10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2006
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                         to
	Commission file number: 0-17189

CALIFORNIA COASTAL COMMUNITIES, INC.

(Exact name of registrant as specified in its charter)

Delaware	02-0426634
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
6 Executive Circle, Suite 250	92614
Irvine, California	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (949) 250-7700

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.05 per  share
(Title of Class)

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 x  NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of  “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o  NO x

The number of shares of Common Stock outstanding as of July 31, 2006 was 10,172,712.

CALIFORNIA COASTAL COMMUNITIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2006

I N D E X

Cautionary Statement About Forward-Looking Statements
Part I -	Financial Information:
	Item 1 -	Consolidated Financial Statements
		Consolidated Balance Sheets -
		June 30, 2006 and December 31, 2005 (unaudited)
		Consolidated Statements of Income -
		Three and Six Months Ended June 30, 2006 and 2005 (unaudited)
		Consolidated Statements of Cash Flows -
		Six Months Ended June 30, 2006 and 2005 (unaudited)
		Notes to Consolidated Financial Statements
	Item 2 -	Management’s Discussion and Analysis of Financial
		Condition and Results of Operations
	Item 3 -	Quantitative and Qualitative Disclosures About
		Market Risk
	Item 4 -	Evaluation of Disclosure Controls and Procedures
Part II -	Other Information:
	Item 1 -	Legal Proceedings
	Item 1A -	Risk Factors That May Affect Results of Operations and Financial Condition
	Item 4 -	Submission of Matters to a Vote of Security Holders
	Item 6 -	Exhibits
SIGNATURE

CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that relate to future events or our future financial performance. In addition, other statements we may make from time to time, such as press releases, oral statements made by our officials and other reports that we file with the Securities and Exchange Commission may also contain such forward-looking statements. Undue reliance should not be placed on these statements which involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”, “continue”, or the negative of such terms or other comparable terminology.

These forward-looking statements include, but are not limited to:

·statements about our strategies, plans, objectives, goals, expectations and intentions;

·information relating to anticipated operating results, financial resources, changes in revenues, changes in profitability, interest expense, growth and expansion, anticipated income to be realized from our investments in unconsolidated entities;

·the impact of demographic trends and supply constraints on the demand for and supply of housing;

·housing market conditions in the geographic markets in which we operate;

·the number and types of homes and number of acres of land that we may develop and sell;

·the ability to deliver homes from backlog;

·the timing and outcomes of regulatory approval processes or administrative proceedings, which may result in delays in the land entitlement, development, construction, or the opening of new communities (including, but not limited to ongoing administrative proceedings related to our joint venture near Oxnard, California);

·the ability to secure materials and subcontractors;

·the ability to produce the liquidity and capital necessary to expand and take advantage of opportunities in the future;

·our ability to realize the value of our net operating loss carry forwards;

·our ability to continue relationships with current or future partners;

·the effectiveness and adequacy of our disclosure and internal controls;

·the impact of recent accounting pronouncements; and

·stock market valuations.

Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us may turn out to be inaccurate. This can occur as a result of incorrect assumptions or as a consequence of known or unknown risks and uncertainties. These risks and uncertainties include the competitive environment in which we operate, local, regional and national economic conditions, the demand for homes fluctuations in interest rates, changes in home prices, the availability and cost of land for future growth, the availability of capital, uncertainties and fluctuations in capital and securities markets, changes in tax laws and their interpretation, legal proceedings, the ability of customers to finance the purchase of homes, the availability and cost of labor and materials, weather conditions, domestic and international political events, uncertainties created by terrorist attacks, and the effects of governmental regulation. Many factors mentioned in this report or in other reports or public statements made by us, such as government regulation and the competitive environment, will be important in determining our future performance. Consequently, actual results may differ materially from those that might be anticipated from our forward-looking statements. You should not place undue reliance on any of these forward-looking statements because they are based on current expectations or beliefs regarding future events or circumstances, which involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by these forward-looking statements.

Although we believe that our strategies, plans, objectives, goals, expectations and intentions reflected in, or suggested by these forward-looking statements are reasonable given current information available to us, we can give no assurance that any of them will be achieved.

These forward-looking statements should be considered in light of the information included in this report and our other filings with the Securities and Exchange Commission, including, without limitation, the “Risk Factors”, as well as the description of trends

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and other factors in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, set forth in our Form 10-K for the year ended December 31, 2005. You should also read the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in conjunction with the unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report.

We assume no, and hereby disclaim any, obligation to update any of the foregoing or any other forward-looking statements. We nonetheless reserve the right to make such updates from time to time by press release, periodic report or other method of public disclosure without the need for specific reference to this Form 10-Q or any other report filed by us.  No such update shall be deemed to indicate that other statements not addressed by such update remain correct or create an obligation to provide any other updates.

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PART I.  FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

 CALIFORNIA COASTAL COMMUNITIES, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in millions)

	June 30,			December 31,
	2006			2005
ASSETS
Cash and cash equivalents	$	2.7		$	7.7
Short-term investments	15.1			30.3
Restricted cash	3.5			2.3
Real estate inventories	267.8			253.6
Deferred tax assets	34.0			35.4
Other assets	1.6			1.1
	$	324.7		$	330.4
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Accounts payable and accrued liabilities	$	17.8		$	17.4
Project debt	48.7			57.9
Other liabilities	7.9			7.9
Total liabilities	74.4			83.2
Minority interest	—			.3
Commitments and contingencies
Stockholders’ equity:
Common Stock—$.05 par value; 13,500,000 shares authorized; 10,172,712 and 10,160,212 shares issued and outstanding, respectively	.5			.5
Excess Stock—$.05 par value; 13,500,000 shares authorized; no shares outstanding	—			—
Capital in excess of par value	191.9			191.6
Retained earnings	59.7			56.6
Accumulated other comprehensive loss	(1.8		)	(1.8		)
Total stockholders’ equity	250.3			246.9
	$	324.7		$	330.4

See the accompanying notes to consolidated financial statements.

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CALIFORNIA COASTAL COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(in millions, except per share amounts)

(unaudited)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006			2005		2006			2005
Revenues:
Homebuilding	$	18.8		$	3.1	$	46.7		$	9.6
Costs of sales:
Homebuilding	15.6			2.2		38.8			7.0
Gross operating profit	3.2			.9		7.9			2.6
Selling, general and administrative expenses	1.4			.7		3.1			1.9
Other (income) expense, net	(.2		)	.1		(.5		)	.3
Income before income taxes	2.0			.1		5.3			.4
Provision (benefit) for income taxes	.8			.1		2.2			(4.4		)
Minority interest in income of consolidated joint venture	—			—		—			.1
Net income	1.2			—		3.1			4.7
Other comprehensive income, net of income taxes:
Minimum pension liability income tax benefit	—			—		—			.9
Comprehensive income	$	1.2		$	—	$	3.1		$	5.6
Net earnings per common share:
Basic	$	.12		$	—	$	.30		$	.46
Diluted	$	.11		$	—	$	.30		$	.43
Common equivalent shares:
Basic	10.2			10.2		10.2			10.2
Diluted	10.5			10.9		10.5			10.9

See the accompanying notes to consolidated financial statements.

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CALIFORNIA COASTAL COMMUNITIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

	Six Months Ended
	June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	3.1		$	4.7
Adjustments to reconcile net income to cash used in operating activities:
Stock-based compensation expense	.1			—
Distributions from unconsolidated joint ventures	.1			—
Non-cash benefit from reversal of deferred tax asset allowance	—			(4.7		)
Deferred taxes	1.4			.2
Gains on sales of real estate inventories	(7.9		)	(2.6		)
Minority interest in income of consolidated joint venture	—			.2
Proceeds from asset sales, net	46.5			9.6
Investments in real estate inventories	(52.8		)	(59.0		)
Investments in land held for future development or sale	—			(1.4		)
Changes in assets and liabilities:
(Increase) decrease in other assets	(.2		)	4.0
Increase (decrease) in accounts payable, accrued and other liabilities	.4			(6.3		)
Cash used in operating activities	(9.3		)	(55.3		)
Cash flows from investing activities:
Sales of short-term investments	51.6			—
Purchases of short-term investments	(36.4		)	—
Investments in unconsolidated joint ventures	(.4		)	—
Change in restricted cash	(1.2		)	.5
Cash provided by investing activities:	13.6			.5
Cash flows from financing activities:
Borrowings of project debt	5.6			58.3
Repayments of project debt	(14.8		)	(7.0		)
Proceeds from exercise of stock options	.1			.3
Tax benefit from exercise of stock options	.1			—
Minority interest distributions	(.3		)	(.4		)
Cash (used in) provided by financing activities	(9.3		)	51.2
Net decrease in cash and cash equivalents	(5.0		)	(3.6		)
Cash and cash equivalents - beginning of period	7.7			9.0
Cash and cash equivalents - end of period	$	2.7		$	5.4
Supplemental disclosures of cash flow information:
Cash paid during the period for income taxes, net of refunds received	$	4.7		$	.9

See the accompanying notes to consolidated financial statements.

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CALIFORNIA COASTAL COMMUNITIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 - Basis of Presentation

The accompanying financial statements have been prepared by California Coastal Communities, Inc. and its consolidated subsidiaries (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The Company believes that these unaudited consolidated financial statements reflect all material adjustments (consisting only of normal recurring adjustments) and disclosures necessary for the fair presentation of the results of operations and statements of financial position when read in conjunction with the Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 and the current year’s previously issued Quarterly Report on Form 10-Q. Intercompany accounts and transactions have been eliminated.  Certain prior year amounts have been reclassified to conform to the current year presentation.

The results for interim periods are not necessarily indicative of the results to be expected for the full year. This report contains forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties that actual events or results may differ materially from those described herein as a result of various factors, including without limitation, the factors discussed generally in this report.

Note 2 - Significant Accounting Policies

Consolidation of Variable Interest Entities

A Variable Interest Entity (“VIE”) is created when (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties or (ii) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur.  If an entity is deemed to be a VIE, pursuant to Financial Interpretation FIN No. 46, “Consolidation of Variable Interest Entities — an interpretation of ARB No. 51” (“FIN 46”), an enterprise that has the majority of the variability in gains and losses of the VIE is considered to be the primary beneficiary and must consolidate the VIE.  FIN 46 was effective immediately for VIEs created after January 31, 2003.

Based on the provisions of FIN 46, the Company has concluded that whenever it options land or lots from an entity and pays a non-refundable deposit, a VIE may be created under condition (ii)(b) and (c) of the previous paragraph. The Company may be deemed to have provided subordinated financial support, which refers to variable interests that will absorb some or all of an entity’s expected theoretical losses if they occur.  For each VIE created with a significant nonrefundable option fee, the Company will compute expected losses and residual returns based on the probability of future cash flows as outlined in FIN 46.  If the Company is deemed to be the primary beneficiary of the VIE, the VIE will be consolidated on the Company’s balance sheet.

The Company’s exposure to loss as the result of a purchase contract with a VIE is limited to the amount of the non-refundable option deposit, which is generally 5% to 15% of the purchase price, not total assets on the balance sheet of the VIE.  Therefore, the Company believes that consolidating the VIE does not reflect the economic realities or risks of owning and developing land.  The Company has no material third party guarantees related to these contracts.  Creditors of these VIEs, if any, have no recourse against the Company.

As of June 30, 2006, the Company has no deposits with VIEs. See Note 7 — Real Estate Matters.

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Real Estate

Real estate inventories primarily consists of homes under construction and lots under development and are carried at the lower of cost or fair value less costs to sell. The estimation process involved in the determination of fair value is inherently uncertain since it requires estimates as to future events and market conditions. Such estimation process assumes the Company’s ability to complete development and dispose of its real estate properties in the ordinary course of business based on management’s present plans and intentions. Economic, market, and environmental conditions may affect management’s development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction activities. Accordingly, the ultimate values of the Company’s real estate properties are dependent upon future economic and market conditions, and the availability of financing.

The cost of sales of multi-unit projects is generally computed using the relative sales value method. Interest and other carrying costs are capitalized to real estate projects during their development and construction period.

Impairment of Long-Lived Assets

The Company assesses the impairment of real estate inventories and other long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which requires that an impaired asset, for which costs cannot be recovered from estimated undiscounted future cash flows, be written down to fair value. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As provided by SFAS No. 144, impairment is evaluated by comparing an asset’s carrying value to the undiscounted estimated cash flows expected from the asset’s operations and eventual disposition. If the sum of the undiscounted estimated future cash flows is less than the carrying value of the asset, an impairment loss is recognized based on the fair value of the asset. If impairment occurs, the fair value of an asset for purposes of SFAS No. 144 is deemed to be the amount a willing buyer would pay a willing seller for such asset in a current transaction.

In accordance with SFAS No. 144, in developing estimated future cash flows for impairment testing, the Company has incorporated its own market assumptions including those regarding home prices, infrastructure, home-building costs and financing costs regarding real estate inventories.  Additionally, as appropriate, the Company identifies alternative courses of action to recover the carrying value of its long-lived assets and evaluates all likely alternatives under a probability-weighted approach as described in SFAS No. 144.

Earnings Per Common Share

Earnings per common share is accounted for in accordance with SFAS No. 128, “Earnings Per Share”. Basic earnings per common share is computed using the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is computed using the weighted-average number of common shares outstanding and the dilutive effect of potential common shares outstanding. For the three and six months ended June 30, 2006 and 2005, the average market price of the Company’s common stock exceeded the exercise price of outstanding stock options.  Therefore, diluted earnings per share includes the dilutive effect of the weighted average number of common shares from potential exercise of approximately 700,000 options.

The table below sets forth the reconciliation of the denominator of the earnings per share calculation (in millions):

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2006	2005	2006	2005
Shares used in computing basic earnings per common share	10.2	10.2	10.2	10.2
Dilutive effect of stock options	.3	.7	.3	.7
Shares used in computing diluted earnings per common share	10.5	10.9	10.5	10.9

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Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”).  This Statement replaces SFAS 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25. “Accounting for Stock Issued to Employees.”  SFAS 123(R) addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments.  SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method under APB No. 25, and generally would require instead that such transactions be accounted for using a fair-value-based method.  The Company adopted SFAS 123(R) in the first quarter of 2006 using the modified prospective method, which requires that compensation is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 for either recognition or pro forma disclosures. The Company previously adopted the fair value recognition provisions of SFAS 123 in 2003. The adoption of SFAS 123(R) did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An amendment of APB 29, Accounting for Nonmonetary Transactions” (“SFAS 153”).  This statement amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance.  A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.  This statement was effective beginning in the Company’s first quarter of 2006. The adoption of SFAS 153 did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). This statement replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application of changes in accounting principle to prior periods’ financial statements unless it is impracticable to determine the period-specific effects or the cumulative effect of the change. This statement was effective beginning in the Company’s first quarter of 2006. The adoption of SFAS 154 did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In June 2005, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue No. 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-5”). EITF 04-5 affects the consolidation of entities in which a general partner or managing member is presumed to control a partnership or limited liability company. EITF 04-5 was effective for the Company beginning in the first quarter of 2006. The adoption of EITF 04-5 did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows upon initial adoption. EITF 04-5 may materially impact the Company’s consolidated financial position, results of operations, or cash flows in future periods should the Company form new limited partnerships or modify existing limited partnerships such that the Company is deemed to control the limited partnership. Under those circumstances, the Company may be required by EITF 04-5 to consolidate the limited partnership.

In July 2006, the FASB issued FASB Interpretation No. 48  (“FIN 48”), Accounting for Uncertainty in Income Taxes, which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 are effective for reporting periods beginning after December 15, 2006.  The Company is currently assessing the impact of the adoption of FIN 48 and its impact on the Company’s consolidated financial statements.

Note 3 - Real Estate Inventories

Real estate inventories primarily consist of homes under construction and lots under development in communities in five Southern California counties.  At June 30, 2006, real estate inventories include 858 lots and homes under construction, and nine completed homes.  Approximately $142.0 million of real estate inventories at June 30, 2006 reflects the 105-acre

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parcel of land on a mesa north of the Bolsa Chica wetlands (“Upper Mesa”), which is planned for 356 homes as discussed below. In addition, the balance includes approximately 51 acres nearby which have been offered for dedication to the County of Orange for inclusion in the Harriet M. Weider Linear Park in conjunction with the development of the Upper Mesa, and 51 additional acres which are subject to a conservation easement. The Company capitalizes direct carrying costs including interest and property taxes, as well as direct construction costs, to real estate inventories.

The planned community on the Upper Mesa, known as “Brightwater,” will offer a broad mix of home choices, averaging 2,850 square feet and ranging in size from 1,700 square feet to 4,100 square feet.  The plan also includes 37 acres of open space and conservation area.  With 349 homes permitted on 68 acres of the Upper Mesa, the resulting low-density plan equates to approximately five homes per acre, consistent and compatible with the neighboring Huntington Beach communities.  In addition, the Company owns land adjacent to the planned Brightwater development, on which it intends to process permits to build seven additional homes which will be included in the Brightwater community. The Company expects to (i) complete grading during the third quarter of 2006, (ii) begin building model homes during the fourth quarter of 2006, (iii) start selling homes during the second quarter of 2007, and (iv) begin delivering homes during the fourth quarter of 2007.  However, there can be no assurance in that regard, or as to the absence of further administrative or construction delay.

The estimation process involved in the determination of value is inherently uncertain since it requires estimates as to future events and market conditions. Such estimation process assumes the Company’s ability to complete development and disposition of its real estate properties in the ordinary course of business based on management’s present plans and intentions. Economic and market conditions may affect management’s development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction activities. Accordingly, the amount ultimately realized from such project may differ materially from current estimates and the project’s carrying value.

Capitalized interest is allocated to real estate inventories when incurred, and charged to cost of sales when the related property is delivered. Certain information regarding interest follows (in millions):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Capitalized interest, beginning of period	$	6.1		$	1.7		$	6.1		$	1.3
Interest incurred and capitalized	1.1			2.1			2.2			2.6
Charged to cost of sales	(.7		)	(0.1		)	(1.8		)	(0.2		)
Capitalized interest, end of period	$	6.5		$	3.7		$	6.5		$	3.7

Note 4 - Project Debt

In conjunction with the acquisition of single-family residential lots, the Company’s homebuilding subsidiary, Hearthside Homes, Inc. and its subsidiaries, enter into construction loan agreements with commercial banks.  These loan facilities finance a portion of the land acquisition and the majority of the construction of infrastructure and homes.  Each loan facility requires a guaranty of project completion and an environmental indemnity. The loans secured by first trust deeds bear an interest rate of prime plus three-fourths percent (9.0 % at June 30, 2006), and some of these loan facilities have a minimum interest rate ranging from 5.75% to 7.5%. Additional borrowings under these loan facilities totaled $5.6 million during the six months ended June 30, 2006, and consisted primarily of draws on the Lancaster loan and interest on outstanding borrowings. The $14.8 million of repayments during the six months ended June 30, 2006 included full repayment of $8.7 million outstanding under the Rancho Santa Fe facility due in March 2006 and $6.1 million on the Lancaster and Corona loans upon deliveries of homes. During the three and six months ended June 30, 2006, Hearthside Homes, Inc. entered into no new loan facilities.  The following amounts were available and outstanding under these loan facilities as of June 30, 2006 and December 31, 2005 ($ in millions):

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					Outstanding at
	Amount		Number	Maturity	June 30,		December 31,
First Trust Deeds	of Facility		of Lots	Date	2006		2005
Rancho Santa Fe	$	15.4	—	3/27/06	$	—	$	8.5
Lancaster	9.5		—	5/10/06	—		.2
Rancho Santa Fe	1.8		2	9/13/06	1.8		1.7
Ontario	11.7		26	10/19/06	4.8		4.6
Corona	1.9		4	10/26/06	1.9		1.8
Corona	14.8		35	10/26/06	6.5		7.0
Lancaster	1.0		3	11/17/06	1.0		1.0
Lancaster	10.5		20	11/17/06	2.0		3.6
Corona	41.1		151	1/7/07	19.6		18.8
Beaumont	20.7		102	2/17/07	7.9		7.6
Lancaster	17.7		77	7/1/07	3.2		3.1
					$	48.7	$	57.9

Note 5 - Other Liabilities

Other liabilities were comprised of the following (in millions):

	June 30,			December 31,
	2006			2005
Accrued pensions and benefits	$	4.7		$	4.8
Home warranty reserves	2.2			2.1
Contingent indemnity and environmental obligations	1.5			1.5
Unamortized discount	(.5		)	(.5		)
	$	7.9		$	7.9

Contingent indemnity and environmental obligations primarily reflect reserves before related discount (recorded pursuant to Fresh-Start Reporting) for contingent indemnity obligations for businesses disposed of by former affiliates and unrelated to the Company’s current operations.

Home Warranty Reserve

The Company provides a home warranty reserve to reflect its contingent obligation for product liability. The Company generally records a provision as homes are delivered, based upon historical and industry experience, for the items listed in the homeowner warranty manual, which does not include items that are covered by manufacturers’ warranties or items that are not installed by the Company’s employees or contractors. The home warranty reserve activity is presented below (in millions):

	Six Months Ended
	June 30,
	2006			2005
Balance at beginning of period	$	2.1		$	1.6
Provision	.2			.1
Payments	(.1		)	(.2		)
Balance at end of period	$	2.2		$	1.5

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Note 6 - Income Taxes

The following is a summary of the tax provision (benefit):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Current taxes	$	.2	$	—	$	.7	$	.1
Deferred taxes	.6		.1		1.5		.2
Reversal of valuation allowance on deferred tax assets	—		—		—		(4.7		)
Provision (benefit) for income taxes	$	.8	$	.1	$	2.2	$	(4.4	)

Deferred tax benefits resulting from reductions in the deferred tax asset valuation allowance on NOLs are recorded when the Company concludes that it is more likely than not that it will utilize additional NOLs to offset future taxable income.  As a result of the California Coastal Commission’s approval of the Company’s development plan for the Bolsa Chica Upper Mesa on April 14, 2005, the Company concluded that it is more likely than not that it will utilize all of its deferred tax assets.  Therefore, during the six months ended June 30, 2005, the Company recorded a reversal of valuation allowance on post-reorganization NOLs and other deferred tax assets of approximately $4.7 million, which is reflected in the tax benefit.  Pursuant to Fresh Start Reporting, also during the six months ended June 30, 2005, a reversal of valuation allowance on federal Pre-reorganization NOLs of approximately $38.5 million was reflected by increasing the Company’s capital in excess of par value.

The Internal Revenue Code (the “Code”) generally limits the availability of NOLs if an ownership change occurs within any three-year period under Section 382. If the Company were to experience an ownership change of more than 50%, the use of all remaining NOLs would generally be subject to an annual limitation equal to the value of the Company’s equity before the ownership change, multiplied by the long-term tax-exempt rate. The Company estimates that after giving effect to various transactions by stockholders who hold a 5% or greater interest in the Company, it has experienced a three-year cumulative ownership shift of approximately 44% as of July 31, 2006.

The federal NOLs available as of June 30, 2006 were approximately $122 million. The amount of federal NOLs which expire if not utilized is zero for 2006, 2007 and 2008 and $6 million, $49 million, and $67 million for 2009, 2010 and thereafter, respectively.

In October 1999, in response to an unsolicited written consent from a majority of its stockholders, the Company amended its certificate of incorporation in order to protect the ability of the Company to utilize its tax loss carryforwards. Since the Company’s use of its NOLs would be severely restricted if it experiences an ownership change of more than 50%, the Company’s majority stockholders requested that the Board of Directors enact the amendments, which were determined to be in the best interest of the Company and its stockholders. The amendments prohibit future purchases of the Company’s common stock by persons who would become new 5% holders, and also prohibit current holders of over 5% from increasing their positions, except in certain permissible circumstances which would not jeopardize the Company’s ability to use its NOLs. While these amendments reduced the Company’s risk of an ownership change occurring due to the acquisition of shares by 5% stockholders, the risk remains that an ownership change could result from the sale of shares by existing 5% stockholders. The Company’s Board of Directors evaluates requests to purchase any amounts in excess of 5% of the Company’s common stock and authorizes such transactions which are not expected to jeopardize the Company’s ability to use its NOLs.

Note 7 - Commitments and Contingencies

Real Estate Matters

The Company is subject to the usual obligations associated with entering into contracts for the purchase of land and improved home sites. The purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property entitlements. The Company also utilizes option contracts with third-party land sellers and financial entities as a method of acquiring land in staged takedowns and minimizing the use of funds from other corporate financing sources. These option contracts also help to manage the

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financial and market risk associated with land holdings. Option contracts generally require the payment of a non-refundable cash deposit of 5% to 15% of the purchase price for the right to acquire lots over a specified period of time (usually one to two years) at predetermined prices. The Company has the right at its discretion to terminate its obligations under these land purchase and option agreements by forfeiting the cash deposit with no further financial responsibility.  As of December 31, 2005, the Company had no land option deposits. As of June 30, 2006, the Company had one $25,000 refundable land option deposit. In addition, our unconsolidated Oxnard joint venture has land deposits (discussed below).

In February 2003, the Company entered into two option contracts to acquire land adjacent to the City of Oxnard in Ventura County, California aggregating approximately 168 acres. The Company is in the process of developing a land plan for the area, which also includes an additional 149 acres owned by other landowners, with the intention of entitling the property for residential development and annexing it into Oxnard. During October 2003, the Company entered into a limited liability company joint venture agreement with a major financial partner to pursue the Oxnard development opportunity. The Company assigned the land purchase option contracts to the Oxnard limited liability company. Hearthside Homes, Inc., the Company’s homebuilding subsidiary, is the managing member of the Oxnard joint venture, and made an initial contribution of $500,000. The non-managing member also made an initial contribution of $500,000 to the joint venture and, as of December 31, 2005, had made an aggregate of $4 million of first tier additional contributions. The members have agreed to provide a second tier of additional capital contributions of up to $2 million, as necessary, to complete the business plan.  For contributions in excess of $5 million, the first $500,000 is to be contributed equally by the Company and the Company’s partner.  At the Company’s discretion, the Company could continue to contribute equally to the next $500,000. Thereafter, the next $1 million is to be contributed equally between the members. During the fourth quarter of 2005 and the first six months of 2006, the members each contributed approximately $160,000 and $440,000, respectively, of the additional $2 million.  The Company’s total investment in the venture as of June 30, 2006 is $1.1 million. The Company expects to make additional aggregate capital contributions of approximately $700,000 to the joint venture during the next 15 months, bringing the Company’s total expected investment in the venture to $1.8 million.

The Company has outstanding performance and surety bonds, for the benefit of city and county jurisdictions, related principally to its obligations for site improvements at various projects.  The Company does not believe that draws upon these bonds, if any, will have a material effect on the Company’s financial position, results of operations or cash flows.

Legal Proceedings

There are various lawsuits and claims pending against the Company and certain subsidiaries. In the opinion of the Company’s management, ultimate liability, if any, will not have a material adverse effect on the Company’s financial condition or results of operations.

See Note 5 for a discussion of other contingencies.

Corporate Indemnification Matters

The Company and its former affiliates have, through a variety of transactions effected since 1986, disposed of several assets and businesses, many of which are unrelated to the Company’s current operations. By operation of law or contractual indemnity provisions, the Company may have retained liabilities relating to certain of these assets and businesses. There is generally no maximum obligation or amount of indemnity provided for such liabilities. A portion of such liabilities is supported by insurance or by indemnities from certain of the Company’s previously affiliated companies. The Company believes its consolidated balance sheet reflects adequate reserves for these matters.

Note 8 - Subsequent Event

On August 1, 2006, the Company obtained a commitment from KeyBank to underwrite a $125 million five-year, senior secured term loan to finance the distribution of a “special dividend” of between $11 and $13 per share. On June 27, 2006, the Company announced that this “special dividend” is expected to be paid to the holders of the Company’s common stock by the end of September 2006. The term loan will be secured by a pledge of the stock of the Company’s material subsidiaries, including the subsidiary that owns the Bolsa Chica mesa. KeyBank is also in the process of syndicating a $100 million three-year, Senior Secured Revolving Credit Facility (“Facility”) to finance development and construction costs for the Company’s Brightwater project. The Facility will be secured by a first trust deed on the Bolsa

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Chica mesa and includes financial covenants that require the Company to, among other requirements, meet compliance tests for budgeted Brightwater revenue and cost amounts, maintain an interest reserve, maintain a minimum net worth of $100 million plus 25% of future earnings, and not exceed certain leverage ratios. The term loan is expected to bear interest at the Company’s option at either Libor plus 275 basis points or Prime plus 25 basis points and the revolver will bear interest at the Company’s option at either Libor plus 200 basis points or Prime minus 25 basis points. The Company expects both of these financing transactions to be completed within the next 30 days; however, there can be no assurances that there will not be delays or that the transactions will be completed and the special dividend distribution will be made.

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview of California Coastal Communities, Inc

We are a residential land development and homebuilding company with properties owned or controlled in six Southern California counties (Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura). Our principal activities include:

·obtaining zoning and other entitlements for land we own or control through purchase options or joint ventures;

·improving the land for residential development; and

·designing, constructing and selling single-family homes in Southern California.

Once our residential land is entitled, we may build homes, sell unimproved land to other developers or homebuilders, sell improved land to homebuilders, or participate in joint ventures with other developers, investors or homebuilders to finance and construct infrastructure and homes.  The majority of these homes are designed to appeal to move-up homebuyers and are generally offered for sale in advance of their construction. During the next 12 months, we will focus our primary efforts to:

·complete grading and begin building model homes for our Brightwater project located on 105 acres of the Bolsa Chica mesa in Orange County, California in accordance with the Coastal Development Permit for 349 homes issued by the California Coastal Commission in December 2005;

·complete the entitlement process for a 168-acre joint venture project near Oxnard, California; and

·increase deliveries, revenues and profitability of our homebuilding operations throughout Southern California.

However, we are also considering other strategic opportunities as discussed below; and there can be no assurance that we will accomplish, in whole or in part, all or any of these strategic goals.

Our total revenues for the three months ended June 30, 2006 and 2005 were $18.8 million and $3.1 million, respectively, and $46.7 million and $9.6 million for the six months ended June 30, 2006 and 2005, respectively. For the three months ended June 30, 2006 and 2005, we delivered 28 and four homes, respectively, and for the six months ended June 30, 2006 and 2005, we delivered 77 and 14 homes, respectively. Our total assets as of June 30, 2006 and December 31, 2005 were $324.7 million and $330.4 million, respectively. Over the last 11 years, we have delivered over 1,900 homes to families throughout Southern California.

We were formed in 1988 and our executive offices are located at 6 Executive Circle, Suite 250, Irvine, California 92614. Our telephone number is (949) 250-7700.

Strategic Alternatives

Our Board of Directors and management have always been and continue to be committed to enhancing value for all stockholders. In that regard, we continue to evaluate strategic alternatives. From time to time we have considered the various strategic alternatives available to us with respect to our businesses, assets, operations and available cash. We have engaged investment bankers and other advisors for this purpose, with a view towards assessing alternatives which would enhance the value of our current businesses, create additional business opportunities, or otherwise maximize the value of our company for our stockholders. Included in this process has been an exploration of merger, acquisition and disposition possibilities; analysis of equity and debt financings; open market and other repurchases of our stock; dividends and other distributions to our stockholders; and combinations of these alternatives.

Prior to obtaining the Coastal Development Permit for our Brightwater project in December 2005, we have historically maintained a minimal amount of leverage. We currently have $48.7 million of project-specific debt against

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$250 million of book equity and a $326 million equity market capitalization as of June 30, 2006.  The Bolsa Chica mesa is currently unencumbered by debt; however, if the financing transactions described below and in Note 8 to the Financial Statements are completed, the Bolsa Chica mesa will be encumbered by a first trust deed.

On June 27, 2006, we announced our plan to distribute a special tax-advantaged “dividend” of $11 to $13 per share by the end of September 2006. We expect this special dividend to be treated as a return of capital to the extent of each stockholder’s tax basis in our stock. Our Board of Directors will declare the dividend amount, record date and payment date upon completion of the KeyBank financing transactions discussed below and in Note 8.

On August 1, 2006, we obtained a commitment from KeyBank to underwrite a $125 million five-year, senior secured term loan to finance the special dividend payment. The term loan will be secured by a pledge of the stock of our material subsidiaries, including the subsidiary that owns the Bolsa Chica mesa. KeyBank is also in the process of syndicating a $100 million three-year, senior secured revolving construction loan for our Brightwater project, which will be secured by a first trust deed on the Bolsa Chica mesa. The term loan is expected to bear interest at the Company’s option at either Libor plus 275 basis points or Prime plus 25 basis points and the revolver will bear interest at the Company’s option at either Libor plus 200 basis points or Prime minus 25 basis points. We expect both of these financing transactions to be completed within the next 30 days; however, there can be no assurances that there will not be any delays or that the transactions will be completed and the special dividend distribution will be made.

As we continue to develop Brightwater, we will also continue to evaluate any other available strategic alternative that will maximize value to our stockholders.

Our Current and Future Homesites

We currently have on-going Southern California homebuilding projects in:

·Riverside County near the cities of Corona and North Corona, and in the City of Beaumont;

·San Bernardino County in the City of Ontario;

·Northern Los Angeles County in the City of Lancaster;

·San Diego County in the Rancho Santa Fe area; and

·Orange County in the Huntington Beach area.

We began grading our Brightwater development project during June 2006 and plan to process permits for seven homes on adjacent parcels, which would bring the total unit count up to 356.  The following chart describes our current projects, their location and our lot inventories as of June 30, 2006:

Project	Location	Lot Inventory
Chandler Ranch	North Corona		39
Alisal at Ontario	Ontario		26
Woodhaven	Beaumont		102
Hearthside Lane	Corona		151
	Subtotal — Inland Empire		318
Alisal at Lancaster	Lancaster		23
Lancaster II	Lancaster		73
Quartz Hill	Lancaster		77
	Subtotal - Lancaster		173
Cancion	Rancho Santa Fe		20
Brightwater	Bolsa Chica		356
	Total - All Projects		867

These homebuilding projects are currently expected to generate cash flows and gross operating margins through mid-2010.  Up to approximately 555 additional single-family lots would be available for homebuilding operations if we obtain entitlements for our Oxnard project; however, the exact number of homes will depend on the final outcome of the entitlement process.

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Brightwater at Bolsa Chica

The Bolsa Chica upper mesa is the largest property in our portfolio, representing approximately 44% of our total assets as of June 30, 2006. The Bolsa Chica upper mesa is one of the last large undeveloped coastal properties in Southern California, and is located in Orange County, approximately 35 miles south of downtown Los Angeles. Bolsa Chica is bordered on the north and east by residential development in the City of Huntington Beach and Huntington Harbor, to the south by open space and the Bolsa Chica wetlands, and to the west by open space, Pacific Coast Highway, Bolsa Chica State Beach, and the Pacific Ocean. Our holdings include 68 acres of developable land on the Bolsa Chica upper mesa planned for a residential community known as Brightwater, 37 acres of open space and conservation area in the planned community, five acres in the City of Huntington Beach which are currently zoned agricultural, and approximately 104 non-developable acres on, or adjacent to, the Huntington Mesa. Approximately 51 acres of land on the Huntington Mesa have been offered for dedication to the County of Orange for inclusion in the Harriet M. Weider Linear Park in conjunction with the development of Brightwater and an additional 51 acres are subject to a conservation easement. We are analyzing development alternatives for the 5-acre Huntington Beach parcel and expect to submit a proposed site plan to the City of Huntington Beach later this year.

On December 15, 2005, we received a permit from the California Coastal Commission for development of the 349-home Brightwater residential community, which will offer a broad mix of home choices averaging 2,850 square feet and ranging in size from 1,700 square feet to 4,100 square feet.  In addition, we own land adjacent to the planned Brightwater development in the City of Huntington Beach, for which we intend to process permits to build seven additional homes which would be included in the Brightwater community. We began grading the Brightwater development this past June and we currently expect to:

·complete grading during the third quarter of 2006,

·begin building model homes during the fourth quarter of 2006, and

·start selling homes during the second quarter of 2007;

however, there can be no assurance in that regard, or as to the absence of any delays.

Our Brightwater plan also includes 37 acres of open space and conservation area. With 356 homes on 68 acres of the upper mesa, the resulting low-density plan equates to approximately five homes per acre, consistent and compatible with the neighboring Huntington Beach communities.

During the first quarter of 2005, following the Coastal Commission’s conditional approval of our permit to develop Brightwater, we concluded that it is more likely than not that we will utilize all of our deferred tax assets, including net operating losses, to offset future taxable income. As a result, we recorded a $4.7 million reversal of valuation allowance on post-reorganization net operating losses and other deferred tax assets and a $38.5 million reversal of valuation allowance on federal pre-reorganization net operating losses. See Note 6 in our Consolidated Financial Statements.

We used the following facts and assumptions in evaluating the value that we expect to receive from the Brightwater development project:

·The Brightwater coastal development permit provides for 349 homes aggregating approximately 995,000 square feet.

·We own land adjacent to Brightwater in the City of Huntington Beach, for which we intend to process permits to build seven additional homes which would be included in the Brightwater community.

·Development at Brightwater is projected to take approximately four to six months for infrastructure, approximately eight months to build 14 model homes, and two to three years for home construction.

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·We are currently planning to: (i) complete grading during the third quarter of 2006, (ii) begin building model homes during the fourth quarter of 2006, (iii) begin selling homes during the second quarter of 2007, and (iv) begin delivering homes in the fourth quarter of 2007.

·As of January 2006, new home prices approximated $650 per square foot, including view and other premiums, in the local residential market (coastal Huntington Beach).

·The finished lot component of home prices ranges from 60% to 65%.

·Costs to improve the lots from their raw condition to finished lots, including building permits and city fees, approximate $140,000 per lot.

·While demand continues to exceed the supply of housing in coastal Orange county, the volume of home sales has slowed during the first half of 2006 and pressure for continued appreciation of home prices appears to have subsided.

The estimation process involved in the determination of value is inherently uncertain because it requires estimates as to future events and market conditions. This estimation process assumes our ability to complete development and disposition of our real estate properties in the ordinary course of business based on management’s present plans and intentions. Economic, market, and environmental conditions may affect our development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction activities. The development of Brightwater is dependent upon various economic factors. Accordingly, the amount ultimately realized from the Brightwater project may differ materially from our current estimates and the project’s carrying value.

Oxnard Land Development - Unconsolidated Joint Venture

In February 2003, we entered into two option contracts to acquire land adjacent to the City of Oxnard in Ventura County, California aggregating approximately 168 acres. We are in the process of developing a land plan for the area, which also includes an additional 149 acres owned by other landowners, with the intention of entitling the property for residential development and annexing it into Oxnard. We currently expect the residential development plan to include approximately 800 single-family detached lots and approximately 750 attached family residential units (townhomes, condominiums, and apartments); however, these numbers are subject to change during the course of the entitlement process. Approximately 555 of the single-family lots and 490 of the attached units would be developed on the 168 acres of optioned land that we currently expect to purchase.  The option contracts give us two years, plus up to three additional years through the exercise of extensions, to complete these entitlement activities before purchasing the land. We have the right to terminate these option agreements by forfeiting the cash deposits. We are striving to obtain approval of our plan from the Oxnard City Council by the end of 2006 and approval of annexation into the City of Oxnard from the Local Agency Formation Commission in the second half of 2007; however, delays could be encountered.  We have exercised four six-month extensions, extending the current closing date for the option contracts to February 2007.

