. If payment is to be made in shares of Stock, the number of such shares shall be determined by dividing the final value of the Performance Award by the Fair Market Value of a share of Stock determined by the method specified in the Award Agreement. Shares of Stock issued in payment of any Performance Award may be fully vested and freely transferable shares or may be shares of Stock subject to Vesting Conditions as provided in Section 8.5. Any shares subject to Vesting Conditions shall be evidenced by an appropriate Award Agreement and shall be subject to the provisions of Sections 8.5 through 8.8 above.

10.6 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Performance Share Awards until the date of the issuance of such shares, if any (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Performance Share Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date the Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date on which the Performance Shares are settled or the date on which they are forfeited. Such Dividend Equivalent Rights, if any, shall be credited to the Participant either in cash or in the form of additional whole Performance Shares as of the date of payment of such cash dividends on Stock, as determined by the Committee. The number of additional Performance Shares (rounded to the nearest whole number), if any, to be so credited shall be determined by dividing (a) the amount of cash dividends paid on the dividend payment date with respect to the number of shares of Stock represented by the Performance Shares previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Dividend Equivalent Rights, if any, shall be accumulated and paid to the extent that the related Performance Shares become nonforfeitable. Settlement of Dividend Equivalent Rights may be made in cash, shares of Stock, or a combination thereof as determined by the Committee, and may be paid on the same basis as settlement of the related Performance Share as provided in Section 10.5. Dividend Equivalent Rights shall not be paid with respect to Performance Units. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in

Section 4.4, appropriate adjustments shall be made in the Participant’s Performance Share Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Performance Share Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Performance Goals as are applicable to the Award.

10.7 Effect of Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement evidencing a Performance Award, the effect of a Participant’s termination of Service on the Performance Award shall be as follows:

(a) Death or Disability. If the Participant’s Service terminates because of the death or Disability of the Participant before the completion of the Performance Period applicable to the Performance Award, the final value of the Participant’s Performance Award shall be determined by the extent to which the applicable Performance Goals have been attained with respect to the entire Performance Period and shall be prorated based on the number of months of the Participant’s Service during the Performance Period. Payment shall be made following the end of the Performance Period in any manner permitted by Section 10.5.

(b) Other Termination of Service. If the Participant’s Service terminates for any reason except death or Disability before the completion of the Performance Period applicable to the Performance Award, such Award shall be forfeited in its entirety; provided, however, that in the event of an involuntary termination of the Participant’s Service, the Committee, in its discretion, may waive the automatic forfeiture of all or any portion of any such Award and determine the final value of the Performance Award in the manner provided by Section 10.7(a). Payment of any amount pursuant to this Section shall be made following the end of the Performance Period in any manner permitted by Section 10.5.

10.8 Nontransferability of Performance Awards. Prior to settlement in accordance with the provisions of the Plan, no Performance Award shall be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Performance Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

11. Cash-Based Awards and Other Stock-Based Awards .

Cash-Based Awards and Other Stock-Based Awards shall be evidenced by Award Agreements in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

11.1 Grant of Cash-Based Awards . Subject to the provisions of the Plan, the Committee, at any time and from time to time, may grant Cash-Based Awards to Participants in such amounts and upon such terms and conditions, including the achievement of performance criteria, as the Committee may determine.

11.2 Grant of Other Stock-Based Awards . The Committee may grant other types of equity-based or equity-related Awards not otherwise described by the terms of this Plan (including the grant or offer for sale of unrestricted securities, stock-equivalent units, stock appreciation units, securities or debentures convertible into common stock or other forms determined by the Committee) in such amounts and subject to such terms and conditions as the Committee shall determine. Other Stock-Based Awards may be made available as a form of payment in the settlement of other Awards or as payment in lieu of compensation to which a Participant is otherwise entitled. Other Stock-Based Awards may involve the transfer of actual shares of Stock to Participants, or payment in cash or otherwise of amounts based on the value of Stock and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.

11.3 Value of Cash-Based and Other Stock-Based Awards . Each Cash-Based Award shall specify a monetary payment amount or payment range as determined by the Committee. Each Other Stock-Based Award shall be expressed in terms of shares of Stock or units based on such shares of Stock, as determined by the Committee. The Committee may require the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be

established by the Committee and set forth in the Award Agreement evidencing such Award. If the Committee exercises its discretion to establish performance criteria, the final value of Cash-Based Awards or Other Stock-Based Awards that will be paid to the Participant will depend on the extent to which the performance criteria are met. The establishment of performance criteria with respect to the grant or vesting of any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based Compensation shall follow procedures substantially equivalent to those applicable to Performance Awards set forth in Section 10.

11.4 Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards . Payment or settlement, if any, with respect to a Cash-Based Award or an Other Stock-Based Award shall be made in accordance with the terms of the Award, in cash, shares of Stock or other securities or any combination thereof as the Committee determines. The determination and certification of the final value with respect to any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based Compensation shall comply with the requirements applicable to Performance Awards set forth in Section 10. To the extent applicable, payment or settlement with respect to each Cash-Based Award and Other Stock-Based Award shall be made in compliance with the requirements of Section 409A.

11.5 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Other Stock-Based Awards until the date of the issuance of such shares of Stock (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), if any, in settlement of such Award. However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Other Stock-Based Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date such Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date the Award is settled or the date on which it is terminated. Such Dividend Equivalent Rights, if any, shall be paid in accordance with the provisions set forth in Section 9.4. Dividend Equivalent Rights shall not be granted with respect to Cash-Based Awards. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.4, appropriate adjustments shall be made in the Participant’s Other Stock-Based Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of such Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Vesting Conditions and performance criteria, if any, as are applicable to the Award.

11.6 Effect of Termination of Service . Each Award Agreement evidencing a Cash-Based Award or Other Stock-Based Award shall set forth the extent to which the Participant shall have the right to retain such Award following termination of the Participant’s Service. Such provisions shall be determined in the discretion of the Committee, need not be uniform among all Cash-Based Awards or Other Stock-Based Awards, and may reflect distinctions based on the reasons for termination, subject to the requirements of Section 409A, if applicable.

11.7 Nontransferability of Cash-Based Awards and Other Stock-Based Awards. Prior to the payment or settlement of a Cash-Based Award or Other Stock-Based Award, the Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. The Committee may impose such additional restrictions on any shares of Stock issued in settlement of Cash-Based Awards and Other Stock-Based Awards as it may deem advisable, including, without limitation, minimum holding period requirements, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such shares of Stock are then listed and/or traded, or under any state securities laws or foreign law applicable to such shares of Stock.

12. Standard Forms of Award Agreement .

12.1 Award Agreements . Each Award shall comply with and be subject to the terms and conditions set forth in the appropriate form of Award Agreement approved by the Committee and as amended from time to time. No Award or purported Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement, which execution may be evidenced by electronic means.

12.2 Authority to Vary Terms . The Committee shall have the authority from time to time to vary the terms of any standard form of Award Agreement either in connection with the grant or amendment of an individual Award or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Award Agreement are not inconsistent with the terms of the Plan.

13. Change in Control .

13.1 Effect of Change in Control on Awards. Subject to the requirements and limitations of Section 409A, if applicable, the Committee may provide for any one or more of the following:

(a) Accelerated Vesting. In its discretion, the Committee may provide in the grant of any Award or at any other time may take such action as it deems appropriate to provide for acceleration of the exercisability, vesting and/or settlement in connection with a Change in Control of each or any outstanding Award or portion thereof and shares acquired pursuant thereto upon such conditions, including termination of the Participant’s Service prior to, upon, or following the Change in Control, and to such extent as the Committee determines.

(b) Assumption, Continuation or Substitution. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the “ Acquiror ” ), may, without the consent of any Participant, assume or continue the Company’s rights and obligations under each or any Award or portion thereof outstanding immediately prior to the Change in Control or substitute for each or any such outstanding Award or portion thereof a substantially equivalent award with respect to the Acquiror’s stock, as applicable. For purposes of this Section, if so determined by the Committee in its discretion, an Award denominated in shares of Stock shall be deemed assumed if, following the Change in Control, the Award confers the right to receive, subject to the terms and conditions of the Plan and the applicable Award Agreement, for each share of Stock subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, other securities or property or a combination thereof) to which a holder of a share of Stock on the effective date of the Change in Control was entitled (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Stock); provided, however, that if such consideration is not solely common stock of the Acquiror, the Committee may, with the consent of the Acquiror, provide for the consideration to be received upon the exercise or settlement of the Award, for each share of Stock subject to the Award, to consist solely of common stock of the Acquiror equal in Fair Market Value to the per share consideration received by holders of Stock pursuant to the Change in Control. Any Award or portion thereof which is neither assumed or continued by the Acquiror in connection with the Change in Control nor exercised or settled as of the time of consummation of the Change in Control shall terminate and cease to be outstanding effective as of the time of consummation of the Change in Control.