During October 2003, we entered into a limited liability company joint venture agreement with a major financial partner to pursue the Oxnard development opportunity. We assigned the land purchase option contracts to the Oxnard limited liability company. Hearthside Homes, Inc., our homebuilding subsidiary, is the managing member of the Oxnard joint venture, and made an initial contribution of $500,000. The non-managing member also made an initial contribution of $500,000 to the joint venture and, as of December 31, 2005, had made an aggregate of $4 million of first tier additional contributions. The members have agreed to provide a second tier of additional capital contributions of up to $2 million, as necessary, to complete the business plan.  For contributions in excess of $5 million, the first $500,000 is to be contributed equally by us and our partner.  At our discretion, we could continue to contribute equally to the next $500,000. Thereafter, the next $1 million is to be contributed equally between us. During the fourth quarter of 2005 and the first six months of 2006, we each contributed approximately $160,000 and $440,000, respectively, of the additional $2 million.  Our total investment in the venture as of June 30, 2006 is $1.1 million. We expect to make additional aggregate capital contributions of approximately $700,000 to the joint venture during the next 15 months, bringing our total expected investment in the project to $1.8 million.  After payment of a 10% preferred return on invested capital to us and our partner, first tier profits are generally allocated 75% to our partner and 25% to us and second tier profits and losses over $5 million are generally allocated on a 50/50 basis. The first $5 million of losses are generally allocated 80% to our partner and 20% to us.  While we exert a large degree of influence over the joint venture, our partner does have

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various substantive participating rights such as approval rights with regard to the majority of business decisions, including approval of project budgets.

Homebuilding

We acquired no single-family residential lots during the first six months of 2006. Although home prices in Southern California increased dramatically over the last few years, we have not seen price appreciation in our markets in the first half of 2006, and expect modest, if any, increases over the next year. We have noticed a number of large national homebuilders offering various buyer incentives and there is also a possibility of price decreases over the next 12 months. We delivered 28 homes during the second quarter of 2006, compared to only four deliveries during the comparable period in 2005. The record rainfall during the fourth quarter of 2004 and the first quarter of 2005 negatively impacted our construction schedule and contributed to our lower number of home deliveries in the second quarter of 2005.

Our homebuilding projects are described below:

									Deliveries
									Quarter Ended
		Land	Commenced			Commenced			June 30,
	Location	Acquisition	Construction			Sales			2006	2005
Completed Projects	Various	n/a		n/a			n/a		—	4
Active Projects
Chandler Ranch	North Corona	2004		2005			2005		6	—
Cancion	Rancho Santa Fe	2003-2005		2005			2005		6	—
Alisal at Lancaster	Lancaster	2004		2004			2005		16	—
Alisal at Ontario	Ontario	2005		2005			2006		—	—
Woodhaven	Beaumont	2005		2005			2006		—	—
Hearthside Lane	Corona	2005		2005			2006	(a)	—	—
Quartz Hill	Lancaster	2005		2006			2006	(a)	—	—
Brightwater	Bolsa Chica	1970		2006			2007	(a)	—	—
					Total Deliveries				28	4

(a)Pending

Rancho Santa Fe.   In October 2003, we entered into an agreement to acquire 32 lots in a luxury golf community known as Crosby Estates in the Rancho Santa Fe area of San Diego County in California. We acquired the lots during the period from October 2003 to March 2005.  During 2005, two model homes averaging approximately 3,370 square feet were completed and six homes were delivered at an average price of $1,223,000.  We delivered six homes during the first half of 2006 at an average price of $1,359,000. During July 2006, six additional homes were delivered at an average price of $1,421,000, and as of July 31, 2006, eight homes are in escrow at an average price of $1,420,000, two homes are completed and held for sale, and four additional homes are under construction and held for sale.

Lancaster.   We acquired 104 lots in the City of Lancaster in northern Los Angeles County during May 2004. We began construction of model homes averaging approximately 2,800 square feet during the third quarter of 2004 and opened for home sales in January 2005.  During 2005, we delivered 55 homes at an average price of $406,000. We delivered 26 homes during the first half of 2006 at an average price of $424,000, delivered an additional nine homes during July and, as of July 31, 2006, seven homes are in escrow at an average price of $488,000, and six homes are completed models or are under construction and held for sale. In April 2005, we acquired an additional 73 unentitled lots in Lancaster. We are completing the entitlement process and plans for the project and expect to begin construction during 2007.

In December 2005, we acquired 77 additional lots in an area known as Quartz Hill in the City of Lancaster. The homes in this community will be on 10,000 square foot lots and will average 3,642 square feet. Construction of models began in May 2006 and we opened for sales during July 2006. As of July 31, 2006, three model homes and the first 13 production homes are under construction, and six homes have been released for sale.

Corona.   We acquired 83 lots in North Corona in May 2004. Following construction of infrastructure, during April 2005, we began construction of homes averaging 3,160 square feet. We opened for sales during the third quarter of 2005 and delivered 44 homes during the first half of 2006 at an average price of $607,000 and delivered two additional homes in July. As of July 31, 2006, five homes are in escrow at an average price of $595,000, six homes are completed and held for sale, and six additional homes are under construction and have been released for sale.

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During April 2005, we acquired 151 lots in Corona.  Following construction of infrastructure, construction of homes averaging 3,600 square feet on lots of approximately 7,200 square feet is expected to begin during the third quarter of 2006.

Ontario.   During April 2005, we acquired 26 lots in the City of Ontario in Riverside County, California. This small community of homes, planned to average 3,380 square feet, is an infill site situated very close to the projects we recently completed in the City of Chino. Construction began during the fourth quarter of 2005, and we opened for sales during March 2006. As of July 31, 2006, four homes are in escrow at an average price of $690,000, and nine additional homes are under construction and have been released for sale.

Beaumont.   We acquired 102 lots in the City of Beaumont during the third quarter of 2005. Following construction of infrastructure, construction of homes averaging 2,500 square feet began during the first quarter of 2006, and sales commenced during March 2006. As of July 31, 2006, 14 homes are in escrow at an average price of $403,000 and 26 additional homes are under construction and have been released for sale.

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Outlook

The housing market in Southern California has slowed during the first half of 2006.  For the second quarter of 2006, our net new orders decreased 57% to 16 homes from 37 homes for the second quarter of 2005. The decrease in net new orders reflects the industry-wide slowdown and is comparable to the 55% decrease in the first quarter of 2006 (29 homes for the first quarter of 2006 compared with 64 homes for the first quarter of 2005). At the same time, backlog as of quarter end decreased 48% (49 as of June 30, 2006 compared with 94 as of June 30, 2005), while the value of homes in backlog decreased only 24% to $39.8 million from $52.3 million. Although the homebuilding business historically has been cyclical, it has not undergone an economic down cycle in a number of years. Further, during 2005, home prices rose significantly in all of our markets. This has led some people to assert that the prices of land, new homes and the stock prices of homebuilding companies may be inflated and may decline further if the demand for new homes weakens further. A decline in the prices for new homes could adversely affect both our revenues and margins. A decline in our stock price could make raising capital through stock issuances more difficult and expensive.

We believe this slowdown is attributable to an overall softening of demand for new homes as well as an oversupply of homes available for sale. We attribute the reduction in demand to reduced affordability of new homes due to rapid price increases over the last six years and concerns on the part of prospective home buyers about the future direction of home prices and interest rates, and their ability to sell existing homes. In addition, speculators and investors are no longer helping to fuel demand. We try to avoid selling homes to speculators and build very few homes without having a signed agreement of sale. Nonetheless, we have been impacted by an overall increase in the supply of homes available for sale in our markets as speculators attempt to sell the homes they previously purchased or cancel contracts for homes under construction. At the same time, many of the large national homebuilders operating in our markets are attempting to reduce their inventories by offering incentives and/or lowering prices.

In addition, based on the high cancellation rates reported by other builders, and on the increased cancellation rates we have experienced, non-speculative buyer cancellations are also adding to the supply of homes in the marketplace. Our cancellations increased to five and 17 in the three and six months ended June 30, 2006, compared to none in the comparable periods of 2005.

Despite this slowdown, we remain cautiously optimistic about the future growth of our business. The long term outlook for homebuilding in Southern California remains strong due to the continuing regulation-induced constraints on lot supplies. We have traditionally employed a conservative approach to managing our real estate inventories and believe we are well-positioned to withstand the effects of the market downturn as it unfolds.

There can be no assurance regarding the duration of the current slowdown of the Southern California residential real estate market.  In particular, (i) the significant increases in home prices over the last six years and the related decline in the affordability of new homes in Southern California, (ii)  the state of the national economy, continued increases in interest rates by the Federal Reserve Board and the possibility of a recession in the future, and (iii) the volatility in the stock market, collectively may exert recessionary pressures on the California economy and may have further negative impacts on the Southern California housing market.

Critical Accounting Policies

In the preparation of the Consolidated Financial Statements, we applied accounting principles generally accepted in the United States of America. The application of generally accepted accounting principles may require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying results. Listed below are those policies and estimates that we believe are critical and require the use of complex judgment in their application. In particular, our critical accounting policies and estimates include the evaluation of the impairment of long-lived assets and the evaluation of the probability of being able to realize the future benefits indicated by our significant federal tax net operating losses, as discussed further in Notes 2 and 6 to the Consolidated Financial Statements.

Impairment of Long-Lived Assets

We assess the impairment of real estate inventories and other long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires that an impaired asset, for which costs cannot be recovered from estimated undiscounted future cash flows, be written down to fair value. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As provided by SFAS No. 144, impairment is evaluated by comparing an asset’s carrying value to the undiscounted estimated cash flows expected from the asset’s operations and eventual disposition. If the sum of the undiscounted estimated future cash flows is less than the carrying value of the asset, an impairment loss is recognized based on the fair value of the asset. If impairment occurs, the fair value of an asset for purposes of SFAS No. 144 is deemed to be the amount a willing buyer would pay a willing seller

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for such asset in a current transaction. These assets are carried at cost, unless the carrying amount of the parcel or subdivision is determined not to be fully recoverable, in which case the impaired real estate is written down to fair value. Given the significance of the carrying value of real estate inventories, the application of SFAS No. 144 in evaluating any potential impairment is critical to our consolidated financial statements, as discussed further in Note 2 to the Consolidated Financial Statements.

The Bolsa Chica property is our largest asset. Prior to the December 2005 receipt of our Brightwater permit, the property was included in land held for future development or sale. In December 2005, we sold approximately 146 acres of the property to the State. Beginning in December 2005, the remaining portion consisting of approximately 214 acres is included in real estate inventories.

In accordance with SFAS No. 144, in developing estimated future cash flows for impairment testing, we incorporated our own market assumptions including those regarding home prices, infrastructure, home-building costs, and financing costs regarding real estate inventories.  Additionally, as appropriate, we identify alternative courses of action to recover the carrying value of our long-lived assets and evaluate all likely alternatives under a probability-weighted approach as described in SFAS No. 144.

The estimation process involved in the determination of value is inherently uncertain because it requires estimates as to future events and market conditions. Such estimation process assumes our ability to complete development and disposition of our real estate properties in the ordinary course of business based on management’s present plans and intentions. Economic, market, and environmental conditions may affect management’s development and marketing plans. In addition, the implementation of such development and marketing plans could be affected by the availability of future financing for development and construction activities. The development of our Brightwater project is dependent upon various economic factors. Accordingly, the amount ultimately realized from such project may differ materially from current estimates and the project’s carrying value.

Basis of Consolidation

Certain of our wholly-owned subsidiaries are members in joint ventures involved in the development and sale of residential projects and residential loan production. Our consolidated statements include our accounts and all of our majority-owned and controlled subsidiaries and joint ventures. The financial statements of joint ventures in which we generally have a controlling or majority economic interest (and thus are controlled by us) are consolidated with our financial statements. Minority interest represents the equity interest of our joint venture partner for one consolidated venture. Our investments in unconsolidated joint ventures are accounted for using the equity method when we do not have voting or economic control of the venture operations.

Income Taxes

We account for income taxes on the liability method. Deferred income taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities. The liability method requires an evaluation of the probability of being able to realize the future benefits indicated by deferred tax assets, such as tax net operating losses. A valuation allowance related to the deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. Given the significance of our historical federal tax net operating losses, as discussed in Note 6 to the Consolidated Financial Statements, the application of our policy in evaluating the expected future benefit of net operating losses is critical. In applying those policies, estimates and judgments affect the amounts at which certain assets and liabilities are recorded. We apply our accounting policies on a consistent basis. As circumstances change, they are considered in our estimates and judgments, and future changes in circumstances could result in changes in amounts at which assets and liabilities are recorded.

We remain subject to the general rules of Section 382, which limit the availability of net operating losses if an ownership change occurs. If we were to experience another ownership change, the amount of net operating losses available would generally be limited to an annual amount equal to (i) the value of our equity immediately before the ownership change, multiplied by the long-term tax-exempt rate (4.45% as of July 2006) plus (ii) recognized built-in-gains, defined as those gains recognized within five years of the ownership change subject to an overall limitation of the net unrealized built-in gains  existing as of the ownership change date. We believe we have net unrealized built-in gains sufficient to allow utilization of the entire net operating loss, assuming that we are able to recognize these gains within the five-year time limitation. We estimate that as of July 31, 2006, we have experienced a three-year cumulative ownership shift of approximately 44%, as computed in accordance with Section 382.

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Homebuilding Revenues and Cost of Sales

Our homebuilding operation generates revenues from the sale of homes to homebuyers. The majority of these homes are designed to appeal to move-up homebuyers and the homes are generally offered for sale in advance of their construction. Sales contracts are usually subject to certain contingencies such as the buyer’s ability to qualify for financing. Revenue from the sale of homes is recognized at closing when title passes to the buyer, and the earnings process is complete. As a result, our revenue recognition process does not involve significant judgments or estimates. However, we do rely on certain projections and estimates to determine the related construction costs and resulting gross margins associated with revenues recognized. The cost of sales is recorded based upon total estimated costs within a subdivision and allocated using the relative sales value method. Our construction costs are comprised of direct and allocated costs, including estimated costs for future warranties and indemnities. Our estimates are based on historical results, adjusted for current factors.

Litigation Reserves

We and certain of our subsidiaries have been named as defendants in various cases arising in the normal course of business and regarding assets and businesses disposed of by us or our former affiliates. See Notes 5 and 7 to the Consolidated Financial Statements. We have reserved for costs expected to be incurred with respect to these cases based upon information provided by our legal counsel. There can be no assurance that total litigation costs actually incurred will not exceed the amount of such reserve.

Recent Accounting Pronouncements

See discussion regarding recent accounting pronouncements in Note 2 to the Consolidated Financial Statements.

Results of Operations

Three Months Ended June 30, 2006 Compared with the Three Months Ended June 30, 2005

We reported revenues of $18.8 million and gross operating profit of $3.2 million for the second quarter of 2006, compared with $3.1 million in revenues and gross operating profit of $900,000 for the same period of 2005. Revenues in the current period reflect deliveries of 28 homes, including 16 homes at the “Alisal” project in Lancaster, six homes at the “Chandler Ranch” project in North Corona and six homes at the Rancho Santa Fe project.  The comparable period of the prior year reflects deliveries of four homes at the “Jasper Ranch” project in Riverside.  The current quarter’s gross margin of 17.0% is lower than the prior period gross margin of 29.0% due to the lower profitability of the Lancaster and North Corona (Chandler Ranch) homes delivered during the current quarter as compared with the Riverside (Jasper Ranch) homes delivered during the comparable period of the prior year. Revenue per home declined by $104,000, reflecting the lower price level of homes in Lancaster compared with homes in the Inland Empire and a higher-end product delivered at our Jasper Ranch project in 2005. The decline in gross margin percentage reflects lower levels of price appreciation resulting from shorter holding periods for the land underlying the homes delivered during the three months ended June 30, 2006.

The $700,000 increase in selling, general and administrative expenses during the second quarter of 2006, as compared with the second quarter of 2005, primarily reflects an increased accrual for incentive-formula bonuses related to the increased profitability of our homebuilding business.

The $300,000 increase in other income during the second quarter of 2006 compared with the second quarter of 2005 primarily reflects interest income on short-term investments during the 2006 period.

Six Months Ended June  30, 2006 Compared with Six Months Ended June 30, 2005

We reported revenues of $46.7 million and gross operating profit of $7.9 million for the first six months of 2006 compared with $9.6 million in revenues and gross operating profit of $2.6 million for the first six months of 2005.  Our revenues during the current six-month period were significantly higher than the prior six-month period due to the greater number of homes delivered, while the average revenue per home decreased by $79,000 to $607,000.  Revenues in the first six months of 2006 reflect deliveries of 77 homes, including 44 homes at our North Corona project, 26 homes at the Lancaster project, six homes at our Rancho Santa Fe project, and one home at the Riverside (Jasper Ranch) project.  The comparable period of the prior year reflects an aggregate of 14 homes including 10 homes at the Chino project and four

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homes at the Jasper Ranch project.  The decrease in revenue per home reflects the lower price level of homes in Lancaster compared with homes in the Inland Empire and a higher-end product delivered at our Jasper Ranch project in 2005. The homebuilding gross margin for the first six months of 2006 of 16.9% is lower than the prior period gross margin of 27.1% and the per unit average gross margin decreased by $83,000 to $103,000.  The decline in gross margin percentage reflects lower levels of price appreciation resulting from shorter holding periods for the land underlying the homes delivered during the six months ended June 30, 2006.

The $1.2 million increase in selling, general and administrative expenses during the first six months of 2006 compared with the first six months of 2005 primarily reflects an increased accrual for incentive-formula bonuses related to the increased profitability of our homebuilding businesses.

The $800,000 increase in other income during the six months ended June 30, 2006 as compared with the same period last year primarily reflects interest income on short-term investments during the 2006 period.

During the quarter ended March 31, 2005, we recorded reversals of valuation allowances on post-Reorganization NOLs of $4.7 million following the Coastal Commission’s approval of the development plan for 349 homes on the Upper Mesa (see Note 6), which is reflected in Results of Operations for the six months ended June 30, 2005.

Payments Under Contractual Obligations

We have entered into certain contractual obligations to make future payments for items such as project debt, lease agreements and liability insurance.  A summary of the payments due under specified contractual obligations, aggregated by category of contractual obligation, for specified time periods is presented below as of June 30, 2006 (in millions):

			Payments due by period
			Less						More
			than 1		1-3		4-5		than 5
	Total		year		years		years		years
Project debt	$	48.7	$	48.7	$	—	$	—	$	—
Operating leases	.1		.1		—		—		—
Insurance premium payable	4.3		4.3		—		—		—
Total	$	53.1	$	53.1	$	—	$	—	$	—

Our purchase contracts which are made in the normal course of our homebuilding business for land acquisition and construction subcontracts are generally cancelable at will. Other contractual obligations including our tax liabilities, accrued benefit liability for a frozen retirement plan and other accrued pensions, home warranty reserves and contingent indemnity and environmental obligations are estimated based on various factors. Payments are not due as of a given date, but rather are dependent upon the incurrence of professional services, the lives of annuitants and other factors. The estimation process involved in the determination of carrying values of these obligations is inherently uncertain since it requires estimates as to future events and contingencies. We have provided additional disclosure in Item 1. “Legal Proceedings” and in Note 5 to our Consolidated Financial Statements.

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Liquidity and Capital Resources

Year-over-year changes in the principal components of our liquidity and capital resources are as follows (in millions, except percentages):

	Six Months Ended June 30,
	2006			2005
Cash and cash equivalents	$	2.7		$	5.4
Short-term investments	15.1			—
Cash used in operating activities	9.3			55.3
Cash provided by investing activities	13.6			.5
Cash (used in) provided by financing activities	(9.3		)	51.2

The principal assets in our portfolio are residential land which must be held over an extended period of time in order to be developed to a condition that, in management’s opinion, will ultimately maximize our return. Consequently, we require significant capital to finance our real estate development and homebuilding operations. Historically, sources of capital have included loan facilities secured by specific projects, asset sales and available internal funds. We are currently utilizing internally generated cash to fund our Brightwater development at Bolsa Chica and, along with joint venture contributions, to fund the Oxnard land development project.  We expect to obtain construction financing for infrastructure and homebuilding activities at Brightwater during the third quarter of 2006 as further described in Note 8 to the Financial Statements. We expect to make aggregate additional capital contributions of approximately $700,000 to the Oxnard joint venture during the next 15 months, bringing our total expected investment in the project to $1.8 million. For the year to date period, we have primarily utilized internally generated cash to fund new construction at our homebuilding projects in order to reduce the negative arbitrage between interest costs on project debt compared with interest income earned on short-term investments. As of June 30, 2006, based on construction in place, the immediately available borrowing capacity on our construction loan facilities is approximately $20 million, and additional facility availability for future construction costs is approximately $55 million. Our current and pending homebuilding projects (excluding Brightwater), which are primarily in the “Inland Empire” area of Southern California (Riverside and San Bernardino counties) and Lancaster in northeastern Los Angeles County, are currently expected to generate approximately $95 million of positive cash flows over the next three years, based on present economic conditions and market assumptions. However, any adverse change in such conditions or assumptions would adversely impact the amount of our cash flows. Our unrestricted cash and cash equivalents and short-term investments as of June 30, 2006 were $17.8 million. We believe that our cash and cash equivalents, short-term investments, future real estate sales proceeds, and funds available under our current and future credit agreements will be sufficient to meet anticipated operating and capital investment requirements, including payment of the special dividend discussed in “Strategic Alternatives” above and in Note 8 to the Financial Statements and project development costs for homebuilding projects, the Oxnard and Brightwater land development projects, and general and administrative expenses, for at least the next 12 months.

We are subject to the usual obligations associated with entering into contracts for the purchase of land and improved homesites. The purchase of properties under these contracts is generally contingent upon satisfaction of certain requirements by the sellers, including obtaining applicable property entitlements. We also utilize option contracts with third-party land sellers and financial entities as a method of acquiring land in staged takedowns and minimizing the use of funds from other corporate financing sources. These option contracts also help to manage the financial and market risk associated with land holdings. Purchase and option contracts generally require the payment of a non-refundable cash deposit of 5% to 15% of the purchase price for the right to acquire lots over a specified period of time (usually one to two years) at predetermined prices. We have the right at our discretion to terminate our obligations under these land purchase and option agreements by forfeiting the cash deposit with no further financial responsibility. As of June 30, 2006, we have one consolidated land option deposit for $25,000 which is refundable. In addition, our unconsolidated Oxnard joint venture has land deposits.

We may enter into land development and homebuilding joint ventures from time to time as a means of expanding our market opportunities, establishing strategic alliances, managing our risk profile and leveraging our capital base. These joint ventures may obtain secured acquisition, development and construction financing, which minimize the use of funds from other corporate financing sources.

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June 30, 2006 Compared with December 31, 2005

Cash used in homebuilding operations of $9.3 million for the first half of 2006 primarily reflects real estate sales proceeds of $46.5 million from deliveries of 77 homes, offset by uses of cash for investments in real estate inventories and construction costs of $52.8 million. Additional significant uses of cash include approximately $9.2 million for net repayments of project debt financing to reduce the negative arbitrage between interest costs on project debt and interest income on short-term investments. The primary sources of cash during the period were net sales of short-term investments of $15.2 million. These items, as well as other activity presented in the Statements of Cash Flows, resulted in a $5.0 million decrease in cash and cash equivalents.

The $1.4 million decrease in deferred tax assets primarily reflects the usage of $300,000 of federal Pre-reorganization net operating losses (“NOLs”) and $1.1 million related to amounts not deductible until paid.

Off Balance Sheet Financing

In the ordinary course of business, we enter into land option contracts in order to procure land for the construction of homes. The use of such option agreements allows us to reduce the risks associated with land ownership and development; reduce our financial commitments, including interest and other carrying costs; and minimize land inventories. Under such land option contracts, we will fund a specified option deposit or earnest money deposit in consideration for the right to purchase land in the future, usually at a predetermined price.  Our liability is generally limited to forfeiture of the nonrefundable deposits, letters of credit and other nonrefundable amounts incurred. As of June 30, 2006, we have no consolidated land option deposits and no material third party guarantees.

We also acquire land and conduct residential construction activities through participation in joint ventures in which we hold less than a controlling interest. Through joint ventures, we reduce and share our risk and also reduce the amount invested in land, while increasing our access to potential future home sites. The use of joint ventures also, in some instances, enables us to acquire land which we might not otherwise obtain or access on as favorable terms, without the participation of a strategic partner. While we view the use of unconsolidated joint ventures as beneficial to our homebuilding activities, we do not view them as essential to those activities.

Our investment in unconsolidated joint ventures totaled $1.1 million and $700,000 at June 30, 2006 and December 31, 2005, respectively. These joint ventures had total assets of $7.1 million and $5.8 million as of June 30, 2006 and December 31, 2005, respectively, which included land deposits of $1.8 million and $1.6 million, respectively. In certain instances, we may provide varying levels of guarantees on debt of unconsolidated joint ventures. As of June 30, 2006, we provided no guarantees on debt of unconsolidated joint ventures.

Under the requirements of FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“FASB Interpretation No. 46(R)”), certain of our land option contracts may create a variable interest for us, with the land seller being identified as a VIE.  In compliance with FASB Interpretation No. 46(R), we analyze our land option contracts and other contractual arrangements and consider whether we should consolidate the fair value of certain VIEs from which we are purchasing land under option contracts. At June 30, 2006, we had no deposits with VIEs.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We utilize project debt financing for acquisition, development and construction of homes. The interest rates on our project debt approximate the current rates available for secured real estate financing with similar terms and maturities, and as a result, their carrying amounts approximate fair value. While changes in interest rates generally do not impact the fair market value of the debt instrument, they do affect our earnings and cash flows. Holding our variable rate debt balance constant as of June 30, 2006, each one point percentage increase in interest rates would result in an increase in variable rate interest incurred for the next 12 months of approximately $487,000.

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ITEM 4 - EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

No matter how well a control system is conceived and operated, it can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to costs.  Therefore, no cost-effective control systems and no evaluation of controls can provide absolute assurance that all control issues and instances of misstatements due to error or fraud, if any, within our company have been detected.

Evaluation of Disclosure Controls and Procedures

Our chief executive officer and chief financial officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report (the “Evaluation Date”). Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no significant changes in our internal control over financial reporting during the three months ended June 30, 2006 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 7 to the Consolidated Financial Statements above, and “Item 1 - Business - Corporate Indemnification Matters” and “Item 3 - - Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 1A - RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

There has not been any material change in the risk factors disclosure from that contained in our Form 10-K for the fiscal year ended December 31, 2005; however, the risks and uncertainties described in the Form 10-K are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations and financial condition.

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ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of stockholders was held on June 27, 2006. A quorum of common stock was present in person or by proxy. The following proposals were approved by the requisite vote of our stockholders entitled to vote, as follows:

Proposal No. 1:           The Director Proposal.   The director proposal recommended election of four directors to a one-year term. Set forth below is a table of how the votes were cast for each nominee, which constituted the affirmative votes for all nominees, by the holders of at least 81.9% of the outstanding common stock represented in person or by proxy at the Annual Meeting.

	Name		Votes Cast “For Nominee”		Votes “Withheld”
Geoffrey W. Arens		7,470,225		1,615,881
Phillip R. Burnaman II		7,470,225		1,615,881
Raymond J. Pacini		7,500,819		1,585,287
Thomas W. Sabin, Jr.		7,440,934		1,645,172

Proposal No. 2:           The Stock Option/Stock Issuance Plan Amendment Proposal.   The holders of common stock cast 6,143,933 votes “for” and 1,418,773 votes “against” the proposal to increase the number of shares of common stock issuable under the Amended and Restated 1993 Stock Option Stock Issuance Plan by an additional 250,000 shares, and to extend its term to December 31, 2020.  Such votes constituted the affirmative vote “for” the Stock Option/Stock Issuance Plan Amendment Proposal by the holders of approximately 60.5% of the outstanding common stock. There were 190,524 abstentions and 1,332,876 broker non-votes by the holders of shares of common stock with respect to the Stock Option/Stock Issuance Plan Amendment Proposal.

Proposal No. 3:           The Auditor Proposal.   The holders of common stock cast 8,887,447 votes “for” and 12,659 votes “against” the proposal to ratify the appointment of Deloitte & Touche, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006. Such votes constituted the affirmative vote “for” the Auditor Proposal by the holders of approximately 97.8% of the outstanding common stock represented in person or by proxy at the Annual Meeting. There were 186,000 abstentions and no broker non-votes by the holders of shares of common stock with respect to the Auditor Proposal.

ITEM 6 - EXHIBITS

10.1         Amended and Restated 1993 Stock Option/Stock Issuance Plan.

10.2Retirement Plan of the Registrant, Amended and Restated through December 19, 2001, dated December 21, 2001.

10.3         Amendment No. 1 to Retirement Plan of the Registrant dated December 30, 2002.

31.1Section 302 Certificate of Raymond J. Pacini, Chief Executive Officer of California Coastal Communities, Inc.

31.2         Section 302 Certificate of Sandra G. Sciutto, Chief Financial Officer of California Coastal Communities, Inc.

32Section 906 Certificate of Raymond J. Pacini, Chief Executive Officer and Sandra G. Sciutto, Chief Financial Officer of California Coastal Communities, Inc.*

*               These certifications are being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURE

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

Date: August 8, 2006	CALIFORNIA COASTAL COMMUNITIES, INC.
	By:	/s/ Sandra G. Sciutto
		SANDRA G. SCIUTTO
		Senior Vice President and
		Chief Financial Officer

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EX-10.1

Exhibit 10.1

CALIFORNIA COASTAL COMMUNITIES, INC.
AMENDED AND RESTATED
1993 STOCK OPTION/STOCK ISSUANCE PLAN

(As approved by the Board of Directors (i) on February 28, 2006 with required
Stockholder approval obtained on June 27, 2006; and on June 14, 2006
without the requirement of Stockholder approval)

ARTICLE ONE
GENERAL

I.PURPOSE OF THE AMENDED AND RESTATED PLAN

A.    This Amended and Restated 1993 Stock Option/Stock Issuance Plan (“Plan”) is intended to promote the interests of California Coastal Communities, Inc., a Delaware corporation (the “Corporation”), by providing (i) key employees (including officers) of the Corporation (or its parent or subsidiary corporations) who are responsible for the management, growth and financial success of the Corporation (or its parent or subsidiary corporations), and (ii) consultants and other independent contractors who provide valuable services to the Corporation (or its parent or subsidiary corporations) with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation (or its parent or subsidiary corporations).

B.     The Plan amends and restates the Corporation’s Amended and Restated 1993 Stock Option/Stock Issuance Plan (the “1993 Plan”) which was adopted by the Board on March 4, 2004 and was approved by the Corporation’s stockholders on May 27, 2004.

II.   DEFINITIONS

A.    For purposes of the Plan, the following definitions shall be in effect:

Board:           the Corporation’s Board of Directors.

Change in Control:    a change in ownership or control of the Corporation effected through either of the following transactions:

a.      any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept; or

b.      a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either (A) have been Board members continuously since the beginning of such period or (B) have been elected or nominated for election as Board members during such period by at least a majority of the Board members

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described in clause (A) who were still in office at the time such election or nomination was approved by the Board.

Common Stock:    shares of the Corporation’s Common Stock, par value $.05 per share, on a post 1997 capital stock combination and one for one hundred (1:100) reverse stock split basis.

Code:    the Internal Revenue Code of 1986, as amended.

Committee:    the committee of two (2) or more non-employee Board members appointed by the Board to administer the Plan.

Corporate Transaction:    any of the following stockholder-approved transactions to which the Corporation is a party:

a.      a merger or consolidation in which the Corporation is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Corporation is incorporated,

b.      the sale, transfer or other disposition of all or substantially all of the assets of the Corporation in complete liquidation or dissolution of the Corporation, or

c.      any reverse merger in which the Corporation is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such merger.

Employee:     an individual who performs services while in the employ of the Corporation or one or more parent or subsidiary corporations, subject to the control and direction of the employer entity not only as to the work to be performed but also as to the manner and method of performance.

Exercise Date:    the date on which the Corporation shall have received written notice of the option exercise.

Fair Market Value:    the Fair Market Value per share of Common Stock determined in accordance with the following provisions:

a.      If the Common Stock is not at the time listed or admitted to trading on any national securities exchange but is traded on the Nasdaq National Market, the Fair Market Value shall be the closing selling price per share of that security on the date in question, as such price is reported by the National Association of Securities Dealers through the Nasdaq National Market or any successor system. If there is no reported closing selling price for the Common Stock on the date in question, then the closing selling price per share of that security on the last preceding date for which such quotation exists shall be determinative of Fair Market Value.

b.      If the Common Stock is at the time listed or admitted to trading on any national stock exchange, then the Fair Market Value shall be the closing selling price per share of that security on the date in question on the exchange serving as the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no reported sale of Common Stock on such exchange on the date

2

in question, then the Fair Market Value shall be the closing selling price per share of that security on the exchange on the last preceding date for which such quotation exists.

Hostile Take-Over:    a change in ownership of the Corporation effected through the following transaction:

a.any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders which the Board does not recommend such stockholders to accept, and

b.more than fifty percent (50%) of the securities so acquired in such tender or exchange offer are accepted from holders other than the officers and directors of the Corporation subject to the short-swing profit restrictions of Section 16 of the 1934 Act.

Incentive Option:    a stock option which satisfies the requirements of Code Section 422.

1934 Act:    the Securities and Exchange Act of 1934, as amended.

Non-Statutory Option:    a stock option not intended to meet the requirements of Code Section 422.

Optionee:     any person to whom an option is granted under the Discretionary Option Grant Program in effect under the Plan.

Permanent Disability or Permanently Disabled:    the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve (12) months or more.

Plan Administrator:    the Committee in its capacity as the administrator of the Plan.

Service:        the performance of services on a periodic basis to the Corporation (or any parent or subsidiary corporation) in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant or advisor, except to the extent otherwise specifically provided in the applicable stock option or stock issuance agreement.

Take-Over Price:    the greater of (a) the Fair Market Value per share of the Common Stock subject to the particular option surrendered to the Corporation in connection with a Hostile Take-Over on the date such option surrender is effected or (b) the highest reported price per share of that security paid by the tender offeror in effecting such Hostile Take-Over. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the clause (a) price per share.

B.     The following provisions shall be applicable in determining the parent and subsidiary corporations of the Corporation:

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—     Any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation shall be considered to be a parent of the Corporation, provided each such corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

—     Each corporation (other than the Corporation) in an unbroken chain of corporations which begins with the Corporation shall be considered to be a subsidiary of the Corporation, provided each such corporation in the unbroken chain (other than the last corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

III.  STRUCTURE OF THE PLAN

A.    Stock Programs.    The Plan shall be divided into two (2) separate components: the Discretionary Option Grant Program specified in Article Two and the Director Fee Program specified in Article Three. Under the Discretionary Option Grant Program, eligible individuals may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock in accordance with the provisions of Article Two. Under the Director Fee Program, each non-employee Board member may, in accordance with the provisions of Article Three, elect to apply all or any portion of his or her annual retainer fee to the acquisition of unvested shares of Common Stock.

B.     General Provisions.    Unless the context clearly indicates otherwise, the provisions of Articles One and Four shall apply to the Discretionary Option Grant Program and the Director Fee Program and shall accordingly govern the interests of all individuals under the Plan.

IV.    ADMINISTRATION OF THE PLAN

A.    The Discretionary Option Grant Program shall be administered by the Committee in its capacity as Plan Administrator. No non-employee Board member shall be eligible to serve on the Committee if such individual has, within the twelve (12)-month period immediately preceding the date of his or her appointment to the Committee, received an option grant or direct stock issuance under this Plan or any other stock plan of the Corporation (or any parent or subsidiary corporation), other than pursuant to the Director Fee Program.

B.     Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time.

C.     The Committee as Plan Administrator shall have full power and authority (subject to the express provisions of the Plan) to establish rules and regulations for the proper administration of the Discretionary Option Grant Program and to make such determinations under, and issue such interpretations of, the provisions of such program and any outstanding option grants thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Discretionary Option Grant Program or any outstanding option or unvested share issuance thereunder.

D.     Administration of the Director Fee Program shall be self-executing in accordance with the express terms and conditions of Article Three and the Committee as Plan Administrator shall

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exercise no discretionary functions with respect to option grants or share issuances made pursuant to those programs.

V.     OPTION GRANTS AND STOCK ISSUANCES

A.    The persons eligible to participate in the Discretionary Option Grant Program under Article Two shall be limited to the following:

—     officers and other key employees of the Corporation (or its parent or subsidiary corporations) who render services which contribute to the management, growth and financial success of the Corporation (or its parent or subsidiary corporations);

—     members of the Board or the members of the board of directors of any parent or subsidiary corporation; and

—     those consultants or other independent contractors who provide valuable services to the Corporation (or its parent or subsidiary corporations).

B.     Non-employee Board members who serve as Plan Administrator shall not, during their period of service as such, be eligible to participate in the Discretionary Option Grant Program or in any other stock option, stock purchase, stock bonus or other stock plan of the Corporation (or its parent or subsidiary corporations), other than the Director Fee Program, to the extent they are eligible for participation in those latter programs in accordance with the provisions of Articles Three.

C.     The Plan Administrator shall have full authority to determine which eligible individuals are to receive option grants under the Discretionary Option Grant Program, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times at which each granted option is to become exercisable and the maximum term for which the option is to remain outstanding.

VI.   STOCK SUBJECT TO THE PLAN

A.    Shares of Common Stock shall be available for issuance under the Plan and shall be drawn from either the Corporation’s authorized but unissued shares of Common Stock or from reacquired shares of Common Stock, including shares repurchased by the Corporation on the open market. One Million One Hundred Fifty Nine Thousand Nine Hundred and Eighty-Four (1,159,984) shares of Common Stock may be issued over the term of the Plan, subject to adjustment from time to time in accordance with the provisions of this Section VI. Such authorized share reserve is comprised of the number of shares of Common Stock which remained available for issuance under the 1993 Plan prior to this amendment, as reduced by this amendment.

B.     In no event shall there be issued over the remaining term of the Plan, from the effective date of this amendment to the 1993 Plan until the termination of the Plan pursuant to Article Four, Section IV, more than One Million One Hundred Fifty Nine Thousand Nine Hundred and Eighty-Four (1,159,984) shares in the aggregate of Common Stock. The foregoing share limitations shall be subject to periodic adjustment in accordance with the provisions of Section F of this Article VI.

C.     Should one or more outstanding options under this Plan expire or terminate for any reason prior to exercise in full then the shares subject to the portion of each option not so exercised shall be available for subsequent issuance under the Plan. Shares subject to any option or portion

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thereof surrendered in accordance with Section IV of Article Two and all share issuances under the Plan, whether or not the shares are subsequently repurchased by the Corporation pursuant to its repurchase rights under the Plan, shall reduce on a share-for-share basis the number of shares of Common Stock available for subsequent issuance under the Plan. In addition, should the exercise price of an outstanding option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an outstanding option under the Plan or the vesting of a direct share issuance made under the Plan, then the number of shares of Common Stock (as the case may be) available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vest under the share issuance, and not by the net number of shares of Common Stock actually issued to the holder of such option or share issuance.

D.     Should any change be made to the Common Stock issuable under the Plan by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, then appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, (ii) the maximum number and/or class of securities in the aggregate for which any one individual participating in the Plan may be granted stock options, separately exercisable stock appreciation rights and direct share issuances over the term of the Plan, (iii) the number and/or class of securities for which share issuances are subsequently to be made to non-employee Board members under the Director Fee Program, and (iv) the number and/or class of securities and price per share in effect under each option outstanding under the Discretionary Option Grant. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive.

ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM

I.     TERMS AND CONDITIONS OF OPTIONS

Options granted pursuant to the Discretionary Option Grant Program shall be authorized by action of the Plan Administrator and may, at the Plan Administrator’s discretion, be either Incentive Options or Non-Statutory Options. Individuals who are not Employees of the Corporation or its parent or subsidiary corporations may only be granted Non-Statutory Options. Each granted option shall be evidenced by one or more instruments in the form approved by the Plan Administrator; provided, however, that each such instrument shall comply with the terms and conditions specified below. Each instrument evidencing an Incentive Option shall, in addition, be subject to the applicable provisions of Section II of this Article Two.

A.    Exercise Price.

1.      The exercise price per share of Common Stock subject to any option granted under this Article Two shall be fixed by the Plan Administrator at the time of the grant, but in no event shall such exercise price be less than one hundred percent (100%) of the Fair Market Value per share of that security on the grant date.

2.      The exercise price shall become immediately due upon exercise of the option and, subject to the provisions of Section I of Article Four and the instrument evidencing the grant, shall be payable in one of the following alternative forms specified below:

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a.      full payment in cash or check made payable to the Corporation’s order;

b.      full payment in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date;

c.      full payment in a combination of shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date and cash or check drawn to the Corporation’s order; or

d.      to the extent the option is exercised for vested shares, full payment through a broker-dealer sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to (i) a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation in connection with such purchase and (ii) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale transaction.

Except to the extent the sale and remittance procedure is utilized in connection with the exercise of the option for vested shares, payment of the exercise price for the purchased shares must accompany the exercise notice.

B.     Term and Exercise of Options.    Each option granted under this Discretionary Option Grant Program shall be exercisable at such time or times and during such period as is determined by the Plan Administrator and set forth in the instrument evidencing the grant. No such option, however, shall have a maximum term in excess of ten (10) years from the grant date. During the lifetime of the Optionee, the option, together with any stock appreciation rights pertaining to such option, shall be exercisable only by the Optionee and shall not be assignable or transferable by the Optionee except for a transfer of the option effected by will or by the laws of descent and distribution following the Optionee’s death.

C.     Termination of Service.

1.      The following provisions shall govern the exercise period applicable to any outstanding options under this Article Two held by the Optionee at the time of cessation of Service or death:

—     Should an Optionee cease Service for any reason (including death or Permanent Disability) while holding one or more outstanding options under this Article Two, then none of those options shall (except to the extent otherwise provided pursuant to subparagraph 3 below) remain exercisable for more than a thirty-six (36)-month period (or such shorter period determined by the Plan Administrator and set forth in the instrument evidencing the grant) measured from the date of such cessation of Service.

—     Any option held by the Optionee under this Article Two and exercisable in whole or in part on the date of his or her death may be subsequently exercised by the

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personal representative of the Optionee’s estate or by the person or persons to whom the option is transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution. The right to exercise such option, however, shall lapse upon the earlier of (i) the third anniversary of the date of the Optionee’s death (or such shorter period determined by the Plan Administrator and set forth in the instrument evidencing the grant) or (ii) the specified expiration date of the option term. Accordingly, upon the occurrence of the earlier event, the option shall terminate and cease to be outstanding.

—     During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of shares (if any) in which the Optionee is vested at the time of his or her cessation of Service. Upon the expiration of the limited post-Service exercise period or (if earlier) upon the specified expiration date of the option term, each such option shall terminate and cease to he outstanding with respect to any vested shares for which the option has not otherwise been exercised. However, each outstanding option shall immediately terminate and cease to be outstanding, at the time of the Optionee’s cessation of Service, with respect to any shares for which the option is not otherwise at that time exercisable or in which the Optionee is not otherwise vested.

—     Under no circumstances shall any such option be exercisable after the specified expiration date of the option term.

—     Should (i) the Optionee’s Service be terminated for misconduct (including, but not limited to, any act of dishonesty, willful misconduct, fraud or embezzlement) or (ii) the Optionee make any unauthorized use or disclosure of confidential information or trade secrets of the Corporation or its parent or subsidiary corporations, then in any such event all outstanding options held by the Optionee under this Article Two shall terminate immediately and cease to be outstanding.

2.      The Plan Administrator shall have complete discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to permit one or more options held by the Optionee under this Article Two to be exercised, during the limited post-Service exercise period applicable under subparagraph 1 above, not only with respect to the number of vested shares of Common Stock for which each such option is exercisable at the time of the Optionee’s cessation of Service but also with respect to one or more subsequent installments of vested shares for which the option would otherwise have become exercisable had such cessation of Service not occurred.

3.      The Plan Administrator shall also have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to extend the period of time for which the option is to remain exercisable following the Optionee’s cessation of Service or death from the limited period in effect under subparagraph 1 above to such greater period of time as the Plan Administrator shall deem appropriate. In no event, however, shall such option be exercisable after the specified expiration date of the option term.

D.     Stockholder Rights.    An Optionee shall have no stockholder rights with respect to any shares covered by the option until such individual shall have exercised the option and paid the exercise price for the purchased shares.

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E.     Repurchase Rights.    The shares of Common Stock acquired upon the exercise of any Article Two option grant may be subject to repurchase by the Corporation in accordance with the following provisions:

—     The Plan Administrator shall have the discretion to authorize the issuance of unvested shares of Common Stock under this Article Two. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase any or all of those unvested shares at the exercise price paid per share. The terms and conditions upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the instrument evidencing such repurchase right.

—     All of the Corporation’s outstanding repurchase rights under this Article Two shall automatically terminate, and all shares subject to such terminated rights shall immediately vest in full, upon the occurrence of a Corporate Transaction, except to the extent: (i) any such repurchase right is expressly assigned to the successor corporation (or parent thereof) in connection with the Corporate Transaction or (ii) such termination is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued.

—     The Plan Administrator shall have the discretionary authority, exercisable either before or after the Optionee’s cessation of Service, to cancel the Corporation’s outstanding repurchase rights with respect to one or more shares purchased or purchasable by the Optionee under this Discretionary Option Grant Program and thereby accelerate the vesting of such shares in whole or in part at any time.

II.    INCENTIVE OPTIONS

The terms and conditions specified below shall be applicable to all Incentive Options granted under this Article Two. Incentive Options may only be granted to individuals who are Employees of the Corporation. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall not be subject to such terms and conditions.

A.    Dollar Limitation.    The aggregate Fair Market Value (determined as of the respective date or dates of grant) of the Common Stock for which one or more options granted to any Employee under this Plan (or any other option plan of the Corporation or its parent or subsidiary corporations) may for the first time become exercisable as incentive stock options under the Federal tax laws during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as incentive stock options under the Federal tax laws shall be applied on the basis of the order in which such options are granted. Should the number of shares of Common Stock for which any Incentive Option first becomes exercisable in any calendar year exceed the applicable One Hundred Thousand Dollar ($100,000) limitation, then that option may nevertheless be exercised in that calendar year for the excess number of shares as a non-statutory option under the Federal tax laws.

B.     10% Stockholder.    If any individual to whom an incentive Option is granted is the owner of stock (as determined under Section. 424(d) of the Code) possessing ten percent (10%) or more of the total combined voting power of all classes of stock of the Corporation or any one of its

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parent or subsidiary corporations, then the exercise price per share of the Common Stock subject to that option shall not be less than one hundred and ten percent (110%) of the Fair Market Value per share of that security on the grant date, and the option term shall not exceed five (5) years, measured from the grant date.

Except as modified by the preceding provisions of this Section II, the provisions of Articles One, Two and Four of the Plan shall apply to all Incentive Options granted hereunder.

III.  CORPORATE TRANSACTIONS/CHANGES IN CONTROL

A.    In the event of any Corporate Transaction, each option which is at the time outstanding under this Article Two shall automatically accelerate so that each such option shall, immediately prior to the specified effective date for the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to such option and may be exercised for all or any portion of such shares. However, an outstanding option under this Article Two shall not so accelerate if and to the extent: (i) such option is, in connection with the Corporate Transaction, either to be assumed by the successor corporation or parent thereof or to be replaced with a comparable option to purchase shares of the capital stock of the successor corporation or parent thereof, (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the option spread existing at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such option or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. The determination of option comparability under clause (i) above shall be made by the Plan Administrator, and its determination shall be final, binding and conclusive.

B.     Immediately following the consummation of the Corporate Transaction, all outstanding options under this Article Two shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation or its parent company.

C.     Each outstanding option under this Article Two which is assumed in connection with the Corporate Transaction or is otherwise to continue in effect shall be appropriately adjusted, immediately after such Corporate Transaction, to apply and pertain to the number and class of securities which would have been issued to the option holder, in consummation of such Corporate Transaction, had such person exercised the option immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to the exercise price payable per share, provided the aggregate exercise price payable for such securities shall remain the same. In addition, the class and number of securities available for issuance under the Plan on both an aggregate and per participant basis following the consummation of the Corporate Transaction shall be appropriately adjusted.

D.     The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide (upon such terms as it may deem appropriate) for both (i) the automatic acceleration of one or more outstanding options granted under this Article Two Plan which are assumed or replaced in a Corporate Transaction and do not otherwise accelerate at that time and (ii) the immediate termination of one or more of the Corporation’s outstanding repurchase rights which are assigned in connection with such Corporate Transaction and do not otherwise terminate at that time, in the event the Optionee’s Service should subsequently terminate within a designated period following the effective date of such Corporate Transaction.

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E.     The Plan Administrator shall have the discretionary authority, exercisable either in advance of any actually-anticipated Change in Control or at the time of an actual Change in Control, to provide for the automatic acceleration of one or more outstanding options under this Article Two (and the immediate termination of one or more of the Corporation’s outstanding repurchase rights under this Article Two) upon the occurrence of the Change in Control. The Plan Administrator shall also have full power and authority to condition any such option acceleration (and the termination of any outstanding repurchase rights) upon the subsequent termination of the Optionee’s Service within a specified period following the Change in Control.

F.     Any options accelerated in connection with the Change in Control shall remain fully exercisable until the expiration or sooner termination of the option term.

G.     The grant of options under this Article Two shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

H.     The exercisability as incentive stock options under the Federal tax laws of any options accelerated under this Section III in connection with a Corporate Transaction or Change in Control shall remain subject to the dollar limitation of Section II of this Article Two. To the extent such dollar limitation is exceeded, the accelerated option shall be exercisable as a non-statutory option under the Federal tax laws.

IV.    STOCK APPRECIATION RIGHTS.

A.    Provided and only if the Plan Administrator determines in its discretion to implement the stock appreciation right provisions of this Section IV, one or more Optionees may be granted the right, exercisable upon such terms and conditions as the Plan Administrator may establish, to surrender all or part of an unexercised option under this Article Two in exchange for a distribution from the Corporation in an amount equal to the excess of (i) the Fair Market Value (on the option surrender date) of the number of shares of Common Stock in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (ii) the aggregate exercise price payable for such vested shares.

B.     No surrender of an option shall be effective hereunder unless it is approved by the Plan Administrator. If the surrender is so approved, then the distribution to which the Optionee shall accordingly become entitled under this Section IV may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate.

C.     If the surrender of an option is rejected by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (i) five (5) business days after the receipt of the rejection notice or (ii) the last day on which the option is otherwise exercisable in accordance with the terms of the instrument evidencing such option, but in no event may such rights be exercised more than ten (10) years after the date of the option grant.

D.     One or more officers of the Corporation subject to the short-swing profit restrictions of the Federal securities laws may, in the Plan Administrator’s sole discretion, be granted limited stock appreciation rights with respect to their outstanding options under the Plan. Upon the occurrence of a Hostile Take-Over, the officer shall have a thirty (30)-day period in which he or she may

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surrender any outstanding options with such a limited stock appreciation right in effect for at least six (6) months to the Corporation, to the extent such option is at the time exercisable for fully-vested shares of Common Stock. The officer shall in return be entitled to a cash distribution from the Corporation in an amount equal to the excess of (i) the Take-Over Price of the vested shares of Common Stock at the time subject to each surrendered option (or surrendered portion of such option) over (ii) the aggregate exercise price payable for such shares. The cash distribution payable upon such option surrender shall be made within five (5) days following the date the option is surrendered to the Corporation. Neither the approval of the Plan Administrator nor the consent of the Board shall be required in connection with such option surrender and cash distribution. Any unsurrendered portion of the option shall continue to remain outstanding and become exercisable in accordance with the terms of the instrument evidencing such grant.

E.     The shares of Common Stock subject to any option surrendered for an appreciation distribution pursuant to this Section IV shall not be available for subsequent issuance under the Plan.

ARTICLE THREE
DIRECTOR FEE PROGRAM

I.     ELIGIBILITY

Subject to the availability of shares of Common Stock under the Plan pursuant to Article One, Section VI of the Plan, each individual serving as a non-employee Board member shall be eligible to apply all or any portion of the annual retainer fee otherwise payable to him or her in cash to the acquisition of unvested shares of Common Stock under this Article Three Program.

II.    ELECTION PROCEDURE

A.    Filing.    The non-employee Board member must make the stock-in-lieu-of-fee election prior to the start of the calendar year for which the election is to be effective. The first calendar year for which any such election may be filed shall be the 1994 calendar year. The election must be filed with the Plan Administrator on the appropriate form provided for this purpose, and the election, once filed, shall be irrevocable. The election for any upcoming calendar year may be filed at any time prior to the start of that year, but in no event later than December 31 of the immediately preceding calendar year. The non-employee Board member may file a standing election to be in effect for two or more consecutive calendar years or to remain in effect indefinitely until revoked by written instrument filed with the Plan Administrator at least six (6) months prior to the start of the first calendar year for which such standing election is no longer to remain in effect.

B.     Election Form.    On the election form, the non-employee Board member must indicate the percentage or dollar amount of his or her annual retainer fee to be applied to the acquisition of unvested shares under this Article Three Program to be issued in lieu of such fee. The non-employee Board member may elect to apply a portion of the fee to the acquisition of Common Stock.

III.  SHARE ISSUANCE

A.    Issue Date.    On the first trading day in January of the calendar year for which the election is effective, the portion of the retainer fee subject to such election shall automatically be applied to the acquisition of the selected shares of Common Stock by dividing the elected dollar amount by the Fair Market Value per share of the Common Stock on that trading day. The number

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of issuable shares shall be rounded down to the next whole share, and the issued shares shall be held in escrow by the Secretary of the Corporation until the non-employee Board member vests in those shares. The non-employee Board member shall have full stockholder rights, including voting, dividend and liquidation rights, with respect to all issued shares held in escrow on his or her behalf, but such shares shall not be assignable or transferable while they remain unvested.

B.     Vesting.    Upon completion of each calendar quarter of Board service during the year for which the election is in effect, the non-employee Board member shall vest in one-fourth of the issued shares, and the stock certificate for those shares shall be released from escrow. Immediate vesting in all the issued shares shall occur in the event (i) the non-employee Board member should die or become Permanently Disabled during his or her period of Board service or (ii) there should occur a Corporate Transaction or Change in Control while such individual remains in Board service. Should such individual cease Board service prior to vesting in one or more quarterly installments of the issued shares, then those unvested shares shall immediately be surrendered to the Corporation for cancellation, and the non-employee Board member shall not be entitled to any cash payment or other consideration from the Corporation with respect to the cancelled shares and shall have no further stockholder rights with respect to such shares.

IV.    AMENDMENT OF THE DIRECTOR FEE PROGRAM

A.    Limited Amendments.    The provisions of this Director Fee Program, together with the unvested share issuances outstanding under this Article Three, may not be amended at intervals more frequently than once every six (6) months, other than to the extent necessary to comply with applicable Federal income tax laws and regulations.

ARTICLE FOUR
MISCELLANEOUS

I.    NO LOANS OR INSTALLMENT PAYMENTS

A.    The Plan Administrator shall not, assist any Optionee (including an officer of the Corporation) in the exercise of one or more options granted to such Optionee under the Discretionary Option Grant Program, including the satisfaction of any Federal, state and local income and employment tax obligations arising therefrom, by (i) authorizing the extension of a loan from the Corporation to such Optionee or (ii) permitting the Optionee to pay the exercise price for the purchased shares in installments over a period of years. in connection with the acquisition of such shares.

II.    AMENDMENT OF THE PLAN AND AWARDS

A.    The Board has complete and exclusive power and authority to amend or modify the Plan (or any component thereof) in any or all respects whatsoever. However, (i) no such amendment or modification shall adversely affect rights and obligations with respect to options at the time outstanding under the Plan, unless the Optionee consents to such amendment, and (ii) any amendment made to the Director Fee Program (or any stock options or share issuances outstanding thereunder) shall be in compliance with the limitation of Section IV of Article Four. In addition, the Board may not, without the approval of the Corporation’s stockholders, amend the Plan to (i) materially increase the maximum number of shares issuable under the Plan, or increase the maximum number of shares of Common Stock for which any one participant may receive stock options, separately exercisable stock appreciation rights and direct share issuances over the term of the Plan, except for permissible adjustments under Section VI.F of Article One, (ii) materially

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modify the eligibility requirements for plan participation or (iii) materially increase the benefits accruing to plan participants.

B.     Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program, which are in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under the Discretionary Option Grant Program are held in escrow until stockholder approval is obtained for a sufficient increase in the number of shares available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess option grants are made, then (i) any unexercised excess options shall terminate and cease to be exercisable and (ii) the Corporation shall promptly refund the purchase price paid for any excess shares actually issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow.

C.     The Board will not have the authority, at any time, without the approval of  the holders of a majority of the issued and outstanding Common Stock to (i) reduce the exercise price of any Incentive Options or Non-Statutory Options (“Options”) under the Plan that are currently outstanding; or (ii) cancel any outstanding Options under the Plan and grant in substitution therefore new Options under the Plan at a lower exercise price, regardless of whether or not the cancelled Options revert to and again become available for issuance under the Plan.  This Section II C of Article Four may not be amended without the affirmative vote of the holders of a majority of the shares of Common Stock present or represented and entitled to vote at a duly convened meeting of the stockholders. Notwithstanding the foregoing, this paragraph will 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) the provisions of Options which relate to adjustments for any Corporate Transaction or any stock split, stock or cash dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class.

III.  TAX WITHHOLDING

A.    The Corporation’s obligation to deliver shares of Common Stock upon the exercise of stock options for such shares or the vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements.

B.     The Plan Administrator may, in its discretion and in accordance with the provisions of this Section III of Article Four and such supplemental rules as the Plan Administrator may from time to time adopt (including the applicable safe-harbor provisions of Securities and Exchange Commission Rule 16b-3), provide any or all holders of Non-Statutory Options or unvested shares (other than the unvested shares issued under the Director Fee Program) with the right to use shares of the Corporation’s Common Stock in satisfaction of all or part of the Federal, state and local income and employment tax liabilities incurred by such holders in connection with the exercise of their options or the vesting of their shares (the “Taxes”). Such right may be provided to any such holder in either or both of the following formats:

Stock Withholding:    The holder of the Non-Statutory Option or unvested shares may be provided with the election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of the shares, a portion of those shares with an aggregate Fair Market Value equal to the percentage of the applicable Taxes (not to exceed one hundred percent (100%)) designated by the holder.

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Stock Delivery:    The Plan Administrator may, in its discretion, provide the holder of the Non-Statutory Option or the unvested shares with the election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such individual (other than in connection with the option exercise triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes incurred in connection with such option exercise or share vesting (not to exceed one hundred percent (100%)) designated by the holder.

IV.    EFFECTIVE DATE AND TERM OF PLAN

A.    The 1993 Plan originally became effective immediately upon adoption by the Board on November 29, 1993. The Plan, as amended hereby, will become effective immediately upon approval by the Company’s stockholders at the Annual Meeting on June  27, 2006. Stock options may be made under the Plan, as amended hereby, immediately thereafter upon the effective date of this amendment.

B.     The Plan shall terminate upon the earlier of (i) December 31, 2020 or (ii) the date on which all shares available for issuance under the Plan shall have been issued or cancelled pursuant to the exercise, surrender or cash-out of the options granted under the Plan or the issuance of shares (whether vested or unvested) under the Director Fee Program. If the date of termination is determined under clause (i) above, then all option grants and unvested share issuances outstanding on such date shall thereafter continue to have force and effect in accordance with the provisions of the instruments evidencing such grants or issuances.

V.     USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares pursuant to option grants or share issuances under the Plan shall be used for general corporate purposes

VI.   REGULATORY APPROVALS

A.    The implementation of the Plan, the granting of any option under the Plan, the issuance of any shares under the Director Fee Program and the issuance of Common Stock upon the exercise or surrender of the option grants made hereunder shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the Common Stock issued pursuant to it.

B.     No shares of Common Stock or other assets shall be issued or delivered under this Plan unless and until there shall have been compliance with all applicable requirements of Federal, and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any securities exchange on which the Common Stock is then listed for trading.

VII.   NO EMPLOYMENT/SERVICE RIGHTS

Neither the action of the Corporation in establishing the Plan, nor any action taken by the Plan Administrator hereunder, nor any provision of the Plan shall be construed so as to grant any individual the right to remain in the Service of the Corporation (or any parent or subsidiary corporation) for any period of specific duration, and the Corporation (or any parent or subsidiary corporation retaining the services of such individual) may terminate such individual’s Service at any time and for any reason, with or without cause.

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VIII.   MISCELLANEOUS PROVISIONS

A.    Except to the extent otherwise expressly provided under the Plan, the right to acquire Common Stock or other assets under the Plan may not be assigned, encumbered or otherwise transferred by any Optionee or Participant.

B.     The provisions of the Plan relating to the exercise of options and the vesting of shares shall be governed by the laws of the State of California, as such laws are applied to contracts entered into and performed in such State.

C.     The provisions of the Plan shall inure to the benefit of, and be binding upon, the Corporation and its successors or assigns, whether by Corporate Transaction or otherwise, and the Optionees and any holders of unvested shares under the Plan, the legal representatives of their respective estates, their respective heirs or legatees and their permitted assignees.

IN WITNESS WHEREOF, the undersigned being the duly authorized and elected President and Chief Executive Officer of the Corporation has executed this Amended and Restated 1993 Stock Option/Stock Issuance Plan as of June 27, 2006.

/s/Raymond J. Pacini

Raymond J. Pacini

President and Chief Executive Officer

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EX-10.2

Exhibit 10.2

THE CALIFORNIA COASTAL COMMUNITIES, INC.

RETIREMENT PLAN

Generally Effective January 1, 1989

(Amended and Restated through December 19, 2001)

TABLE OF CONTENTS

i

THE CALIFORNIA COASTAL COMMUNITIES, INC.

RETIREMENT PLAN

Effective December 31, 1993, the name of the Bolsa Chica Company Retirement Plan was officially changed to the Koll Real Estate Group Retirement Plan (the “Plan”) and Plan benefits were frozen.(1)  Effective January 1, 1999 the Plan was renamed The California Coastal Communities, Inc. Retirement Plan.  The Plan has been amended to incorporate certain “GUST” required changes, but benefit accruals under this Plan remain frozen.

(1)Effective September 30, 1993, The Bolsa Chica Company changed its name to Koll Real Estate Group, Inc.  Consequently, as of September 30, 1993, all references in this document to the Bolsa Chica Company should be read as references to the Koll Real Estate Group, Inc.   Effective January 1, 1999 all references to the Bolsa Chica Company should be read as references to California Coastal Communities, Inc.

The Bolsa Chica Company Retirement Plan (formerly known as The Henley Properties Inc. Retirement Plan and, prior to January 1, 1990, known as The Henley Group, Inc. Retirement Plan) was originally adopted, effective June 1, 1986, continuation of the Signal Companies, Inc. Retirement Plan.

In connection with the change of the corporate name of Henley Properties Inc. to The Bolsa Chica Company and the merger (the “1992 Merger”) of HP Merger Co., a wholly owned subsidiary of The Bolsa Chica Company (known prior to the 1992 Merger as Henley Properties Inc.), with and into The Henley Group, Inc., the name of the Plan was changed to The Bolsa Chica Company Retirement Plan.

The Henley Group, Inc. Retirement Plan was adopted as a pension plan for the benefit of the employees of The Henley Group, Inc., a Delaware corporation, effective June 1, 1986, by a resolution of Henley’s Board of Directors, as a continuation of the Predecessor Plan.  In connection with the distribution as of December 31, 1989 to shareholders of the Company of the stock of a subsidiary of the Company, the Plan was divided into two Plans, the Company was renamed Henley Properties Inc. and, effective January 1, 1990, the Plan became known as The Henley Properties Inc. Retirement Plan.

The Plan was adopted as a continuation of and successor to The Signal Companies, Inc. Retirement Plan (the “Signal Retirement Plan” or “Predecessor Plan”) for individuals

(i)who

(A)were actively employed on January 1, 1986 by The Henley Group, Inc. (“Henley”) or a business that became a subsidiary or division of Henley in connection with the distribution by Allied-Signal Inc. (“Allied-Signal”) to the owners of its common stock of all of the shares of Henley common stock as of May 27, 1986 (the “Spinoff”); or

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(B)were actively employed on January 1, 1986 by a member of the Allied-Signal controlled group of corporations and became Employees in connection with the Spinoff; and

(ii)who participated or were eligible to participate in the Predecessor Plan on December 31, 1985,

subject to a transfer of all assets allocable to such individuals to the Plan from the Predecessor Plan.  Benefits payable under this Plan shall not duplicate benefits payable under the Predecessor Plan.

The Plan is intended to be tax-exempt and qualified under the provisions of Section 401 and other applicable provisions of the Internal Revenue Code of 1986, as amended, and to comply with Section 7(e)(4) of the Fair Labor Standards Act of 1938, as amended, and with all applicable provisions of the Employee Retirement Income Security Act of 1974 as of their effective dates or sooner.

Pursuant to Notice 88-131, the Plan was amended to limit compensation for purposes of computing accrued benefits under the Plan to $200,000 as of January 1, 1989 (Model Amendment 1), and to prohibit the additional accrual of benefits for highly compensated participants after May 1, 1989 (Model Amendment 2).

The Plan was amended and restated to comply with the Tax Reform Act of 1986 and Section 401(a)(4) of the Internal Revenue Code as of January 1, 1989.  The accrued benefit of highly compensated participants has been retroactively adjusted to reflect the accrual of benefits after May 1, 1989 in accordance with the terms of this Amended and Restated plan.

The Plan was also amended and restated effective January 1, 1990 in connection with the corporate reorganization described above and to make certain other changes.  The Plan was again amended and restated effective August 1, 1992 and again as of the dates indicated in this document to reflect the name changes described above and to make certain other changes.

Subject to Notice 88-131, the rights and obligations of each person covered by the Plan who retires or whose employment otherwise terminates prior to the effective date of any amendment or restatement shall be determined in accordance with the Plan as in effect as of the date of his retirement or termination as the case may be.

Effective December 31, 1993, benefit accruals under this Plan were frozen.

This Plan document contains changes requested by the Internal Revenue Service in April and May of 1996 as part of the determination letter process.   The Plan document also contains changes made as part of the IRS determination letter process in 2001, including incorporation into this amended and restated Plan document of  Amendment No. 1, which was executed on December 14, 1999.

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ARTICLE I

DEFINITIONS

Section 1.1             General.  Whenever the following terms are used in the Plan with the first letter capitalized, they shall have the meaning specified below unless the context clearly indicates to the contrary.

Section 1.2             Accrued Benefit.  An Employee’s “Accrued Benefit” as of his Separation from the Service shall have the meaning given in Section 3.10.

Section 1.3             Actuarial Equivalent.  “Actuarial Equivalent” shall mean the equivalent of a given benefit, or a given amount, payable in another manner, determined using factors independent of sex, pursuant to the following actuarial assumptions:

(a)           7.5% interest (provided that for the purpose of determining the Actuarial Equivalent of monthly payments that may instead be paid as a lump sum pursuant to Section 3.13, the interest rate used shall be no greater than the immediate or deferred rate (in effect as of the first day of each Plan Year), whichever is appropriate, used by the Pension Benefit Guaranty Corporation to determine the present value of a lump sum distribution upon plan termination), and

(b)           mortality based on the 1984 Unisex Pension Table.

(c)           In the case of a Participant who has not reached his Early Retirement Date and who has elected to receive a Disability Retirement Benefit under Section 3.5, the ages in the table specified in subparagraph (b) above will be set forward 5 years in the calculation of the Disability Retirement Benefit of such Participant.

SECTION 1.3 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1, EFFECTIVE AS OF JANUARY 1, 2000, TO READ AS FOLLOWS:

“Actuarial Equivalent.  “Actuarial Equivalent” shall mean the equivalent of a given benefit, or a given amount, payable in another manner.  Determination of a Participant’s vested accrued benefit for purposes other than a lump sum payment shall be based on an interest rate of 7.5% and mortality specified in the 1984 Unisex Pension Table.

In the case of a Participant who has not reached his Early Retirement Date and who has elected to receive a Disability Retirement Benefit under Section 3.5, the ages in the table specified above will be set forward 5 years in the calculation of the Disability Retirement Benefit of such Participant.

For purposes of determining (i) whether the present value of a Participant’s accrued benefit exceeds $5,000 for purposes of Section 3.13 and (ii) the amount of a lump sum benefit, the Actuarial Equivalent shall be calculated using the Applicable

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Interest Rate under Section 417(e) of the Code for the second full calendar month before the date of distribution, and the Applicable Mortality Table under Section 417(e) of the Code.

Notwithstanding any other provision of the Plan to the contrary, the present value of the accrued lump sum retirement benefit due an Employee who became a Participant prior to January 1, 2000 shall not be less than the present value of such Participant’s vested accrued benefit as of December 31, 1999 utilizing an interest rate that is equal to 7.5% (provided the interest rate used shall be no greater than the immediate or deferred rate, in effect as of the first day of each Plan Year, whichever is appropriate, used by the Pension Benefit Guaranty Corporation to determine the present value of a lump sum distribution upon plan termination) and mortality table specified above for purposes other than a lump sum payment.”

Section 1.4             Administrator or Administrative Committee.  “Administrator” or “Administrative Committee” shall mean the Bolsa Chica Administrative Committee, appointed in accordance with Article VII.  Effective September 30, 1993, “Administrator” or “Administrative Committee” means Koll Real Estate Group, Inc., and any officer of Koll Real Estate Group, Inc. is authorized to act on behalf of the Administrator or the Administrative Committee.

Section 1.5             Aggregate Group.  “Aggregate Group” shall mean the plan or plans required to be considered with this Plan for purposes of satisfying the requirements of Section 401(a)(4) and Section 410 of the Code.

Section 1.6             Anniversary Date.  “Anniversary Date” of a Participant shall mean the anniversary of the date on which he became an Employee for the first time or after a Severance from Service Date.

Section 1.7             Average Final Compensation.  “Average Final Compensation” of a Participant shall mean his average monthly Compensation during the highest sixty consecutive full calendar months during which he received Compensation as an Employee in his last one hundred twenty such months.  If he has less than one hundred twenty such months there shall be substituted the number of such months he has accumulated.  For purposes of determining consecutiveness, calendar months other than full calendar months during which he received Compensation as an Employee shall be ignored.  Subject to Section 1.16(g), Compensation for any twelve-month period included in the calculation of Average Final Compensation shall not exceed $200,000, adjusted for changes in the cost of living as provided in Section 415(d) of the Code.

Effective December 31, 1993, the Average Final Compensation of a Participant shall be calculated for a consecutive monthly period under Section 1.7 of the Plan ending no later than December 31, 1993, and no Compensation paid or earned after December 31, 1993 shall be taken into account.  Accordingly, the Average Final Compensation of each Participant shall be a fixed

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dollar amount as of December 31, 1993 which shall not be subsequently adjusted for any Compensation earned or paid after December 31, 1993.

Section 1.8             Beneficiary.  “Beneficiary” shall mean a person properly designated by a Participant or Former Participant in accordance with the Plan and the rules, if any, promulgated by the Administrator, to receive Benefits, solely in accordance with Section 3.6, 3.7 or 3.9, in the event of the death of the Participant or Former Participant.

Section 1.9             Benefit.  The “Benefit” of a Participant shall mean a payment payable at the times and over the applicable period specified in Article III.

Section 1.10           Board of Directors.  “Board of Directors” shall mean the Board of Directors or the Executive Committee of the Board of Directors of Bolsa Chica.  Effective September 30, 1993, “Board of Directors” shall mean the Board of Directors of Koll Real Estate Group, Inc.

Section 1.11           Bolsa Chica.  “Bolsa Chica” shall mean The Bolsa Chica Company, a Delaware corporation, formerly known as Henley Properties Inc.  Effective September 30, 1993, Bolsa Chica became Koll Real Estate Group, Inc. and, effective September 30, 1993 all references in this Plan to Bolsa Chica should be read as references to Koll Real Estate Group, Inc.   Effective January 1, 1999, all references in this Plan to Bolsa Chica should be read as references to California Coastal Communities, Inc.

Section 1.12           Code.  “Code” shall mean the Internal Revenue Code of 1986, as amended.  All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.

Section 1.13           Commissioner.  “Commissioner” means the Commissioner of the Internal Revenue Service.

Section 1.14           Committee.  “Committee” shall mean the Administrator or Administrative Committee.

Section 1.15           Company; Companies.  As the context requires, “Company” or “Companies” shall mean Bolsa Chica (as defined in Section 1.11), any corporation which adopts the Plan as a whole or as to one or more divisions or classifications in accordance with Section 8.4, and any successor corporation which continues the Plan under Section 8.9, acting through their respective officers.

Section 1.16           Compensation.  (a) “Compensation” of a Participant for any Plan Year shall mean

(i)his fixed, basic and regularly recurring straight-time pay which for purposes of this Plan shall include the amount, if any, by which such pay was voluntarily reduced in accordance with a qualified cash or deferred arrangement under a qualified savings or thrift plan of any of the Companies,

5

(ii)any additional shift differential pay,

(iii)all amounts which an Employee on sick leave would have received as his fixed, basic and regular recurring straight-time pay had he not collected sick leave pay during such leave (but excluding any statutory benefits or insured benefits),

(iv)payment for overtime hours,

(v)commissions or sales, production or nonincentive bonus payments, and

(vi)except as provided in subsection, any annual year-end bonus or incentive compensation award attributable to such Plan Year (whether or not paid within such Plan Year and whether paid in cash or in securities), expressed as an average monthly rate of pay for the entire Plan Year.  For purposes of computing such average monthly rate of pay, a Participant’s Compensation for an entire Plan Year shall be divided by the number of months in such Plan Year during which Compensation was paid for such Plan Year.

(b)           For purposes of the Plan and notwithstanding any other provision of this Section 1.16, a Participant’s Compensation for an entire Plan Year shall not exceed $200,000, adjusted for changes in the cost of living as provided in section 415(d) of the Code.  In determining the Compensation of a Participant for purposes of this limitation, the rules of section 414(q)(6) of the Code shall apply, except that in applying such rules, the term “family” shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the year.

(c)           “Compensation” shall not include lump sum severance payments, inducement or completion bonuses for periods of overseas or on-location employment, overseas or on-location differential payments, insurance, long-term disability pay, any profit sharing payments, any public or private retirement contributions or benefits, any retainers, any insurance benefits or Company-paid premiums, payments from any stock option and award plan or any savings and stock purchase plan or any other special benefits, provided, however, that recurring overseas bonuses which constitute incentive compensation awards and are paid on a regular basis shall be included in Compensation.

(d)           “Compensation” shall not include any portion of salary or any bonus or incentive compensation award the payment of which has been deferred at the election of the Participant; provided, however, that such deferred salary, bonus or incentive compensation attributable to a year used to calculate Average Final Compensation and actually paid in a year used to calculate Average Final Compensation will be treated as Compensation in the year paid.

(e)           Subject to (f) below, the Compensation of an Employee who was a participant in the Predecessor Plan on December 31, 1985 and became a Participant in this Plan in connection with the Spinoff of Henley by Allied-Signal shall include all amounts earned during employment by a member of the Allied-Signal controlled group of corporations prior to

6

January 1, 1986 that would have been treated as Compensation pursuant to Section 1.14 of the Predecessor Plan.

(f)            Notwithstanding the foregoing provisions of Section 1.7 and this Section 1.16, Compensation shall not include any amount earned by the Participant prior to January 1, 1990 if the Participant’s accrued benefit under this Plan was transferred to The Henley Group, Inc. Retirement Plan in connection with the distribution as of December 31, 1989 to shareholders of the Company of the stock of The Henley Group, Inc. (formerly known as New Henley Inc.) and the division of the Plan into two Plans.

(g)           In addition to other applicable limitations set forth in the Plan and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation (if any) of each Employee taken into account under the Plan shall not exceed the OBRA ‘93 annual compensation limit.  The OBRA ‘93 annual Compensation limit is $150,000, as adjusted by the Commissioner of Internal Revenue for increases in the cost of living in accordance with Code Section 401(a)(17)(B).  The cost-of-living adjustment in effect for a calendar year applies to any period not exceeding 12 months, over which Compensation is determined (“Determination Period”) beginning in that calendar year.  If a Determination Period consists of fewer than 12 months, the OBRA ‘93 annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the Determination Period, and the denominator of which is 12.

For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limit under Code Section 401(a)(17) shall mean the OBRA ‘93 annual Compensation limit set forth in this provision.

In determining the $150,000 (indexed) limit, the family aggregation rules of Code Section 414(q)(6) apply, but the term “family” includes only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year.  To the extent required by applicable Regulations, if the limitation is reached for a family group, then the limitation amount will be prorated among each member of the family group in the proportion that each family member’s compensation bears to the total Compensation of the family group.

Notwithstanding any other provision in the Plan, for purposes of calculating each Section 401(a)(17) Employee’s Accrued Benefit under this Plan, the Accrued Benefit will be the sum of (a) the Employee’s Accrued Benefit as of the last day of the last Plan Year beginning before January 1, 1994, frozen in accordance with Regulation 1.401(a)(4)-13, and (b) the Employee’s Accrued Benefit determined under the benefit formula applicable for the Plan Year beginning on or after January 1, 1994, as applied to the Employee’s years of service credited to the Employee for Plan Years beginning or after January 1, 1994 for purposes of benefit accruals.  A Section 401(a)(17) Employee means an Employee whose current Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994, is based on Compensation for a year beginning prior to the first day of the first Plan Year beginning on or after January 1, 1994, that exceeded $150,000.

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(h)           “Compensation” shall include any amounts treated as ‘compensation’ under any of the Related Plans with respect to a period when the Participant is entitled to Credited Service pursuant to Section 1.19(a)(v).

Section 1.17           Contingent Annuitant.  “Contingent Annuitant” shall mean a person properly designated by a Participant or Former Participant to receive benefits, solely in accordance with Section 3.6 or 3.7 in the event of the Participant’s death after payment of an annuity hereunder commences.

Section 1.18           Covered Compensation.  “Covered Compensation” means the average (without indexing) of the Taxable Wage Base (as defined below) in effect for each calendar year during the 35-year period ending with the calendar year in which the Participant attains (or will attain) Social Security Retirement Age.  The Taxable Wage Base in effect for any year following the year in which the determination is being made will be assumed to be equal to the Taxable Wage Base in effect for the calendar year in which the determination is being made.  The Taxable Wage Base is the contribution and benefit base in effect under Section 230 of the Social Security Act as of the beginning of the calendar year.

Effective December 31, 1993, the Covered Compensation of each Participant shall be calculated under Section 1.18 of the Plan as of December 31, 1993.  For purposes of such calculation, it shall be assumed that the Taxable Wage Base for each year in the remainder of the 35-year period applicable to the Participant shall remain at the Taxable Wage Base in effect for that Participant for the 1993 calendar year.  Accordingly, the Covered Compensation of each Participant shall be set at a fixed dollar amount as of December 31, 1993 and shall not be adjusted for (i) Compensation or other remuneration the Participant may in fact earn after December 31, 1993 or (ii) any changes in the Taxable Wage Base for calendar years after the 1993 calendar year.

Section 1.19           Credited Service.  (a) Except as provided in subparagraph (g), (h) or (i) and consistent with the rules of subparagraphs (b) through (f), the Credited Service of a Participant means the total number of months (for which he receives or is entitled to receive Compensation) of an Employee’s latest period of uninterrupted employment (beginning on the Employee’s employment commencement date or reemployment commencement date, whichever is applicable) with the Company (including any business treated as a Company under Section 10.15), beginning on or after January 1, 1986 and ending on his Severance from Service Date, but not later than the date he ceases to be eligible to continue to be a Participant in accordance with Section 2.1(b).  An individual’s Credited Service also shall include the following periods of time regardless of whether he receives Compensation therefor from the Company:

(i)any period of absence from active employment with the Company prior to his Normal Retirement Date due to Disability, provided the Participant has not elected to receive the Disability Retirement Benefit Payable under Section 3.5;

(ii)any period of absence from active employment with the Company prior to his Normal Retirement Date due to service in the United

8

States Armed Forces, provided he is reemployed by the Company in accordance with applicable statutes following his discharge from military service;

(iii)any period of absence from active employment with the Company prior to his Normal Retirement Date due to a Company directed or authorized leave of absence; and/or

(iv)any period of service provided for in Sections 8.8.2 and 8.8.3.