(c) Cash-Out of Outstanding Stock-Based Awards. The Committee may, in its discretion and without the consent of any Participant, determine that, upon the occurrence of a Change in Control, each or any Award denominated in shares of Stock or portion thereof outstanding immediately prior to the Change in Control and not previously exercised or settled shall be canceled in exchange for a payment with respect to each vested share (and each unvested share, if so determined by the Committee) of Stock subject to such canceled Award in (i) cash, (ii) stock of the 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 Stock in the Change in Control, reduced (but not below zero) by the exercise or purchase price per share, if any, under such Award. In the event such determination is made by the Committee, an Award having an exercise or purchase price per share equal to or greater than the Fair Market Value of the consideration to be paid per share of Stock in the Change in Control may be canceled without payment

of consideration to the holder thereof. Payment pursuant to this Section (reduced by applicable withholding taxes, if any) shall be made to Participants in respect of the vested portions of their canceled Awards as soon as practicable following the date of the Change in Control and in respect of the unvested portions of their canceled Awards in accordance with the vesting schedules applicable to such Awards.

13.2 Effect of Change in Control on Nonemployee Director Awards. Subject to the requirements and limitations of Section 409A, if applicable, including as provided by Section 15.4(f), in the event of a Change in Control, each outstanding Nonemployee Director Award shall become immediately exercisable and vested in full and, except to the extent assumed, continued or substituted for pursuant to Section 13.1(b), shall be settled effective immediately prior to the time of consummation of the Change in Control.

13.3 Federal Excise Tax Under Section 4999 of the Code.

(a) Excess Parachute Payment. If any acceleration of vesting pursuant to an Award and any other payment or benefit received or to be received by a Participant would subject the Participant to any excise tax pursuant to Section 4999 of the Code due to the characterization of such acceleration of vesting, payment or benefit as an “excess parachute payment” under Section 280G of the Code, then, provided such election would not subject the Participant to taxation under Section 409A, the Participant may elect to reduce the amount of any acceleration of vesting called for under the Award in order to avoid such characterization.

(b) Determination by Independent Accountants. To aid the Participant in making any election called for under Section 13.3(a), no later than the date of the occurrence of any event that might reasonably be anticipated to result in an “excess parachute payment” to the Participant as described in Section 13.3(a), the Company shall request a determination in writing by the professional firm engaged by the Company for general tax purposes, or, if the tax firm so engaged by the Company is serving as accountant or auditor for the Acquiror, the Company will appoint a nationally recognized tax firm to make the determinations required by this Section (the “ Tax Firm ”). As soon as practicable thereafter, the Tax Firm shall determine and report to the Company and the Participant the amount of such acceleration of vesting, payments and benefits which would produce the greatest after-tax benefit to the Participant. For the purposes of such determination, the Tax Firm may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Participant shall furnish to the Tax Firm such information and documents as the Tax Firm may reasonably request in order to make its required determination. The Company shall bear all fees and expenses the Tax Firm charge in connection with its services contemplated by this Section.

14. Compliance with Securities Law .

The grant of Awards and the issuance of shares of Stock pursuant to any Award shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities and the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless (a) a registration statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the shares issuable pursuant to the Award, or (b) in the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares under the Plan shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to issuance of any Stock, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

15. Compliance with Section 409A .

15.1 Awards Subject to Section 409A. The Company intends that Awards granted pursuant to the Plan shall either be exempt from or comply with Section 409A, and the Plan shall be so construed. The

provisions of this Section 15 shall apply to any Award or portion thereof that constitutes or provides for payment of Section 409A Deferred Compensation. Such Awards may include, without limitation:

(a) A Nonstatutory Stock Option or SAR that includes any feature for the deferral of compensation other than the deferral of recognition of income until the later of (i) the exercise or disposition of the Award or (ii) the time the stock acquired pursuant to the exercise of the Award first becomes substantially vested.

(b) Any Restricted Stock Unit Award, Performance Award, Cash-Based Award or Other Stock-Based Award that either (i) provides by its terms for settlement of all or any portion of the Award at a time or upon an event that will or may occur later than the end of the Short-Term Deferral Period (as defined below) or (ii) permits the Participant granted the Award to elect one or more dates or events upon which the Award will be settled after the end of the Short-Term Deferral Period.

Subject to the provisions of Section 409A, the term “ Short-Term Deferral Period ” means the 2½ month period ending on the later of (i) the 15th day of the third month following the end of the Participant’s taxable year in which the right to payment under the applicable portion of the Award is no longer subject to a substantial risk of forfeiture or (ii) the 15th day of the third month following the end of the Company’s taxable year in which the right to payment under the applicable portion of the Award is no longer subject to a substantial risk of forfeiture. For this purpose, the term “substantial risk of forfeiture” shall have the meaning provided by Section 409A.

15.2 Deferral and/or Distribution Elections. Except as otherwise permitted or required by Section 409A, the following rules shall apply to any compensation deferral and/or payment elections (each, an “ Election ”) that may be permitted or required by the Committee pursuant to an Award providing Section 409A Deferred Compensation:

(a) Elections must be in writing and specify the amount of the payment in settlement of an Award being deferred, as well as the time and form of payment as permitted by this Plan.

(b) Elections shall be made by the end of the Participant’s taxable year prior to the year in which services commence for which an Award may be granted to the Participant.

(c) Elections shall continue in effect until a written revocation or change in Election is received by the Company, except that a written revocation or change in Election must be received by the Company prior to the last day for making the Election determined in accordance with paragraph (b) above or as permitted by Section 15.3.

15.3 Subsequent Elections . Except as otherwise permitted or required by Section 409A, any Award providing Section 409A Deferred Compensation which permits a subsequent Election to delay the payment or change the form of payment in settlement of such Award shall comply with the following requirements:

(a) No subsequent Election may take effect until at least twelve (12) months after the date on which the subsequent Election is made.

(b) Each subsequent Election related to a payment in settlement of an Award not described in Section 15.4(a)(ii), 15.4(a)(iii) or 15.4(a)(vi) must result in a delay of the payment for a period of not less than five (5) years from the date on which such payment would otherwise have been made.

(c) No subsequent Election related to a payment pursuant to Section 15.4(a)(iv) shall be made less than twelve (12) months before the date on which such payment would otherwise have been made.

(d) Subsequent Elections shall continue in effect until a written revocation or change in the subsequent Election is received by the Company, except that a written revocation or change in a subsequent Election must be received by the Company prior to the last day for making the subsequent Election determined in accordance the preceding paragraphs of this Section 15.3.

15.4 Payment of Section 409A Deferred Compensation .

(a) Permissible Payments. Except as otherwise permitted or required by Section 409A, an Award providing Section 409A Deferred Compensation must provide for payment in settlement of the Award only upon one or more of the following:

(i) The Participant’s “separation from service” (as defined by Section 409A);

(ii) The Participant’s becoming “disabled” (as defined by Section 409A);

(iii) The Participant’s death;

(iv) A time or fixed schedule that is either (i) specified by the Committee upon the grant of an Award and set forth in the Award Agreement evidencing such Award or (ii) specified by the Participant in an Election complying with the requirements of Section 15.2 or 15.3, as applicable;

(v) A change in the ownership or effective control or the Company or in the ownership of a substantial portion of the assets of the Company determined in accordance with Section 409A; or

(vi) The occurrence of an “unforeseeable emergency” (as defined by Section 409A).

(b) Installment Payments . It is the intent of this Plan that any right of a Participant to receive installment payments (within the meaning of Section 409A) shall, for all purposes of Section 409A, be treated as a right to a series of separate payments.

(c) Required Delay in Payment to Specified Employee Pursuant to Separation from Service. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, except as otherwise permitted by Section 409A, no payment pursuant to Section 15.4(a)(i) in settlement of an Award providing for Section 409A Deferred Compensation may be made to a Participant who is a “specified employee” (as defined by Section 409A) as of the date of the Participant’s separation from service before the date (the “ Delayed Payment Date ” ) that is six (6) months after the date of such Participant’s separation from service, or, if earlier, the date of the Participant’s death. All such amounts that would, but for this paragraph, become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment Date.

(d) Payment Upon Disability. All distributions of Section 409A Deferred Compensation payable pursuant to Section 15.4(a)(ii) by reason of a Participant becoming disabled shall be paid in a lump sum or in periodic installments as established by the Participant’s Election. If the Participant has made no Election with respect to distributions of Section 409A Deferred Compensation upon becoming disabled, all such distributions shall be paid in a lump sum upon the determination that the Participant has become disabled.

(e) Payment Upon Death . If a Participant dies before complete distribution of amounts payable upon settlement of an Award subject to Section 409A, such undistributed amounts shall be distributed to his or her beneficiary under the distribution method for death established by the Participant’s Election upon receipt by the Committee of satisfactory notice and confirmation of the Participant’s death. If the Participant has made no Election with respect to distributions of Section 409A Deferred Compensation upon death, all such distributions shall be paid in a lump sum upon receipt by the Committee of satisfactory notice and confirmation of the Participant’s death.

(f) Payment Upon Change in Control. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, to the extent that any amount constituting Section 409A Deferred Compensation would become payable under this Plan by reason of a Change in Control, such amount shall become payable only if the event constituting a Change in Control would also constitute a change in ownership or effective control of the Company or a change in the ownership of a substantial portion of the assets of the Company within the meaning of Section 409A. Any Award which constitutes Section 409A Deferred Compensation and which would vest and otherwise become payable upon a Change in Control as a result of the failure of the Acquiror to assume, continue or substitute for such Award in accordance with Section 13.1(b) shall vest to the extent provided by such Award but shall be converted automatically at the effective time of such Change in Control into a right to receive, in cash on the date or dates such award would have been settled in accordance with its then existing settlement schedule (or as required by Section 15.4(c)), an amount or amounts equal in the aggregate to the intrinsic value of the Award at the time of the Change in Control.

(g) Payment Upon Unforeseeable Emergency. The Committee shall have the authority to provide in the Award Agreement evidencing any Award providing for Section 409A Deferred

Compensation for payment pursuant to Section 15.4(a)(vi) in settlement of all or a portion of such Award in the event that a Participant establishes, to the satisfaction of the Committee, the occurrence of an unforeseeable emergency. In such event, the amount(s) distributed with respect to such unforeseeable emergency cannot exceed the amounts reasonably necessary to satisfy the emergency need plus amounts necessary to pay taxes reasonably anticipated as a result of such distribution(s), after taking into account the extent to which such emergency need is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship) or by cessation of deferrals under the Award. All distributions with respect to an unforeseeable emergency shall be made in a lump sum upon the Committee’s determination that an unforeseeable emergency has occurred. The Committee’s decision with respect to whether an unforeseeable emergency has occurred and the manner in which, if at all, the payment in settlement of an Award shall be altered or modified, shall be final, conclusive, and not subject to approval or appeal.

(h) Prohibition of Acceleration of Payments. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, this Plan does not permit the acceleration of the time or schedule of any payment under an Award providing Section 409A Deferred Compensation, except as permitted by Section 409A.

(i) No Representation Regarding Section 409A Compliance . Notwithstanding any other provision of the Plan, the Company makes no representation that Awards shall be exempt from or comply with Section 409A. No Participating Company shall be liable for any tax, penalty or interest imposed on a Participant by Section 409A.

16. Tax Withholding .

16.1 Tax Withholding in General. The Company shall have the right to deduct from any and all payments made under the Plan, or to require the Participant, through payroll withholding, cash payment or otherwise, to make adequate provision for, the federal, state, local and foreign taxes (including social insurance), if any, required by law to be withheld by any Participating Company with respect to an Award or the shares acquired pursuant thereto. The Company shall have no obligation to deliver shares of Stock, to release shares of Stock from an escrow established pursuant to an Award Agreement, or to make any payment in cash under the Plan until the Participating Company Group’s tax withholding obligations have been satisfied by the Participant.

16.2 Withholding in or Directed Sale of Shares. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable to a Participant upon the exercise or settlement of an Award, or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the tax withholding obligations of any Participating Company. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates. The Company may require a Participant to direct a broker, upon the vesting, exercise or settlement of an Award, to sell a portion of the shares subject to the Award determined by the Company in its discretion to be sufficient to cover the tax withholding obligations of any Participating Company and to remit an amount equal to such tax withholding obligations to such Participating Company in cash.

17. Amendment, Suspension or Termination of Plan .

The Committee may amend, suspend or terminate the Plan at any time. However, without the approval of the Company’s shareholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Sections 4.2, 4.3, and 4.4), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company’s shareholders under any applicable law, regulation or rule, including the rules of any stock exchange or quotation system upon which the Stock may then be listed or quoted. No amendment, suspension or termination of the Plan shall affect any then outstanding Award unless expressly provided by the Committee. Except as provided by the next sentence, no amendment, suspension or termination of the Plan may have a materially adverse effect on any then outstanding Award without the consent of the Participant. Notwithstanding any other provision of the Plan or any Award Agreement to the contrary, the Committee may, in its sole and absolute discretion and without the consent of any Participant, amend the Plan or any Award Agreement, to

take effect retroactively or otherwise, as it deems necessary or advisable for the purpose of conforming the Plan or such Award Agreement to any present or future law, regulation or rule applicable to the Plan, including, but not limited to, Section 409A.

18. Miscellaneous Provisions .

18.1 Repurchase Rights . Shares issued under the Plan may be subject to one or more repurchase options, or other conditions and restrictions as determined by the Committee in its discretion at the time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

18.2 Forfeiture Events.

(a) The Committee may specify in an Award Agreement that the Participant’s rights, payments, and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to, termination of Service for Cause or any act by a Participant, whether before or after termination of Service, that would constitute Cause for termination of Service, or any accounting restatement due to material noncompliance of the Company with any financial reporting requirements of securities laws as a result of which, and to the extent that, such reduction, cancellation, forfeiture, or recoupment is required by applicable securities laws.

(b) If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, any Participant who knowingly or through gross negligence engaged in the misconduct, or who knowingly or through gross negligence failed to prevent the misconduct, and any Participant who is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002, shall reimburse the Company for (i) the amount of any payment in settlement of an Award received by such Participant during the twelve- (12-) month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever first occurred) of the financial document embodying such financial reporting requirement, and (ii) any profits realized by such Participant from the sale of securities of the Company during such twelve- (12-) month period.

18.3 Provision of Information. Each Participant shall be given access to information concerning the Company equivalent to that information generally made available to the Company’s common shareholders.

18.4 Rights as Employee, Consultant or Director. No person, even though eligible pursuant to Section 5, shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. Nothing in the Plan or any Award granted under the Plan shall confer on any Participant a right to remain an Employee, Consultant or Director or interfere with or limit in any way any right of a Participating Company to terminate the Participant’s Service at any time. To the extent that an Employee of a Participating Company other than the Company receives an Award under the Plan, that Award shall in no event be understood or interpreted to mean that the Company is the Employee’s employer or that the Employee has an employment relationship with the Company.

18.5 Rights as a Shareholder. A Participant shall have no rights as a shareholder with respect to any shares covered by an Award until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 4.4 or another provision of the Plan.

18.6 Delivery of Title to Shares. Subject to any governing rules or regulations, the Company shall issue or cause to be issued the shares of Stock acquired pursuant to an Award and shall deliver such shares to or for the benefit of the Participant by means of one or more of the following: (a) by delivering to the Participant evidence of book entry shares of Stock credited to the account of the Participant, (b) by depositing such shares of Stock for the benefit of the Participant with any broker with which the Participant has an account relationship, or (c) by delivering such shares of Stock to the Participant in certificate form.

18.7 Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise or settlement of any Award.

18.8 Retirement and Welfare Plans . Neither Awards made under this Plan nor shares of Stock or cash paid pursuant to such Awards may be included as “compensation” for purposes of computing the benefits payable to any Participant under any Participating Company’s retirement plans (both qualified and non-qualified) or welfare benefit plans unless such other plan expressly provides that such compensation shall be taken into account in computing a Participant’s benefit.

18.9 Beneficiary Designation. Subject to local laws and procedures, each Participant may file with the Company a written designation of a beneficiary who is to receive any benefit under the Plan to which the Participant is entitled in the event of such Participant’s death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. If a married Participant designates a beneficiary other than the Participant’s spouse, the effectiveness of such designation may be subject to the consent of the Participant’s spouse. If a Participant dies without an effective designation of a beneficiary who is living at the time of the Participant’s death, the Company will pay any remaining unpaid benefits to the Participant’s legal representative.

18.10 Severability . If any one or more of the provisions (or any part thereof) of this Plan shall be held invalid, illegal or unenforceable in any respect, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions (or any part thereof) of the Plan shall not in any way be affected or impaired thereby.

18.11 No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (a) limit, impair, or otherwise affect the Company’s or another Participating Company’s right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or (b) limit the right or power of the Company or another Participating Company to take any action which such entity deems to be necessary or appropriate.

18.12 Unfunded Obligation. Participants shall have the status of general unsecured creditors of the Company. Any amounts payable to Participants pursuant to the Plan shall be considered unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974. No Participating Company shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between the Committee or any Participating Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant’s creditors in any assets of any Participating Company. The Participants shall have no claim against any Participating Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the Plan.

18.13 Choice of Law. Except to the extent governed by applicable federal law, the validity, interpretation, construction and performance of the Plan and each Award Agreement shall be governed by the laws of the State of California, without regard to its conflict of law rules.

IN WITNESS WHEREOF , the undersigned Secretary of the Company certifies that the foregoing sets forth the PICO Holdings, Inc. 2014 Equity Incentive Plan as duly adopted by the Board on February 27, 2014.





	/s/ James F. Mosier
	James F. Mosier, Secretary

PICO Holdings, Inc.

Stock Option Grant Notice

2014 Equity Incentive Plan

PICO Holdings, Inc. (the “ Company ”), pursuant to its 2014 Equity Incentive Plan (the “ Plan ”), hereby grants to Optionholder an option to purchase the number of shares of the Company’s Stock as specified and on the terms set forth below (the “ Option ”). This Option is subject to all of the terms and conditions as set forth in this Stock Option Grant Notice (the “ Grant Notice ”), in the Option Agreement (the “ Agreement ” and, together with this Grant Notice, the “ Award Agreement ”), the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Capitalized terms not explicitly defined herein but defined in the Plan or the Award Agreement will have the same definitions as in the Plan or the Award Agreement, as applicable. If there is any conflict between the terms in this Grant Notice, the Agreement or the Plan, the terms of the Plan will control.