(v)effective for an Employee’s latest period of uninterrupted employment with the Company beginning on or after January 1, 1990 and ending on the earliest of (1) December 31, 1993, (2) the Employee’s Separation from the Service, (3) the Employee’s Severance from Service Date, or (4) the date that the Employee ceases to be eligible to continue to be a Participant in accordance with Section 2.1(b), any period prior to the individual becoming an Employee during which the individual is an ‘employee’ earning ‘credited service’ under any of the Related Plans, or would have earned ‘qualified service’ under the Fisher Scientific International Inc. Retirement Plan, but for the individual’s decision not to participate in said Plan.

(b)           In computing the Credited Service of any Employee, which shall be expressed as years and twelfths thereof, a Participant shall be credited with a full calendar month of service only if his employment commences during the first fifteen days of such month, or is terminated after the first fifteen days of such month.  No Employee shall receive credit for more than one (1) month of Credited Service for any one (1) calendar month nor shall he receive credit for more than twelve (12) months of Credited Service during any Plan Year.

(c)           An Employee will be deemed to have voluntarily terminated his employment if and as of the date any of the following occurs:

(i)he fails or refuses to return to work for the Company promptly after a sick leave or after a Company directed or authorized leave of absence expires, or after he recovers from disability; or

(ii)he leaves the employ of the Company for service in the Armed Forces of the United States and fails to make application for reemployment by the Company in accordance with applicable statutes following his discharge from military service.

When an Employee is treated as voluntarily terminated as a result of any of the causes listed above, his Credited Service will include the calendar month in which such voluntary termination occurs unless such voluntary termination occurs during the first fifteen days of such calendar month.

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(d)           Continuation of temporary layoff for lack of work for a period in excess of twelve months shall be considered a discharge effective as of the expiration of twelve months of the layoff.

(e)           If an Employee who has met the requirements for a Vested Retirement Benefit set forth herein begins a Period of Severance and subsequently returns to the employ of the Company, his participation in the Plan shall be reinstated immediately.  He shall retain his previously accumulated Credited Service and he shall be credited with additional Credited Service for his continuous eligible employment with the Company after such return.

(f)            If a Participant who has not met the requirements for a Vested Retirement Benefit set forth herein begins a Period of Severance and subsequently returns to the employ of the Company, his participation in the Plan shall be reinstated immediately.  If the total period of time elapsed from the Severance from Service Date to the effective date of his reemployment is less than the period of his previously accumulated Vesting Service, he shall retain his previously accumulated Credited Service and shall be credited with Credited Service under this Plan for his continuous eligible employment during such new period.  If the total period of time elapsed from his Severance from Service Date to the effective date of his reemployment equals or exceeds the greater of five (5) years or his previously accumulated Vesting Service, he shall forfeit his previously accumulated Credited Service and shall be credited with Credited Service for his continuous eligible employment during such new period.

(g)           Notwithstanding any other provision of this Section 1.19, the Credited Service of each Participant

(i)who

(A)was actively employed on January 1, 1986 by Henley or a business that became a subsidiary or division of Henley in connection with the Spinoff of Henley by Allied-Signal as of May 27, 1986; or

(B)was actively employed on January 1, 1986 by a member of the Allied-Signal controlled group of corporations and became an Employee in connection with the Spinoff; and

(ii)who was a participant in the Predecessor Plan on December 31, 1985

shall, subject to the transfer of all assets allocable to such Employee from the trust under the Predecessor Plan to the Trust Fund, include all Credited Service under Section 1.16 of the Predecessor Plan.  Notwithstanding anything herein to the contrary, for purposes of calculating the Credited Service of any Employee who is a Participant in the Plan on or after June 1, 1992 and whose Credited Service is calculated in part by reference to Section 1.16(a) of The Signal Companies, Inc. Retirement Plan, such Section 1.16(a) of The Signal Companies, Inc. Retirement Plan shall be modified so as to provide for the calculation of Credited Service from the participant’s date of hire.

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(h)           Except as provided in subsection 1.19(a)(iv) and (v) of this Plan, the Credited Service of a Participant shall not include any period of employment with the Company during which such Participant was excluded from eligibility to participate in the Plan by subsection 2.1 or during which such Participant was not an Employee.

(i)            Notwithstanding any other provision of this Section 1.19, the term “Credited Service” shall not include the Credited Service of a Participant to the extent such Participant’s accrued benefit under this Plan was transferred to The Henley Group, Inc. Retirement Plan in connection with the distribution as of December 31, 1989 to shareholders of the Company of the stock of The Henley Group, Inc. (formerly known as New Henley Inc.) and the division of the Plan into two plans.

(j)            Effective December 31, 1993, the Credited Service of each Participant shall, for benefit accrual purposes under the Plan, be fixed and frozen as of December 31, 1993, and no Credited Service shall, for benefit accrual purposes, be earned for any service rendered after December 31, 1993.  However, Credited Service may continue to be earned after December 31, 1993, in accordance with the provisions of Section 1.19 of the Plan, solely and exclusively for purposes of the early retirement subsidies available under the Plan as of December 31, 1993 and protected under Internal Revenue Code Section 411(d)(6).

Section 1.20           Determination Date.  “Determination Date” means the date specified in Section 9.2.

Section 1.21           Disability; Disabled.  “Disability” of a Participant or “Disabled” when used with reference to a Participant shall mean that he has been found by the Company employing the Participant, on the basis of competent medical evidence, before December 31, 1993 and while employed by the Company to be unable, by reason of a medically determinable physical or mental impairment which can be expected to result in death or to be of permanent duration, to engage in the level of gainful activity determined under standards adopted by such Company for purposes of this Plan.  The determination by each Company that an employee is “Disabled” for purposes of this Plan shall be made under standards adopted by each Company and applied uniformly, which standards may include the Social Security Act definition of disability, the definition applicable to such Company’s long-term disability programs, if any, or such other definitions as may be adopted from time to time by each Company.  Such determination shall be subject to the approval of the Administrator.

Section 1.22           Disability Retirement Date.  “Disability Retirement Date” of a Participant shall mean the first day of any month coincident with or following his Disability, provided the Participant has at least 10 years of Credited Service at his Disability and elects to retire before age 65.

Section 1.23           Early Commencement Date.  “Early Commencement Date” shall mean the first day of the month as of which a Participant elects to begin receiving payments prior to his Normal Retirement Date.

Section 1.24           Early Retirement Benefit.  “Early Retirement Benefit” shall mean the Benefit payable under Section 3.4.

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Section 1.25           Early Retirement Date.  “Early Retirement Date” of a Participant shall generally mean the first day of the month, so designated by an Employee, preceding his Normal Retirement Date, and which is coincident with or following the later of his 55th birthday and his completion of ten (10) years of Credited Service or such other date as is provided in Section 3.3.

Section 1.26           Employee.  “Employee” shall mean any employee of any Company (including any person treated as an Employee under Section 10.15) excluding

(a)           an employee who will not complete 1,000 Hours of Service during a Plan Year,

(b)           a temporary employee, that is, one who is employed by a Company for the specific purpose of working on a designated project for the duration of such project, and

(c)           a director who is not otherwise an Employee.

(d)           a Leased Employee.  For these purposes, a Leased Employee means an individual not otherwise an Employee who, pursuant to an agreement between an Employer and a leasing organization, has performed, on a substantially full-time basis for the individual’s initial 12-month period of performing services for the Employer or for any Plan Year, services of a type historically performed by employees in the business field of the Employer unless the individual is covered by a money purchase pension plan maintained by the leasing organization and meeting the requirements of Code Section 414(n)(5)(B), and leased employees do not constitute more than 20% of all Non-Highly Compensated Employees of all Affiliated Companies within the meaning of Code Section 414(n)(5)(C)(ii).

SECTION 1.26 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1, EFFECTIVE AS OF JANUARY 1, 1997, TO READ AS FOLLOWS:

“(d) a Leased Employee.  For these purposes a Leased Employee means any person, other than a common law employee of a Company, who pursuant to an agreement between that Company and any other person (“leasing organization”) has performed services for the recipient Company (or for such recipient and one or more related persons determined in accordance with Code Section 414(n)(6)) on a substantially full-time basis for a period of at least one (1) year (as determined in accordance with the applicable provisions of the proposed Income Tax Regulations section 1.414(n)-1(b)(10)), and such services are performed under the primary direction or control of the recipient Company, unless such individual is covered by a money purchase plan maintained by the leasing organization and meeting the requirements of Code Section 414(n)(5)(B), and leased employees do not constitute more than 20% of all Non-Highly Compensated Employees of all Affiliated Companies within the meaning of Code Section 414(n)(5)(C)(ii).”

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Section 1.27           ERISA.  “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

Section 1.28           Former Participant.  “Former Participant” shall mean a person who has Separated from the Service and has become entitled to a Benefit under the Plan.

Section 1.29           Henley.  “Henley” shall mean the corporate entity known as The Henley Group, Inc. during the period commencing on May 27, 1986 and ending December 31, 1989.

Section 1.30           Henley Properties.  “Henley Properties” shall mean Henley Properties Inc., a Delaware corporation known prior to January 1, 1990 as The Henley Group, Inc. and after the 1992 Merger (as defined in the preamble) as The Bolsa Chica Company.

Section 1.31           Hour of Service.  (a) “Hour of Service” of an Employee shall mean the following:

(i)Each hour for which he is paid or entitled to payment (as determined under regulations of the Secretary of Labor without reference to the limitations of Section 1.19) by a Company,

(ii)Each hour in or attributable to a period of time during which he performs no duties (irrespective of whether he has had a Separation from the Service) due to a vacation, holiday, illness, incapacity (including pregnancy or disability), layoff, jury duty, military duty or a leave of absence, for which he is so paid or so entitled to payment; provided, however, that

(A)no more than five hundred and one Hours of Service shall be credited under this paragraph to an Employee on account of any such period, and

(B)no such hours shall be credited to an Employee if attributable to payments made or due under a plan maintained solely for the purpose of complying with applicable worker’s compensation, unemployment compensation or disability insurance laws or to a payment which solely reimburses the Employee for medical or medically related expenses incurred by him.

(iii)Each hour for which he is entitled to back pay, irrespective of mitigation of damages, whether awarded or agreed to by a Company.

(b)           Hours of Service under subsection (a) (ii) and (a)(iii) shall be calculated in accordance with 29 CFR Section 2530.200b-2(b).  Each Hour of Service shall be attributed to the Plan Year or initial eligibility year in which it occurs except to the extent that the Company, in

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accordance with 29 CFR Section 2530.200b-2(c), credits such Hour to another computation period under a reasonable method consistently applied.

(c)           Where his Company’s records do not readily permit determination of an Employee’s actual hours, Hours of Service before 1976 shall be the product of

(i)Forty, and

(ii)The number of weeks in which he had an Hour of Service.

(d)           Where his Company’s records or procedures do not readily permit determination of an Employee’s actual hours, Hours of Service may be credited under an equivalency method under which an Employee who is customarily employed for at least thirty (30) hours per week throughout each Plan Year (except for holidays and vacations) shall be credited with 190 Hours of Service for each month in which he completes at least one (1) Hour of Service in accordance with the provisions of this Section 1.28 (regardless of whether the number of Hours of Service actually completed in such month exceeds 190).

(e)           Hours of Service shall include hours performed or paid for by any company, which was then or subsequently became controlled by a Company.

(f)            Notwithstanding any other provision of this Section 1.31, the Hours of Service of each Employee who became a Participant in connection with the Spinoff of Henley by Allied-Signal as of May 27, 1986 and who participated in the Predecessor Plan on December 31, 1985 shall include all Hours of Service under Section 1.25 of the Predecessor Plan.

Section 1.32           Investment Committee.  “Investment Committee” shall mean the Investment Committee designated by the Board of Directors to have the investment responsibilities under the Plan described in Article VII.  Effective September 30, 1993, the Board of Directors or its delegate shall serve as the Investment Committee.

Section 1.33           Insurance Company.  “Insurance Company” shall mean any insurance company selected by the Administrator to provide contracts of insurance or annuity contracts to the Trustee for the purpose of funding benefits under the Plan.

Section 1.34           Key Employee.  “Key Employee” shall mean an Employee described in Section 9.1.4 of the Plan and in Section 416 of the Code.

Section 1.35           Maximum Permissible Amount.  “Maximum Permissible Amount” means the amount, as adjusted, specified in Section 6.3.

Section 1.36           Military Leave.  Any Employee who leaves the Company directly to perform service in the Armed Forces of the United States or the United States Public Health Service under conditions entitling him to reemployment rights as provided in the laws of the United States, shall, solely for the purposes of the Plan and irrespective of whether he is compensated by any Company during such period of service be presumed an Employee on Military Leave.  Such presumption shall cease to apply if such Employee voluntarily resigns from the Company during such period of service, or if he fails to make application for

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reemployment within the period specified by such laws for the preservation of his reemployment rights.

Section 1.37           Minimum Benefit.  “Minimum Benefit” means the benefit described in Section 9.6.

Section 1.38           Normal Retirement Benefit.  “Normal Retirement Benefit” shall mean the Benefit payable under Section 3.2.

Section 1.39           Normal Retirement Date.  “Normal Retirement Date” of a Participant or Former Participant shall mean the first day of the calendar month coincident with or next following his sixty-fifth birthday, on which date such Participant or Former Participant shall be entitled to the Normal Retirement Benefit provided in Section 3.2.

Section 1.40           Participant.  “Participant” shall mean any person included in the Plan as provided in Article II, until such time as such Participant has a Separation from the Service.

Section 1.41           Period of Severance.  “Period of Severance” shall mean the period of time commencing on the Severance from Service Date and ending on the date on which an Employee again performs an Hour of Service within the meaning of 29 CFR Section  2530.200b-2(a)(1).

Solely for the purpose of determining whether a Period of Severance has occurred, in the case of an Employee who is absent from work for maternity or paternity reasons, a period of absence of two years or less shall not be taken into account.  An absence from work for maternity or paternity reasons means an absence (i) by reason of the pregnancy of the Employee, (ii) by reason of the birth of a child of the Employee, (iii) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement.

Section 1.42           Plan.  The “Plan” shall mean The Bolsa Chica Company Retirement Plan (formerly known as the Henley Properties Inc. Retirement Plan and, prior to January 1, 1990, known as The Henley Group, Inc. Retirement Plan), as amended and restated from time to time.  Effective December 31, 1993, “Plan” shall mean the Koll Real Estate Group Retirement Plan, as amended and restated from time to time.

SECTION 1.42 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1, EFFECTIVE AS OF JANUARY 1, 1999, BY ADDING THE FOLLOWING SENTENCE:

“Effective January 1, 1999, “Plan” shall mean the California Coastal Communities, Inc. Retirement Plan, as amended and restated from time to time.”

Section 1.43           Plan Enrolled Actuary.  The term “Plan Enrolled Actuary” shall mean that person who is enrolled by the Joint Board for the Enrollment of Actuaries established under

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subtitle C of Title III of ERISA and who has been engaged by the Committee on behalf of all Participants to make and render all necessary actuarial determinations, statements, opinions, assumptions, reports, and valuations under the Plan as required by law or requested by the Administrator.

Section 1.44           Plan Year.  “Plan Year” shall mean the calendar year, including such years preceding the adoption of the Plan.

Section 1.45           Predecessor Plan.  “Predecessor Plan” shall mean The Signal Companies, Inc. Retirement Plan, as in effect on December 31, 1985.

Section 1.46           Related Plan.  “Related Plan” shall mean the Pneumo Abex Corporation Retirement Plan, the New Hampshire Oak, Inc. Retirement Plan, the Wheelabrator Technologies Inc. Retirement Plan and the Fisher Scientific International Inc. Retirement Plan.

Section 1.47           Retirement Benefit.  “Retirement Benefit” shall mean either the Early Retirement Benefit, the Normal Retirement Benefit, the Disability Retirement Benefit or the Optional Retirement Benefit described in Article III.

Section 1.48           Separation from the Service.  “Separation from the Service” of an Employee shall mean his resignation, treatment as voluntarily terminated, discharge, Normal Retirement, Disability Retirement or Early Retirement from the Company, or his death.

Section 1.49           Severance from Service Date.  “Severance from Service Date” shall mean the earlier of (a) the date on which an Employee quits, retires, is discharged, dies or is treated as voluntarily terminated, (b) the date on which an Employee on Military Leave (i) voluntarily resigns from the Company or (ii) in the case of an Employee on Military Leave who fails to apply for reemployment, the day next following the last day of the period specified by the laws of the United States for the preservation of such Employee’s reemployment rights, (c) the day next following the date of expiration of a period of educational leave, or (d) the first anniversary of the first date of a period in which an Employee remains absent from service (with or without pay) for any reason other than quit, retirement, discharge, death or voluntary termination, such as vacation, holiday, sickness, disability, leave of absence or layoff, provided that (e) with the prior approval of the Company, the Severance from Service Date of an Employee who receives salary continuation in respect of termination of employment may be a date no earlier than the first anniversary, and no later than the second anniversary, of the last date of a period during which salary continuation is provided.  A one-year period of severance is a 12 consecutive month period, beginning on the Severance from Service Date, during which the employee does not perform an hour of service for the employer.

Section 1.50           Spinoff.  “Spinoff” shall have the meaning assigned to such term in the Preamble to the Plan.

Section 1.51           Social Security Retirement Age.  “Social Security Retirement Age” means:

(i)Age 65 with respect to any Employee who was born before January 1, 1938;

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(ii)Age 66 with respect to any Employee who was born after December 31, 1937 and before January 1, 1955; and

(iii)Age 67 with respect to any Employee who was born after December 31, 1954.

Section 1.52           Trust.  “Trust” shall mean the trust established pursuant to the Trust Agreement.

Section 1.53           Trust Agreement.  “Trust Agreement” shall mean the trust agreement under the Plan as it may be amended from time to time, providing for the investment and administration of the Trust Fund.  By this reference the Trust Agreement is incorporated herein.

Section 1.54           Trust Fund.  “Trust Fund” shall mean the fund established under the Trust Agreement by contributions made pursuant to the Plan and from which any amounts payable under the Plan are to be paid.

Section 1.55           Trustee.  “Trustee” shall mean the Trustee under the Trust Agreement.

Section 1.56           Vested Retirement Benefit.  “Vested Retirement Benefit” shall have the meaning given in Section 3.10.

Section 1.57           Vesting Service.  (a) The Vesting Service of a Participant shall mean the aggregate number of whole year periods of service after he first became an Employee and prior to any Period of Severance whether or not such periods of service were completed consecutively.

(b)           The Vesting Service of a Participant shall also include the following Periods of Severance:  (i) a Period of Severance which begins as of the date the Participant quits, is discharged or retires and ends within twelve months of such date; and (ii) a Period of Severance which begins as of the date of any absence from service for any reason not described in (i) above which is then followed by a quit, discharge or retirement and which thereafter ends within twelve months of the original absence.

(c)           The Vesting Service of a nonvested Participant who has incurred a Period of Severance of one year or more and is subsequently reemployed shall not include previously earned Vesting Service if, at the time of such reemployment, the Period of Severance equals or exceeds the greater of five (5) years or the previously earned Vesting Service (whether or not consecutive).  For purposes of this subsection, in the case of an Employee who is absent from work for maternity or paternity reasons, the 12-consecutive-month period beginning on the first anniversary of the first date of such absence shall not be counted as part of a Period of Severance.  An absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the Employee, (2) by reason of a birth of a child of the Employee, (3) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement.

(d)           Notwithstanding any other provision of this Section, the Vesting Service of each Employee who became a Participant in connection with the spinoff of Henley by

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Allied-Signal as of May 27, 1986 and who participated in the Predecessor Plan on December 31, 1985 shall include all Vesting Service under Section 1.49 of the Predecessor Plan.

(e)           For purposes of this Section, service with any member of the controlled group of corporations of which the Company is a member (within the meaning of section 414(b), (c) or (m) of the Internal Revenue Code) shall be considered service as an Employee.

(f)            For purposes of this Section, service from January 1, 1990 through December 31, 1993 that is treated as ‘vesting service’ under any Related Plan will be considered to be Vesting Service under this Plan.

(g)           For purposes of this Section, service of any employee who is a leased employee to any employer aggregated under Code Section 414(b), (c), or (m) will be credited whether or not such individual is eligible to participate in the Plan.

ARTICLE II

ELIGIBILITY

Section 2.1             Requirements for Participation.

(a)           Any Employee

(i)who

(A)was actively employed on January 1, 1986 by Henley or a business that became a subsidiary or division of Henley in connection with the Spinoff of Henley by Allied-Signal as of May 27, 1986; or

(B)was actively employed on January 1, 1986 by a member of the Allied-Signal controlled group of corporations and became an Employee in connection with the Spinoff; and

(ii)who was a participant in the Predecessor Plan on December 31, 1985, shall be a Participant in this Plan as of January 1, 1986.

(b)           Any Employee who

(i)on the first day of any calendar month after December 1985 an Employee shall become a Plan Participant if he or she has completed either one three hundred sixty-five day period commencing with the first day for which he is entitled to be credited with an Hour of Service within the meaning of 29 CFR Section  2530.200b-2(a)(1) upon employment or reemployment, or one calendar year commencing with or after such first period, during which three hundred sixty-five day period or year he had

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completed one thousand or more Hours of Service as an Employee, and

(ii)is not

(A)an Employee in a division of a Company as to which the Plan has not been adopted, or a Company as to which the Plan was adopted only for positions or classifications excluding the Employee, or

(B)an Employee in a bargaining unit covered by a collective bargaining agreement in existence on March 4, 1975 (unless such agreement provided for coverage hereunder of Employees in such unit) or a bargaining unit which becomes covered by a collective bargaining agreement after such date, with respect to which retirement benefits were the subject of good faith bargaining (unless such agreement provides for coverage hereunder of Employees in such unit), or

(C)a citizen of a country other than the United States and a resident of a country other than the United States, or

(D)a citizen of a country other than the United States and an Employee of any Company determined by the Administrator to be predominantly involved in international operations, unless the Administrator otherwise determines that such Employee is eligible to participate in this Plan, on the basis of uniform standards applied in a nondiscriminatory manner to all Employees similarly situated, shall be eligible to become a Participant.  Service rendered for a member of the Allied-Signal controlled group of corporations prior to May 27, 1986 by an Employee who was eligible to become a participant in the Predecessor Plan on December 31, 1985, became an Employee in connection with the spinoff of Henley by Allied-Signal and was actively employed on January 1, 1986 by a member of the Allied-Signal controlled group of corporations shall be considered service as an Employee for purposes of this subsection.

(c)           For purposes of determining eligibility to participate in the Plan under this Section 2.1, service with any member of the controlled group of corporations of which the Company is a member (within the meaning of section 414(b), (c) or (m) of the Code) shall be considered service as an Employee.

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(d)           Effective January 1, 1990, for purposes of determining eligibility to participate in the Plan under this Section, service from January 1, 1990 through December 31, 1993 that is counted toward eligibility under any Related Plan shall be considered service as an Employee.

Section 2.2             Termination of Participation.  A Participant shall cease to be a Participant on the date on which he is deemed to have Separated from the Service. A Former Participant who returns to the employ of the Company shall be reinstated as a Participant immediately and his Credited Service and Vesting Service as of such date shall be calculated in accordance with the rules in Section 1.19 and Section 1.56, respectively.

Section 2.3             Forfeitures.  If a Participant has a Separation from the Service for any reason prior to his acquisition of a Vested Retirement Benefit, his Accrued Benefit shall be forfeited when his continuous Period of Severance equals or exceeds the greater of five (5) years or his previously earned Vesting Service (whether or not completed consecutively).

Section 2.4             Freeze.  Notwithstanding anything to the contrary in the Plan, there shall be no new Participants in the Plan after December 31, 1993, and any Employees who would otherwise commence their participation in the Plan after December 31, 1993 shall not be eligible for such participation and shall not accrue any retirement or other benefits under the Plan. Accordingly, the participant group in the Plan shall be fixed and frozen as of December 31, 1993.

ARTICLE III

RETIREMENT, TERMINATION, OR DEATH

Section 3.1             Normal Retirement.  A Participant may retire on his Normal Retirement Date or the first day of any month thereafter.

IN THE JANUARY 1, 1989 RESTATEMENT
SECTION 3.2 WAS AMENDED TO READ AS FOLLOWS

Section 3.2             Normal Retirement Benefit.

(a)           A Participant who retires on or after his Normal Retirement Date shall receive a Normal Retirement Benefit which shall not be less than the Participant’s Accrued Benefit provided  in Section 3.10(c) subsections (i) , (ii), (iii) or (iv) below. His Normal Retirement Benefit shall consist of a monthly payment commencing on the first day of the month coincident with or next following the date he retires and ending with the month in which his death occurs.

(b)           Except as provided in subsections (c) through (k), his Normal Retirement Benefit shall be the sum of (i) , (ii) and (iii):

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(i)1.1% of his Average Final Compensation up to Covered Compensation multiplied by his Credited Service (but not more than 35 years);

(ii)1.5% of his Average Final Compensation in excess of Covered Compensation multiplied by his Credited Service (but not more than 35 years);

(iii)1.5% of his Average Final Compensation multiplied by Credited Service in excess of 35 years.

(c)           A Participant’s Normal Retirement Benefit shall not

(i)in the case of a Participant who had his Separation from the Service at the time he was employed by Air Cruisers Corporation or Signal Landmark, and except as provided in subsections (d) through (k), be less than the greater of (a) $20.00 times his Credited Service, or (b) 1% of his Average Final Compensation multiplied by his Credited Service, or

(ii)in the case of a Participant who had his Separation from the Service at the time he was employed by a Company other than one described in (c)(i), and except as provided in subsections (d) through (k), be less than 1.25% of his Average Final Compensation multiplied by his Credited Service; provided, however, that for this purpose Average Final Compensation shall be computed by taking into account only the Compensation described in subsections 1.15(a)(i) and (iii) of this Plan, provided that

(iii)in the case of a Participant who had his Separation from the Service at the time he was employed at the La Jolla facility or the Hampton facility of the Company, shall not be less than the greater of his Normal Retirement Benefit calculated in accordance with subsection (c)(i) or subsection (c)(ii) above.

(d)           Notwithstanding anything in the Plan to the contrary, in no event shall a Participant’s or Former Participant’s monthly Benefit payment under Section 3.2, 3.5, 3.4(b) or 3.10 be less than the largest monthly Benefit payment under Section 3.4(b) to which he could have become entitled by electing, at any time, Early Retirement under Section 3.3.

(e)           The Normal Retirement Benefit of a Participant specified below shall be adjusted as follows:

(i)In the case of a Participant who holds or has held an account in the Garrett Secured Benefit Account in The Henley Savings and Stock Purchase Plan (the “Savings Plan”), his Normal Retirement Benefit shall be,

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(A)in the case of a Participant who elects pursuant to the Savings Plan to transfer his entire account balance held in the Garrett Secured Benefit Account to this Plan, the Normal Retirement Benefit provided hereunder without regard to this subparagraph (e) and

(B)in the case of a Participant who elects pursuant to the Savings Plan not to transfer his account balance in the Garrett Secured Benefit Account to this Plan, the Normal Retirement Benefit provided under subparagraph (b) of this Section 3.2, offset by the value of the account balance not transferred (the “Offset”). Except in the case of a Participant eligible for a Normal Retirement Benefit under the Predecessor Plan on December 31, 1983, the Offset shall be calculated at the earlier of the time the Participant reaches Normal Retirement Date or the time the Participant has a Separation from the Service (the “Offset Calculation Date”). Any portion of a Participant’s Garrett Secured Benefit Account withdrawn prior to the Offset Calculation Date and after December 31, 1983 shall be disregarded, and for purposes of calculating the Offset, the Participant’s balance in such account shall be assumed to be the amount which would have been his balance at the Offset Calculation Date had no prior withdrawals been made. Solely for purposes of calculating the Offset, the actuarial assumptions set forth in this paragraph shall apply. The Offset shall be calculated as follows:  (1) the portion of the Participant’s account which would have existed as of December 31, 1983 absent Amendment IV to the Garrett Severance Plan is treated as earning a 1.75% semi-annual interest rate (the “Assumed Rate”) to the  Offset Calculation Date (the “Offset Portion”) and is then subtracted from the Participant’s actual account balance on the Offset Calculation Date (the result is the “Remainder Amount”); (2) the Offset Portion, treated as earning the Assumed Rate from the Offset Calculation Date to Normal Retirement Date, if later and the Remainder Amount, treated as earning a 7 1/2% annual interest rate from the Offset Calculation Date to Normal Retirement Date, if later, are added together; (3) the sum of (1) and (2) is divided by 153.31 and in the case of a Participant eligible for a Normal Retirement Benefit under the Predecessor Plan on December 31, 1983, the Offset shall be calculated on the basis of the Participant’s Garrett Secured Benefit Account at the Participant’s Normal Retirement Date, plus the amount allocated to such Participant’s account by virtue

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of Amendment IV to the Garrett Severance Plan, divided by 153.31;

(ii)In the case of a Participant who was a member of the Equity Group Amended Employee Retirement Plan (the “Equity Plan”) as of December 31, 1971, whose contributions to such plan had not been returned pursuant to Article VIII of the Wheelabrator-Frye Inc. Salaried Employees’ Retirement Plan, the Normal Retirement Benefit shall be increased by the greater of (a) one-twelfth of the product of two-thirds percent of his final average earnings, as defined in the Equity Plan times the number of his years of service under the Equity Plan or (b) the amount necessary to make his Normal Retirement Benefit hereunder equal to the benefit he would have received if he had retired in December 1971.

(f)            In the case of an Employee of a Company who was a participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984, the provisions of which plan require any adjustments for additional benefits, offset benefits, predecessor plan benefits or, except in the case of UOP Realty Development Company or Wolverine Tube Corporation, any amounts representing employee contributions which are withdrawn by the Participant at retirement, such adjustments shall be applied in the manner specified in such plan against the Normal Retirement Benefit provided under subparagraph (b) to determine the amount payable hereunder to such participant.

(g)           In the case of an Employee other than an Employee of UOP Realty Development Company or Wolverine Tube Corporation who was a participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984, who made employee  contributions to any retirement plan or any other pension or profit sharing plan of any Company which contribution increased the amount of any retirement benefit payable under such plans, the provisions of such plans in effect on December 31, 1983 shall govern the timing and manner of the payment of such contributions or benefits provided, however, that the interest rate used to accumulate such employee contributions after December 31, 1983 shall in no event be less than the interest rate provided in the definition of Actuarial Equivalent under this Plan and the accumulated amount at retirement will be converted to an annuity using the lump sum factor described in Section 3.8.

(h)           The Normal Retirement Benefit of any Participant who was transferred from a Company described in (c)(i) to a Company described in (c)(ii) or from a Company described in (c)(ii) to a Company described in (c)(i) shall be calculated as though the Employee had, at all times, been employed by his Employer on the date of his Separation from the Service, provided that in no event will his Normal Retirement Benefit be less than his Accrued Benefit on the date of any transfer.

(i)            The Benefit of a Participant who elects an Optional Retirement Benefit under Section 3.6 and the Benefit of a Participant who is married on his Normal or Early Retirement Date and has not elected not to receive the automatic Statutory Joint and Survivor

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Annuity provided under Section 3.7, shall be determined under the provisions of Section 3.6 or 3.7, respectively.

(j)            In the case of an Employee who made contributions to any retirement plan sponsored by UOP, Inc., which merged with the Predecessor Plan on January 1, 1984, which contributions were not withdrawn prior to or as of his Normal Retirement Date, the Normal Retirement Benefit payable under this section shall be increased by the amount of such contributions accumulated to such date at the interest rate applicable under the prior plan (but after December 31, 1983, in no event less than the interest rate specified in the definition of Actuarial Equivalent hereunder) expressed as the actuarial equivalent of a single life annuity.

BEFORE JANUARY 1, 1989
SECTION 3.2(b) READ AS FOLLOWS

(b)           Notwithstanding (i), (ii), (iii) or (iv) above, except as provided in subsections (c) through (k), his Normal Retirement Benefit shall be:

(i)1.5% of his Average Final Compensation multiplied by his Credited Service, minus;

(ii)1.5% of his Primary Social Security Benefit multiplied by his Credited Service (not in excess of 33 1/3 years), provided that;

(iii)if the amount determined under clause (ii) exceeds $60, and if he was a Participant in the Signal Retirement Plan (as defined in the Predecessor Plan) on April 1, 1971, the excess over such $60 shall be disregarded.

Before January 1, 1989, Primary Social Security Benefit was defined in Section 1.42 of the Plan as follows:  “Primary Social Security Benefit” means the estimated monthly benefit that a Participant would be entitled to receive at age 65, under the Social Security Act in effect on the January 1 coincident with or next preceding the earlier of Separation from the Service, his Disability or the day preceding his 65th birthday, whichever is applicable, without regard to whether the Participant receives such benefit and without regard to any changes made after said January 1. For purposes of the Plan, such estimated amount shall be determined using the following basis to determine the Participant’s history of covered earnings:

(a)           the Participant’s average total compensation for the five full calendar years immediately preceding his Separation from the Service, Disability or the day preceding his 65th birthday, whichever is applicable;

(b)           the assumption that earnings for calendar years preceding the Separation from the Service, Disability or the day preceding his 65th birthday, whichever is applicable, increase at the same rate as the Average Per Worker Total Wages as reported by the Social Security Administration;

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(c)           the participant’s earnings for each year in and subsequent to the calendar year of Separation from the Service or Disability to the December 31 preceding his 65th birthday are equal to earnings for the calendar year preceding Separation from the Service;

(d)           estimated using a table of amounts for varying pay ranges reflecting the foregoing assumptions.

The Participant shall have the right to supply the Company with his actual salary history, documented in a manner acceptable to the Administrator, which salary history must be obtained from the Social Security Administration. If a Participant or his surviving spouse supplies actual Social Security earnings on a timely basis (in no event later than 12 months from the last date on which the Participant worked) the Primary Social Security Benefit will be redetermined using such earnings and his Benefit will be adjusted accordingly, but only if such redetermination results in a greater benefit to the Participant. Failure to provide the Company with a record of actual earnings on a timely basis will entitle the Company to calculate the offset in the manner described above land may result in an offset which is greater (and therefore result in a lesser benefit) than an offset calculated with reference to actual earnings.

IN THE AUGUST 1, 1992 AND SUBSEQUENT AMENDMENTS AND RESTATEMENTS,
WAS AMENDED TO READ AS FOLLOWS

Section 3.2.            Normal Retirement Benefit.  (a) Participant who retires on or after his Normal Retirement Date shall receive a Normal Retirement Benefit which shall not be less than the Participant’s Accrued Benefit provided in Section 3.10(c) subsection (i), (ii), (iii) or (iv) below. His Normal Retirement Benefit shall consist of a monthly payment commencing on the first day of the month coincident with or next following the date he retires and ending with the month in which his death occurs.

(b)           Effective January 1, 1990, except as provided in subsections (c) through (i), his Normal Retirement Benefit shall be the greater of (A) the sum of (i) , (ii) and (iii), less (iv), and (B) the sum of (i) , (ii) and (iii) determined without regard to the Credited Service described in Section 1.19(a)(v) or the Compensation described in Section 1.16(h):

(i)1.1% of his Average Final Compensation up to Covered Compensation multiplied by his Credited Service (but not more than 35 years);

(ii)1.5% of his Average Final Compensation in excess of Covered Compensation multiplied by his Credited Service (but not more than 35 years);

(iii)1.5% of his Average Final Compensation multiplied by Credited Service in excess of 35 years.

(iv)His “normal retirement benefit” payable under any Related Plan which is based on Credited Service described in Section 1.19(a)(v).

(c)           A Participant’s Normal Retirement Benefit shall not

25

(i)except as provided in subsections (c) through (i), be less than 1.25% of his Average Final Compensation multiplied by his Credited Service; provided, however, that for this purpose Average Final Compensation shall be computed by taking into account only the Compensation described in subsections 1.16(a)(i) and (iii) of this Plan, provided that

(ii)in the case of a Participant who had his Separation from the Service at the time he was employed at the La Jolla facility or the Hampton facility of the Company, be less than the greater of (A) his Normal Retirement Benefit calculated in accordance with subsection(i) above or (B) the greater of (1) $20.00 times his Credited Service or (2) 1% of his Average Final Compensation multiplied by his Credited Service.

(d)           Notwithstanding anything in the Plan to the contrary, in no event shall a Participant’s or Former Participant’s monthly Benefit payment under Section 3.2, 3.5, 3.4(b) or 3.10 be less than the largest monthly Benefit payment under Section 3.4(b) to which he could have become entitled by electing, at any time, Early Retirement under Section 3.3.

(e)           In the case of an Employee of a Company who was a participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984, the provisions of which plan require any adjustments for additional benefits, offset benefits, predecessor plan benefits or, except in the case of UOP Realty Development Company, any amounts representing employee contributions which are withdrawn by the Participant at retirement, such adjustments shall be applied in the manner specified in such plan against the Normal Retirement Benefit provided under subparagraph (b) to determine the amount payable hereunder to such participant.

(f)            In the case of an Employee other than an Employee of UOP Realty Development Company who was a participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984, who made employee contributions to any retirement plan or any other pension or profit sharing plan of any Company which contribution increased the amount of any retirement benefit payable under such plans, the provisions of such plans in effect on December 31, 1983 shall govern the timing and manner of the payment of such contributions or benefits provided, however, that the interest rate used to accumulate such employee contributions after December 31, 1983 shall in no event be less than the interest rate provided in the definition of Actuarial Equivalent under this Plan and the accumulated amount at retirement will be converted to an annuity using the lump sum factor described in Section 3.8.

(g)           The Normal Retirement Benefit of any Participant who was transferred from a Company described in (c)(i) to a Company described in (c)(ii) or from a Company described in (c)(ii) to a Company described in (c)(i) shall be calculated as though the Employee had, at all times, been employed by his Employer on the date of his Separation from the Service, provided that in no event will his Normal Retirement Benefit be less than his Accrued Benefit on the date of any transfer.

26

(h)           The Benefit of a Participant who elects an Optional Retirement Benefit under Section 3.6 and the Benefit of a Participant who is married on his Normal or Early Retirement Date and has not elected not to receive the automatic Statutory Joint and Survivor Annuity provided under Section 3.7, shall be determined under the provisions of Section 3.6 or 3.7, respectively.

(i)            In the case of an Employee who made contributions to any retirement plan sponsored by UOP, Inc., which merged with the Predecessor Plan on January 1, 1984, which contributions were not withdrawn prior to or as of his Normal Retirement Date, the Normal Retirement Benefit payable under this section shall be increased by the amount of such contributions accumulated to such date at the interest rate applicable under the prior plan (but after December 31, 1983, in no event less than the interest rate specified in the definition of Actuarial Equivalent hereunder) expressed as the actuarial equivalent of a single life annuity.

Section 3.3             Early Retirement.  (a) A Participant may voluntarily retire on his Early Retirement Date upon written notice to the Administrator designating such date. A Participant who undergoes a Separation from the Service after he has qualified for Early Retirement may elect to have Benefits commence in accordance with this Section at or after such Separation, and the designated effective date of such election shall be his Early Commencement Date.

(b)           Notwithstanding the foregoing, any Employee who was eligible to retire as of December 31, 1985 under the terms of the Predecessor Plan shall be eligible to retire under this Plan.

(c)           Notwithstanding the foregoing, any Employee or former Employee who was an employee participating on December 31, 1983 in the UOP Pension Plan, or in any like plan maintained by UOP, Inc. on such date, or any Employee who would otherwise have become a participant in such a plan upon completing the applicable eligibility requirements, shall be eligible to retire on or after his fifty-fifth birthday and the completion of five years of Vesting Service.