Optionholder:	[Name]
Date of Grant:	[Date]
Vesting Commencement Date:	[Date]
Number of Shares Subject to Option:	[____]
Exercise Price (Per Share):	$[___]
Total Exercise Price:	$[___]
Expiration Date:	[Date]

Type of Grant: Incentive Stock Option ¹ Nonstatutory Stock Option


Vesting Conditions :	[ _________________] subject to the potential vesting acceleration described in Section 1 of the Agreement.

Exercise Conditions : [ _________________]

Payment: By one or a combination of the following items (described in the Agreement):


X	By cash, check, bank draft or money order payable to the Company


X	Pursuant to a Cashless Exercise (as defined in the Agreement) if the shares are publicly traded


X	By a Stock Tender Exercise (as defined in the Agreement) if the shares are publicly traded


X	If and only to the extent this option is a Nonstatutory Stock Option, and subject to the Company’s consent at the time of exercise, by a Net Exercise (as defined in the Agreement) arrangement

Additional Terms/Acknowledgements: By their signatures below, the Company and the Optionholder agree that the Option is governed by this Grant Notice and by the provisions of the Agreement and the Plan, both of which are attached to and made a part of this document. The Optionholder acknowledges receipt of copies of the Agreement, the Plan, and the stock plan prospectus for this Plan and represents that the Participant has read and is familiar with their provisions. As of the Date of Grant set forth above, this Grant Notice, the Agreement and the Plan set forth the entire understanding between Optionholder and the Company and any Participating Company regarding the Option and supersedes all prior oral and written agreements, promises and/or representations on that subject, with the exception of (i) stock options or other stock awards previously granted and delivered to Optionholder, (ii) any compensation recovery policy maintained by the Company or any applicable Participating Company or otherwise required by applicable law and (iii) any written employment or severance or change in control (or similar) arrangement between the Optionholder and the Company or any Participating Company that would provide for vesting acceleration of this Option upon the terms and conditions set forth therein.

¹ If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option.

The Optionholder hereby accepts the Option subject to all of the terms and conditions of this Notice, the Agreement and the Plan. The Optionholder consents to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or any other Participating Company or another third party designated by the Company or any other Participating Company.



PICO Holdings Inc. By: Signature Title: Date:	Optionholder: By: Signature Title: Date:

Attachments : Option Agreement, 2014 Equity Incentive Plan and Notice of Exercise

Attachment

Agreement

Attachment II

2014 Equity Incentive Plan

Attachment III

Notice of Exercise

PICO Holdings, Inc.

2014 Equity Incentive Plan Name

Option Agreement

(Incentive Stock Option or Nonstatutory Stock Option)

Pursuant to your Stock Option Grant Notice (“ Grant Notice ”) and this Option Agreement (the “ Agreement ”, and together with the Grant Notice, the “ Award Agreement ”) and in consideration of your services, PICO Holdings, Inc. (the “ Company ”) has granted you an option (the “ Option ”) under its 2014 Equity Incentive Plan (the “ Plan ”) to purchase the number of shares of the Company’s Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Your Option is granted to you effective as of the date of grant set forth in the Grant Notice (the “ Date of Grant ”). Capitalized terms not explicitly defined in this Agreement or in the Grant Notice but defined in the Plan will have the same definitions as in the Plan.

The details of your Option, in addition to those set forth in the Grant Notice and the Plan, are as follows:

1. Vesting.

(a) General Vesting . Subject to the provisions contained herein, your Option will vest, if at all, in accordance with the Vesting Conditions provided in the Grant Notice and the potential vesting acceleration provisions of this Section 1. Vesting will cease upon the termination of your Service.

(b) Effect of a Change in Control. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the “ Acquiror ” ), may, without your consent or the consent of any Participant, assume or continue the Company’s rights and obligations under your Option or portion thereof outstanding immediately prior to the Change in Control or substitute for your outstanding Option or portion thereof a substantially equivalent award with respect to the Acquiror’s stock, as applicable so long as you are not adversely affected due to any such substitution. For purposes of this Section, your Option shall be deemed assumed if, following the Change in Control, your Option confers the right to receive, subject to the terms and conditions of the Plan and this Award Agreement, for each share of Stock subject to your Option immediately prior to the Change in Control, the consideration (whether stock, cash, other securities or property or a combination thereof) to which a holder of a share of Stock on the effective date of the Change in Control was entitled (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Stock); provided, however, that if such consideration is not solely common stock of the Acquiror, the Committee may, with the consent of the Acquiror, provide for the consideration to be received upon the exercise or settlement of your Option, for each share of Stock subject to your Option, to consist solely of common stock of the Acquiror equal in Fair Market Value to the per share consideration received by holders of Stock pursuant to the Change in Control. If your Option or any portion of your Option is neither assumed, continued or substituted for by the Acquiror in connection with the Change in Control nor exercised or settled as of the time of consummation of the Change in Control, and provided that you are providing continued Services through the date immediately prior to the Change in Control, your Option or portion thereof, as applicable, shall become vested in full immediately prior to, and contingent upon, the effective time of the Change in Control.

(c) Acceleration of Vesting Upon a Termination Without Cause . If your Service terminates at any time as a result of (1) your termination by the Company or Participating Company, as applicable, without Cause (excluding your death or Disability) or (2) your Resignation for Good Reason (as defined below), then effective as of the date of such termination of Service, the vesting of your Option shall accelerate in full.

(i) “ Resignation for Good Reason ” means the voluntary resignation from employment with the Company within a period of 180 days after the initial occurrence, without your express written consent, of any of the following conditions (each, a “ Good Reason ”) which remains in effect for thirty (30) days after your delivery of written notice of the occurrence of such condition(s) to the Board within sixty (60) days following your knowledge of the initial occurrence of such condition(s): (i) a material diminution in your authority, duties or responsibilities; (ii) a material reduction in your base salary; (iii) a material reduction in the health and welfare insurance, retirement or other benefits available to you as of the Grant Date (except for reductions in such benefits applicable to senior executive employees of the Company generally) and provided that such material reduction shall only be deemed “Good Reason” if it constitutes a material reduction in your base compensation; (iv) the relocation of you to a facility or a location more than fifty (50) miles from La Jolla, California; or (v) the failure of the Company or Acquiror to honor any material term of the employment, severance or other similar agreement under which you provide Services.

2. Number of Shares and Exercise Price. The number of shares of Stock subject to your Option and your exercise price per share in your Grant Notice will be adjusted for any changes in Stock effected without receipt of consideration by the Company, as provided in Section 4.4 of the Plan.

3. Exercise Restriction for Non-Exempt Employees. If you are an Employee eligible for overtime compensation under the Fair Labor Standards Act of 1938, as amended (that is, a “ Non-Exempt Employee ”), and except as otherwise provided in the Plan, you may not exercise your Option until you have completed at least six (6) months of Service measured from the Date of Grant, even if you have already been an employee for more than six (6) months. Consistent with the provisions of the Worker Economic Opportunity Act, you may exercise your Option as to any vested portion prior to such six (6) month anniversary in the case of (i) your death or disability, (ii) a Change in Control or (iii) your termination of Continuous Service on your “retirement” (as defined in the Company’s benefit plans) or otherwise as permitted by the Worker Economic Opportunity Act.

4. Exercise Conditions. As set forth in your Grant Notice and subject to the provisions of your Option, you may elect at any time that is during the term of your Option, to exercise all or part of your Option if the applicable vesting and exercisability conditions have been satisfied.

5. Method of Payment. You must pay the full amount of the exercise price for the shares you wish to exercise. You may pay the exercise price in cash or by check, bank draft or money order payable to the Company or in any other manner permitted by your Grant Notice, which may include one or more of the following

(a) Provided that at the time of exercise the Stock is publicly traded, pursuant to a Cashless Exercise program described in Section 6.3 of the Plan. This manner of payment is also known as a “broker-assisted exercise”, “same day sale”, or “sell to cover”.

(b) Provided that at the time of exercise the Stock is publicly traded, by a Stock Tender Exercise as described in Section 6.3 of the Plan.

(c) If this Option is a Nonstatutory Stock Option, subject to the consent of the Company at the time of exercise, by a Net Exercise arrangement as described in Section 6.3 of the Plan.

6. Whole Shares. You may exercise your Option only for whole shares of Stock.

7. Securities Law Compliance. In no event may you exercise your Option unless the shares of Stock issuable upon exercise are then registered under the Securities Act or, if not registered, the Company has determined that your exercise and the issuance of the shares would be exempt from the registration requirements of the Securities Act. The exercise of your Option also must comply with all other applicable laws and regulations governing your Option, and you may not exercise your Option if the Company determines that such exercise would not be in material compliance with such laws and regulations (including any restrictions on exercise required for compliance with Treas. Reg. 1.401(k)-1(d)(3), if applicable).

8. Term. You may not exercise your Option before the Date of Grant or after the expiration of your Option’s term. Notwithstanding the provisions of Section 6.4 of the Plan, the term of your Option expires upon the earliest of the following:

(a) twelve (12) months after the termination of your Service as a result of (1) your termination by the Company or Participating Company, as applicable, without Cause (excluding your death or Disability) or (2) your Resignation for Good Reason;

(b) twelve (12) months after the termination of your Service due to your Disability (except as otherwise provided in Section 8(c) below);

(c) eighteen (18) months after your death if you die either during your Service or within three (3) months after your Service terminates for any reason;

(d) three (3) months after the termination of your Service for any reason other than as provided in Section 8(a) through 8(c); provided, however, that if during any part of such three (3) month period your Option is not exercisable solely because of the condition set forth in the section above relating to “Securities Law Compliance,” your Option will not expire until the earlier of the Expiration Date or until it has been exercisable for an aggregate period of thirty (30) days after the date such exercise first would no longer be prevented because of the condition set forth in the section above relating to “Securities Law Compliance”; provided further, if during any part of such three (3) month period, the sale of any Stock received upon exercise of your Option would violate the Company’s insider trading policy, then your Option will not expire until the earlier of the Expiration Date or until it has been exercisable for an aggregate period of thirty (30) days after the date such exercise first would no longer be in violation of the Company’s insider trading policy. Notwithstanding the foregoing, if (i) you are a Non-Exempt Employee, (ii) your Service terminates within six (6) months after the Date of Grant, and (iii) you have vested in a portion of your Option at the time of your termination of Service, your Option will not expire until the earlier of (x) the later of (A) the date that is seven (7) months after the Date of Grant, and (B) the date that is three (3) months after the termination of your Service, and (y) the Expiration Date;

(e) the Expiration Date indicated in your Grant Notice; or

(f) the day before the tenth (10th) anniversary of the Date of Grant.

If your Option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an Incentive Stock Option, the Code requires that at all times beginning on the Date of Grant

and ending on the day three (3) months before the date of your Option’s exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extended exercisability of your Option under certain circumstances for your benefit but cannot guarantee that your Option will necessarily be treated as an Incentive Stock Option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your Option more than three (3) months after the date your employment with the Company or an Affiliate terminates.

9. Exercise.

(a) You may exercise the vested and exercisable portion of your Option during its term by (i) delivering a Notice of Exercise (in a form designated by the Company) or completing such other documents and/or procedures designated by the Company for exercise and (ii) paying the exercise price and any applicable withholding taxes to the Company’s Secretary, stock plan administrator, or such other person as the Company may designate, together with such additional documents as the Company may then require.

(b) By exercising your Option you agree that, as a condition to any exercise of your Option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (i) the exercise of your Option, (ii) the lapse of any substantial risk of forfeiture to which the shares of Stock are subject at the time of exercise, or (iii) the disposition of shares of Stock acquired upon such exercise.

(c) If your Option is an Incentive Stock Option, by exercising your Option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Stock issued upon exercise of your Option that occurs within two (2) years after the Date of Grant or within one (1) year after such shares of Stock are transferred upon exercise of your Option.

10. Transferability. Except as otherwise provided in this Section 10, your Option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you.

(a) Certain Trusts. Upon receiving written permission from the Committee or its duly authorized designee, you may transfer your Option to a trust if you are considered to be the sole beneficial owner (determined under Section 671 of the Code and applicable state law) while the option is held in the trust. You and the trustee must enter into transfer and other agreements required by the Company.

(b) Domestic Relations Orders. To the extent your Option is a Nonstatutory Stock Option, upon receiving written permission from the Committee or its duly authorized designee, and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer your Option pursuant to the terms of a domestic relations order, official marital settlement agreement or other divorce or separation instrument as permitted by Treasury Regulation 1.421-1(b)(2) that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the proposed terms of any division of this Option with the Company prior to finalizing the domestic relations order or marital settlement agreement to help ensure the required information is contained within the domestic relations order or marital settlement agreement. If this Option is an Incentive Stock Option, this Option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.

(c) Beneficiary Designation. Upon receiving written permission from the Committee or its duly authorized designee, you may, by delivering written notice to the Company, in a form approved

by the Company and any broker designated by the Company to handle option exercises, designate a third party who, on your death, will thereafter be entitled to exercise this Option and receive the Stock or other consideration resulting from such exercise. In the absence of such a designation, your executor or administrator of your estate will be entitled to exercise this Option and receive, on behalf of your estate, the Stock or other consideration resulting from such exercise.

11. Option not a Service Contract. Your Option is not an employment or service contract, and nothing in your Option will be deemed to create in any way whatsoever any obligation on your part to continue in the employ of any Participating Company, or of any Participating Company to continue your employment. In addition, nothing in your Option will obligate any Participating Company, their respective stockholders, boards of directors, officers or employees to continue any relationship that you might have as a Director or Consultant for any Participating Company.

12. Withholding Obligations.

(a) At the time you exercise your Option, in whole or in part, and at any time thereafter as requested by the Company or any applicable Participating Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a “same day sale” pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of any applicable Participating Company which arise in connection with the exercise of your Option.

(b) If this Option is a Nonstatutory Stock Option, then upon your request and subject to approval by the Company, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Stock otherwise issuable to you upon the exercise of your Option a number of whole shares of Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid classification of your Option as a liability for financial accounting purposes). If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your Option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your Option. Notwithstanding the filing of such election, shares of Stock shall be withheld solely from fully vested shares of Stock determined as of the date of exercise of your Option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility.

(c) You may not exercise your Option unless the tax withholding obligations of the Company and/or any Participating Company are satisfied. Accordingly, you may not be able to exercise your Option when desired even though your Option is vested and exercisable, and the Company will have no obligation to issue a certificate for such shares of Stock or release such shares of Stock from any escrow provided for herein, if applicable, unless such obligations are satisfied.

13. Tax Consequences . You hereby agree that neither Company nor any Participating Company has any duty to design or administer the Plan or its other compensation programs in a manner that minimizes your tax liabilities. You will not make any claim against any Participating Company, or any of its officers, directors, employees or affiliates related to tax liabilities arising from your Option or your other compensation.

In particular, you acknowledge that this Option is exempt from Section 409A of the Code only if the exercise price per share specified in the Grant Notice is at least equal to the “fair market value” per share of the Stock on the Date of Grant and there is no other impermissible deferral of compensation associated with your Option.

14. Notices. Any notices provided for in this Award Agreement or the Plan will be given in writing (including electronically) and will be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. Notwithstanding the foregoing, the Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan and this Award by electronic means or to request your consent to participate in the Plan by electronic means. By accepting this Option, you consent to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

15. Governing Plan Document. Your Option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In addition, your Option will be subject to recoupment in accordance with any clawback policy that the Company has adopted or any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to resign for “good reason” or “constructive termination” (or similar term) under any plan of or agreement with the Company or any Participating Company. Except as expressly provided in this Award Agreement, in the event of any conflict between the provisions of your Option and those of the Plan, the provisions of the Plan will control.

16. Other Documents. You hereby acknowledge receipt of and the right to receive a document providing the information required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt of the Trading Compliance Policy in effect from time to time.

17. Effect on Other Employee Benefit Plans. The value of your Option will not be included as compensation, earnings, salaries, or other similar terms used when calculating employee benefits under any employee benefit plan sponsored by the Company or any Participating Company, except as such plan otherwise expressly provides. The Company and each Participating Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Participating Company’s employee benefit plans.

18. Voting Rights. You will not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant to this Option until such shares are issued to you. Upon such issuance, you will obtain full voting and other rights as a stockholder of the Company. Nothing contained in this Option, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between you and any Participating Company or any other person.

19. Severability. If all or any part of this Award Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Award Agreement or the Plan not declared to be unlawful or invalid. Any Section of this

Award Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

20. Miscellaneous .

(a) The rights and obligations of the Company under your Option will be transferable to any one or more persons or entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by the Company’s successors and assigns.

(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Option.

(c) You acknowledge and agree that you have reviewed your Option in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Option, and fully understand all provisions of your Option.

(d) This Award Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

(e) All obligations of the Company under the Plan and this Award Agreement will be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Company.

* * *

This Agreement will be deemed to be accepted by you upon your acceptance of the Grant Notice to which it is attached.

Notice of Exercise

PICO Holdings, Inc.

Attention: Stock Plan Administrator

Date of Exercise: _______________

This constitutes notice to PICO Holdings, Inc. (the “ Company ”) under my Option that I elect to purchase the below number of shares of Stock of the Company (the “ Shares ”) for the price set forth below.



Type of Option (check one):	Incentive	Nonstatutory
Option Date of Grant:	_______________	_______________
Number of Shares as to which Option is exercised:	_______________	_______________
Certificates to be issued in name of:	_______________	_______________
Total exercise price:	$______________	$______________
Cash payment delivered herewith:	$______________	$______________
[Value of ________ Shares delivered herewith as Stock Tender Exercise ¹ :	$______________	$______________]
[Value of ________ Shares pursuant to net exercise ² :	$______________	$______________]
[Cashless Exercise ³ :	$______________	$______________]

¹ Shares must meet the public trading requirements and other terms set forth in the Option. Shares must be valued in accordance with the terms of the Option being exercised, and must be owned free and clear of any liens, claims, encumbrances or security interests. Certificates must be endorsed or accompanied by an executed assignment separate from certificate.