(d)           Notwithstanding the foregoing, any Employee or former Employee who was a Participant on December 31, 1983 in the Signal Retirement Plan (as defined in the Predecessor Plan) shall be entitled to retire under this Plan with respect to his Accrued Benefit as of December 31, 1988 at the time and using the reduction factors specified in the Signal Retirement Plan in effect on such date.

Section 3.4             Early Retirement Benefit.  (a) A Participant who retires on his Early Retirement Date, or Former Participant who at the time of his Separation from the Service has qualified for Early Retirement, shall receive a benefit which shall be no less than his Accrued Benefit provided under Section 3.10(c), appropriately reduced, as provided under Section 3.4(b)(ii) and, subject to the provisions of Sections 3.6 and 3.7, shall consist of a monthly payment commencing upon his Early Commencement Date and ending with the month in which his death occurs.

(b)           The amount of each such monthly payment shall, subject to Section 3.2(d), be an amount determined by reducing

27

(i)his Normal Retirement Benefit, computed under Section 3.2(b) on the basis of his Credited Service completed prior to his Early Retirement Date plus the number of years and fractional years from his Separation from the Service to his Normal Retirement Date, multiplied by a fraction, the numerator of which is his Credited Service and the denominator of which is his Credited Service plus the number of years and fractional years from his Separation from the Service to his Normal Retirement Date, and under Section 3.2(c) on the basis of his Credited Service completed prior to his Early Retirement Date, by

(ii)1/3 of 1% for each of the first 60 months (if any) by which his Early Commencement Date precedes the first day of the month coincident with or next following his 60th birthday; provided, however, that for Participants who attain age 55 in the year 2009 or later, the reduction factor provided for under this subparagraph (ii) shall be equal to 1/3 of 1% for each of the first 36 months and 5/12 of 1% for each additional month up to 24 months (if any) by which his Early Commencement Date precedes the first day of the month coincident with or next following his 60th birthday.

(c)           An Employee or former Employee who was a Participant in the Signal Retirement Plan (as defined in the Predecessor Plan) on December 31, 1983 shall, in addition to the monthly payment provided in subparagraph (b) above, receive a temporary additional Early Retirement Benefit of $150.00 per month ending with the earliest of the month in which he dies, the month before his 62nd birthday or the date of eligibility for full or reduced Social Security benefits.

(d)           In the case of an Employee who is eligible to retire before age fifty-five by virtue of subparagraph (b) or (d) of Section 3.3, the Early Retirement Benefit payable hereunder shall be further reduced before age fifty-five by an Actuarial Equivalent reduction factor for the months, if any, by which his Early Commencement Date precedes the first day of the month coincident with or next following his fifty-fifth birthday.

(e)           In the case of an Employee who made contributions to any retirement plan sponsored by UOP, Inc., which merged with the Predecessor Plan on January 1, 1984, which contributions were not withdrawn prior to or as of his Early Retirement Date, the Early Retirement Benefit payable under this section shall be increased by the amount of such contributions accumulated to such date at the interest rate applicable under the Predecessor Plan (but after December 31, 1983, in no event less than the interest rate specified in the definition of Actuarial Equivalent hereunder) expressed as the actuarial equivalent of a single life annuity.

Section 3.5             Disability Retirement Benefit.  (a) A Participant who has at least ten years of Credited Service at his date of Disability, and who retires on his Disability Retirement Date prior to December 31, 1993, may elect, in a manner prescribed by the Committee, to receive a Disability Retirement Benefit which shall be no less than his Accrued Benefit, appropriately reduced, as provided under Section 3.10(c) and, subject to the provisions of Sections 3.6 and 3.7,

28

shall consist of a monthly payment on the first day of each calendar month commencing with his Disability Retirement Date and ending with the month in which his death occurs or, if earlier, the month in which his Disability ceases.

(b)           The amount of each such monthly payment shall be the greater of (x) the amount computed by reducing (i) his Normal Retirement Benefit, computed under Section 3.2(b) on the basis of his Credited Service completed prior to his Disability Retirement Date multiplied by a fraction, the numerator of which is his Credited Service, and the denominator of which is his Credited Service plus the number of years and fractional years from his Disability Retirement Date to his Normal Retirement Date, by (ii) 1/3 of 1% for each of the first 60 months (if any) by which his Disability Retirement Date precedes his 60th birthday, provided, however, that for Participants who attain age 55 in the year 2009 or later, the reduction factor shall be 1/3 of 1% for each of the first 36 months and 5/12 of 1% for each additional month up to 24 months (if any) by which his Disability Retirement Date precedes his 60th birthday; and with an Actuarial Equivalent reduction factor applied for each month in excess of such first 60 months, or (y) the amount of his Normal Retirement Benefit computed under Section 3.2(c)(i) or (ii) on the basis of Credited Service completed prior to his Disability Retirement Date, whichever is applicable to such Participant, reduced by the amount referred to in (x)(ii) of this Section 3.5(b), but with such reduction limited to 50%.

(c)           If a Former Participant’s Disability ceases and he thereupon again becomes an Employee his Disability Retirement Benefit shall cease and he shall resume status as a Participant. Such Former Participant shall accrue Credited Service in accordance with the terms of the Plan for any period prior to his Normal Retirement Date after resuming status as a Participant. The Normal Retirement Benefit payable to such Participant on his Normal Retirement Date shall be redetermined by taking into account total Credited Service including the period of disability, Compensation, etc. as required by the terms of the Plan and benefits already paid hereunder.

(d)           In the case of an Employee who made contributions to any retirement plan sponsored by UOP, Inc., which merged with the Predecessor Plan on January 1, 1984, which contributions were not withdrawn prior to or as of his Disability Retirement Date, the Disability Retirement Benefit payable under this section shall be increased by the amount of such contributions accumulated to such date at the interest rate applicable under the prior plan (but after December 31, 1983, in no event less than the interest rate specified in the definition of Actuarial Equivalent hereunder) expressed as the actuarial equivalent of a single life annuity.

Section 3.6             Optional Retirement Benefit.  (a) A Participant or Former Participant entitled to receive a Normal or Early Retirement Benefit or a Participant who is entitled to receive a Disability Retirement Benefit, shall generally receive the joint and survivor annuity provided in Section 3.7 (so long as such Participant is otherwise described in Section 3.7), unless such Participant elects not to receive such annuity and elects instead to receive a distribution in a form specified in subsections (i), (ii), (iii) or (iv) below. In addition, to be effective, any election made under this Section 3.6 must be made by the Participant himself, must be in writing on a form prescribed by the Administrator, must name the Beneficiary if a form of joint annuity is chosen, must be signed by the Participant and, if required by the Administrator, by the Participant’s spouse and must be filed with the Administrator prior to the date his benefits are to

29

commence. A Participant to whom Section 3.7 does not apply and who makes no written election under this Section shall receive a Benefit in accordance with subsection (i) below. A Participant may elect, in accordance with the requirements of the Administrator, to receive his Benefit in any one of the following manners:

(i)A Normal, Early or Disability Retirement Benefit, as the case may be, in the form of a single life annuity,

(ii)A reduced monthly Benefit payable during his Normal, Early or Disability Retirement Benefit period with the provision that if he dies after his Normal, Early, or Disability Retirement Date, as the case may be, survived by his properly designated Contingent Annuitant, such Contingent Annuitant shall receive a monthly Benefit in the same amount (or in 50%, 66 2/3% or 75% of that amount if the Participant shall so elect) until the first day of the calendar month in which the Contingent Annuitant’s death occurs provided, however, that if the Contingent Annuitant is other than the Participant’s spouse, not less than 50% of the actuarial value of the Participant’s Normal, Early, or Disability Retirement Benefit must be applied to provide Benefits payable to the Participant during his life under this subsection. (This election shall not take effect if the Contingent Annuitant does not survive until the commencement of payments under this subsection),

(iii)An increased retirement benefit payable during the Participant’s lifetime until age 62, decreased after age 62 by the expected Social Security Benefit and payable at such reduced rate during the remainder of the Participant’s life, so as to produce, as nearly as possible, a level retirement income. Such benefit shall be payable, at the Participant’s option, in the form of a life annuity or a contingent annuity with 50%, 66 2/3%, 75% or 100% payable to the Participant’s designated Contingent Annuitant in the event of the Participant’s death and until the first day of the calendar month in which the Contingent Annuitant’s death occurs, provided, however, that notwithstanding anything to the contrary in this Plan, effective January 1, 1985, distributions will be made in accordance with the Regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirement of Code Section 401(a)(9)(G). (An election of a benefit payable to a Contingent Annuitant pursuant to this section shall not take effect if the Contingent Annuitant does not survive until the commencement of payments under this subsection), or

(iv)A reduced retirement benefit payable during the Participant’s life, with a guarantee that not less than a fixed number of payments will be made to the Participant or, if the Participant dies prior to the expiration of such fixed number of years, to the Participant and the

30

Participant’s Beneficiary, in the aggregate. The Participant may select a guarantee of 60, 120 or 180 payments. If a Participant elects this option, the Participant shall also designate the Beneficiary to whom monthly payments will be continued if the Participant dies before having received the fixed number of payments. The Participant shall (subject to the consent requirements of this Section) have the right to change such Beneficiary prior to the Participant’s annuity starting date upon giving notice in writing to the Administrator. If a Participant elects this option and dies in active employment with a Company, the Beneficiary will not be entitled to any rights or benefits under the Plan, except in accordance with Section 3.9 hereof.

(b)           Notwithstanding (i), (ii), (iii) or (iv) above, the payment of the Actuarial Equivalent of any stream of payments or of any annuity paid to Beneficiaries shall be paid pursuant to the requirements of Section 3.15.

(c)           A Former Participant entitled to a Normal Retirement Benefit in a form prescribed in this section or pursuant to Section 3.7 who has previously left the employ of the Company shall be notified of such entitlement as provided in Section 10.8 of the Plan.

(d)           Subject to the foregoing provisions of this Section 3.6 and to the provisions of Section 3.7, a Participant or Former Participant who (i) made employee contributions to the UOP Pension Plan prior to January 1, 1984, (ii) elects after October 1, 1988 and prior to March 1, 1990 to withdraw all such contributions with accrued interest, and (iii) has an accrued benefit under the Plan immediately following such withdrawal the present value of which (determined using the Actuarial Equivalent definition applicable to small benefit cashouts under Section 3.13) is equal to $3,500 or less, may elect to receive an immediate lump sum distribution of such remaining accrued benefit.

SECTION 3.6 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1,
EFFECTIVE AS OF JANUARY 1, 1998, BY SUBSTITUTING THE NUMBER “$5,000” FOR
THE NUMBER “$3,500” WHEREVER THE LATTER APPEARS THEREIN.

Section 3.7             Statutory Joint and Survivor Annuity.  (a) Notwithstanding anything in the Plan to the contrary, the Benefit, if any, of a Participant or Former Participant commencing on his “Annuity Starting Date” (meaning either the first day of the first period with respect to which an amount is received as a life annuity; or in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitle the Participant to an annuity) shall be a statutory joint and survivor annuity which is immediately available, as described in subsection, if

(i)he was married upon his Annuity Starting Date,

31

(ii)he notified the Administrator in writing prior to his Annuity Starting Date that he was married, and

(iii)he has not otherwise elected under subsection.

(b)           The joint and survivor annuity of a Participant or Former Participant shall be a Benefit, reduced as provided in subsection, consisting of monthly payments to him beginning on his Annuity Starting Date and ending with the calendar month in which his death occurs with the provision that, if he dies after his Annuity Starting Date survived by the spouse to whom he was married on his Annuity Starting Date, such spouse shall receive monthly payments of fifty percent of such reduced Benefit beginning on the first day of the calendar month following the month in which the Participant or Former Participant dies. Payments to such Participant’s or Former Participant’s spouse continue until the first day of the calendar month following the spouse’s death.

(c)           The reduced Benefit payable under this Section to a Participant or Former Participant during his lifetime shall be at a monthly rate such that his joint and survivor annuity is the Actuarial Equivalent of his Disability, Early or Normal Retirement Benefit, as the case may be.

(d)           A Participant or Former Participant referred to in subsection (a) may elect in writing, in the manner prescribed by the Administrator and with the consent of such Participant’s or Former Participant’s spouse, if required by the Administrator, not to receive a joint and survivor annuity (in which case he shall receive his Benefit as otherwise provided in the Plan). Such an election must satisfy the requirements of Section 3.14(b). Such an election shall be made not earlier than:

(i)90 days before the commencement of the distribution of any part of an Accrued Benefit under this Plan,

and not later than the later of

(ii)his Annuity Starting Date, or

(iii)the ninetieth (90th) day after the mailing or personal delivery to him of information referred to in subsection 3.7(e).

Such an election may be revoked, or revoked and re-elected, at any time during the applicable election period described in this subsection 3.7(d). A Participant may request additional information regarding the notices he receives under subsection 3.7(e). However, such a request for additional information must be made within 60 days after the notices have been mailed or personally delivered. Should a Participant request additional information, then the applicable election period described in this subsection 3.7(d) shall be extended so that it ends 90 days after the requested additional information has been mailed or personally delivered to the Participant. If a Participant (i) has separated from service, (ii) is entitled to receive or is currently receiving a Qualified Joint and Survivor Annuity under Code Section 401(a)(11), and (iii) has not had an election described in this subsection 3.7(d) made available to him, then the Plan shall provide to such a Participant an election to receive the balance of his benefits in the form of an Optional

32

Retirement Benefit, described in Section 3.6. Such a Participant shall have 90 days after notice of the election is mailed or personally delivered to him in which to make the election described in the preceding sentence. If the Participant has died, then the election shall be made available to the Participant’s personal representative. The balance of the Participant’s benefits distributed under such an election may be adjusted, if applicable, for payments previously distributed in the form of a Qualified Joint and Survivor Annuity.

(e)           Each Participant or Former Participant shall receive from the Committee nontechnical explanations of the availability and consequences of the election provided hereunder at such time and in such a manner so as to comply with all Internal Revenue Service Regulations that may be promulgated in this regard.

(f)            During the period described in subsection, a participant or Former Participant who properly elected thereunder not to receive a joint and survivor annuity may revoke such election and after any such revocation, an election under subsectionmay be made again prior to the expiration of such election period.

SECTION 3.7 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1, EFFECTIVE AS
OF JANUARY 1, 1997, BY ADDING A NEW SUBSECTION (g) TO READ AS FOLLOWS:

“(g)         Waiver of Notice.  The Annuity Starting Date for a distribution in a form other than a Qualified Joint and Survivor Annuity may be less than 30 days after receipt of the written explanation described in subsection (e) above provided: (a) the Participant has been provided with information that clearly indicates that the Participant has at least 30 days to consider whether to waive the Qualified Joint and Survivor Annuity and elect (with spousal consent) to a form of distribution other than a Qualified Joint and Survivor Annuity; (b) the Participant is permitted to revoke any affirmative distribution election at least until the annuity starting date or, if later, at any time prior to the expiration of the 7-day period that begins the day after the explanation of the Qualified Joint and Survivor Annuity is provided to the Participant; and (c) the Annuity Starting Date is a date after the date that the written explanation was provided to the Participant.”

Section 3.8             Actuarial Equivalence.  The Participant’s Optional Retirement Benefit under Section 3.6 or the Benefit provided under Section 3.7 shall be the Actuarial Equivalent of his Normal, Early, or Disability Retirement Benefit, said Equivalent being computed as of the date payments commence.

Section 3.9             Death Benefit - Qualified Preretirement Survivor Annuity.  (a) If a Participant dies after becoming eligible for an Early Retirement Benefit while he is an Employee (including a Participant who was so eligible, was Disabled and did not elect to receive a Disability Retirement Benefit and a Former Participant who was eligible at the time of his Separation from the Service to receive Early Retirement Benefits, but who elected to defer his Early Commencement Date beyond such Separation from the Service), and is survived by a spouse, such spouse shall receive a Benefit equal to one-half of the amount such Participant

33

would have received (other than pursuant to Section 3.4(e)) had he retired immediately preceding his death and had he elected to receive a single life annuity.

(b)           Subject to the limitation imposed by Section 3.6(b), in the event of the death of a Participant who is not survived by a spouse (or if the spouse dies after Benefits described in subparagraph (a) above have commenced) but is survived by one or more children of the Participant under the age of 21, each periodic payment of the Benefit described in subparagraph (a) above shall be paid in equal shares among all of such children who are under the age of 21 at the time of such payment, and shall continue to be paid until the last of such children either attains age 21 or dies.

(c)           Notwithstanding the foregoing and subject to the limitation imposed by Section 3.6(b), in the case of an Employee other than an Employee of UOP Realty Development Company or Wolverine Tube Corporation who was a Participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984, the Death Benefit payable hereunder to a Participant’s spouse or beneficiary shall in no event be less than the amount of any employee contributions made to such plans, accumulated to the earlier of the date benefits commence payment or the Participant’s Normal Retirement Date, at the interest rate applicable under the Predecessor Plan (but after December 31, 1983, in no event less than the interest rate specified in the term Actuarial Equivalent under this Plan), less any benefits received by the Participant or Beneficiary.

(d)           Notwithstanding the foregoing, the death benefit payable hereunder in respect of any Participant or Former Participant who was at any time prior to January 1, 1984 a participant in the Retirement Plan for Employees of the Garrett Corporation and its Participating Subsidiary Companies and had elected to be covered by the death benefit provisions thereunder shall in no event be less than the death benefit which would have been payable under such plan if he had died on December 31, 1983.

(e)           There shall be paid a death benefit in the case of any Employee of Air Cruisers Corporation who is a retired Participant who (1) retired on a Normal or Early Retirement Date, (2) was at least age 55 at the time of termination, (3) has at least 10 years of Vesting Service and (4) has not elected to take a death benefit under any other plan covering former employees of the Garrett Corporation. This death benefit is equal to $5,000 minus (1) the sum of all medical payments paid on behalf of such retired Participant or his dependents for treatment or services because of injury or sickness incurred by such Participant or dependents after the Participant reached Normal Retirement Date as provided under any retiree health care benefits provision of any Garrett Corporation health care plan covering former employees of the Garrett Corporation, and (2) any life insurance paid on behalf of such retired Participant under the Extended Death Benefit Clause of the Garrett Corporation Group Life Insurance Plan.

(f)            In the case of an Employee who was a participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984 which provided for the payment of a death benefit to the surviving spouse of any Employee who died after a stated period of service, a Death Benefit shall be payable  hereunder to the surviving spouse of such an Employee in an amount equal to the greater of the amount which would have been payable to

34

such spouse had such Employee died on December 31, 1983 or the Death Benefit payable under subparagraph (a).

(g)           In addition to the Death Benefit payable hereunder, the death benefits provided under Sections 4.7(a) and 4.7(b)(1) of the Retirement Plan for Employees of the Garrett Corporation and its Participating Subsidiaries shall continue to be provided to the extent applicable.

(h)           In the case of any Employee who has transferred his Garrett Secured Benefit Account balance to this Plan pursuant to the applicable provisions of the Savings Plan, the Death Benefit payable hereunder shall in no event be less than the value of the account so transferred accumulated to the earlier of the date benefits commence payment or the Participant’s Normal Retirement Date at the interest rate specified in the definition of Actuarial Equivalent under this Plan, less any benefits received by the Participant or Beneficiary.

(i)            In the case of the death of any Employee or former Employee who made contributions to any retirement plan sponsored by UOP, Inc. which was merged with the Predecessor Plan on January 1, 1984, and the death of any and all persons to whom benefits were being paid under Section 3.6 or 3.7 on behalf of the Employee following the Employee’s death, there shall be paid in a lump sum to the Beneficiary of the Employee the amount of any contributions made to such plan by the Employee accumulated to the earlier of the date benefits commence payment or the Employee’s Normal Retirement Date at the interest rate applicable under such plan, but after December 31, 1983 in no event at a rate less than the interest rate specified in the definition of Actuarial Equivalent under this Plan, less any benefits paid with respect to such contributions to the Employee and to such other person or persons under Section 3.6 or 3.7, except that if benefits are payable under Section 3.9(a) following the Employee’s death, the amount of such contributions accumulated with interest as provided for above shall be paid to the Employee’s spouse in the form of an actuarial equivalent life annuity based on such spouse’s age at the date of death of the Employee unless such spouse shall elect in writing to receive such contributions in the form of a lump sum payment.

(j)            If a Participant who has fulfilled the requirements for a Vested Retirement Benefit dies before his entire Benefit has been paid to him and before the earliest date which the  Participant could have designated as his Early Retirement Date, or if a Former Participant who has fulfilled the requirements for a Vested Retirement Benefit dies before his Benefit commences payment, his surviving spouse, if any, shall be entitled to receive the greater of the benefits, if any, described in subsection 3.9(f) above or benefits having the effect of a Qualified Preretirement Survivor Annuity, as described below, unless such spouse had not been married to the Participant or Former Participant for at least one year at the time of his death. The benefits payable to the spouse of a Participant (or Former Participant) who dies before the earliest date which the Participant could have designated as his Early Retirement Date shall commence with the month in which the Participant would have reached the earliest date which could have been designated as his Early Retirement Date or the first day of any month thereafter up to and including the first day of the month next following the date on which the Participant would have attained age 65, as elected by the spouse, and shall be equal to one-half of the amount which would have been payable to such Participant if he had (a) separated from service on the date of death; (b) survived to the earliest date which could have been designated as his Early Retirement

35

Date or the first day of any month thereafter, as elected by the spouse and (c) commenced payment on such date with an immediate straight life annuity. The benefit payable to the spouse of a Former Participant who dies after the earliest date which the Former Participant could have designated as his Early Commencement Date but before his Benefit commences payment shall commence with the month following the date of death or the first day of any month thereafter up to and including the first day of the month next following the date on which the Participant would have attained age 65, as elected by the spouse, and shall be equal to one-half the amount which would have been payable to such Former Participant if he had commenced payment with an immediate straight life annuity on the day before such Former Participant’s death or the first day of any month thereafter up to and including the first day of the month next following the date on which the Participant would have attained age 65, as elected by the spouse.

(k)           Subject to the limitation imposed by Section 3.6(b), in the case of the death of any Participant who formerly participated in the MPB Retirement Plan, the Death Benefit, if any, payable hereunder to the surviving spouse of such Participant shall be increased by one-twelfth of the amount of employee contributions plus interest remaining in the MPB Retirement Plan as of December 31, 1983, increased by 8.75% interest (or, if greater, the rate specified herein under the definition of Actuarial Equivalent) from such date to such Participant’s death, divided by the lump sum factor described in Section 3.8. If no other Death Benefit is payable hereunder, the amount of the foregoing increase may be paid as a lump sum with the consent of the surviving spouse. If payment of the additional annuity benefit is deferred beyond such Participant’s date of death, the balance at the date of death shall be increased to the actual benefit commencement date at the rate of interest specified under the definition of Actuarial Equivalent hereunder and converted to a monthly benefit using an Actuarial Equivalent conversion factor.

(l)            Except as expressly herein provided, no Benefit shall be payable hereunder upon the death of a Participant or Former Participant.

IN THE AUGUST 1, 1992 RESTATEMENT
SECTIONS 3.9(c) THROUGH 3.9(l) WERE REPLACED WITH THE FOLLOWING

(c)           Notwithstanding the foregoing and subject to the limitation imposed by Section 3.6(b), in the case of an Employee other than an Employee of UOP Realty Development Company who was a Participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984, the Death Benefit payable hereunder to a Participant’s spouse or beneficiary shall in no event be less than the amount of any employee contributions made to such plans, accumulated to the earlier of the date benefits commence payment or the Participant’s Normal Retirement Date, at the interest rate applicable under the Predecessor Plan (but after December 31, 1983, in no event less than the interest rate specified in the term Actuarial Equivalent under this Plan), less any benefits received by the Participant or Beneficiary.

(d)           In the case of an Employee who was a participant on December 31, 1983 in a plan which merged with the Predecessor Plan on January 1, 1984 which provided for the payment of a death benefit to the surviving spouse of any Employee who died after a stated period of service, a Death Benefit shall be payable hereunder to the surviving spouse of such an

36

Employee in an amount equal to the greater of the amount which would have been payable to such spouse had such Employee died on December 31, 1983 or the Death Benefit payable under subparagraph (a) ..

(e)           In the case of the death of any Employee or former Employee who made contributions to any retirement plan sponsored by UOP, Inc. which was merged with the Predecessor Plan on January 1, 1984, and the death of any and all persons to whom benefits were being paid under Section 3.6 or 3.7 on behalf of the Employee following the Employee’s death, there shall be paid in a lump sum to the Beneficiary of the Employee the amount of any contributions made to such plan by the Employee accumulated to the earlier of the date benefits commence payment or the Employee’s Normal Retirement Date at the interest rate applicable under such plan, but after December 31, 1983 in no event at a rate less than the interest rate specified in the definition of Actuarial Equivalent under this Plan, less any benefits paid with respect to such contributions to the Employee and to such other person or persons under Section 3.6 or 3.7, except that if benefits are payable under Section 3.9(a) following the Employee’s death, the amount of such contributions accumulated with interest as provided for above shall be paid to the Employee’s spouse in the form of an actuarial equivalent life annuity based on such spouse’s age at the date of death of the Employee unless such spouse shall elect in writing to receive such contributions in the form of a lump sum payment.

(f)            If a Participant who has fulfilled the requirements for a Vested Retirement Benefit dies before his entire Benefit has been paid to him and before the earliest date which the Participant could have designated as his Early Retirement Date, or if a Former Participant who has fulfilled the requirements for a Vested Retirement Benefit dies before his Benefit commences payment, his surviving spouse, if any, shall be entitled to receive the greater of the benefits, if any, described in subsection 3.9(d) above or benefits having the effect of a Qualified Preretirement Survivor Annuity, as described below, unless such spouse had not been married to the Participant or Former Participant for at least one year at the time of his death. The benefits payable to the spouse of a Participant (or Former Participant) who dies before the earliest date which the Participant could have designated as his Early Retirement Date shall commence with the month in which the Participant would have reached the earliest date which could have been designated as his Early Retirement Date or the first day of any month thereafter up to and including the first day of the month next following the date on which the Participant would have attained age 65, as elected by the spouse, and shall be equal to one-half of the amount which would have been payable to such Participant if he had (a) separated from service on the date of death; (b) survived to the earliest date which could have been designated as his Early Retirement Date or the first day of any month thereafter, as elected by the spouse and (c) commenced payment on such date with an immediate straight life annuity. The benefit payable to the spouse of a Former Participant who dies after the earliest date which the Former Participant could have designated as his Early Commencement Date but before his Benefit commences payment shall commence with the month following the date of death or the first day of any month thereafter up to and including the first day of the month next following the date on which the Participant would have attained age 65, as elected by the spouse, and shall equal to one-half the amount which would have been payable to such Former Participant if he had commenced payment with an immediate straight life annuity on the day before such Former Participant’s death or the first day of any month thereafter up to and including the first day of the month next following the date on which the Participant would have attained age 65, as elected by the spouse.

37

(g)           Except as expressly herein provided, no Benefit shall be payable hereunder upon the death of a Participant or Former Participant.

(h)           If the spousal benefit described above is not fully subsidized, the Participant may waive the spousal benefit described above by following the procedures described below.

(i)Notice.  During the Applicable Period (defined below), the Committee will provide the Participant with an explanation of the terms and conditions of the spousal benefit, the Participant’s right to make, and the effect of, an election to waive the spousal benefit, the rights of the Participant’s spouse to approve such a waiver, the Participant’s right to revoke such a waiver at any time before the Participant’s death and the effect of the Participant’s right to revoke such a waiver.

(ii)Procedure.  A Participant’s waiver of the spousal benefit must be made on a form prepared by, and delivered to the Committee during the period (“Applicable Period”) that begins with the first day of the Plan Year in which the Participant attains age 35 and ends with the death of the Participant; provided, however, if a Participant ceases to be an Employee before the first day of the Plan Year in which the Participant attains age 35, this period will begin on the day the Participant ceases to be an Employee. A Participant may revoke such a waiver at any time before the first to occur of the Participant’s Annuity Starting Date or the Participant’s death by delivering a subsequent form to the Committee that satisfies the waiver provisions of this Plan.

(iii)Spousal Consent.  The Participant’s surviving spouse must waive any rights to the spousal benefit in a written document that acknowledges the effect of the waiver, and that is witnessed by a notary public or, to the extent permitted by the Company, by a Company representative. Spousal consent will be irrevocable; provided, however, that spousal consent will be deemed to be revoked if the Participant changes his or her waiver election.

(iv)Waiver Unnecessary.  If the Participant is legally separated or abandoned (within the meaning of local law) and the Participant has a court order to that effect (and there is no Qualified Domestic Relations Order as defined in Code Section 414(p) that provides otherwise), or the surviving spouse cannot be located, then the waiver described in the preceding paragraph need not be filed with the Committee when a married Participant waives a spousal benefit under this Plan.

38

(v)Effect of Waiver. Any waiver by a spouse obtained pursuant to these procedures (or establishment that the consent of a spouse could not be obtained) will be effective only with respect to that spouse.

(i)            The surviving spouse need not begin receiving a qualified preretirement survivor annuity prior to the time the Participant would have attained age 65 except where the present value of the nonforfeitable benefit does not exceed $3,500.

Section 3.10           Vested Retirement Benefit. (a) Each Participant who has completed five (5) years of Vesting Service or who has reached his Normal Retirement Date while an Employee shall be entitled to a Vested Retirement Benefit equal to his Accrued Benefit. In the event of his Separation from the Service prior to his Normal, Early or Disability Retirement Date, a vested Former Participant shall, upon the earlier of his Normal Retirement Date or his attainment of age 55 (or applicable earlier retirement age) become entitled to receive a Normal, Early but with an Actuarial Equivalent early reduction factor applied or Optional Retirement Benefit as he shall elect (or in the absence of such election, as determined in the manner of Section 3.2, 3.4 or 3.7), all in an amount equal or Actuarially Equivalent to his Accrued Benefit payable at age 65. In addition, any Employee or former Employee who was a Participant in the Signal Retirement Plan (as defined in the Predecessor Plan) on December 31, 1983 and who completes five years of Vesting Service and attains his thirty-fifth birthday, shall be entitled to a Vested Retirement Benefit equal to his Accrued Benefit as of such date. In the event of his Separation from the Service prior to his Normal, Early, or Disability Retirement Date, a vested Former Participant shall upon his Normal or Early Retirement Date become entitled to a Normal, Early but with an Actuarial Equivalent early reduction factor applied or Optional Retirement Benefit as he shall elect (or in the absence of such election, as determined in the manner of Section 3.2, 3.4, or 3.7), all in an amount equal or Actuarially Equivalent to his Accrued Benefit payable at age 65.

(b)           An Employee’s “Accrued Benefit” as of his Separation from the Service shall be equal to his Normal Retirement Benefit computed under Section 3.2(b) on the basis of his Credited Service completed prior to such Separation plus the number of years and fractional years from the date of such Separation to his Normal Retirement Date, multiplied by a fraction, the numerator of which is his Credited Service and the denominator of which is his Credited Service plus the number of years and fractional years from the date of such Separation to his Normal Retirement Date, and under Section 3.2(c) on the basis of his Credited Service completed prior to such Separation.

(c)           If the Plan’s vesting schedule is amended, the vested percentage of every Employee who is a Participant on the amendment adoption date or the amendment effective date, whichever is later, may not be less than the Participant’s vested percentage determined under the Plan without regard to the amendment. In addition, if the Plan’s vesting schedule is amended, each such Participant who has completed 3 Years of Service and whose vested percentage is determined under the new vesting schedule may elect to have his or her vested percentage determined under the old vesting schedule if the old vesting schedule would be more favorable.

(d)           An Employee’s right to his or her normal retirement benefit is nonforfeitable on attainment of age 65.

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BEFORE THE JANUARY 1, 1989 RESTATEMENT
READ AS FOLLOWS

(c)           An Employee’s “Accrued Benefit” as of his Separation from the Service shall be equal to his Normal Retirement Benefit computed under Section 3.2 on the basis of his Credited Service completed prior to such Separation but with the amount referred to in Section 3.2(b)(ii) not to exceed 50% of his Primary Insurance Amount multiplied by a fraction, the numerator of which is his Credited Service and the denominator of which is his Credited Service plus the number of years and fractional years from the date of such Separation to his Normal Retirement Date.

(d)           Notwithstanding the foregoing:

(i)the “Accrued Benefit” of any Employee or former Employee who was a Participant in the Signal Retirement Plan (as defined in the Predecessor Plan) shall not be less than the amount of such “Accrued Benefit” as of December 31, 1983 determined under the provisions of such plan and the actuarial equivalence tables specified in such plan in effect on December 31, 1983;

(ii)the “Accrued Benefit” as of December 31, 1983 of any Employee or former Employee who was a participant in any plan which merged with the Predecessor Plan effective January 1, 1984 shall not be less than his “Accrued Benefit” as of December 31, 1983 determined under the terms of such other plan and, for Participants eligible to commence benefits on December 31, 1983, further determined by reference to the actuarial equivalence tables or interest assumption actually specified in such other plan on December 31, 1983;

(iii)the “Accrued Benefit” as of December 31, 1983 of any Employee or former Employee who was a participant in the Equity Plan prior to January 1, 1984, shall not be less than the amount of such “Accrued Benefit” as of December 31, 1983 determined under the terms of the Equity Plan;

(iv)the “Accrued Benefit” of any Employee or former Employee who was a participant in a plan which merged with the Predecessor Plan on January 1, 1984, shall not be less than the amount of any employee contributions made by the Employee to such plan (which contributions were not withdrawn prior to the earlier of his Early Commencement Date or Normal Retirement Date), expressed as an actuarial equivalent single life annuity, accumulated to the earlier of his Normal Retirement Date or Early Commencement Date at the interest rate applicable under such plan, but after December 31, 1983, in no event at a rate less than the interest rate specified in the definition of Actuarial Equivalent under this Plan;

40

(v)the “Accrued Benefit” of any Employee who transferred the balance of his account in the Garrett Secured Benefit Account to this Plan under the provisions of the Savings Plan shall be the gross accrued benefit prior to the Offset specified in Section 4.2(e)(i)(b), including the value of the account transferred accumulated to the earlier of Normal Retirement Date or Early Commencement Date at the rate specified in such plan, but in no event at a rate less than the interest rate specified in the definition of Actuarial Equivalent under this Plan; and

(vi)the “Accrued Benefit” of any Employee or former Employee who was a participant in the Predecessor Plan on December 31, 1985 and became a Participant in this Plan in connection with the spinoff of Henley by Allied-Signal as of May 27, 1986 shall not be less than his “Accrued Benefit” as of December 31, 1985 determined under the terms of the Predecessor Plan and the actuarial equivalence factors specified in the Predecessor Plan, subject to a transfer of all assets allocable to such Participant from the trust under the Predecessor Plan to the Trust Fund as of January 1, 1986.

(vii)the “Accrued Benefit” of a non-highly compensated Participant shall not be less than his Accrued Benefit computed under the terms of the Plan immediately prior to April 30, 1991, the adoption date of this Amended and Restated Plan. The “Accrued Benefit” of any highly compensated Participant shall not be less than his Accrued Benefit on December 31, 1988. The Accrued Benefit of any person who becomes a highly compensated person after December 31, 1988 shall not be less than his Accrued Benefit as of December 31 of the year prior to the year in which he becomes a highly compensated participant.

IN THE AUGUST 1, 1992 RESTATEMENT
WAS REPLACED WITH THE FOLLOWING

(c)           Notwithstanding the foregoing, the “Accrued Benefit” of a non-highly compensated Participant shall not be less than his Accrued Benefit computed under the terms of the Plan immediately prior to April 30, 1991, the adoption date of the prior amended and restated version of the Plan. The “Accrued Benefit” of any highly compensated Participant shall not be less than his Accrued Benefit on December 31, 1988. The Accrued Benefit of any person who becomes a highly compensated person after December 31, 1988 shall not be less than his Accrued Benefit as of December 31 of the year prior to the year in which he becomes a highly compensated participant.

(d)           An Employee or former Employee who made contributions to any retirement plan sponsored by UOP, Inc. which was merged with the Predecessor Plan on January 1, 1984 may, by written election at any time after Separation from the Service and prior

41

to or as of the date any monthly benefit first becomes payable hereunder, withdraw such contributions with interest at the rates specified in Section 3.2(i) above, accumulated to the end of the calendar month immediately preceding the date of such written election.

(e)           If the present value of the Participant’s vested Accrued Benefit is zero at the time of his Separation from the Service, then that Participant shall be deemed to have received an immediate distribution of that vested Accrued Benefit on his Severance from Service Date.

(f)            The Accrued Benefit for each Section 401(a)(17) employee (defined below) under this Plan will be the sum of (i) the employee’s Accrued Benefit as of December 31, 1993 and (ii) the employee’s Accrued Benefit (if any) determined under the benefit formula applicable for a Plan Year beginning on or after January 1, 1994, as applied to the employee’s years of service (if any) credited to the employee for Plan Years beginning on or after January 1, 1994 for purposes of benefit accruals. A Section 401(a)(17) employee means an employee whose current Accrued Benefit as of a date on or after the first day of the first Plan Year beginning on or after January 1, 1994, is based on Compensation for a year beginning prior to the first day of the first Plan Year beginning on or after January 1, 1994, that exceeded $150,000.

(g)           Notwithstanding anything to the contrary in the Plan, no Participant shall accrue any additional retirement benefits under the Plan after December 31, 1993, and the Accrued Benefit of each Participant shall be fixed and frozen on December 31, 1993 on the basis of the Participant’s Average Final Compensation (through December 31, 1993), years of Credited Service and Covered Compensation through December 31, 1993. Accordingly, the Normal Retirement Benefit under Section 3.2 of the Plan, the Early Retirement Benefit under Section 3.4 of the Plan, the Disability Retirement Benefit under Section 3.5 of the Plan, and the Vested Retirement Benefit under Section 3.10 of the Plan which each Participant may have accrued through December 31, 1993 shall be fixed and frozen in accordance with the principles set out in Section 1.7 (Average Final Compensation), Section 1.19 (Credited Service), and Section 1.18 (Covered Compensation).

Section 3.11           Suspension of Benefits.  (a) Payment of any benefit derived from Company contributions to which a Participant would otherwise be entitled shall be suspended for any calendar month in which the Participant completes 40 or more hours of service with the Company or with any member of the controlled group; provided, however, that individual companies may adopt non-discriminatory procedures to permit payment of benefits during reemployment. Any suspension shall be effected in accordance with Department of Labor Regulations § 2530.203-3 (29 CFR 2530.203-3), as amended, and rules and operational guidelines promulgated by the Committee consistent with such regulations.

(b)           Subject to Section 1.19, a Participant shall accrue Credited Service in accordance with the terms of the Plan for any period for which his benefit payments are suspended. The benefit to which a Participant is entitled under the Plan shall be recomputed as of the first day of the month following the end of the suspension of benefits by taking into account such additional Credited Service, Compensation, etc. as required by the terms of the Plan and the benefits already paid thereunder, but in no event shall the Benefit payable following

42

the suspension be less than the Benefit to which such Participant was entitled immediately prior to the suspension.

Section 3.12           Direct Rollover.  Effective for distributions made on or after January 1, 1993, notwithstanding any provision of this Plan to the contrary that would otherwise limit a Distributee’s election under this Plan, a Distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a Direct Rollover. For these purposes, the following definitions apply:

(a)           An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee’s designated Beneficiary, or for a specified period of 10 years or more; any distribution to the extent that distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities).

(b)           An Eligible Retirement Plan is an individual retirement account described in Code section 408(a), an individual retirement annuity described in Code section 408(b), an annuity plan described in Code section 403(a), or a qualified trust described in Code section 401(a), that accepts the Distributee’s Eligible Rollover Distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity.

(c)           A Distributee includes an Employee or former Employee. In addition, the Employee’s or former Employee’s surviving spouse and the Employee’s or former Employee’s spouse or former spouse who is the alternate payee under a Qualified Domestic Relations Order, as defined in Code section 414(p), are Distributees with regard to the interest of the spouse or former spouse.

(d)           A Direct Rollover is a payment by the Plan to the Eligible Retirement Plan specified by the Distributee.

Section 3.13           Payment of Small Amounts.  The Actuarial Equivalent, if $3,500 or less, of any Accrued Benefit payable in respect of a Participant shall be paid in a lump sum in lieu of monthly or other periodic payments.

(a)           For purposes of determining an employee’s accrued benefit under the Plan, the Plan may disregard service performed by the employee with respect to which the employee has received (i) a distribution of the present value of his entire nonforfeitable benefit if such distribution was in an amount (not more than $3,500) permitted under regulations prescribed by the Secretary of the Treasury, or (ii) a distribution of the present value of the employee’s nonforfeitable benefit attributable to such service which he elected to receive. Clause (i) applies only if such distribution was made on termination of the employee’s

43

participation in the Plan. Clause (ii) applies only if such distribution was made on termination of the employee’s participation in the plan or under such other circumstances as may be provided under regulations prescribed by the Secretary of the Treasury.

(b)           For purposes of determining an employee’s accrued benefit under the Plan, the Plan will not disregard service as provided in the preceding paragraph (a) if the employee (i) received a distribution under paragraph (a) which was less than the present value of the Participant’s accrued benefit, the employee resumes employment covered under the Plan, and the employee repays the full amount of such distribution with interest at the rate determined for purposes of subsection 411(c)(2)(C). Such repayment must be made (I) in the case of a withdrawal on account of separation from service, before the earlier of 5 years after the first date on which the employee is subsequently re-employed by the employer, or the close of the first period of 5 consecutive 1-year breaks in service commencing after the withdrawal; or (II) in the case of any other withdrawal, 5 years after the date of the withdrawal.

(c)           This Plan precludes the immediate distribution of any benefit where the present value of the nonforfeitable accrued benefit (taking into account benefits derived from both employer and employee contributions) is in excess of $3,500 without the consent of the Participant and, when applicable, the Participant’s spouse. For these purposes, an immediate distribution means the distribution of any part of the benefit before the later of age 62 or normal retirement age.

SECTION 3.13 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1,
EFFECTIVE AS OF JANUARY 1, 1998, BY SUBSTITUTING THE NUMBER “$5,000” FOR
THE NUMBER “$3,500” WHEREVER THE LATTER APPEARS THEREIN.

Section 3.14           Special Election Provisions.  (a) Qualified Preretirement Survivor Annuity coverage shall be automatically implemented for each Participant upon attainment of his or her right to a Vested Retirement Benefit or on such other date specified in the regulations prescribed under Section 417(a) of the Code, and shall automatically continue until the Participant dies, is divorced, or his spouse dies.

(b)           Notwithstanding any other provision of this Plan, any election by a Participant or Former Participant of a form of benefit payment other than that having the effect of a Statutory Joint and Survivor Annuity described in Section 3.7 shall be effective only if the Participant’s spouse consents to it in writing, such consent is witnessed by a Plan representative designated by the Administrator or a notary public, such election designates a beneficiary (or a form of benefits) which may not be changed without spousal consent (unless the consent of the spouse expressly permits designations by the Participant without any requirement of further consent by the spouse), and the spouse’s consent acknowledges the effect of the election. Spousal consent shall not be required if the Participant establishes to the satisfaction of the Plan representative that such consent may not be obtained because there is no spouse or the spouse cannot be located. Any consent shall be effective only with respect to the spouse who gave it.

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Section 3.15           Distribution of Vested Retirement Benefit.  (a) Notwithstanding anything in the Plan to the contrary, unless otherwise elected by the Employee in writing, payment of a Vested Retirement Benefit under the Plan shall commence not later than the sixtieth (60th) day following the last day of the Plan Year in which occurs the later of his attainment of age 65 or his termination of employment.

(b)           Payment of benefits to an Employee under the Plan must commence, regardless of his election, no later than April 1 of the calendar year following the calendar year in which he attains age 70-1/2. The first payment required under this Section 3.15 must be made by the required beginning date, the second must be made not later than the end of the calendar year in which the required beginning date occurs and each succeeding payment must be made no later than the end of each succeeding calendar year.

SECTION 3.15(b) OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1,
EFFECTIVE AS OF JANUARY 1, 1997, BY ADDING THE FOLLOWING PARAGRAPHS:

“Notwithstanding the above, in the case of an individual who is not a 5% owner and who attains age seventy and one-half (70½) on or after January 1, 1999, the benefit of such Participant shall be distributed, or commence to be distributed, not later than the first day of April following the later of the calendar year of termination of employment or the calendar year in which the Participant attains age seventy and one-half (70½).

A Participant is treated as a 5-percent owner for purposes of this section if such Participant is a 5-percent owner as defined in section 416 of the Code at any time during the plan year ending with or within the calendar year in which such owner attains age 70½. Once distributions have begun to a 5-percent owner under this section, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year.

Except with respect to a 5-percent owner, a Participant’s accrued benefit is actuarially increased to take into account the period after age 70½ in which the Employee does not receive any benefits under the Plan.”

(c)           If benefits shall become payable to an Employee under the Plan for a period extending beyond his lifetime, (i) such period shall not exceed the life expectancy of the Employee or if such benefits are payable to the Employee’s spouse or another individual, the lives or the joint life and last survivor expectancy of the Employee and such spouse or individual, and (ii) notwithstanding anything to the contrary in this Plan, distributions will be made in accordance with the Regulations under Code Section 401(a)(9), including the minimum distribution incidental benefit requirement of Code Section 401(a)(9)(G).

(d)           If benefits shall become payable upon the death of an Employee prior to his receipt of any benefits under this Plan, (i) such benefits shall not extend beyond (A) 5 years or (B) if such benefits are payable to the Employee’s spouse or another individual, the life or life expectancy of such spouse or individual, and (ii) such benefits shall commence to be paid no

45

later than one year after the date of the Employee’s death (or such later date as permitted by applicable law). Notwithstanding the foregoing, benefits payable to an Employee’s surviving spouse may commence on a date which is later than the date provided in the preceding sentence, but in no event later than the date on which the Employee would have attained age 70-1/2. If any benefits become payable upon the death of an Employee after his pension commencement date, such benefits will be paid out under a method of distribution which is at least as rapid as the method which was in effect at the time of the Employee’s death.

ARTICLE IV

FUNDING OF BENEFITS

Section 4.1             Funding Policy and Method.  The Administrative Committee shall establish a funding policy and method consistent with the objectives of the Plan and the requirements of ERISA. Participants shall neither be required nor permitted to make contributions under the Plan.

Section 4.2             Company Contributions.  The Company shall contribute and pay to the Trustee, to be held and administered in trust, such amounts at such times as shall be required by the funding policy and method established pursuant to Section 4.1 and as shall be in accordance with the rules promulgated by the Administrative Committee pursuant to Section 7.6 in effectuation of such funding policy and method.

Section 4.3             Reduction of Company Contributions.  Forfeitures arising under the Plan from termination of employment, death or for any other reason shall not be applied to increase the benefits any person would receive from the Plan prior to termination or the complete discontinuance of Company contributions thereto, but shall instead be used, to the extent not anticipated in determining actuarial costs hereunder, to reduce subsequent Company contributions to the Plan.

ARTICLE V

TRUST AGREEMENT AND TRUST FUND

Section 5.1             Trust Agreement.  Bolsa Chica has entered into a master trust agreement with the Trustee, providing for the administration of the Trust Fund, in such form and containing such provisions as Bolsa Chica has deemed appropriate, including, but not by way of limitation, provisions with respect to the powers and authority of the Trustee, the right of Bolsa Chica to discharge or replace the Trustee at any time, the authority of Bolsa Chica to amend or terminate the master trust agreement and to settle the accounts of the Trustee on behalf of all persons having an interest in the Trust Fund, and a provision that it shall be impossible at any time prior to the satisfaction of all liabilities under the Plan with respect to Participants and their Beneficiaries for any part of the corpus or income of the Trust Fund to be used for or diverted to purposes other than for the exclusive benefit of Participants and their Beneficiaries. The master trust agreement shall constitute the Trust Agreement for the Plan and shall be a part of the Plan,

46

and the rights and duties of any person under the Plan shall be subject to all applicable terms and provisions of the master trust agreement.

Section 5.2             Trust Fund.  The Trust Fund shall be held by the Trustee, pursuant to the terms of the master trust agreement, for the exclusive purposes of providing benefits to Participants and their Beneficiaries and defraying reasonable expenses of administering the Plan, to the extent such expenses are not paid by the Company, and no assets of the Plan shall inure to the benefit of the Company except to the extent permitted by ERISA; provided, however, that any contribution made as a result of erroneous actuarial calculations will be returned within one year from the date of contribution to the Company which made the contribution. No person shall have any interest in or right to any part of the earnings of the Trust Fund, or any right in, or to, any part of the assets thereof, except as and to the extent expressly provided in the Plan and in the master trust agreement.

ARTICLE VI

CERTAIN LIMITATIONS ON BENEFITS

Section 6.1             Special Definitions.  For purposes of this Article VI, which is effective January 1, 1987, the following capitalized terms shall have the following respective meanings:

Bolsa Chica Group:  either (i) the controlled group of corporations (within the meaning of section 1563(a) of the Internal Revenue Code, determined without regard to section 1563(a)(4) and (e)(3)(C) thereof) whose common parent is Bolsa Chica, or (ii) the group of trades or businesses which are under “common control” (as defined in section 414(c) of the Internal Revenue Code and regulations prescribed under said section) whose common parent is Bolsa Chica, determined in either case by substituting for the phrase “at least 80 percent” each place it appears in section 1563(a)(1) the phrase “more than 50 percent.” The Bolsa Chica Group also includes affiliated entities within the meaning of Code Section 414(m).

Defined Contribution Plan:  any pension, profit-sharing or stock bonus plan of the Bolsa Chica Group which (a) satisfies the applicable qualification requirements of the Internal Revenue Code and (b) provides for an individual account for each participant thereunder and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.

Defined Contribution Plan Fraction:  a fraction, the numerator of which is the sum of the Participant’s annual additions as of the close of the Plan Year under all Defined Contribution Plans (whether or not terminated), and the denominator of which is the sum of the lesser of the following amounts determined for such year and for each prior year of service with the Bolsa Chica Group:

(a)           1.25 times the dollar limitation in effect under Internal Revenue Code section 415(c)(1)(A) for such year, or

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(b)           1.4 times the amount which may be taken into account under Internal Revenue Code section 415(c)(1)(B).

Defined Benefit Plan:  any pension plan of the Bolsa Chica Group which (a) satisfies the applicable qualification requirements of the Internal Revenue Code and (b) is not a Defined Contribution Plan.

Defined Benefit Plan Fraction:  a fraction, the numerator of which is the sum of the Participant’s projected annual benefits under all Defined Benefit Plans of the Bolsa Chica Group (whether or not terminated) and the denominator of which is the lesser of:

(A)1.25 times the dollar limitation of Internal Revenue Code section 415(b)(1)(A) in effect for the Plan Year, or

(B)1.4 times the Participant’s average compensation for the three consecutive Plan Years that produce the highest average.

Aggregate Employee Contribution:  for any Participant with respect to any Plan Year, the aggregate of all contributions other than “rollover amounts” or “rollover contributions” (as such terms are defined in section 402(a)(5), 403(a)(4), 408(d)(3) or 409(b)(3)(C) of the Internal Revenue Code) and other than “deductible employee contributions” (as such term is defined in section 72(o)(5) of the Internal Revenue Code) made by such Participant for such Plan Year under all Defined Contribution Plans.

Aggregate Employer Contribution:  for any Participant with respect to any Plan Year, the sum of:

(a)           all amounts allocated to the account of such Participant in respect of forfeitures, and in respect of contributions made by one or more members of the Bolsa Chica Group under all Defined Contribution Plans, plus

(b)           the Aggregate Employee Contribution of such Participant for such Plan Year, plus

(c)           amounts described in sections 415(l)(1) and 419A(d)(2) of the Code.

Aggregate Annual Benefit:  for any Participant, the aggregate of his projected benefits under all Defined Benefit Plans where each such projected benefit is expressed as a benefit payable annually in the form of a straight life annuity (with no ancillary benefits) and where benefits attributable to any participant contributions or rollover contributions (as defined in sections 402(a)(5), 403(a)(4) and 408(d)(3) of the Internal Revenue Code) are excluded.

Social Security Retirement Age:  the age used as the retirement age under section 216(l) of the Social Security Act, applying such section without regard to the age increase factor and as if the early retirement age under section 216(1)(2) of the Social Security Act were age 62.

Limitation Year:  the calendar year.

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Compensation:  the Participant’s wages, salaries, fees for professional services, other amounts received for personal services actually rendered in the course of employment with the Bolsa Chica Group and any additional items of compensation specified in section l.415-2(d)(l)(i) of the Treasury Regulations promulgated under Code section 415, but excluding any amounts which are not includible as compensation under section 1.415-2(d)(2) of the Treasury Regulations promulgated under Code section 415.

SECTION 6.1 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1,
EFFECTIVE AS OF JANUARY 1, 1997, BY ADDING THE FOLLOWING PARAGRAPH
TO THE DEFINITION OF “COMPENSATION:”

“For Limitation Years beginning after December 31, 1997, for purposes of applying the limitations of this section, compensation paid or made available during such Limitation Year shall include any Elective Deferral (as defined in Code Section 402(g)(3)), and any amount which is contributed or deferred by the Employer at the election of the Employee and which is not includible in the gross income of the Employee by reason of Code Sections 125, 132(f)(4), or 457.”

Section 6.2             Initial Limitation on Amounts Allocated to Accounts of Defined Contribution Plans.  Notwithstanding any other provision of a Defined Contribution Plan, the aggregate of all amounts allocated to a Participant shall not exceed such amount as would cause the Aggregate Employer Contribution for such Participant with respect to such Plan Year to exceed in value the lesser of (a) $30,000 (or, if greater, 1/4 of the dollar limitation referred to in Section 6.3.l(a)(i)), or (b) twenty-five percent (25%) of such Participant’s compensation (within the meaning of section 415(c)(3) of the Internal Revenue Code) from the Bolsa Chica Group for such Plan Year; provided, however, that the $30,000 amount referred to in the foregoing shall be deemed to be automatically increased (without the necessity for an amendment of a Defined Contribution Plan) to the full extent permitted under regulations promulgated from time to time by the Secretary of the Treasury or his delegate pursuant to section 415(d) of the Internal Revenue Code.

Section 6.3             Initial Limitation on Benefits Under Defined Benefit Plans.

Section 6.3.1          Initial Limitation on Benefits.  (a) Notwithstanding any other provision in a Defined Benefit Plan, a Participant’s benefit under such Defined Benefit Plan, assuming payment in the form of a single life annuity commencing on his normal retirement date, as of the end of any Plan Year shall not exceed in value an amount which would cause his Aggregate Annual Benefit as of the end of such Plan Year to exceed the smallest of the following (the “Maximum Permissible Amount”):

(i)$90,000; or

(ii)100% of the Participant’s average annual compensation during the period of consecutive calendar years (not more than three (3))

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during which such Participant both was an active participant in one or more Defined Benefit Plans and had the greatest aggregate compensation from the Bolsa Chica Group;

provided, however, that the amount set forth in clause (i) above shall be deemed to be automatically increased (without the necessity for an amendment of a Defined Benefit Plan) to the full extent permitted under regulations promulgated from time to time by the Secretary of the Treasury or his delegate pursuant to section 415(d) of the Internal Revenue Code. Notwithstanding the foregoing, (1) in the case of a Participant who has completed less than 10 years of participation in a Defined Benefit Plan, his Aggregate Annual Benefit shall not be deemed to exceed the limitation specified in (i) above as of the end of any Limitation Year unless it also exceeds the product of the amount determined under (i) above multiplied by a fraction, the numerator of which is his number of years (or parts thereof) of participation in a Defined Benefit Plan and the denominator of which is 10, (2) in the case of a Participant who has completed less than 10 years of service with one or more members of the Bolsa Chica Group, his Aggregate Annual Benefit shall not be deemed to exceed the limitation specified in (ii) above as of the end of any Limitation Year unless it also exceeds the product of the amount determined under (ii) above multiplied by a fraction, the numerator of which is his number of years (or parts thereof) of service with one or more members of the Bolsa Chica Group and the denominator of which is 10, and (3) in the case of a Participant who has at no time been a participant in a Defined Contribution Plan, his Aggregate Annual Benefit shall be deemed not to exceed the limitations specified in (i) and (ii) as of the end of any Limitation Year unless it also exceeds $10,000 as of the end of such Limitation Year or as of the end of any prior Limitation Year and, if such Participant has completed less than 10 years of service with one or more members of the Bolsa Chica Group, the $10,000 limitation shall be reduced to the product obtained by multiplying $10,000 by a fraction, the numerator of which is the Participant’s years (or parts thereof) of service with one or more members of the Bolsa Chica Group and the denominator of which is 10. The fractions referred to in clauses (1) and (2) of the preceding sentence shall in no event be less than one-tenth (1/10) and the limitations referred to in the preceding sentence shall be applied separately with respect to each benefit increase under the Plan, but only to the extent specified in regulations promulgated by the Secretary of the Treasury or his delegate pursuant to section 415(b)(5)(D) of the Code. For purposes of this Section 6.3, survivor benefits payable to a Participant’s spouse under a joint and survivor form of retirement income shall not be taken into account except to the extent that the annual rate of such survivor benefits exceeds the annual rate of the benefits payable as such retirement income during the joint lives of the Participant and his spouse.

Section 6.3.2          Certain Actuarial Adjustments.

(a)           If the annual benefit of the Participant begins before the Participant’s Social Security Retirement Age, but on or after age 62, the defined benefit dollar limitation will be determined as follows:

(1)           Age 65.  If a Participant’s social security retirement age is 65, the dollar limitation for benefits commencing on or after age 62 is determined by reducing the defined benefit dollar limitation by 5/9 of 1% for each month by which benefits commence before the month in which the Participant attains age 65.

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(2)Greater than Age 65.  If a Participant’s social security retirement age is greater than age 65, the dollar limitation for benefits beginning on or after age 62 is determined by reducing the defined benefit dollar limitation by 5/9 of 1% for each of the first 36 months and 5/12 of 1% for each additional month (up to 24 months) by which benefits begin before the month of the Participant’s social security retirement age.

(b)If the annual benefit of a Participant begins before age 62, the defined benefit dollar limitation will be the actuarial equivalent of an annual benefit beginning at age 62, as determined above, reduced for each month by which benefits begin before the month in which the Participant attains age 62. To determine actuarial equivalence, the interest rate assumption is the greater of the rate specified in the Plan’s definition of Actuarial Equivalent, or 5%. Any decrease in the defined benefit dollar limitation determined in accordance with this provision shall not reflect the mortality decrement to the extent that benefits will not be forfeited upon the death of the Participant.

(c)If the annual benefit of a Participant begins after the Participant’s social security retirement age, the defined benefit dollar limitation is increased so that it is the actuarial equivalent of an annual benefit beginning at the Participant’s social security retirement age. To determine actuarial equivalence, the interest rate assumption used will be the lesser of the rate specified in the Plan’s definition of Actuarial Equivalent or 5%.

(d)If the benefit the Participant would otherwise accrue in a limitation year would produce an annual benefit in excess of the maximum permissible amount, the rate of the Participant’s benefit accrual will be reduced so that the annual benefit will equal the maximum permissible amount. For a participant in one or more defined benefit plans of the Bolsa Chica Group as of the first day of the first limitation year beginning after December 31, 1986, the application of the limits of this Article VIII will not cause the maximum permissible amount under all such defined benefit plans to be less than the individual’s current accrued benefit (defined below). The preceding sentence applies only if the defined benefit plans met the requirements of Code Section 415, for all limitation years beginning before May 6, 1986. A Participant’s current accrued benefit is the Participant’s accrued benefit, determined as if the Participant had separated from service at the close of the last limitation year beginning before January 1, 1987, expressed as an annual benefit. In determining a Participant’s current accrued benefit, changes in the terms and conditions of the plan after May 5, 1986 and cost of living adjustments after May 5, 1986 are disregarded.

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Section 6.4Limitation Applicable to Certain Persons Under Defined Benefit Plans.

Section 6.4.1Limitation on Early Terminations.  In the event of termination of the Plan, the benefit of any “Highly Compensated Employee” and/or “Former Highly Compensated Employee” (both within the meaning of Code Section 414(g) and applicable regulations thereunder) shall be limited to a benefit that is nondiscriminatory under Code Section 401(a)(4).

Section 6.4.2Restricted Benefits.  In the event of termination of this Plan, the provisions of this Section 6.4 shall apply to restrict the annual benefit under the Plan to any Participant or former Participant who is among the twenty-five (25) highest paid Highly Compensated Employees and/or Former Highly Compensated Employees (including an Employee who is not presently a Participant but who may later become a Participant) to the following amount:  the payments that would be made to such Employee under a single life annuity that is the Actuarial Equivalent of the sum of the Employee’s Accrued Benefit and the Employee’s “other benefits” under the Plan, within the meaning of the regulations under Code Section 411(d)(2), including any periodic income, any withdrawal values payable to a living Employee and any death benefits not provided for by insurance on the Employee’s life.

Section 6.4.3Unrestricted Benefits.  Notwithstanding the foregoing, the restrictions of this Section 6 shall not apply to any Employee described in Section 6.4.2 if:

(a)after payment of all “other benefits” under the Plan referred to in Section 6.4.2, the value of Plan assets equals or exceeds one hundred ten percent (110%) of the value of current liabilities as defined in Code Section 412(1)(7); or

(b)the value of the “other benefits” under the Plan referred to in Section 6.4.2 for such Employee is less than one percent (1%) of the value of current liabilities, within the meaning of Code Section 412(1)(7).

Section 6.4.4Discontinuance of This Section.  The provisions of Section 6.4.1 through 6.4.4 shall be null and void without amendment to the Plan in the event that by ruling of the Commissioner of Internal Revenue the limitations herein set forth are no longer necessary to prevent the prohibited discrimination that may occur in the event of an early termination of the Plan.

Section 6.4.5Additional Limitation.  After the Aggregate Employer Contribution to be made and the Aggregate Annual Benefit to be paid with respect to a Participant for a Plan Year has been determined in accordance with the applicable provisions of all Defined Contribution Plans and Defined Benefit Plans in which such Participant is a participant, the following sum shall be computed as of the end of such Plan Year:

(a)the Defined Contribution Plan Fraction determined for the Plan Year and giving effect to all prior plan years under any Defined Contribution Plan; plus

(b)the Defined Benefit Plan Fraction determined for the Plan Year and giving effect to the Participant’s benefits under all Defined Benefit Plans.

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If the foregoing sum exceeds 1.0 after the determination of the Maximum Permissible Amount thereunder (including limitations prescribed for compliance with section 415(e) of the Internal Revenue Code), the aggregate of all amounts allocated to such Participant’s accounts in any Defined Contribution Plan for such Plan Year shall be reduced until such sum does not exceed 1.0.

SECTION 6.4.5 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1,
EFFECTIVE AS OF JANUARY 1, 1999, BY ADDING THE FOLLOWING SENTENCE:

“For Limitation Years beginning after December 31, 1999, the additional limitation as prescribed in this section shall not apply.”

Section 6.4.6Pre-1983 Predecessor Plan Benefit.  In the case of an individual who was a Participant of the Predecessor Plan (or in any plan which merged with the Predecessor Plan effective January 1, 1984) on or before January 1, 1983, the Maximum Permissible Amount for such individual shall not be less than the individual’s Retirement Benefit under such Plan (or such other plan) as of January 1, 1983. The preceding sentence applies only if the applicable plan met the requirements of section 415 of the Code, as in effect on July 1, 1982, for all Plan Years beginning prior to January 1, 1983.

ARTICLE VII

PLAN ADMINISTRATION

Section 7.1Establishment of the Administrative Committee.  The general administration of the Plan and the responsibility for carrying out its provisions shall be placed in the Administrative Committee. If the Company is not serving as the Administrative Committee, the Administrative Committee shall consist of not less than two nor more than seven persons appointed from time to time by the Board of Directors to serve at its pleasure. Any member of the Administrative Committee may resign by delivering his written resignation to Bolsa Chica and the secretary of the Administrative Committee. The Administrative Committee shall be the Plan Administrator (within the meaning of section 3 of ERISA and section 414(g) of the Internal Revenue Code) with such authority, responsibilities and obligations as ERISA and the Internal Revenue Code grant to and impose upon persons so designated. For purposes of ERISA, the Administrative Committee shall be a “named fiduciary” under the Plan.

Section 7.2Establishment of the Investment Committee.  The responsibility for the formulation of the general investment practices and policies of the Plan and its related Trust Fund and for effectuating such practices and policies shall be placed in the Investment Committee. If the Company is not serving as the Investment Committee, the Investment Committee shall consist of not less than three nor more than seven persons appointed from time to time by the Board of Directors to serve at its pleasure. Any member of the Investment Committee may resign by delivering his written resignation to Bolsa Chica and the secretary of

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the Investment Committee. For purposes of ERISA, the Investment Committee shall be a “named fiduciary” under the Plan. Effective September 30, 1993, the Board of Directors or its delegate shall serve as the Investment Committee.

Section 7.3Organization of the Committees.  If the Company is not serving as the Committee, the members of the Committee shall elect a chairman from their number, and shall also elect a secretary who may be but need not be one of the members of the Committee. No member of a Committee who is also an Employee receiving regular compensation as such shall receive any compensation for his services as a member of such Committee. No bond or other security shall be required of any member of a Committee in any jurisdiction. No member of a Committee shall, in such capacity, act or participate in any action directly affecting his own benefits under the Plan other than an action which affects the benefits of Participants generally.

Section 7.4Powers of the Administrative Committee.  The powers of the Administrative Committee shall include, but are not limited to, the following:

(a)appointing such committees with such powers as it shall determine, including an executive committee to exercise all powers of the Administrative Committee between meetings of the Administrative Committee;

(b)determining the times and places for holding meetings of the Administrative Committee and the notice to be given of such meetings;

(c)employing such agents and assistants, such counsel (who may be counsel to the Company or to Bolsa Chica) and such clerical, medical, accounting and actuarial services or advisers as the Administrative Committee may require in carrying out the provisions of the Plan;

(d)authorizing one or more of their number or any agent to make any payment, or to execute or deliver any instrument, on behalf of the Administrative Committee, except that all requisitions for funds from, and requests, directions, notifications and instructions to the Trustee shall be signed either by two members of the Administrative Committee or by one member and the secretary thereof;

(e)fixing and determining the proportion of expenses of the Plan from time to time to be paid by the Companies and requiring payment thereof;

(f)establishing one or more subcommittees in each location at which Bolsa Chica or any of its subsidiaries or affiliates does business, appointing the members of any such subcommittees, in such number and for such service as the Administrative Committee shall deem appropriate, and delegating any power or duty granted to the Administrative Committee by the Plan to any such subcommittees;

(g)receiving and reviewing reports from the Trustee as to the financial condition of the Trust Fund, including its receipts and disbursements;

(h)executing and filing with the appropriate governmental agencies such registration and other statements, forms, applications, notifications, and other documents or

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information as the Administrative Committee may from time to time deem appropriate in connection with the Plan;

(i)approving the adoption of the Plan by any subsidiary or affiliate of the Company in accordance with Section 8.4;

(j)amending the Plan to the extent provided in Section 8.1; and

(k)determining all questions concerning eligibility, elections, contributions, and benefits under the Plan, construing all terms of the Plan, including any uncertain terms, and determining all questions concerning administration of the Plan.

Section 7.5Powers of the Investment Committee.  The powers of the Investment Committee shall include, but not be limited to, the following:

(a)directing the Trustee, or appointing one or more investment managers to direct the Trustee, subject to the conditions set forth in the master trust agreement and in paragraphbelow, in all matters concerning the investment of the Trust Fund;

(b)authorizing one or more of their number or any agent to make any payment, or to execute or deliver any instrument, on behalf of the Investment Committee, except that if the Company is not serving as the Investment Committee all requisitions for funds from, and requests, directions, notifications and instructions to the Trustee shall be signed either by two members of the Investment Committee or by one member and the secretary thereof;

(c)receiving and reviewing reports from the Trustee as to the financial condition of the Trust Fund, including its receipts and disbursements;

(d)employing such agents and assistants, such counsel (who may be counsel to the Company or to Bolsa Chica) and such clerical, accounting, actuarial and investment services or advisers as the Investment Committee may require in carrying out its responsibilities under the Plan.

Section 7.6Duties of the Administrative Committee.  The Administrative Committee shall have the general responsibility for administering the Plan and carrying out its provisions. Subject to the limitations of the Plan, the Administrative Committee from time to time shall establish rules for the administration of the Plan and the transaction of its business and shall promulgate such rules as may be necessary to effectuate the funding policy and method established pursuant to Section 4.1. If the Company is not serving as the Administrative Committee, as to all matters of administration, interpretation and application not reserved to the Company or Bolsa Chica, the determination of the Administrative Committee as to any disputed question shall be conclusive. Any determination made by the Administrative Committee shall be given deference in the event it is subject to judicial review and shall be overturned only if it is arbitrary and capricious. It shall be the duty of the Administrative Committee to notify the Trustee in writing of the amount of any benefit which shall be due to any Participant and in what form and when such benefit is to be paid. The Administrative Committee may at any time or from time to time with respect to a Defined Benefit Plan (as defined in Section 6.1) require the Trustee by a written direction to purchase one or more annuities, in specific amounts, in the

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names of Participants, their spouses, their contingent annuitants, and/or their beneficiaries from an insurance company designated by the Administrative Committee.

Section 7.7Actions by a Committee.  If the Company is not serving as the Committee, a majority of the members of a Committee at the time in office shall constitute a quorum for the transaction of business at any meeting and resolutions or other actions made or taken by a Committee shall require the affirmative vote of a majority of the members of such Committee attending a meeting, or by a majority of members in office by writing without a meeting.

Section 7.8Actuarial Tables and Studies.  The Administrative Committee shall adopt from time to time such actuarial tables as may be required in connection with the Plan. As an aid to the Administrative Committee in adopting tables and to the Company in fixing the rates of its contribution payable under a Defined Benefit Plan (as defined in Section 6.1), the actuary (who shall be enrolled by the Joint Board for the Enrollment of Actuaries established under ERISA) designated by the Administrative Committee shall make periodical actuarial studies in relation to such Defined Benefit Plan, and shall recommend tables to the Administrative Committee and rates of contribution to the Company.

Section 7.9Accounts.  The Administrative Committee shall maintain accounts showing the fiscal transactions of the Plan and shall keep in convenient form such data as may be necessary for the effective operation and administration and actuarial valuations of the Plan.

Section 7.10Discretionary Action.  The Administrative Committee shall have full discretionary authority to administer and interpret the Plan, including discretionary authority to determine eligibility for participation and for benefits under the Plan and discretionary authority to construe ambiguous terms and to correct errors. The Plan Administrator may delegate its administrative duties. Any such delegation will carry with it the full discretionary authority of the Plan Administrator to carry out these duties. Any determination by the Plan Administrator or its delegate will be final and conclusive upon all persons.

Section 7.11Action Taken in Good Faith.  To the extent permitted by ERISA, the members of the Committees, the Company, Bolsa Chica, and their officers and directors shall be entitled to rely upon all tables, valuations, certificates, and reports, if any, furnished by the actuary described at Section 7.8, upon all certificates and reports made by any accountant or by the Trustee, upon all opinions given by any legal counsel selected or approved by a Committee, and upon all opinions given by any investment adviser selected or approved by the Investment Committee, and the members of the Committees, the Company, Bolsa Chica, and their officers and directors shall be fully protected in respect of any action taken or suffered by them in good faith in reliance upon any such tables, valuations, certificates, reports, opinions or other advice of any actuary, accountant, Trustee, investment adviser or legal counsel, and all action so taken or suffered shall be conclusive upon each of them and upon all Participants and Employees.

Section 7.12Indemnification.  To the extent not contrary to ERISA, the Company shall indemnify the Committees, each member of a Committee and any other director, officer or employee of an employer who is designated to carry out any responsibilities under the Plan for any liability, joint and/or several, arising out of or connected with their duties hereunder, except such liability as may arise from their gross negligence or willful misconduct.

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Section 7.13Claims Procedure.  Claims relating to benefits under the Plan shall be filed with the Administrative Committee on such forms as it shall prescribe and make available on request. The Administrative Committee shall notify the claimant of its decision within 90 days of such filing, unless it determines that more time is needed, in which case the Administrative Committee shall notify the claimant of the reason for the delay and notify the claimant of its decision within 180 days of the filing of the claim. In the event a claim is denied, written notice thereof shall be mailed or delivered to the claimant, specifically setting forth the reasons for the denial, citing the relevant provisions of the Plan and, if appropriate, explaining how the claimant can perfect his claim.

Section 7.14Claims Review Procedure.  Any person whose claim filed pursuant to Section 7.13 has been denied may request the Administrative Committee to give further consideration to his claim. A form for making such a request shall be prescribed by the Administrative Committee and furnished by the secretary of the Administrative Committee upon request. A claimant seeking such review shall complete and file such form, together with a statement of his position, with the Administrative Committee no later than 90 days after the mailing or delivery of the written notice of denial provided for in Section 7.13. Pursuant to its discretionary authority to administer and interpret the Plan and to determine eligibility for benefits under the terms of the Plan, no later than 60 days after the filing of such claim, the Administrative Committee shall inform the claimant in writing of its decision regarding his claim and the specific reason therefor. Any such decision of the Administrative Committee shall be binding upon the claimant.

Section 7.15Responsibilities of Named Fiduciaries Other than the Committees.  The Trustee shall have such responsibilities with respect to the operation of the Plan as are set forth in the master trust agreement. Any investment adviser which the Investment Committee may employ pursuant to Section 7.5 shall have the responsibility to direct the Trustee in investing and reinvesting the Trust Fund (or that portion thereof specified by the Investment Committee in the instrument appointing such adviser) and to report the book value and fair market value of each asset in the Trust Fund (or such portion thereof) to the Committees periodically, as such responsibilities may be more fully described in the master trust agreement.

Section 7.16Allocation of Responsibilities.  The description of the responsibilities and powers of the Committees and the description of the responsibilities of the Trustee contained in the foregoing provisions of this Article VII shall constitute, for purposes of ERISA, procedures for allocating responsibilities for the operation and administration of the Plan among named fiduciaries.

Section 7.17Designation of Persons to Carry Out Responsibilities of Named Fiduciaries.  The Committees, the Trustee and any investment adviser which the Investment Committee may employ pursuant to Section 7.5 may, except as to responsibilities involving management and control of assets held in the Trust Fund, designate one or more other persons to carry out any or all of their respective responsibilities under the Plan, provided that such designation shall be made in writing, filed with the Plan’s records and made available for inspection upon request by any Participant or Beneficiary under the Plan.

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ARTICLE VIII

AMENDMENT AND TERMINATION; PARTICIPATION AND
WITHDRAWAL BY COMPANIES; PLAN MERGERS

Section 8.1Authority to Amend or Terminate.  Bolsa Chica hopes and expects to continue the Plan indefinitely but reserves the right to terminate, or to modify, alter or amend the Plan or the Trust Agreement from time to time to any extent that it may, at its sole and complete discretion, deem advisable including, but without limiting the generality of the foregoing, any amendment deemed necessary to qualify or to ensure the continued qualification of the Plan under the Internal Revenue Code. The foregoing right shall be exercised only by action of Bolsa Chica, except that the Administrative Committee, by a written instrument, duly executed by a majority of its members, may make (a) any amendment which may be necessary or desirable to ensure the continued qualification of the Plan and its related trust under the Internal Revenue Code or which may be necessary to comply with the requirements of ERISA, or any regulations or interpretations issued by the Department of Labor or the Internal Revenue Service with respect to the requirements of ERISA or the Internal Revenue Code, (b) any amendment which is required by the provisions of any collective bargaining agreement between the Company and its employees and (c) any other amendment which will not involve an estimated annual cost under the Plan (determined at the time of the amendment in a manner consistent with the requirements of ERISA) in excess of $200,000. No such amendment shall increase the duties or responsibilities of the Trustee without its consent thereto in writing. No such amendment shall have the effect of diverting the whole or any part of the principal or income of the Trust Fund to purposes other than for the exclusive benefit of Participants and others having an interest in the Plan, prior to the satisfaction of all liabilities with respect to them. Effective September 30, 1993, all amendments will be in writing and will be signed by an officer of Koll Real Estate Group, Inc. or any successor to Koll Real Estate Group, Inc. that adopts the Plan. No such amendment shall eliminate or reduce Section 411(d)(6) protected benefits that have already accrued.

Section 8.2Effect of Termination.

(a)Defined Benefit Plan.  Upon the termination or partial termination of a Defined Benefit Plan (as defined in Section 6.1), the rights of all affected Participants to their respective accrued benefits under the Plan shall be nonforfeitable to the extent then funded. Upon the withdrawal from a Defined Benefit Plan of any Company under circumstances constituting a partial termination of the Plan within the meaning of section 411(d)(3) of the Code, such rights of all affected Participants who are Employees of such Company shall likewise be nonforfeitable to the extent then funded. In either such event, the Administrative Committee shall (except as provided in Section 8.3) direct the Trustee as to the allocation of the applicable assets of the Defined Benefit Plan, in accordance with the following provisions of this Section 8.2. After providing for the expenses of the Defined Benefit Plan, the assets remaining in the account of each Company withdrawing from the Defined Benefit Plan shall be used and applied for the benefit of its Employees, former Employees who are Participants, and the beneficiaries of the foregoing in the manner prescribed by section 4044 of ERISA (or corresponding provision of any subsequent applicable law in effect at the time). The Administrative Committee may require that the benefits accrued hereunder be paid in cash or in

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the form of immediate or deferred annuities or otherwise as it shall determine. After such allocation has been made, any residue of such applicable assets of the Defined Benefit Plan may be distributed to such Company if all liabilities of the Plan with respect to its Employees, former Employees who are Participants, and the beneficiaries of the foregoing have been satisfied and the distribution does not contravene any applicable provisions of law.

Whether or not a “partial termination” within the meaning of this Section 8.2 has occurred in any given situation shall be determined by the Administrator in light of existing Internal Revenue Service guidelines and other relevant authorities. However, in the event of the disposition of a particular business operation, or the shutdown thereof, under conditions which do not constitute a “partial termination”, the Administrator may declare that such disposition or shutdown shall nevertheless be treated as a “partial termination” for purposes of this Plan. Any such declarations shall be made in a manner which does not discriminate in favor of officers, shareholders or highly compensated individuals.

(b)Defined Contribution Plan.  Upon the termination or partial termination of a Defined Contribution Plan (as defined in Section 6.1) or upon the complete discontinuance of contributions by a Company under a Defined Contribution Plan, the value of each affected Participant’s account shall be fully vested in him. The assets of the Trust Fund relating to such Defined Contribution Plan shall thereupon or thereafter be distributed to such persons in accordance with the terms of such Defined Contribution Plan, or in such other manner, not inconsistent with the requirements of any applicable law or regulation, as the Company may in its sole discretion determine.

Section 8.3Trust Fund Continuation.  If a Defined Benefit Plan or a Defined Contribution Plan is terminated but the Administrative Committee determines that the Trust Fund shall be continued pursuant to its terms and the provisions of this Section 8.3, no further contributions will thereafter be made by the Company, the rights of all Participants to their accrued benefits under the Plan shall be nonforfeitable to the extent then funded, but the Trust Fund shall be administered as though the Plan were otherwise in full force and effect, except that no further benefits will accrue after the date of termination. If the Trust Fund is subsequently terminated, the Trust Fund shall then be allocated and disbursed in accordance with the provisions of Section 8.2.