² The option must be a Nonstatutory Stock Option, and PICO Holdings, Inc. must have established net exercise procedures at the time of exercise, in order to utilize this payment method.

³ Shares must meet the public trading requirements and other terms set forth in the Option.

By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the 2014 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this Option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the Shares issued upon exercise of this Option that occurs within two (2) years after the date of grant of this Option or within one (1) year after such Shares are issued upon exercise of this Option.

Very truly yours,

PICO Holdings, Inc.

Restricted Stock Unit Award

Grant Notice

2014 Equity Incentive Plan

PICO Holdings, Inc. (the “Company” ) hereby awards to Participant the number of Restricted Stock Units specified and on the terms set forth below (the “Award” ). The Award is subject to all of the terms and conditions as set forth in this Restricted Stock Unit Award Grant Notice (the “ Grant Notice ”), in the Restricted Stock Unit Award Agreement (the “ Agreement ” and, together with the Grant Notice, the “ Award Agreement ”) and in the Company’s 2014 Equity Incentive Plan (the “Plan” ), all of which are attached hereto and incorporated herein in their entirety. Capitalized terms not explicitly defined herein but defined in the Plan or the Award Agreement shall have the meanings set forth in the Plan or the Award Agreement, as applicable. In the event of any conflict between the terms of this Grant Notice, the Agreement or the Plan, the terms of the Plan shall control.



Participant:	[Name]
Date of Grant:	[Date]
Vesting Commencement Date:	[Date]
Number of Restricted Stock Units:	[_______]
Settlement Date:	For each Restricted Stock Unit received, and subject to any adjustment pursuant to Section 3(a) of the Agreement, one share of Stock of the Company will be issued for each Restricted Stock Unit that vests at the time set forth in Section 6 of the Agreement.
Vesting Conditions:	[ _________________] subject to the potential vesting acceleration described in Section 2 of the Agreement.

Additional Terms/Acknowledgements: By their signatures below, the Company and the Participant agree that the Award is governed by this Grant Notice and by the provisions of the Agreement and the Plan, both of which are attached to and made a part of this document. The Participant acknowledges receipt of copies of the Agreement, the Plan, and the stock plan prospectus for this Plan and represents that the Participant has read and is familiar with their provisions. As of the Date of Grant set forth above, this Grant Notice, the Agreement and the Plan set forth the entire understanding between Participant and any other Participating Company regarding the Award and supersedes all prior oral and written agreements, promises and/or representations on that subject, with the exception of (i) restricted stock units or other stock awards previously granted and delivered to Participant, (ii) any compensation recovery policy maintained by the Company or Participating Company or otherwise required by applicable law and (iii) any written employment or severance or change in control (or similar) arrangement between the Participant and the Company or any Participating Company that would provide for vesting acceleration of this Award upon the terms and conditions set forth therein.

The Participant hereby accepts the Award subject to all of the terms and conditions of this Notice, the Agreement and the Plan. Participant consents to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or any other Participating Company or another third party designated by the Company or any other Participating Company.



PICO Holdings Inc. By: Signature Title: Date:	Participant: By: Signature Title: Date:


Attachments :	Restricted Stock Unit Award Agreement, 2014 Equity Incentive Plan and Prospectus

PICO Holdings, Inc.

2014 Equity Incentive Plan

Restricted Stock Unit Award Agreement

Pursuant to the Restricted Stock Unit Award Grant Notice (the “ Grant Notice ”) and this Restricted Stock Unit Award Agreement (the “ Agreement ”, and together with the Grant Notice, the “ Award Agreement ”) and in consideration of your services, PICO Holdings, Inc. (the “ Company ”) has awarded you a Restricted Stock Unit Award (the “ Award ”) under its 2014 Equity Incentive Plan (the “ Plan ”) for the number of Restricted Stock Units indicated in the Grant Notice (the “ Stock Units ”). Capitalized terms not explicitly defined in this Agreement or in the Grant Notice but defined in the Plan will have the same definitions as in the Plan.

The details of your Award, in addition to those set forth in the Grant Notice and the Plan are as follows:

1. Grant of the Award. This Award represents your right to be issued on a future date one share of Stock for each Stock Unit indicated in the Grant Notice that vests. As of the Date of Grant specified in the Grant Notice, the Company will credit to a bookkeeping account maintained by the Company for your benefit (the “ Account ”) the number of Stock Units subject to this Award. This Award was granted in consideration of your services to the Participating Company Group. Except as otherwise provided herein, you will not be required to make any payment to Participating Company Group (other than services to a Participating Company) with respect to your receipt of the Award, the vesting of the Stock Units or the delivery of the Stock to be issued in respect of the Award.

2. Vesting.

(a) General Vesting . Subject to the provisions contained herein, your Award will vest, if at all, in accordance with the Vesting Conditions provided in the Grant Notice and the potential vesting acceleration provisions of this Section 2. Vesting will cease upon the termination of your Service for any reason. Upon such termination of your Service, any Stock Units credited to the Account that were not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title or interest in such Stock Units or the shares of Stock to be issued in respect of such portion of the Award.

(b) Effect of a Change in Control.

(i) In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the “ Acquiror ” ), may, without your consent or the consent of any Participant, assume or continue the Company’s rights and obligations under your Award or portion thereof outstanding immediately prior to the Change in Control or substitute for your outstanding Award or portion thereof a substantially equivalent award with respect to the Acquiror’s stock, as applicable so long as you are not adversely affected due to any such substitution. For purposes of this Section, your Award shall be deemed assumed if, following the Change in Control, the Award confers the right to receive, subject to the terms and conditions of the Plan and this Award Agreement, for each share of Stock issuable under the Award immediately prior to the Change in Control, the consideration (whether stock, cash, other securities or property or a combination thereof) to which a holder of a share of Stock on the effective date of the Change in Control was entitled (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Stock); provided, however, that if such consideration is not solely common stock of the Acquiror, the

Committee may, with the consent of the Acquiror, provide for the consideration to be received upon the exercise or settlement of the Award, for each share of Stock issuable in respect of the Award, to consist solely of common stock of the Acquiror equal in Fair Market Value to the per share consideration received by holders of Stock pursuant to the Change in Control. If your Award or any portion of your Award is neither assumed, continued or substituted for by the Acquiror in connection with the Change in Control nor settled as of the time of consummation of the Change in Control, and provided that you are providing continued Services through the date immediately prior to the Change in Control, your Award or portion thereof, as applicable, shall become vested in full immediately prior to, and contingent upon, the effective time of the Change in Control and shall be settled in accordance with Section 6.

(ii) To the extent the Award is subject to the requirements of Section 409A of the Code, the provisions of this subsection 2(b)(ii) shall apply and shall supersede anything to the contrary set forth herein and in the Plan to the extent required for the Award to comply with the requirements of Section 409A of the Code. In a Change in Control the Award must be assumed, continued or substituted by the Acquiror and any shares of Stock may not be earlier issued unless the Change in Control is also a “change in the ownership or effective control of the corporation”, or a “change in the ownership of a substantial portion of the assets of the corporation” with respect to the Company in each case within the meaning of Treasury Regulation Section 1.409A-3(i)(5) and an exemption is available and elected under Treasury Regulation 1.409A-3(j)(ix)(B) or such earlier issuance of the shares of Stock is otherwise permitted by Section 409A of the Code. The Company retains the right to provide for earlier issuance of shares of Stock in settlement of any vested portion of the Award to the extent permitted by Section 409A of the Code.

3. Number of Stock Units & Shares of Stock.

(a) The Stock Units subject to your Award will be adjusted for any changes in Stock effected without receipt of consideration by the Company, as provided in Section 4.4 of the Plan.

(b) Any additional Restricted Stock Units and any shares, cash or other property that become subject to the Award pursuant to this Section 3, if any, will be subject, in a manner determined by

the Committee, to the same forfeiture restrictions, restrictions on transferability, and time and manner of delivery as applicable to the other Stock Units and shares covered by your Award.

(c) No fractional shares or rights for fractional shares of Stock will be created pursuant to this Section 3. Any fraction of a share will be rounded down to the nearest whole share. The Committee may, in its discretion, determine an equivalent benefit for any fractional shares or fractional shares that may be created by the adjustments referred to in this Section 3.

4. Securities Law Compliance. You will not be issued any Stock in respect of your Award unless either (i) the shares are registered under the Securities Act or (ii) the Company has determined that such issuance would be exempt from the registration requirements of the Securities Act. Your Award also must comply with all other applicable laws and regulations governing the Award, and you will not receive such shares if the Company determines that such receipt would not be in material compliance with such laws and regulations.