Section 8.4Participation by Companies.  The Administrative Committee or Bolsa Chica may approve the adoption of the Plan by any subsidiary or affiliate of the Company upon appropriate action by such subsidiary or affiliate. In such event, or if any individuals become Employees of a Company as a result of the acquisition of all or a part of the assets or business of another company, the Administrative Committee or Bolsa Chica may, subject to the provisions of ERISA and the qualification requirements of the Internal Revenue Code, determine to what extent, if any, credit and benefits shall be granted for previous service with such subsidiary, affiliate or other company.

Section 8.5Withdrawal of a Company.  Any company which is a Company may, by appropriate action taken by it, terminate its participation in the Plan, in which event the applicable provisions of Section 8.2 shall apply; provided, however, that if so directed by the Administrative Committee, the applicable assets of the Plan shall be segregated by the Trustee as

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a separate trust and the Plan shall be continued as a separate plan for the employees of such company under which the board of directors of such company shall succeed to all the powers and duties of Bolsa Chica hereunder.

Section 8.6Merger with Other Plans.  The Plan shall not be merged or consolidated with, nor transfer its assets or liabilities to, any other plan unless each Participant would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (if the plan had then terminated).

Section 8.7Certain Employee Terminations.  The provisions of this Section 8.7 shall apply whenever, under circumstances which do not constitute a partial termination of the Plan for purposes of Section 8.2, the following events occur:

(a)a company other than a member of the Bolsa Chica Group (as defined in Section 6.1) (such company being hereinafter referred to in this Section 8.7 as the “Acquiring Company”) purchases or otherwise acquires some part or all of the assets or business of a Company and

(b)in connection with such purchase or other acquisition, a group of Participants who are covered by a Defined Benefit Plan or a Defined Contribution Plan (as defined in Section 6.1) (such Participants being hereinafter referred to in this Section 8.7 as the “Transferred Participants”) become employees of the Acquiring Company.

In its sole discretion, the Administrative Committee may determine to vest each such Participant in the full amount of his account in the case of a Defined Contribution Plan or his accrued benefit in the case of a Defined Benefit Plan, and distribute his interest in the Trust Fund, as so determined, in accordance with the appropriate provisions of the Plan. In the alternative, in the case of a Defined Contribution Plan, after distribution to each Transferred Participant in such plan of the vested portion of his account, any remaining balance of the account of each such Transferred Participant shall be held as a separate account in his name until such time as the Administrative Committee shall determine, on the basis of evidence satisfactory to it, either that (i) such Transferred Participant has completed a period of continuous service with the Acquiring Company which, when added to his Vesting Service, is equal to five years or (ii) such Transferred Participant’s employment by the Acquiring Company has been terminated prior to his completion of such a period of continuous service. Subject to the provisions of such Defined Contribution Plan regarding the manner and time of payment under the plan, if the Administrative Committee makes the determination referred to in clause (i) of the preceding sentence with respect to any such Transferred Participant, the amount held in the separate account in his name shall thereafter be distributed to him in full; if the Administrative Committee makes the determination referred to in clauseof the preceding sentence with respect to any such Transferred Participant, the amount theretofore held in the separate account in his name shall be forfeited as of the last day of the plan year during which such determination shall have been made, and the amount so forfeited shall be applied in accordance with the forfeiture provisions of the Defined Contribution Plan.

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THE JANUARY 1, 1989 RESTATEMENT CONTAINED
THE FOLLOWING SECTION 8.8

Section 8.8             Employee Transfers.

Section 8.8.1          Transfer to a Non-Participating Company.  In the event an Employee is transferred to employment of a member of Henley Properties (as defined in Section 6.1) other than a Participating Company (such company hereinafter referred to as a “Non-Participating Company”), such Employee shall not be deemed to have terminated his employment with the Participating Company or to have retired for purposes of the Plan until the date as of which his employment with the last Non-Participating Company shall terminate. The Employee’s service for the purpose of eligibility for early retirement and vesting shall include service with the Non-Participating Company as if his period of employment with such Non-Participating Company were a period of employment with the Participating Company.

Section 8.8.2          Transfer from a Non-Participating Company.

In the event an employee of a Non-Participating Company is transferred to the employment of a Participating Company and becomes an Employee under the Plan, his service for the purpose of eligibility for early retirement and vesting, shall be determined under the applicable provisions of the Plan as if his period of employment with the Non-Participating Company were a period of employment with the Participating Company. Such Employee shall be entitled to participate in the Plan on the first day of the month coincident with or next following the date of such transfer of employment assuming his period of employment with the Non-Participating Company is sufficient to meet the Plan’s participation requirement.

In addition to the foregoing, if the Employee was participating in a Defined Benefit Plan of a Non-Participating Company at the time of transfer, the Employee’s period of employment with the Non-Participating Company shall be included as a period of employment with the Participating Company under this Plan for the purpose of determining the amount of Employee’s benefit under this Plan, except that (i) the benefit calculated under the provisions of this Plan shall be offset by the amount of the benefit payable under the other plan, calculated under the terms of the other plan as of the time of transfer, and (ii) if the separate benefits payable to the Employee under the terms of each plan (and based solely on the service credited under each such plan) exceed the benefit payable hereunder, the Employee shall receive such separate benefits from each plan on such terms and in the manner provided in each plan.

Section 8.8.3          Transfers Between Defined Benefit Plans of a Participating Company.

In the event an employee who is participating in another Defined Benefit Plan of a Participating Company is transferred to a job classification which entitles the employee to become an Employee under this Plan, his period of employment with the Participating Company under the other Defined Benefit Plan shall be included as a period of employment under this Plan for all purposes under this Plan, except that (i) the benefit calculated under the provisions of this Plan shall be offset by the amount of the benefit payable under the other plan based upon the Employee’s service as of the time of transfer, and (ii) if the separate benefits payable to the Employee under the terms of each plan (based solely on the service credited under each such

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plan) exceeds the benefit payable hereunder, the Employee shall receive such separate benefits from each plan on the terms and in the manner provided in each plan.

THE PRECEDING SECTION 8.8 WAS DELETED
IN THE AUGUST 1, 1992 RESTATEMENT
AND THE PLAN WAS RENUMBERED TO READ AS FOLLOWS

Section 8.8.            Suspension of Contributions.  A Company shall have the right to suspend its contributions to the Plan at any time for a fixed period of time, and such period shall be extended by subsequent action of such Company. Such suspension shall not automatically become a discontinuance of contributions as under Section 8.2 until the time at which in the opinion of the Plan Enrolled Actuary such suspension affects the benefits to be paid or made available under the Plan. No such suspension shall be allowed to create an “accumulated funding deficiency” under Section 302(a)(2) of ERISA, unless the Plan is then terminated under Section 8.2; provided that in the event of an unintentional creation of an accumulated funding deficiency, the Companies shall have 90 days after such a deficiency is finally determined to correct it without such termination. In the event of such suspension the Plan shall otherwise remain in full force and effect.

Section 8.9             Consolidation or Merger of Bolsa Chica.  In the event of the consolidation or merger of Bolsa Chica with or into any other corporation, or the sale by Bolsa Chica of substantially all of its assets, the resulting successor may continue the Plan by adopting the same by resolution of its board of directors and by executing a proper supplemental agreement to the master trust agreement with the Trustee.

If within ninety days from the effective date of such consolidation, merger or sale of assets, such new corporation does not adopt the Plan, the rights of all affected Participants to their respective accrued benefits under the Plan shall be nonforfeitable to the extent funded as of the effective date of such consolidation, merger or sale of assets.

ARTICLE IX

TOP-HEAVY PROVISIONS

Section 9.1             Certain Top-Heavy Plans.

(a)           Defined Benefit Plans.  If, for any Plan Year, the sum of the present values of the Basic Accrued Benefits of all Participants in a Defined Benefit Plan (as defined in Section 6.1) who are “Key Employees” of the Company exceeds 60 percent of the sum of the present values of the Basic Accrued Benefits of all Participants in such Defined Benefit Plan and the Defined Benefit Plan satisfies the other requirements of section 416 or any other successor section of the Internal Revenue Code, then the Defined Benefit Plan will be a “Top-Heavy Plan,” as such term is defined in section 416(g) of the Internal Revenue Code and the limitations specified in this Article IX and in section 416 of the Internal Revenue Code shall apply to the Defined Benefit Plan for such Plan Year.

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(b)           Defined Contribution Plan.  If, for any Plan Year, the sum of the accounts of all Participants in a Defined Contribution Plan (as defined in Section 6.1), who are “Key Employees” exceeds 60 percent of the sum of the accounts of all Participants in such Defined Contribution Plan and the Defined Contribution Plan satisfies the other requirements of section 416 or any other successor section of the Internal Revenue Code, then the Defined Contribution Plan will be a “Top-Heavy Plan,” as such term is defined in section 416(g) of the Internal Revenue Code and the limitations specified in this Article IX and in section 416 of the Internal Revenue Code shall apply to the Defined Contribution Plan for such Plan Year.

(c)           Benefits Excluded.  For purposes of determining whether either a Defined Benefit Plan or a Defined Contribution Plan is a Top-Heavy Plan, for Plan Years beginning after December 31, 1984, the Basic Accrued Benefit of an Employee who has not performed any service for the Company at any time during the five (5) year period ending on the Determination Date shall be excluded.

(d)           Key Employee Defined.  For purposes of this Article IX, a “Key Employee” of the Company is an Employee who (a) is an officer of the Company having an annual compensation greater than 50 percent of the amount in effect under Internal Revenue Code section 415(b)(1)(A) for any Plan Year, (b) is among the 10 employee-shareholders of the Company whose interests are both the largest and are greater than 1/2% and who have annual compensation from the Company greater than the amount in effect under Internal Revenue Code Section 415(c)(1)(A) for any Plan Year, (c) owns a five percent (5%) or greater interest in the Company, or owns a one percent (1%) or greater interest in the Company and receives annual compensation of more than $150,000 or more, or (d) was an employee named in any one of the above categories within any one of the preceding four (4) Plan Years. The term Key Employee also includes a beneficiary of a deceased Participant to the extent that the Participant would have been considered a Key Employee.

Section 9.2             Determination Date.  For each Plan Year to which Section 9.1 applies, the determination of the value of a Participant’s Basic Accrued Benefit in a Defined Benefit Plan or a Participant’s accounts in a Defined Contribution Plan shall be made on the last day of the preceding Plan Year, or on such other dates as the Secretary of the Treasury may, by regulations, prescribe. The Determination Date is also the valuation date.

Section 9.3             Calculation of Benefits.

(a)           Defined Benefit Plans.  For purposes of calculating the value of a Participant’s basic Accrued Benefit, solely for purposes of Section 9.1.1, a Participant’s Basic Accrued Benefit as of the Determination Date shall include (a) all accumulated employer and all nondeductible Employee contributions, but shall not include any deductible Employee contributions, (b) the sum of all amounts distributed to the Participant during the five (5) years preceding the Determination Date, and (c) any additional amounts as the Secretary of the Treasury may, by regulations, prescribe; provided, however, that any amounts contributed as rollover contributions (as defined in section 402(a)(5), 403(a)(4), 408(d)(3), or 409(b)(3)(C) of the Internal Revenue Code) shall not be included in (a) above, except as the Code or regulations thereunder may require.

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(b)           Defined Contribution Plans.  For purposes of calculating the value of a Participant’s accounts solely for purposes of Subsection 9.1.2, a Participant’s accounts on the Determination Date shall include:

(i)the value of the accounts on such date;

(ii)the sum of all accounts distributed to such Participant during the five (5) years preceding the Determination Date; and

(iii)any additional amounts as the Secretary of the Treasury may, by regulations, prescribe;

provided, however, that any amounts contributed as rollover contributions (as defined in section 402(a)(5), 403(a)(4), 408(d)(3), or 409(b)(3)(C) of the Internal Revenue Code) shall not be included in (a) above, except as the Code or regulations thereunder may require.

Section 9.4             Aggregation Rules.

(a)           Required Aggregation.  If, on the Determination Date, any member of the controlled group of corporations (“Controlled Group”) within the meaning of Code Section 414 of which the Company is a member maintains one or more other plans which must be considered with this Plan for purposes of satisfying the requirements of section 401(a)(4) and section 410 of the Internal Revenue Code (the “Aggregate Group”), then any valuation made pursuant to Section 9.1 shall treat the Aggregate Group as one plan. The Aggregate Group shall also include each plan maintained by a member of the Controlled Group in which a Key Employee participates. The Aggregate Group shall include each terminated plan of the Controlled Group if it was maintained within the last five (5) years ending on the Determination Date for the Plan Year in question and would, but for the fact it is terminated, be part of a required aggregation group for such Plan Year. If, for a Plan Year, the Aggregate Group, considered as one plan, is a Top-Heavy Plan, then each plan in the Aggregate Group shall be a Top-Heavy Plan.

(b)           Permissive Aggregation.  If, on the Determination Date, any member of the Controlled Group maintains one or more plans which are not required to be considered together for purposes of satisfying the requirements above, the Company may treat the plans as one plan for purposes of the valuation of benefits under Section 9.1. No plan aggregated with another plan or plans at the election of the Company shall be deemed a Top-Heavy Plan solely by virtue of such election.

Section 9.5             Special Vesting.  For any Plan Year in which the Plan is Top-Heavy under Section 9.1, the vesting provisions specified in Section 3.10 shall be inapplicable for such Plan Year, and a Participant’s right to receive benefits under this Plan shall become vested in accordance with the following table:

Years of Vesting Service	Vesting Percentage
less than 2	0
2	20
3	40
4	60
5 or more	100

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Section 9.6             Minimum Benefit.

(a)           Defined Benefit Plan.  For any Plan Year in which a Defined Benefit Plan (as defined in Section 6.1) is a Top-Heavy Plan under subsection 9.1, a Participant who is not a “Key Employee” must accrue a minimum benefit, expressed as a single life annuity commencing at normal retirement age, which is no less than the “Applicable Percentage” of the Participant’s “Average Compensation” for the “Testing Period.” For purposes of this subsection 9.6.1, (1) the Applicable Percentage is the lesser of (a) 2 percent for each year of a Participant’s Vesting Service (excluding years beginning before January 1, 1984 and years in which the Plan was not a Top-Heavy Plan under subsection 9.1.1) or (b) 20 percent; (2) a Participant’s Average Compensation is calculated on the basis of a period of not more than 5 consecutive years during which a Participant received his highest aggregate Compensation from the Company; and (3) the Testing Period shall include all Plan Years except (i) Plan Years beginning before January 1, 1984, or (ii) Plan Years beginning after the close of the last Plan Year in which the Defined Benefit Plan was a Top-Heavy Plan under subsection 9.1.1. For purposes of this subsection 9.6.1, the minimum benefit for a Top-Heavy Defined Benefit Plan shall be calculated in accordance with regulations, now or hereinafter promulgated, under section 416 of the Internal Revenue Code. If both defined contribution and defined benefit plans exist, appropriate minimum contributions will be provided in each plan.

(b)           Defined Contribution Plan.  For any Plan Year in which a Defined Contribution Plan (as defined in Section 6.1) is Top-Heavy under subsection 9.1.2, the amount of Company contribution for any Employee who has met the participation requirements of the Plan and who is not a Key Employee shall be at least equal to the lesser of (a) 3 percent of such Employee’s compensation (as defined in section 415 of the Code), or (b) the percentage of such compensation contributed as a Company contribution for the Key Employee for whom such percentage is the highest for the Plan Year.

Section 9.7             Limitation on Benefits to an Employee.  Subject to the exception provided below, if, for any Plan Year, this Plan is a Top-Heavy Plan under Section 9.1, then the overall limitation imposed by section 415(e) of the Internal Revenue Code in the case of an Employee who is a Participant in both a Defined Benefit Plan and a Defined Contribution Plan shall be applied by substituting “1.0” for “1.25” in paragraphs (2)(B) and (3)(B) of section 415(e) of the Code as the overall limitation.

(a)           Exception.  The change in the 415(e) limitation specified in Section 9.7 above shall not be applicable to a Plan for a Plan Year in which the Plan is a Top-Heavy Plan if, with respect to any Plan within the Aggregate Group, (a) the sum of the present values of the Basic Accrued Benefits of all Participants who are Key Employees of any Defined Benefit Plan or the sum of the account balances of all Participants who are Key Employees of any Defined Contribution Plan does not exceed 90 percent of a similar sum for all Participants of such plans, and (b) either, in the case of a Defined Contribution Plan, the minimum contribution described in subsection 9.6.2 above is increased to 4 percent or, in the case of a Defined Benefit Plan, the Applicable Percentage described in Section 9.6.1 above is modified by replacing “three percent

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(3%)” for “two percent (2%)” and by replacing “twenty percent (20%), increased by one (1) percentage point (but not by more than ten (10)) for each Plan Year in which a plan is a Top-Heavy Plan” for “twenty percent (20%)”.

Section 9.8             Discontinuance of This Article.  In the event that it shall be determined by the Commissioner that the provisions of this Article IX are no longer necessary to qualify the Plan under the Internal Revenue Code, this Article shall thereupon be void without the necessity of further amendment of the Plan.

Section 9.9             Incorporation by Reference.  Code Section 416(g)(3)(B) regarding distributions from terminated plans and Code Section 416(g)(4)(B) regarding key employees who are no longer key employees are hereby incorporated by reference into this Plan.

ARTICLE X

GENERAL PROVISIONS

Section 10.1           Administration.  Effective September 30, 1993, Koll Real Estate Group, Inc. or any successor to Koll Real Estate Group, Inc. that adopts this Plan will serve as the Administrator.

Section 10.2           Source of Payment.  Benefits under this Plan shall be payable out of the Trust Fund or, in the case of a Defined Benefit Plan (as defined in Section 6.1), through the use of annuity contracts purchased with assets of the Trust Fund, and neither Bolsa Chica, nor any Company shall have any obligation, responsibility or liability to make any direct payment of benefits due under the Plan. Neither Bolsa Chica, nor any Company nor the Trustee makes any guarantee to Participants against the loss or depreciation in value of the Trust Fund or guarantees the payment of any benefits hereunder. No person shall have any right under the Plan with respect to the Trust Fund, or against the Trustee, Bolsa Chica, or any Company, except as specifically provided herein or in ERISA.

Section 10.3           Payment of Expenses.  All expenses that shall arise in connection with the administration of this Plan and the master trust agreement, including, but not limited to, the compensation of the Trustee and of any actuary, accountant, counsel, investment adviser, other expert or other person who shall be employed by a Committee in connection with the administration or investment thereof, shall be paid from the Trust Fund or by the Companies; provided, however, that no person who is employed full-time by any Company shall receive any compensation from the Plan except for reimbursement of expenses properly and actually incurred.

Section 10.4           No Right to Employment.  Nothing herein contained shall be deemed to give an Employee the right to be retained in the service of his employer or to interfere with the rights of his employer to discharge him at any time.

Section 10.5           Inalienability of Benefits.  Except as may be otherwise provided by applicable law or pursuant to a qualified domestic relations order as defined in section 414(p) of the Internal Revenue Code, benefits provided under this Plan shall not, prior to the actual receipt

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thereof by the person entitled thereto, be subject in any manner to anticipation, assignment, alienation, sale, transfer, pledge, encumbrance, charge, attachment, garnishment, execution, levy or other legal or equitable process, whether voluntary or involuntary, and any attempt to anticipate, assign, alienate, sell, transfer, pledge, encumber, charge, attach, garnish, execute or levy upon or otherwise dispose of any right to benefits hereunder shall be void. The Fund shall not in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements or torts of any person entitled to benefits hereunder.

Section 10.6           Return of Company Contributions.  Contributions by the Company are expressly conditioned upon the (i) initial qualification of the Plan under section 401 of the Internal Revenue Code of 1986, as amended, and (ii) deductibility of such contributions under section 404 of the Internal Revenue Code of 1986, as amended. Contributions shall be returned to the Company within one year after (a) the date of denial of the initial qualification of the Plan, (b) the disallowance of a deduction, but only to the extent the deduction is disallowed, or (c) the payment of a contribution by mistake of fact.

Section 10.7           Payment Due an Incompetent.  If the Administrative Committee determines that any person to whom a payment is due hereunder is unable to care for his affairs because of physical or mental disability or because he is under 18 years of age, it shall have the authority to cause payments becoming due to such person to be made to another for his benefit, without responsibility of the Administrative Committee or the Trustee to see to the application of such payments, and any payment made pursuant to such authority shall, to the extent thereof, operate as a complete discharge of the obligations of the Company, the Administrative Committee, the Trustee and the Trust Fund.

Section 10.8           Missing Recipients.  In the event any amount shall become payable hereunder to a Participant, retired Participant, contingent annuitant, Beneficiary or the legal representative of any of the foregoing and if after written notice from the Administrative Committee sent by registered mail to such person’s last known address as shown in the Administrative Committee’s records and such other due diligence as the Administrative Committee deems appropriate, such person or his personal representative shall not have presented himself to the Administrative Committee within five years after the mailing of such notice, then the Administrative Committee may determine that such person’s interest in the Plan has terminated and the amounts otherwise payable shall be forfeited and shall be reapplied in accordance with Article IV of the Plan; provided, however, that if such person presents himself after the expiration of the aforesaid period and provides proper identification satisfactory to the Administrative Committee, then such person’s forfeited benefit shall be reinstated and benefits determined in accordance with Article III shall commence to be paid. Unless required by law, in no event shall benefits under the Plan be paid retroactively for the period during which such benefits were payable but unclaimed.

Section 10.9           Errors in Payment.  If any error shall result in the payment to any Participant or other person of more or less than he would have received but for such error, the Administrative Committee shall be authorized to correct such error and to adjust the payments as far as possible in such manner that the actuarial equivalent of the benefits to which such Participant or other person was correctly entitled shall be paid.

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Section 10.10         Multiple Defined Benefit Plans.  Notwithstanding Section 8.8.3, in the event a group of Employees who are Participants in a Defined Benefit Plan (as defined in Section 6.1) shall become covered by another Defined Benefit Plan established by the Bolsa Chica Group (as defined in Section 6.1), the Company may authorize the Administrative Committee to direct the Trustee to pay over and deliver to the trustee of such other plan such of the assets of the original Defined Benefit Plan as the Administrative Committee may determine, but in no event shall the assets so transferred exceed that proportion of the original Defined Benefit Plan’s assets which the actuarially determined liability for the accrued benefit credited to the Employees of such group (on a termination basis) bears to the liability for all accrued benefits thereunder (on a termination basis).

Section 10.11         Notices, etc.

(a)           By Employee.  Wherever provision is made in the Plan for the filing of any notice, application, election or designation, such action shall, except where expressly provided herein to the contrary, be evidenced by the execution of such form, and on such notice, as the Administrative Committee may specify for the purpose and shall be effective upon receipt unless the Plan otherwise provides.

(b)           To Employee.  Any communication, statement, or notice addressed to any Employee or claimant at his latest post office address as filed with the Company or the Administrative Committee will, on deposit in the United States mail with postage prepaid, be binding upon such Employee or claimant for all purposes of the Plan and, Subject to Section 10.8, neither the Trustee nor the Company shall be obligated to undertake a search to ascertain the whereabouts of any Employee or claimant.

Section 10.12         Multiple Capacities.  Any person or group of persons may serve in more than one fiduciary capacity with respect to the Plan.

Section 10.13         Severability.  In case any provisions of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions of the Plan, but shall be fully severable, and the Plan shall be construed and enforced as if the illegal or invalid provisions had never been inserted in the Plan.

Section 10.14         Construction.  The Plan shall be construed and enforced according to the laws of the State of California except to the extent otherwise required by ERISA or necessary for qualification under the Internal Revenue Code. Headings of Articles, Sections and Subsections herein contained are included solely for convenience of reference, and if there be any conflict between such headings and the text hereof, the text shall control. It is intended that the Plan in all respects conform to and be administered and interpreted in a manner consistent with the requirements of ERISA and the requirements for qualification under the Internal Revenue Code. Accordingly, any provision required to be included herein, in order that the Plan so conform, shall be deemed to be included in the Plan, whether or not expressly set forth.

Section 10.15         Special Transitional Rules in Connection with the Spinoff.  It is the intent of the following transitional rules that this Plan be interpreted as assuring the uninterrupted continuation of the provisions of the Predecessor Plan for Employees of the Company who were

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or would have been eligible to participate in such plan before the Spinoff. (Nevertheless, the Company reserves the right to amend this Plan as provided herein so long as no such amendment adversely affects benefits accrued by such Employees prior to the effective date of amendment.)  Therefore, subject to the exclusions set forth in Section 1.26, the term “Employee” as used in this Plan shall include any person who was employed during the period from January 1, 1986 through May 27, 1986 by Henley or a business that became a division or subsidiary of Henley in connection with the Spinoff. The term “Company”, as used in this Plan shall include, for periods prior to the effective date of the Spinoff, Henley and any business that became a subsidiary or division of Henley in connection with the Spinoff that was previously a Company within the meaning of Section 1.14 of the Predecessor Plan. In addition, subject to the transfer of sufficient assets under section 414(1) of the Code from the trust under the Predecessor Plan to the Trust Fund, the accrued benefit under this Plan as of January 1, 1986 of each Employee of the Company who was a Participant in the Predecessor Plan on December 31, 1985 shall be equal to his accrued benefit, on a termination basis, determined as of such date under the provisions of the Predecessor Plan as then in effect.

Section 10.16         Additional Special Transitional Rule in Connection with Spinoffs of Henley and The Fisher Scientific Group Inc.

(a)           Any Employee who was a participant in the Predecessor Plan on December 31, 1985 and transferred to employment with the Company directly from employment by Allied-Signal or its subsidiaries on or before June 1, 1987 shall, subject to the transfer as of January 1, 1986 of all assets allocable to such Employee from the trust under the Predecessor Plan to the Trust Fund, be deemed for all purposes under the Plan to have commenced employment with the Company as of January 1, 1986.

(b)           Any Employee who was a participant in the Predecessor Plan on December 31, 1985 and transferred to employment with The Fisher Scientific Group Inc., directly from employment with Allied-Signal or its subsidiaries on or before June 1, 1987 shall, subject to the transfer as of January 1, 1986 of all assets allocable to such Employee from the trust under the Predecessor Plan to the Trust Fund, be deemed for all purposes under the Plan to have commenced employment with the Company as of January 1, 1986.

ARTICLE X OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1, EFFECTIVE AS OF DECEMBER 12, 1994, BY ADDING A NEW SECTION 10.17, TO READ AS FOLLOWS:

“Notwithstanding any provision of this Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code.”

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ARTICLE XI

SPECIAL PROVISIONS RELATING TO THE CUTBACK
OF OPERATIONS AT THE HAMPTON LOCATION

Section 11.1           Applicability.  The provisions of this Article XI shall be applicable to each Participant or Former Participant in the Plan (a) who was actively employed on December 31, 1985 in the Signal Engineered Products Group, (b) whose regular place of employment on or after December 31, 1985 was the Hampton office of the Company, regardless of whether such Participant may thereafter be transferred to another location, and (c) who, on or before July 1, 1986, agreed to a date for the involuntary termination of his employment in connection with the Allied-Signal Inc. Streamlining Program. The Participants and Former Participants to whom this Article XI is applicable shall hereinafter be referred to as “Hampton Participants.”

Section 11.2           Full Vesting.  Notwithstanding any other provision of the Plan, each Participant or Former Participant (a) who was actively employed on December 31, 1985 in the Signal Engineered Products Group and (b) whose regular place of employment on or after December 31, 1985 was the Hampton office of the Company, regardless of whether such Participant may thereafter be transferred to another location, shall be fully vested in his Accrued Benefit.

Section 11.3           Special Rules Pertaining to Hampton Participants Electing to Receive Periodic Salary Continuation Payments.  In the case of any Hampton Participant who elects, in connection with the Allied-Signal Inc. Streamlining Program and in accordance with procedures established by the Administrator, to receive periodic salary continuation payments rather than lump-sum salary continuation payments, the following rules shall apply:

(a)           no such Hampton Participant shall be deemed to have Separated from the Service until the last day of the final period to which his or her periodic salary continuation payments relate (which date shall, for the purpose of this Article, be referred to hereinafter as his or her “Severance from Service Date”); and

(b)           the Compensation of each such Hampton Participant shall, for all purposes under the Plan, be deemed to include such periodic salary continuation payments.

Section 11.4           Special Rules Pertaining to Hampton Participants Electing to Receive Salary Continuation.  In the case of any Hampton Participant who is not, as of his Severance from Service Date, eligible to receive the immediate payment of any Early or Normal Retirement Benefit under the Plan and who, in connection with the Allied-Signal Inc. Streamlining Program and in accordance with procedures established by the Administrator, elects to receive periodic or lump-sum salary continuation, the following rules shall apply:

(a)           if such Hampton Participant’s Severance from Service Date, determined in accordance with Section 12.3(a) or in accordance with the other provisions of the Plan, whichever is applicable, is less than or equal to two years before the earliest date that such Hampton Participant could have designated as his Early Commencement Date under the Plan, such Hampton Participant, for the purpose of determining his Credited Service (and for no other

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purpose of determining his Credited Service (and for no other purpose under the Plan), shall be deemed to remain an Employee of the Company until the earlier of (i) his death and (ii) the earliest date that could have been designated as his Early Commencement Date; and

(b)if such Hampton Participant’s Severance from Service Date, determined in accordance with Section 12.3(a) or in accordance with the other provisions of the Plan, whichever is applicable, is less than or equal to three years before the earliest date on which such Hampton Participant would have been eligible to receive an unreduced Retirement Benefit, such Hampton Participant shall, for the purpose of determining his Credited Service (and for no other purpose under the Plan), be deemed to remain an Employee of the Company until the earlier of (i) his death and (ii) the earliest date on which he would have been eligible to receive an unreduced Retirement Benefit.

Section 11.5Special Rules Pertaining to Hampton Participants Electing to Receive “5+5” Benefits.  In the case of any Hampton Participant who is eligible for and elects, in accordance with procedures established by the Administrator, to receive “5+5” benefits rather than periodic or lump-sum salary continuation, the following rules shall apply upon such Hampton Participant’s Separation from the Service:

(a)notwithstanding any other provision of this Plan, five years shall be added to such Hampton Participant’s Credited Service under the Plan; and

(b)five years shall be added to such Hampton Participant’s age, solely for the purposes of (i) the determination of eligibility for Early or Normal Retirement Benefits under the Plan and (ii) the determination of the amount, if any, of applicable early reduction factors.

Section 11.6Additional Special Rule Pertaining to Hampton Participants.  Notwithstanding any other provision of the Plan, the Benefits of Hampton Participants shall not be reduced to cover the cost of Qualified Preretirement Survivor Annuity coverage.

ARTICLE XII

SPECIAL PROVISIONS RELATING TO THE CUTBACK
OF OPERATIONS AT THE LA JOLLA LOCATION

Section 12.1Applicability.  The provisions of this Article XII shall be applicable to each Participant or Former Participant in the Plan (a) who was actively employed on September 30, 1985 by any member of the controlled group of corporations of which Allied-Signal Inc. was a member on the date immediately preceding the Spinoff and (b) whose regular place of employment on or after June 30, 1985 was the La Jolla office of the Company, regardless of whether such Participant may thereafter be transferred to another location.  The Participants to whom this Article XII is applicable shall hereinafter be referred to as “La Jolla Participants.”

Section 12.2Full Vesting.  Notwithstanding any other provision of the Plan, each La Jolla Participant shall be fully vested in his Accrued Benefit.

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Section 12.3Special Rules Pertaining to La Jolla Participants Electing to Receive Periodic Salary Continuation Payments.  In the case of any La Jolla Participant who, in connection with the cutback of operations at the La Jolla location, elects, in accordance with procedures established by the Administrator, to receive periodic salary continuation payments rather than a lump-sum salary continuation payment, the following rules shall apply:

(a)no such La Jolla Participant shall be deemed to have Separated from the Service until the last day of the final period to which his or her periodic salary continuation payments relate (which date shall, for the purpose of this Article, be referred to hereinafter as his or her “Severance from Service Date”); and

(b)the Compensation of such La Jolla Participant shall, for all purposes under the Plan, be deemed to include such periodic salary continuation payments.

Section 12.4Special Rules Pertaining to La Jolla Participants Electing to Receive Salary Continuation.  In the case of any La Jolla Participant who is not, as of his Severance from Service Date, eligible to receive the immediate payment of any Early or Normal Retirement Benefit under the Plan and who, in connection with the cutback of operations at the La Jolla location, elects, in accordance with procedures established by the Administrator, to receive periodic or lump-sum salary continuation, the following rules shall apply:

(a)if such La Jolla Participant’s Severance from Service Date, determined in accordance with Section 12.3(a) or in accordance with the other provisions of the Plan, whichever is applicable, is less than or equal to two years before the earliest date that such La Jolla Participant could have designated as his Early Commencement Date under the Plan, such La Jolla Participant, for the purpose of determining his Credited Service (and for no other purpose under the Plan), shall be deemed to remain an Employee of the Company until the earlier of (i) his death and (ii) the earliest date that could have been designated as his Early Commencement Date;

(b)if such La Jolla Participant’s Severance from Service Date, determined in accordance with Section 12.3(a) or in accordance with the other provisions of the Plan, whichever is applicable, is less than or equal to three years before the earliest date on which such La Jolla Participant would have been eligible to receive an unreduced Retirement Benefit, such La Jolla Participant shall, for the purpose of determining his Credited Service (and for no other purpose under the Plan), be deemed to remain an Employee of the Company until the earlier of (i) his death and (ii) the earliest date on which he would have been eligible to receive an unreduced Retirement Benefit.

Section 12.5Special Rules Pertaining to La Jolla Participants Electing to Receive “5+5” Benefits.  In the case of any La Jolla Participant who, in connection with the cutback of operations at the La Jolla location, elects, in accordance with procedures established by the Administrator, to receive “5+5” benefits rather than periodic or lump-sum salary continuation, the following rules shall apply upon such La Jolla Participant’s Separation from the Service:

(a)notwithstanding any other provision of this Plan, five years shall be added to such La Jolla Participant’s Credited Service under the Plan; and

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(b)five years shall be added to such La Jolla Participant’s age, solely for the purposes of (i) the determination of eligibility for Early or Normal Retirement Benefits under the Plan and (ii) the determination of the amount, if any, of applicable early reduction factors.

Section 12.6Special Rule Pertaining to the Calculation of Normal Retirement Benefits.  Solely for the purpose of calculating Normal Retirement Benefits payable under the Plan to La Jolla Participants, the term “April 1, 1971” appearing in subsection 3.2(b)(iii) of the Plan (prior to its January 1, 1989 amendment and restatement) shall be deemed to read “July 1, 1971.”

ARTICLE XIII

ADDITIONAL SPECIAL RULES

Section 13.1Special Rules for Employees of Schweizer Dipple, Inc.

For purposes of determining the Vesting Service of any person who was an active employee of Schweizer Dipple, Inc. on July 1, 1984, and for determining his or her eligibility for benefits under the Plan (including eligibility for early retirement or disability benefits), but not for purposes of determining the amount of such benefits, periods beginning at the later of such employee’s actual commencement of employment with Schweizer Dipple, Inc. or June 16, 1978 shall be taken into account.  For purposes of determining the amount of any benefit under the Plan, Credited Service shall not include periods prior to July 1, 1984.

Section 13.2Special Rules for Certain Employees of Signal Capital Corporation.  (a)  The following rules shall apply to each person who (i) was actively employed by Equilease Corporation on December 31, 1987, (ii) was a member of the Pension Plan for Salaried Employees of Equilease and Prestolite Wire (the “Equilease Plan”) on December 31, 1987, (iii) was actively employed by Equilease Corporation on January 1, 1987, and (iv) became an employee of Signal Capital Corporation as of January 1, 1988.  The persons described in the foregoing sentence shall hereinafter be referred to as “Transferred Equilease Employees.”

(b)Each Transferred Equilease Employee shall be a Participant in this Plan as of January 1, 1988.

(c)The Credited Service of each Transferred Equilease Employee shall include all of such Transferred Equilease Employee’s credited service as of December 31, 1987 under Section 1.14 of the Equilease Plan.

(d)The Vesting Service of each Transferred Equilease Employee shall include all of such Transferred Equilease Employee’s eligibility service as of December 31, 1987 under Section 1.17 of the Equilease Plan.

(e)The benefit of a Transferred Equilease Employee shall be calculated in the manner set forth in Section 8.8.3 of this Plan, to the extent that such Transferred Equilease Employee is entitled to receive a benefit from the Equilease Plan.  The foregoing sentence shall not apply if all assets allocable to such employee are transferred from the trust under the

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Equilease Plan to the Trust Fund prior to the calculation of such Transferred Equilease Employee’s benefit hereunder.

(f)Subject to the transfer of all assets allocable to a Transferred Equilease Employee from the trust under the Equilease Plan to the Trust Fund, such Transferred Equilease Plan to the Trust Fund, such Transferred Equilease Employee shall be entitled to a minimum vested benefit under this Plan equal or equivalent to his accrued benefit as of December 31, 1987 under the Equilease Plan, determined as of such date under the provisions of the Equilease Plan as then in effect and shall be entitled to the payment of such benefit in accordance with the provisions of the Equilease Plan as in effect on December 31, 1987.  No Transferred Equilease Employee shall be entitled to receive any other benefit except in accordance with the terms of this Plan.

(g)No benefit payable pursuant to this Section 13.2 shall duplicate any benefit payable under the Equilease Plan.

Section 13.3Special Rules Applicable to Certain Former Employees of Equilease Corporation.  (a)  The following rules shall apply to each Person who was (i) a retired member or terminated vested member of the Pension Plan for Salaried Employees of Equilease and Prestolite Wire (the “Equilease Plan”) on December 31, 1987, or who (ii) was a member of the Equilease Plan on December 31, 1987, is not a Transferred Equilease Employee described in the preceding section and was as of January 1, 1988 a “commuter” employee at the Hampton facility of the Company or receiving salary continuation in connection with the shutdown of Equilease Corporation’s operations.  The persons described in the foregoing sentence shall hereinafter be referred to as “Former Equilease Employees”.

(b)Subject to the transfer from the trust under the Equilease Plan to the Trust Fund of all Equilease Plan assets allocable to the Former Equilease Employees,

(i)each retired Former Equilease Employee shall receive from the Plan the benefit to which he was entitled as of December 31, 1987 under the terms of the Equilease Plan as in effect on that date, payable in accordance with the terms of the Equilease Plan as in effect on that date,

(ii)each terminated vested Former Equilease Employee shall be entitled to receive from the Plan a benefit equal or actuarially equivalent to his accrued benefit as of December 31, 1987 under the Equilease Plan, payable in accordance with the terms of the Equilease Plan as in effect on that date, and

(iii)the benefit under the Plan of each Former Equilease Employee who continues to work at the Hampton location as a “commuter” employee or receives salary continuation shall be calculated and payable in accordance with the terms of the Equilease Plan as in effect on December 31, 1987, including credited service under

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section 1.14 of the Equilease Plan for periods of “commuter” employment and salary continuation.

(c)No benefit payable pursuant to this Section 13.3 shall duplicate any benefit payable under the Equilease Plan.

Section 13.4Additional Special Rules Applicable to Certain Employees of Signal Capital Corporation.

(a)The rules set forth in this subsection 13.4(a) shall apply to each Employee of Signal Capital Corporation who became an Employee in connection with the December 12, 1985 acquisition of assets of First City Financial Corporation (“FCFC Employees”).  For purposes of determining each FCFC Employee’s eligibility to participate, Credited Service and Vesting Service under the Plan, periods of employment prior to January 1, 1986 with FCFC or with any member of the controlled group of corporations of which FCFC was a member at the time of such employment shall be taken into account.

(b)The rules set forth in this subsection 13.4(b) shall apply to each Employee of Signal Capital Corporation who became an Employee in connection with the May 22, 1986 acquisition of assets of First Asset-Based Lending (“FABL Employees”).  For purposes of determining each FABL Employee’s  Vesting Service and eligibility to participate in the Plan, periods of employment prior to May 22, 1986 with FABL, but not periods of service with First National Bank and Trust Company of Oklahoma City or First Oklahoma Bank Corporation, Inc., shall be taken into account.