5. Transfer Restrictions. Your Stock Units are not transferable other than by will and by the laws of descent and distribution. Prior to the time that shares of Stock have been delivered to you in respect of your Award, you may not transfer, pledge, sell or otherwise dispose of any portion of the Stock Units or the shares in respect of your Stock Units. In addition to any other limitation on transfer created by applicable securities laws, you agree not to assign, hypothecate, donate, encumber or otherwise dispose of any interest in any of the shares of Stock in respect of your Award until the shares are issued to you in accordance with Section 6 of this Agreement. After the shares have been issued to you, you are free to assign, hypothecate, donate, encumber or otherwise dispose of any interest in such shares provided that any such actions are in compliance with the provisions herein and applicable securities laws. Notwithstanding the foregoing, upon receiving written permission from the Committee or its duly authorized designee, you may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company and any broker designated by the Company to effect transactions under the Plan, designate a third party who, in the event of your death, will thereafter be entitled to receive any distribution of Stock or other consideration to which you were entitled at the time of your death pursuant to this Award Agreement. In the absence of such a designation, your legal representative will be entitled to receive, on behalf of your estate, such Stock or other consideration.

6. Date of Issuance.

(a) To the extent that your Award is exempt from the application of Section 409A of the Code, the issuance of shares of Stock in respect of the Stock Units is intended to comply with Treasury Regulation Section 1.409A-1(b)(4) and will be construed and administered in such a manner.

(b) Subject to the satisfaction of the withholding obligations set forth in Section 11 of this Agreement, in the event one or more Stock Units vests, the Company will issue to you, on the vesting date, one share of Stock for each Stock Unit that vests and such issuance date is referred to as the “ Original Issuance Date .” If the Original Issuance Date falls on a date that is not a business day, delivery will instead occur on the next following business day. If you are permitted to elect to defer delivery of the shares of Stock to be issued in respect of your Award beyond the vesting date, your Original Issuance Date will instead be determined in accordance with such deferral election.

(c) However, if (i) the Original Issuance Date does not occur (1) during an “open window period” applicable to you, as determined by the Company in accordance with the Trading Compliance Policy or other similar applicable policy then in effect for you, or (2) on a date when you are otherwise permitted

to sell shares of Stock on an established stock exchange or stock market (including but not limited to under a previously established written trading plan that meets the requirements of Rule 10b5-1 under the Exchange Act and was entered into in compliance with the Company’s policies (a “ 10b5-1 Plan ”)), and (ii) the Company elects (1) not to satisfy the Withholding Taxes described in Section 11 by withholding shares of Stock from the shares otherwise due, on the Original Issuance Date, to you under this Award, (2) not to permit you to enter into a “same day sale” commitment with a broker-dealer pursuant to Section 11 of this Agreement (including but not limited to a commitment under a 10b5-1 Plan) and (3) not to permit you to pay the Withholding Taxes in cash or from other compensation, then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such Original Issuance Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company’s Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original Issuance Date occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that complies with Treasury Regulation Section 1.409A-1(b)(4), no later than the date that is the 15th day of the third calendar month of the year following the year in which the shares of Stock under this Award are no longer subject to a “substantial risk of forfeiture” within the meaning of Treasury Regulation Section 1.409A-1(d). The form of delivery of the Shares in respect of your Award ( e.g. , a stock certificate or electronic entry evidencing such shares) will be determined by the Company.

7. Dividends. You will receive no Dividend Equivalent Rights or other benefit or adjustment to your Award with respect to any cash dividend, stock dividend or other distribution that does not result from a adjustment for changes in capital structure described in Section 4.4 of the Plan; provided, however, that this sentence will not apply with respect to any shares of Stock that are delivered to you in connection with your Award after such shares have been delivered to you.

8. Restrictive Legends. The Stock issued with respect to your Stock Units will be endorsed with appropriate legends, if any, as determined by the Company.

9. Award not a Service Contract. Your Award is not an employment or service contract, and nothing in your Award will be deemed to create in any way whatsoever any obligation on your part to continue in the employ or service of any Participating Company or on the part of any Participating Company to continue your employment or service. In addition, nothing in your Award will obligate any Participating Company, their respective shareholders, boards of directors, officers or employees to continue any relationship that you might have as an Employee, Director or Consultant for any Participating Company.

10. 280G Best After Tax . If any payment or benefit you would receive from the Company or any other Participating Company or otherwise in connection with a Change in Control or other similar transaction (a “ 280G Payment ”) would (i) constitute a “parachute payment” within the meaning of Section 280G of the Code, and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “ Excise Tax ”), then any such 280G Payment (a “ Payment ”) shall be equal to the Reduced Amount. The “ Reduced Amount ” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment (after reduction) being subject to the Excise Tax or (y) the largest portion, up to and including the total, of the Payment, whichever amount (i.e., the amount determined by clause (x) or by clause (y)), after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in your receipt, on an after-tax basis, of the greater economic benefit notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in a Payment is required pursuant to the preceding sentence and the Reduced Amount is determined pursuant to clause (x) of the preceding sentence, the reduction shall occur in the manner (the “ Reduction Method ”) that results in the greatest economic benefit for you. If more than one

method of reduction will result in the same economic benefit, the items so reduced will be reduced pro rata (the “ Pro Rata Reduction Method ”).

Notwithstanding the foregoing, if the Reduction Method or the Pro Rata Reduction Method would result in any portion of the Payment being subject to taxes pursuant to Section 409A of the Code that would not otherwise be subject to taxes pursuant to Section 409A of the Code, then the Reduction Method and/or the Pro Rata Reduction Method, as the case may be, shall be modified so as to avoid the imposition of taxes pursuant to Section 409A of the Code as follows: (A) as a first priority, the modification shall preserve to the greatest extent possible, the greatest economic benefit for you as determined on an after-tax basis; (B) as a second priority, Payments that are contingent on future events (e.g., being terminated without cause), shall be reduced (or eliminated) before Payments that are not contingent on future events; and (C) as a third priority, Payments that are “deferred compensation” within the meaning of Section 409A of the Code shall be reduced (or eliminated) before Payments that are not deferred compensation within the meaning of Section 409A of the Code.

Unless you and the Company agree on an alternative accounting firm, the accounting firm engaged by the Company for general tax compliance purposes as of the day prior to the effective date of the change of control transaction triggering the Payment shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the change of control transaction, the Company shall appoint a nationally recognized accounting firm to make the determinations required hereunder. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder. The Company shall use commercially reasonable efforts to cause the accounting firm engaged to make the determinations hereunder to provide its calculations, together with detailed supporting documentation, to you and the Company within fifteen (15) calendar days after the date on which your right to a 280G Payment becomes reasonably likely to occur (if requested at that time by you or the Company) or such other time as requested by you or the Company.

If you receive a Payment for which the Reduced Amount was determined pursuant to clause (x) of the first paragraph of this Section 10 and the Internal Revenue Service determines thereafter that some portion of the Payment is subject to the Excise Tax, you shall promptly return to the Company a sufficient amount of the Payment (after reduction pursuant to clause (x) of the first paragraph of this Section so that no portion of the remaining Payment is subject to the Excise Tax. For the avoidance of doubt, if the Reduced Amount was determined pursuant to clause (y) in the first paragraph of this Section 10, you shall have no obligation to return any portion of the Payment pursuant to the preceding sentence.

11. Withholding Obligations.

(a) On each vesting date, and on or before the time you receive a distribution of the shares in respect of your Stock Units, and at any other time as reasonably requested by the Company or any applicable Participating Company in accordance with applicable tax laws, you hereby authorize any required withholdings from the shares of Stock issuable to you and/or otherwise agree to make adequate provision, including in cash, for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of any applicable Participating Company that arise in connection with your Award (the “ Withholding Taxes ”). Specifically, any applicable Participating Company may, in its sole discretion, satisfy all or any portion of the Withholding Taxes relating to your Award by any of the following means or by a combination of such means: (i) withholding from any compensation otherwise payable to you by the Participating Company; (ii) causing you to tender a cash payment; (iii) permitting or requiring you to enter into a “same day sale” commitment with a broker-dealer that is a member of the Financial Industry Regulatory

Authority (a “ FINRA Dealer ”) whereby you irrevocably elect to sell a portion of the shares to be delivered in connection with your Stock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the proceeds necessary to satisfy the Withholding Taxes directly to the applicable Participating Company; or (iv) withholding shares of Stock from the shares of Stock issued or otherwise issuable to you in connection with your Stock Units with a Fair Market Value (measured as of the date shares of Stock are issued to you) equal to the amount of such Withholding Taxes; provided, however , that the number of such shares of Stock so withheld will not exceed the amount necessary to satisfy the applicable Participating Company’s required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and, if applicable, foreign tax purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided further, that to the extent necessary to qualify for an exemption from application of Section 16(b) of the Exchange Act, such share withholding procedure shall be subject to the express prior approval of the Committee.

(b) Unless all applicable Withholding Taxes are satisfied, the Company will have no obligation to deliver to you any Stock or other consideration pursuant to this Award.

(c) In the event a Participating Company’s obligation to withhold arises prior to the delivery to you of Stock or it is determined after the delivery of Stock to you that the amount of the Participating Company’s withholding obligation was greater than the amount withheld by the Participating Company, you agree to indemnify and hold the all Participating Companies harmless from any failure by such Participating Company to withhold the proper amount.

12. Unsecured Obligation. Your Award is unfunded, and as a holder of vested Stock Units, you will be considered an unsecured creditor of the Company with respect to the Company’s obligation, if any, to issue shares or other property pursuant to this Award Agreement. You will not have voting or any other rights as a shareholder of the Company with respect to the shares to be issued pursuant to this Award Agreement until such shares are issued to you. Upon such issuance, you will obtain full voting and other rights as a shareholder of the Company. Nothing contained in this Award Agreement, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company, any other Participating Company or any other person.

13. Other Documents . You hereby acknowledge receipt of and the right to receive a document providing the information required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt of the Trading Compliance Policy in effect from time to time.

14. Notices. Any notices provided for in this Award Agreement or the Plan will be given in writing (including electronically) and will be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. Notwithstanding the foregoing, the Company may, in its sole discretion, decide to deliver any documents related to participation in the Plan and this Award by electronic means or to request your consent to participate in the Plan by electronic means. By accepting this Award, you consent to receive such documents by electronic delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

15. Governing Plan Document. Your Award is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to

the Plan. In addition, your Award will be subject to recoupment in accordance with any clawback policy that the Company has adopted or any clawback policy that the Company is required to adopt pursuant to the listing standards of any national securities exchange or association on which the Company’s securities are listed or as is otherwise required by the Dodd-Frank Wall Street Reform and Consumer Protection Act or other applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to resign for “good reason” or “constructive termination” (or similar term) under any plan of or agreement with the Company or any Participating Company. Except as expressly provided in this Award Agreement, in the event of any conflict between the provisions of your Award and those of the Plan, the provisions of the Plan will control.

16. Severability. If all or any part of this Award Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity will not invalidate any portion of this Award Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Award Agreement (or part of such a Section) so declared to be unlawful or invalid will, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

17. Effect on Other Employee Benefit Plans. The value of the Award subject to this Award Agreement will not be included as compensation, earnings, salaries, or other similar terms used when calculating employee benefits under any employee benefit plan sponsored by the Company or any Participating Company, except as such plan otherwise expressly provides. The Company and each Participating Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Participating Company’s employee benefit plans.

18. Amendment. Any amendment to this Award Agreement must be in writing, signed by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by the Committee by a writing which specifically states that it is amending this Award Agreement, so long as a copy of such amendment is delivered to you, and provided that no such amendment adversely affecting your rights hereunder may be made without your written consent. Without limiting the foregoing, the Company reserves the right to amend this Award Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, interpretation, ruling, or judicial decision.

19. Compliance with Section 409A of the Code . To the maximum extent possible, this Award is intended to be exempt from the application of Section 409A of the Code, including but not limited to by reason of complying with the “short-term deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4) and any ambiguities herein shall be interpreted accordingly. However, if this Award fails to satisfy the requirements of the short-term deferral rule and is otherwise not exempt from, and therefore deemed to be deferred compensation subject to, Section 409A of the Code, this Award shall comply with Section 409A of the Code to the extent necessary to avoid adverse personal tax consequences and any ambiguities herein shall be interpreted accordingly. To the extent this Award is subject to Section 409A of the Code and if you are a “Specified Employee” (within the meaning set forth Section 409A(a)(2)(B)(i) of the Code) as of the date of your separation from service (within the meaning of Treasury Regulation Section 1.409A-1(h)), then the issuance of any shares that would otherwise be made upon the date of the separation from service or within the first six months thereafter will not be made on the originally scheduled dates and will instead be issued in a lump sum on the earlier of: (i) the fifth business day following your death, or (ii) the date that is six months and one day after the date of the separation from service, with the balance of the shares issued thereafter in accordance with the original vesting and issuance schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the imposition of taxation on you in respect of

the shares under Section 409A of the Code. Each installment of shares that vests is a “separate payment” for purposes of Treasury Regulation Section 1.409A-2(b)(2).

20. No Obligation to Minimize Taxes. Neither the Company nor any other Participating Company has any duty or obligation to minimize the tax consequences to you of this Award and neither the Company nor any Participating Company will be liable to you for any adverse tax consequences to you arising in connection with this Award. You are hereby advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Award and by signing the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so.

21. Miscellaneous.

(a) The rights and obligations of the Company under your Award will be transferable to any one or more persons or entities, and all covenants and agreements hereunder will inure to the benefit of, and be enforceable by the Company’s successors and assigns.

(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole determination of the Company to carry out the purposes or intent of your Award.

(c) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to obtain the advice of counsel prior to executing and accepting your Award, and fully understand all provisions of your Award.

(d) This Award Agreement will be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

* * *

This Restricted Stock Unit Award Agreement will be deemed to be accepted by you upon your acceptance of the Restricted Stock Unit Award Grant Notice to which it is attached

PICO Holdings, Inc.

Restricted Stock Unit Award Deferral Election Form

(For Awards Granted in 2015)

Please complete this Election Form and return a signed copy to [Name], [Title] of PICO Holdings, Inc. (the “ Company ” or “ PICO ”) no later than 5:00 p.m. Pacific Time on December 31, 2014 (the “ Election Deadline ”).

The Board of Directors (the “ Board ”) of PICO Holdings, Inc. (the “ Company ” or “ PICO ”) has decided to permit you to make an irrevocable election to defer receipt of all (but not less than all) of the shares that may vest under any Restricted Stock Unit Award granted to you in 2015 (the “ RSU Award ”). The RSU Award will be subject to the terms of the Company’s 2014 Equity Incentive Plan (the “ 2014 Plan ”) and its forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement (together, the “ Award Agreement ”).

I, _________________________, hereby make the following election with respect to my RSU Award:

No Deferral. I hereby elect to be issued all of the shares that vest under my RSU Award as and when they become vested, in accordance with the terms of the applicable Award Agreement and the 2014 Plan.

Deferral. I hereby elect to be issued all of the shares that vest under my RSU Award on the earliest to occur of the following dates/events:


•	On ______________ (Date, Month) of the following calendar year: _______(Year)


◦	(Date selected must be no earlier than January 1, [______] ¹ and no later than [___, _________] ² ).

•

The 5 ^th business day after my “separation from service” (as defined under Treasury Regulation Section 1.409A-1(h)) for any reason, including by reason of death, disability, resignation or retirement. However, if I am a “specified employee” (as defined under Treasury Regulation Section 1.409A-1(i)) as of the date of my separation from service, then the vested shares will be issued on the earlier of (i) the 5 ^th business day after the date of my death and (ii) the date that is 6 months and one day after my separation from service.


•	A Change in Control (as defined in the 2014 Plan) that also constitutes a “change in the ownership or effective control of the corporation”, or a “change in the ownership of a substantial portion of the assets of the corporation” with respect to the Company in each case within the meaning of Treasury Regulation Section 1.409A-3(i)(5).

¹ Minimum deferral date should be first calendar year following the last year in which the RSU is fully vested.

² Maximum deferral date should be set at not more than 5 years following the grant date (or anticipated grant date).

This deferral election is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”) and the regulations and other guidance promulgated thereunder. Notwithstanding any deferral election made herein, as described in Section 6 of the Award Agreement, the distribution of vested shares may be delayed as provided therein, but only if and to the extent such further delay is permissible without penalty under Section 409A of the Code and the regulations and other guidance promulgated thereunder. In addition, the Company reserves the right to terminate this deferral election at any time to the extent permitted by Section 409A of the Code and the regulations and other guidance promulgated thereunder, in which case, any vested shares of common stock granted pursuant to the RSU Award may be issued immediately.

This Election Form shall be construed and administered according to the laws of the State of California, without regard to its conflicts of laws principles.

By completing and executing this Election Form, I authorize the Company to defer or not defer, as indicated, the issuance of the vested shares subject to the RSU Award. I acknowledge that the Company has not made any representations to me concerning the future performance of the Company’s common stock. Further, I have not relied upon advice from the Company in making my election. By executing this Election Form, I acknowledge my understanding of and agreement with all the terms and provisions set forth herein.

I understand that the Election Deadline is December 31, 2014, and that after such deadline this election shall be irrevocable (i.e., after such deadline, I cannot withdraw or change this election). This election is effective only if received by [____________] on or before 5:00 p.m., Pacific Time, on December 31, 2014.




Signature of Participant		Date

EXHIBIT 31.1

CERTIFICATION BY 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

I, John R. Hart, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PICO Holdings, Inc. (the “Registrant”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 10, 2014

/s/ John R. Hart

John R. Hart

President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION BY 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

I, Maxim C.W. Webb, certify that:

1. I have reviewed this quarterly report on Form 10-Q of PICO Holdings, Inc. (the “Registrant”);

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 10, 2014

/s/ Maxim C.W. Webb

Maxim C.W. Webb

Chief Financial Officer

EXHIBIT 32.1

CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Quarterly Report of PICO Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John R. Hart, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that to the best of my knowledge:

(1) The Report fully complies with requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 10, 2014

/s/ John R. Hart

John R. Hart

President and Chief Executive Officer

EXHIBIT 32.2

CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350

(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Quarterly Report of PICO Holdings, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Maxim C. W. Webb, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that to the best of my knowledge:

(1) The Report fully complies with requirements of section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 10, 2014

/s/ Maxim C.W. Webb

Maxim C.W. Webb

Chief Financial Officer