BEFORE ITS JANUARY 1, 1989 RESTATEMENT
THE PLAN CONTAINED THE FOLLOWING SECTIONS 13.6 and 13.7

Section 13.6IRS Notice 99-131 [sic] Model Amendment 1.  In addition to other applicable limitations which may be set forth in the Plan and notwithstanding any other contrary provisions of the Plan, compensation taken into account under the Plan shall not exceed $200,000, adjusted for changes in the cost of living as provided in section 415(d) of the Internal Revenue Code, for the purpose of calculating a Plan participant’s accrued benefit (including the right to any optional benefit provided under the Plan) for any plan year commencing after December 31, 1988.  However, the accrued benefit determined in accordance with this provision shall not be less than the accrued benefit determined on May 1, 1989, without regard to this provision.

Notwithstanding the preceding sentence, the accrued benefit of any plan participant who is a highly compensated employee, within the meaning of section 414(q)d of the Code, is reduced to the extent a benefit has accrued with respect to compensation in excess of $200,000 during the 1989 plan year before the later of the adoption or effective date of this provision.

Section 13.7IRS Notice 88-141 [sic] Model Amendment 2.  Notwithstanding any other contrary provision of the Plan in calculating the accrued benefit (including the right to any optional benefit provided under the Plan) of any plan participant who is a highly compensated employee within the meaning of section 414(q) of the Internal Revenue Code, such highly compensated employee shall accrue no additional benefit under the Plan on or after May 1, 1989,

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to the extent that such additional benefit accrual exceeds the benefit which would otherwise accrue in accordance with the terms of the Plan as subsequently amended to comply with those qualification requirements described in Income Tax Regulations section 1.401(b)-1(b)(2)(ii) (TRA ‘86).

This provision shall be effective until the last day by which the Plan may be amended retroactively to comply with TRA ‘96 [sic] for its first plan year beginning in 1989 in order to remain qualified under the Code and shall be effective for such period if any only if the subsequent Plan amendment to comply with TRA ‘86 is made on or before the last day by which the Plan may be amended retroactively to comply with TRA ‘86 for its first plan year commencing in 1989 in order to remain qualified under the Code.

In addition, the benefit accrued by any highly compensated employee, within the meaning of section 414(q) of the Code, shall in no event exceed the benefit accrual provided during the 1989 plan year with respect to such participant under the terms of the Plan as subsequently amended to comply with the terms of TRA ‘96 [sic].  However, such highly compensated employee’s benefit shall not be less than what that participant had accrued as of the last day of the last plan year beginning before January 1, 1989.

ARTICLE XIV

SPECIAL PROVISIONS RELATING TO FORMER
PARTICIPANTS IN THE ENGINEERING RESEARCH,
INCORPORATED RETIREMENT PLAN FOR SALARIED
EMPLOYEES AND THE ENGINEERING RESEARCH, INC.
HOURLY EMPLOYEES PENSION PLAN

Section 14.1General.  (a) Effective January 1, 1984, Engineering Research, Incorporated (“ERI”) established the Engineering Research, Incorporated Retirement Plan for Salaried Employees (the “ERI Salaried Plan”) to provide retirement benefits for salaried employees of ERI.  The Engineering Research, Inc. Hourly Employees Pension Plan (the “ERI Hourly Plan” and, together with the ERI Salaried Plan, the “ERI Plans”) was established effective January 1, 1984 to provide retirement benefits for certain hourly employees of ERI.  On February 27, 1987, substantially all of the assets of ERI were sold to Babcock and Wilcox (“B&W”).  In connection with the sale, benefit accruals under the ERI Plans were frozen as of February 27, 1987, and offers of employment were made to plan participants by B&W.  Effective December 31, 1988, the ERI Plans were merged with this Plan, and participants in the ERI Plans became participants in this Plan for the limited purpose of receiving their benefits accrued under the ERI Plans.  Subject to this Plan’s provisions of general applicability (including such provisions that are legally required), former participants in the ERI Salaried Plan (“ERI Salaried Participants”) and former participants in the ERI Hourly Plan (“ERI Hourly Participants” and, together with ERI Salaried  Participants, “ERI Participants”) shall be entitled to benefits under this Plan only as set forth in this Article XIV, unless any such ERI Participant qualifies for participation in the Plan other than pursuant to this Article XIV.  Except as otherwise provided in this Article XIV, the rights and obligations of each person covered by an ERI Plan who retired, or whose employment was otherwise terminated prior to December 31,

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1988, shall be governed by the applicable provisions of the ERI Plans as in effect on such person’s retirement or termination date.  Effective January 1, 1990, all assets allocable to the benefits of ERI Participants were transferred to the trust established under The Henley Group, Inc. Retirement Plan.  No benefits under this Plan shall duplicate benefits payable under that plan.

(b)For purposes of this Article XIV, unless otherwise indicated, the term “Company” shall mean the Company as defined in Section 1.14, ERI, B&W and their respective affiliates required to be treated as under common control with such entities pursuant to section 414(b),(c),(m) or (o) of the Code.

Section 14.2Participation.  A person who was a participant or former participant in either ERI Plan on December 31, 1988 shall become an ERI Participant in this Plan for purposes of receiving the benefits described in this Article, effective December 31, 1988.

Section 14.3ERI Salaried Participants

Section 14.3.1Continuous Service.

(a)The Continuous Service of an ERI Salaried Participant shall for purposes of this Article XIV be the sum of his Pre-February 28, 1987 Service and his Post-February 27, 1987 Service.

(b)Pre-February 28, 1987 Service.  The Pre-February 28, 1987 Service of an ERI Salaried Participant shall be equal to his Continuous Service accrued under Section IX(1) of the ERI Salaried Plan as of February 27, 1987.

(c)Post-February 27, 1987 Service.  The Post-February 27, 1987 Service of an ERI Salaried Participant shall consist of such ERI Salaried Participant’s service with the Company after February 27, 1987 until such service is interrupted by (i) Discharge for cause, (ii) quitting by the employee or (iii) retirement.  If an ERI Salaried Participant’s service is terminated and such Participant is subsequently rehired by the Company, the duration of service up to such termination will be reinstated.

Periods of absence from work, other than those which break continuity of service as provided in the preceding paragraph, will be counted in determining length of continuous service except when the total period of absence of an ERI Salaried Participant in any consecutive twelve (12) month period exceeds twelve (12) months.

Section 14.3.2Retirement.

(a)An ERI Salaried Participant who is employed by the Company, upon attaining the age of 65 years, or at any time thereafter, may request retirement, and will be retired.

(b)An ERI Salaried Participant with 10 or more years of Continuous Service who is employed by the Company, upon attaining the age of 60 years, or at any time thereafter, may request retirement, and will be retired.

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(c)An ERI Salaried Participant not eligible for a pension under Section 14.3.2(a), (b) or (d) hereof, whose employment is to be terminated, shall be entitled to elect to be pensioned on the first of the month following such termination provided:

(i)the ERI Salaried Participant’s age and number of years of Continuous Service, when added together, equal or exceed 80; or

(ii)the ERI Salaried Participant has completed at least 15 years of Continuous Service and would have been eligible for a pension under Section 14.3.2(a), (b) or (e) within the next 10 years if employment with the Company had continued.

(d)Notwithstanding any other provisions of the Plan, an ERI Salaried Participant upon attaining the age of 65 years shall, prior to actual retirement or termination of employment, begin receiving pension benefits under this Article XIV on the first of the month following attainment of such age.

(e)Regardless of age, any ERI Salaried Participant with at least 10 years of Continuous Service who shall have become permanently incapacitated through some unavoidable cause while employed by the Company will be retired.

An ERI Salaried Participant shall be “permanently incapacitated” only if (i) the ERI Salaried Participant has been totally disabled by bodily injury or disease while actively employed so that the ERI Salaried Participant cannot regularly engage in any substantial, full-time activity for compensation or profit, (ii) such disability shall have continued for at least three consecutive months, and (iii) in the opinion of a licensed practicing physician, such disability will be continuous throughout the ERI Salaried Participant’s life.

For the purposes of retirement with pension under this Plan, incapacity shall not be deemed to have resulted from an unavoidable cause if such incapacity is occasioned by self-inflicted injury, or as a result of participating in a criminal activity.

A pension because of permanent incapacity under clauseof this Section 14.3.2 shall continue only so long as the pensioner shall be permanently incapacitated, and the Administrator may require an individual pensioned under this clause to submit to a medical examination at any reasonable time by a licensed practicing physician.

A pensioner will be conclusively presumed to be regularly engaged in substantial, full-time activity for compensation or profit, and therefore no longer permanently incapacitated, if the pensioner engages in any activity for compensation or profit from which the pensioner derives income, the annual amount of which, together with the amount of any pension received from the Company, exceeds the annual compensation the ERI Salaried Participant would presently receive if the employee were still employed on the job held at the time the employee was disabled.

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Section 14.3.3Amount and Payment of Pension.

Subject to the provisions of Section 14.3.2(d) regarding commencement of benefits, an ERI Salaried Participant meeting the eligibility requirements will be entitled to receive a pension each month beginning with the month following that in which retirement takes place and ending with the month in which the ERI Salaried Participant dies.  The amount of such pension will be determined as follows:

(a)If an ERI Salaried Participant is retired under the provisions of Section 14.3.2(a) or (d), or is entitled to pension benefits under the provisions of Section 14.3.2(d), the ERI Salaried Participant’s pension shall be equal to the greater of (i) or (ii) below:

(i)1.1% of the average monthly pay received during the highest paid five of the last ten calendar years of employment with ERI (ending on or before February 27, 1987) multiplied by his number of years of Pre-February 28, 1987 Service;

(ii)$100.00.

If it will result in a higher pension, however, an ERI Salaried Participant whose Pre-February 27, 1987 Service ceased to accrue before December 31 of any calendar year will, for the purpose of determining such average monthly pay, be given the benefit of earnings in the year such service ceased in lieu of earnings during an equivalent portion of the earliest of such highest paid five years, provided that no amounts earned after February 27, 1987 shall be taken into account.

(b)If an ERI Salaried Participant is retired under the provisions of Section 14.3.2(b) or (c), the ERI Salaried Participant’s pension will be calculated in accordance with the formula set forth in Section 14.3.3(a) above, and then reduced by 5/9 of 1% for each of the first 60 months by which the pension commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday, plus 5/18 of 1% for each additional month by which the pension commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday.

(c)Any amount paid to or on behalf of any pensioner as reimbursement for loss of earnings resulting from occupational injury or disease for which the Company (which term for purposes of this subsection 14.3.3(c) shall mean the Company as defined in Section 1.14, ERI, and their respective affiliates required to be treated as under common control with them pursuant to section 414(b), (c), (m) or (o) of the Code) is liable, whether pursuant to Workmen’s Compensation or occupational disease laws, or arising otherwise from the statutory or common law (except fixed statutory payment for the permanent total or partial loss of one or any bodily member, and except for payments for medical expenses) and any disability payment in the nature of a pension under any Federal or State law shall be deducted from or charged against the amount of any pension payable under this Section 14.3.3.  However, Social Security payments and allowances for disabilities incurred in the military service of the United States will not be so deducted or charged.

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(d)The Administrator shall pay in a lump sum any pension having a present value of $3,500 or less.  The lump sum payment to an ERI Salaried Participant will be the monthly pension payable at the later of age 65 or pension commencement age multiplied by the factor from Column A for the age of the ERI Salaried Participant when the lump sum benefit will be paid.  The lump sum payment to an ERI Salaried Participant’s surviving spouse will be the spouse’s monthly pension multiplied by the factor from Column B for the age of the spouse at the date the spouse’s pension will commence, and further multiplied by the ratio of the factor in Column A for the age of the spouse at the ERI Salaried Participant’s death to the factor in Column A for the age of the spouse at the date the spouse’s pension will commence (or age 65 if age 65 is earlier than such commencement age).

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Age	Column A	Column B	Age	Column A	Column B
75 & over	77	77	54	43	134
74	80	80	53	41	140
73	82	82	52	38	141
72	85	85	51	36	145
71	87	87	50	33	145
70	90	90	49	32	152
69	92	92	48	31	159
68	95	95	47	29	161
67	97	97	46	28	167
66	99	99	45	27	173
65	102	102	44	26	178
64	93	105	43	25	183
63	85	107	42	24	188
62	78	110	41	23	192
61	72	113	40	22	195
60	66	115	39	21	198
59	61	118	38	20	200
58	56	120	37	19	202
57	53	125	36	19	214
56	49	127	35 & under	18	214
55	46	131

Notwithstanding the foregoing, the above table will not be used if a greater lump sum payment is derived by using the UP-1984 Mortality Table, with an interest rate that is not greater than the immediate or deferred rate used by the Pension Benefit Guaranty Corporation to determine the present value of a lump sum distribution upon plan termination. The rate(s) used shall be the rate(s) in effect on the January 1 of the year in which the Annuity Starting Date occurs. No distribution may be made under this Section 14.3.3(d) after the Annuity Starting Date unless the ERI Salaried Participant and the ERI Salaried Participant’s spouse (or where the ERI Salaried Participant has died, the surviving spouse) consents in a notarized writing to such distribution.

(e)The payment of benefits under this Section 14.3.3 shall be subject to the requirements of Section 3.16 of the Plan.

Section 14.3.4Vested Right to Deferred Pension.

Effective February 27, 1987, the accrued benefit as of such date of each employee covered by the ERI Salaried Plan became 100% vested. Any other ERI Salaried Participant shall acquire a right to a deferred pension if such ERI Salaried Participant’s employment is terminated, and the ERI Salaried Participant is not retired under any of the provisions of Section 14.3.2 hereof, provided such ERI Salaried Participant has attained age 65 or has 10 years

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or more of Continuous Service immediately prior to such termination, or has 9 years of Continuous Service and is employed by the Company for at least 1,000 hours in the tenth year of such service immediately prior to such termination (provided that, in the case of an ERI Salaried Participant with one or more Hours of Service after December 31, 1988, the numbers 5 and 4 shall be substituted for the numbers 10 and 9 in the foregoing sentence).

For purposes of this provision, a year shall mean any 12-month period, commencing on an ERI Salaried Participant’s date of hire and during which the ERI Salaried Participant continues to be employed by the employer and shall include for vesting and eligibility purposes only all periods of absence for up to one year, provided the ERI Salaried Participant resumes participation under the Plan; fractional portions of a year, whether or not consecutive, shall be aggregated; an hour of employment shall mean an hour for which a person was directly or indirectly paid, or entitled to payment, by the employer for the performance of duties; and employment with any employer during or prior to the time such employer is controlled by the Company shall be deemed to be employment with the Company.

An ERI Salaried Participant so entitled to a deferred pension will receive pension payments for each month beginning with the month following that in which the ERI Salaried Participant attains age 65 and ending with the month in which the pensioner dies. If a joint and survivor option is in effect, however, in accordance with Section 14.3.6 the payments provided for by such option will be continued during the life of a surviving spouse.

Subject to Section 14.3.3(c), each monthly pension payment will be an amount to be determined by applying the formula set forth in Section 14.3.3(a)(i) hereof, using as a basis the number of years of the ERI Salaried Participant’s Continuous Service at the earlier of the time of termination of employment and February 27, 1987.

An ERI Salaried Participant so entitled to a deferred pension may elect to have pension payments begin any month after the employee has attained age 55, in which case the amount of monthly pension, determined as provided in the preceding paragraph of this Section 14.3.4, shall be reduced by 5/9 of 1% for each of the first 60 months by which such pension commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday, plus 5/18 of 1% for each additional month by which the pension commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday.

Section 14.3.5Social Security Option.

Subject to the spousal consent provisions of Section 14.3.6, an ERI Salaried Participant retiring under the provisions of Section 14.3.2(b) or (c) hereof before the ERI Salaried Participant first becomes eligible to receive Social Security payments may elect to receive a retirement income providing larger monthly payments, in lieu of the retirement income otherwise payable upon early retirement, until the date the ERI Salaried Participant first becomes eligible to receive Social Security payments; thereafter, the monthly payments shall be reduced by the approximate amount of the ERI Salaried Participant’s monthly Social Security benefit. Insofar as practical, therefore, a level total retirement income will be available for the participant. This option is not available, however, if an option is elected by the ERI Salaried Participant under the provisions of Section 14.3.6. Such larger payments shall equal such retirement income otherwise

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payable plus the following percentage of such approximate amount of the ERI Salaried Participant’s monthly Social Security benefit:

Number of years until the ERI Salaried Participant first becomes eligible to receive Social Security payments	Level Income Percentage
0	100	%
1	89	%
2	80	%
3	71	%
4	64	%
5	57	%

Number of years until the ERI Salaried Participant first becomes eligible to receive Social Security payments	Level Income Percentage
6	52	%
7	47	%
8	42	%
9	38	%
10	34	%
11	31	%
12	28	%
13	26	%
14	24	%
15 or more (interpolate for fractional years)	21	%

If, however, such larger monthly payments, as determined above, are smaller than such approximate amount of the employee’s Social Security benefit, such larger monthly payments shall instead equal the monthly pension otherwise payable divided by the complement of the applicable level income percentage.

Section 14.3.6Joint and Survivor Options.

(a)Pre-retirement Survivor Annuity.  The provisions of this Section shall apply to any ERI Salaried Participant who is credited with at least one Hour of Service on or after August 23, 1984, and such other ERI Salaried Participants as have elected coverage in accordance with Article VIII(1)(e) of the ERI Salaried Plan. If an ERI Salaried Participant dies after the date on which the ERI Salaried Participant is vested in accordance with the first paragraph of Section 14.3.4 and before retiring, or a retired ERI Salaried Participant who has not elected otherwise dies prior to the commencement of benefits, the spouse of such ERI Salaried Participant shall be entitled to pension payments in the form of a Pre-retirement Survivor Annuity in accordance with the following provisions:

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(i)If the ERI Salaried Participant dies after becoming eligible for early retirement under Section 14.3.2(b) or (c), the spouse will receive pension payments for each month beginning with the month following the month in which the ERI Salaried Participant’s death occurs. If the ERI Salaried Participant dies before becoming eligible for early retirement, the spouse will receive pension payments beginning with the first of the month coinciding with or next following the ERI Salaried Participant’s earliest retirement age, unless the spouse elects a later date.

(ii)The monthly pension payment to the spouse shall be an amount to be determined (A) by applying the formula set forth in Section 14.3.3(a) hereof (or a predecessor section of the ERI Salaried Plan), as in effect at the time of the ERI Salaried Participant’s death or earlier termination, using as a basis the number of years of the ERI Salaried Participant’s Pre-February 27, 1987 Service, (B) reduced by 5/9 of 1% for each of the first 60 months by which the commencement date of pension payments to the spouse precedes the calendar month following the ERI Salaried Participant’s 65th birthday, plus 5/18 of 1% for each additional month by which the commencement date precedes the calendar month following the ERI Salaried Participant’s 65th birthday, (C) reduced to reflect the amount the spouse would receive as though an Option II (as defined below) form of pension payments had been elected to take effect at the date of commencement of pension payments to the spouse, and (D) reduced further by any coverage factors applicable under Section 14.3.6(v).

(iii)Terminated ERI Salaried Participants entitled to a deferred pension may waive a Pre-retirement Survivor Annuity in writing at any time after the date of separation. The waiver must be consented to by the employee’s spouse, and the spouse’s consent must acknowledge the effect of such rejection and must be witnessed by a notary public. A revocation of a prior waiver may be made by the ERI Salaried Participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited.

(iv)The Administrator shall provide each terminated ERI Salaried Participant entitled to a deferred pension with a written explanation of the Pre-retirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements applicable to Joint and Survivor Annuity specified in Section 14.3.6(b).

(v)The monthly pension payable to a terminated ERI Salaried Participant will be reduced for the Pre-retirement Survivor Annuity

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coverage by the appropriate factor from the table below multiplied by the number of full years the coverage has been in effect after December 31, 1984.

	Reduction for Each Full Year of Coverage After Termination of Employment
Prior to Age 65	.3%
After Age 65	None

(b)Joint and Survivor Option.  Subject to the conditions hereinafter set forth in Section 14.3.6(b)(ii), if an ERI Salaried Participant shall be married at the beginning of the calendar month in which pension payments are to commence under the Plan, and unless the ERI Salaried Participant otherwise elects, the amount of each such pension payment which would otherwise be payable shall be reduced; and if the spouse shall survive the ERI Salaried Participant, a pension shall be payable under the Plan to the spouse during such spouse’s remaining lifetime after the ERI Salaried Participant’s death in an amount equal to 50% of the ERI Salaried Participant’s reduced pension payment in accordance with Option II.

(i)Every ERI Salaried Participant who is married when benefits are to commence will receive a written explanation of:

(A)The terms and conditions of the Joint and Survivor Option form of benefit;

(B)The ERI Salaried Participant’s right to make, and the effect of, an election to waive the Joint and Survivor Option form of benefit;

(C)The rights of an ERI Salaried Participant’s spouse; and

(D)The right to make, and the effect of, a revocation of a previous election to waive the Joint and Survivor Option.

An ERI Salaried Participant may elect in writing, at any time during the 90-day period ending on the Annuity Starting Date, to reject the Joint and Survivor Option form of benefit and receive the normal form or an optional form of benefit. Such rejection must be accompanied by written spousal consent which acknowledges the effect of the election and is witnessed by a notary public. Any rejection of the Joint and Survivor Option form of benefit may be cancelled by written election at any time prior to the date that benefits commence.

(ii)If an ERI Salaried Participant wishes to have pension payments made to his spouse following his death in excess of that provided in the first paragraph of Section 14.3.6(b) above, the ERI Salaried Participant may so elect prior to retirement. An ERI Salaried

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Participant who makes such an election will receive a reduced pension during the ERI Salaried Participant’s lifetime after retirement, and following the ERI Salaried Participant’s death the same level of pension (Option I), or one-half of it (Option II), or three-fourths of it (Option III), as the ERI Salaried Participant specified when the election was made, will be continued to the ERI Salaried Participant’s spouse during such spouse’s remaining life.

The pension of an ERI Salaried Participant electing Option I, II or III shall be reduced 19%, 11% or 15%, respectively, plus an additional reduction of 0.500%, 0.250% or 0.375%, respectively, for each full year in excess of three by which the ERI Salaried Participant’s birthdate precedes the spouse’s birthdate, to a maximum reduction (after 20 such excess years) of 29%, 16% or 22.5%, respectively; or minus 0.500%, 0.250% or 0.375%, respectively, for each full year in excess of three by which the spouse’s birthdate precedes the ERI Salaried Participant’s birthdate, to a minimum net reduction (after 10 such excess years) of 14%, 8.5% or 11.25%, respectively.

(iii)If an ERI Salaried Participant chooses to elect an option, written notice must be given to the Administrator, and the employee must furnish proof of the spouse’s age.

(iv)If an ERI Salaried Participant or the ERI Salaried Participant’s spouse dies before the option has become effective, the option is automatically cancelled.

(v)If the ERI Salaried Participant’s spouse dies after the option has become effective and after the ERI Salaried Participant has retired, the pension payments to the ERI Salaried Participant will remain unchanged.

(vi)An option may be cancelled or modified by the ERI Salaried Participant before the ERI Salaried Participant retires, by written notice filed with the Administrator.

(vii)An ERI Salaried Participant who acquires a vested interest in a pension under the provisions of Section 14.3.4 may elect a joint and survivor option in the same manner and under the same terms and conditions as an ERI Salaried Participant who is pensioned immediately upon termination of employment. For this purpose, the vestee’s retirement date will be deemed to be the first date the vestee is entitled to receive deferred pension payments under Section 14.3.4.

Section 14.3.7Computation of Average Monthly Pay.

In computing an employee’s average monthly pay for the purposes of Section 14.3.3 hereof, the total compensation the employee received during the applicable period (ending on or before February 27, 1987) shall be divided by 60. However, if during the applicable period, a

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calendar month or more of absence shall have occurred which does not break the continuity of service and in respect to which absence the employee received no compensation from the Company, the number 60 shall be reduced by the number of full calendar months of such absence.

Section 14.3.8Employment of Pensioners.

An ERI Salaried Participant receiving early retirement benefits under the Plan, who is reemployed by the Company (as defined in Section 1.14 and including for this purpose all entities required to be treated as under common control with such Company under sections 414(b), (c), (m) and (o) of the Code) prior to attaining age 65 or 40 or more hours in any calendar month after commencement of such benefits and who has received the notice required by 29 Code of Federal Regulations Section 2530.203-3(b)(4), will have the pension permanently suspended during such reemployment. Upon termination of such reemployment, or if sooner, attainment of age 65, the ERI Salaried Participant’s monthly pension will be recomputed so as to give effect to the additional service and the compensation received during such reemployment to the extent such service and compensation are required to be taken into account for benefit accrual purposes under Plan provisions other than this Article XIV. The pension of such reemployed pensioner will be reduced by 0.9% of the sum of the early retirement benefits previously received. If such recomputed pension exceeds that paid immediately prior to such reemployment, the employee shall be entitled to receive the monthly pension as so recomputed. Notwithstanding the two preceding sentences, in no event will the monthly pension payable upon recommencement be less than that previously paid.”

Section 14.4ERI Hourly Participants

Section 14.4.1Credited Service and Eligibility Service.

(a)Credited Service.  The Credited Service of an ERI Hourly Participant shall for purposes of this Article XIV be equal to his Credited Service under the ERI Hourly Plan as of February 27, 1987.

(b)Eligibility Service.  The Eligibility Service of an ERI Hourly Participant shall for purposes of this Article XIV be the sum of his Pre-February 28, 1987 Eligibility Service and his Post-February 27, 1987 Eligibility Service. If at the date of an Employee’s retirement or termination of employment with the Company, his Eligibility Service is less than his Credited Service with the Company, his Eligibility Service shall be deemed to equal his Credited Service.

(i)Pre-February 28, 1987 Eligibility Service.  The Pre-February 28, 1987 Eligibility Service of an ERI Hourly Participant shall be equal to his Eligibility Service accrued under Article VI(3) of the ERI Hourly Plan as of February 27, 1987.

(ii)Post-February 27, 1987 Eligibility Service.  The Post-February 27, 1987 Eligibility Service of an ERI Hourly Participant shall be computed for each ERI Hourly Participant on the basis of total hours compensated by the Company during each calendar year, with one year of Eligibility Service being recognized for each

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calendar year in which the ERI Hourly Participant receives compensation for 1,000 hours or more (including as compensated hours the hours referred to in subsections 2(b) through 2(f) of Article VI of the ERI Hourly Plan as in effect on December 31, 1988, in accordance with subsection 2(g) of such Article VI). No proportionate or partial credits shall be given for the purpose of computing Eligibility Service. Hours of pay at premium rates shall be computed as straight-time hours.

Section 14.4.2Requirements for Retirement Pensions and Deferred Vested Pensions.

(a)For purposes of this Section 14.4, the term “Pension” shall mean a series of uniform monthly payments payable to an ERI Hourly Participant, the first such payment to be made as of the beginning of the month following the last day of employment immediately prior to retirement, or such other date specified for that purpose, and the last payment to be made as of the beginning of the month in which the death of the ERI Hourly Participant occurs, or in which the Disability (as defined in Section 14.4.7) ends or, in the case of an Early Retirement Pension payable pursuant to Section 14.4.3(b) in which reemployment occurs prior to Normal Retirement Date.

(b)An ERI Hourly Participant shall be considered as retired under the Plan and as becoming a retired or disabled ERI Hourly Participant entitled to a Pension, upon termination of employment, provided such retirement occurs while the ERI Hourly Participant is employed by the Company and:

(i)after the first date he has attained age 65 (for purposes of this Section 14.4, his Normal Retirement Date), or

(ii)after age 60 but prior to age 65 and after 10 years of Eligibility Service, provided that if he retires at his option he shall be eligible for an Early Retirement Pension as provided in Section 14.4.3(b)(i) (provided that, if an ERI Hourly Participant is discharged for cause, he shall be deemed to have retired at his option), or

(iii)after age 60 but prior to age 65 and after 10 years of Eligibility Service, provided that if he retires at the option of B&W and under mutually satisfactory conditions he shall be eligible for an Early Retirement Pension as provided in Section 14.4.3(b)(ii), or

(iv)after 10 years of Eligibility Service in the event termination is caused by Disability and the ERI Hourly Participant is so disabled prior to reaching age 65.

(c)Notwithstanding any other provisions of the Plan, an ERI Hourly Participant whose employment terminates, and (i) who (A) became vested in his accrued benefit effective February 27, 1987 pursuant to Article XIII of the ERI Hourly Plan or (B) at the time of such termination shall have 10 or more years of Eligibility Service (5 or more years of Eligibility Service in the case of an ERI Hourly Participant with one or more Hours of Service after

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December 31, 1988), and (ii) who shall not be eligible for or receiving any other pension under the Plan based (in whole or in part) on Credited Service prior to the date of such termination, shall be entitled to a Deferred Vested Pension as provided in Section 14.4.3(d) of the Plan.

(d)Notwithstanding any other provisions of the Plan, an ERI Hourly Participant or surviving spouse entitled to receive a Pension may, for personal reasons and without disclosure thereof, request the Administrator in writing to suspend for any period payment of all or any part of such Pension otherwise payable to him hereunder. The Administrator, on receipt of such request, shall authorize such suspension, in which event the ERI Hourly Participant shall be deemed to have forfeited all rights to the amount of pension so suspended, but shall retain the right to have the full Pension otherwise payable to him hereunder reinstated as to future monthly payments upon written notice to the Administrator of his desire to revoke his prior request for a suspension under this paragraph. Any suspension requested hereunder by an ERI Hourly Participant or benefits payable to him under the Plan shall not affect benefits payable under any survivorship election he has made or is deemed to have made under the Plan.

(e)Payment of benefits will, unless the ERI Hourly Participant elects a later date, begin not later than the later of (i) sixty days after the close of the Plan Year in which the ERI Hourly Participant attains the earlier of age 65 or the Normal Retirement Date or (ii) sixty days after the end of the Plan Year in which the ERI Hourly Participant’s employment terminates. The payment of benefits shall be further subject to Section 3.16.

(f)Notwithstanding any other provisions of the Plan an ERI Hourly Participant, upon attaining the age of 65, shall, prior to retirement or termination of employment, begin receiving a Pension on the first of the month following attainment of such age.

Section 14.4.3Retirement and Other Benefits.

(a)Normal Retirement Pension.  The amount of the monthly Pension payable out of the Trust to an ERI Hourly Participant upon or after reaching age 65 under the conditions of Section 14.4.2(b) of the Plan, and who shall make application therefor, or to an ERI Hourly Participant entitled to a Pension in accordance with Section 14.4.2(f), shall be a life income benefit equal to $10.00 multiplied by the number of his years of Credited Service (the “Normal Retirement Pension”).

Subject to Section 14.4.2(f), the monthly Normal Retirement Pension payable from the Trust shall become payable to the ERI Hourly Participant, if he then shall be living, on the first day of the first month after (i) his employment shall have terminated, and (ii) he shall have filed an application for such Pension; and shall be payable on the first day of each month thereafter during his lifetime.

Upon attainment of his Normal Retirement Date, the rights of an ERI Hourly Participant to his benefits under this Section shall be nonforfeitable.

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(b)Early Retirement Pension.

(i)The amount of the monthly Pension payable out of the Trust to an Employee who shall retire at his option under the conditions of Section 14.4.2(b)(ii) of the Plan, and who shall make application therefor, shall be one of the following as the ERI Hourly Participant shall elect:

(A)A deferred life income benefit, at age 65 determined in accordance with Section 14.4.3(a), based upon his Credited Service, or

(B)An immediate life income benefit commencing at Early Retirement in an amount equal to the deferred benefit provided for in (A) above, reduced by a percentage equal to 5/9 of 1% multiplied by the number of months from the date the ERI Hourly Participant’s Pension originally commenced to attainment of age 65.

(ii)The amount of the monthly Pension payable out of the Trust to an ERI Hourly Participant who shall retire under the conditions of Section 14.4.2(b)(iii) of the Plan shall be:

(A)A life income benefit in an amount equal to $10.00 for each year of his Credited Service, and

(B)A Temporary Benefit in an amount equal to $10.00 for each year of his Credited Service (not to exceed a total of $250.00); provided, however, that for any month after the retired ERI Hourly Participant attains age 65 or becomes Eligible For an Unreduced Social Security Benefit, whichever occurs first, the Temporary Benefit shall not be payable.

For the purpose of subsection (i) above, a retired ERI Hourly Participant shall be considered as being Eligible For an Unreduced Social Security Benefit even though he does not qualify for, or loses, such payments through failure to make application therefor, entering into covered employment, or other act or failure to act. An ERI Hourly Participant discharged for cause after such ERI Hourly Participant has attained age 60 but before age 65, and who has met the requirements set forth in Section 14.4.2(c)(i) shall be entitled only to the benefits provided under Section 14.4.3(b)(i) of the Plan.

(iii)The monthly Early Retirement Pension shall become payable to the retired ERI Hourly Participant, if he then shall be living, on the first day of the first month after (A) he shall have become eligible for such Pension and (B) he shall have filed application for such Pension; and shall be payable on the first day of each month

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thereafter during his lifetime or until he shall be reemployed prior to his Normal Retirement Date by the Company (as defined in Section 14.4.3(e)).

(c)Disability Retirement Pension.  The monthly Pension payable out of the Trust to an ERI Hourly Participant who shall retire and be eligible for a Pension under the provisions of Section 14.4.2(b)(iv) of the Plan shall be:

(i)A life income benefit in an amount equal to $10.00 for each year of his Credited Service, and

(ii)A Temporary Benefit in an amount equal to $10.00 for each year of his Credited Service (not to exceed a total of $250.00); provided, however, that for any month after the retired ERI Hourly Participant attains age 65 or becomes Eligible For an Unreduced Social Security Benefit, whichever occurs first, the Temporary Benefit shall not be payable.

For the purposes of this Section, a retired ERI Hourly Participant shall be considered as being Eligible For an Unreduced Social Security Benefit by reason of disability even though he does not qualify for, or loses, such payments through failure to make application therefor or other act or failure to act.

The monthly Disability Retirement Pension payable from the Trust shall become payable to the retired ERI Hourly Participant, if he then shall be living, on the first day of the first month after (A) he shall have filed an application for such Pension, and (B) his Disability Retirement shall have commenced, and (C) at least 26 weeks have elapsed since the date upon which his Disability commenced, and shall be payable on the first day of each month thereafter until, but not including, the month after (1) his Disability Retirement shall end, or (2) he shall attain age 65, or (3) he shall die, whichever first shall occur.

When a retired ERI Hourly Participant receiving a Disability Retirement Pension shall reach age 65 or the qualifying age for an unreduced insurance benefit by reason of age under the Federal Social Security Act, he thereafter, if eligible, shall receive a Normal Retirement Pension in accordance with the provisions of Section 14.4.3(a) and shall no longer be considered to be on Disability Retirement.

(d)Deferred Vested Pension.  The monthly Pension payable out of the Trust to an ERI Hourly Participant who shall terminate employment and be eligible for a Deferred Vested Pension under the provisions of Section 14.4.2(c) of the Plan shall be a life income benefit equal to $10.00 multiplied by the number of his years of Credited Service.

The monthly Pension shall become payable to such ERI Hourly Participant, if he shall then be living, on the first day of the month after (i) his 65th birthday and (ii) he shall have filed an application for such Pension; and shall be payable on the first day of each month thereafter during his lifetime, provided, however, that such ERI Hourly Participant may elect a monthly Pension commencing on the first day of any month after he shall have reached his 60th birthday and before he shall have reached his 65th birthday, in which event his monthly Pension shall

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(A) be in an amount equal to the Pension payable at age 65 reduced by a percentage equal to 5/9 of 1% multiplied by the number of months from the date his Pension is to commence to the first day of the month following his 65th birthday and (B) be payable on the first day of each month thereafter during his lifetime or until he shall be reemployed prior to his Normal Retirement Date by the Company (as defined in Section 14.4.3(e)).

(e)Reemployment.  If an ERI Hourly Participant receiving an Early Retirement Pension shall be reemployed prior to his Normal Retirement Date by the Company (which term, for purposes of this Section 14.4.3(e), shall mean the Company as defined in Section 1.14 and all entities required to be treated as under common control with such Company pursuant to section 414(b)(c)(m) or (o) of the Code) for 40 or more hours in any calendar month, and has been given the notice required by 29 Code of Federal Regulations Section 2530.203-3(b)(4), his Pension shall be cancelled. Upon his subsequent retirement, or if sooner, attainment of age 65, his Pension shall be based on the total of his Credited Service; provided, however, that if an ERI Hourly Participant eligible for a Normal Retirement Pension or a Pension in accordance with Section 14.4.2(f) shall previously have been retired on an Early Retirement Pension under the conditions of Section 14.4.2(b)(ii) and then returned to employment, his monthly Normal Retirement Pension or Pension payable in accordance with Section 14.4.2(f), if applicable, payable from the Trust shall be reduced by 8/10 of 1% of the sum of the Early Retirement Benefit payments he shall have received but not to exceed 25% of the monthly Pension payable prior to such reduction.

If the Disability Retirement Pension of a retired ERI Hourly Participant shall cease without loss of seniority, and provided he shall not have subsequently incurred a break in his seniority, he shall be credited upon subsequent Retirement, or if sooner, attainment of age 65, with the Credited Service and Eligibility Service he had at the time his Disability Retirement commenced and shall also receive credit for Eligibility Service accumulated during the period of reemployment.

An ERI Hourly Participant who previously terminated employment and was eligible for a Deferred Vested Pension, and who again becomes an ERI Hourly Participant, prior to his application for such Pension, shall receive credit for Credited Service and Eligibility Service accumulated at the time of such termination and shall also receive credit for Eligibility Service accumulated during the period of reemployment. Upon subsequent retirement, or if sooner, attainment of age 65, such ERI Hourly Participant’s eligibility for retirement and the amount of monthly Pension shall be determined on the basis of his total Credited Service.

(f)Survivorship Option.

(i)In lieu of the applicable Life Income Benefit provided in subsections (a) through (d) of this Section 14.4.3 (but not any Temporary Benefit ceasing at or before age 65), an ERI Hourly Participant who retires or has attained his Normal Retirement Date, or an ERI Hourly Participant whose employment was terminated and is entitled to a Deferred Vested Pension, shall automatically be deemed to have elected a reduced monthly benefit during his lifetime with the provision that, following his death, a monthly

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survivor’s benefit shall be payable to his designated spouse during the further lifetime of the spouse.

(ii)The automatic election shall be deemed to be made on the following date, whichever is applicable:  (A) for a person retiring on Normal Retirement Pension, Early Retirement Pension, or Disability Retirement Pension, the date on which his employment with the Company terminates; or (B) for an ERI Hourly Participant who has attained his Normal Retirement Date, his Normal Retirement Date or January 1, 1984, whichever is later; or (C) for an ERI Hourly Participant who is entitled to a Deferred Vested Pension, the first day of the first month after he reaches age 65 or if earlier, the first day of the first month he receives a Deferred Vested Pension. The automatic election provided in this subsection shall be applicable only with respect to a spouse to whom the ERI Hourly Participant is married at the date of election and has been married for at least one year prior to that date; provided, however, that an ERI Hourly Participant married at the date of election, but for less than one year, shall be deemed to have elected the survivorship option to become effective on the first day of the month following the month in which the ERI Hourly Participant has been married one year, or if later, the first day of the month for which his first benefit under the Plan is payable.

An ERI Hourly Participant may prevent the automatic election provided in this subsection by specific written rejection accompanied by written spousal consent which has been witnessed by a notary public and executed in whatever form and manner may be prescribed for this purpose and before the time such election would be deemed to be made, in which event he shall be entitled to the applicable life income benefit provided in Section 14.4.3(a), (b), (c) or (d) without the reduction provided in subsection 14.4.3(f) (iii) below; provided, however, that said rejection may be cancelled by the ERI Hourly Participant by written action at any time prior to the date his benefits are to commence. The notice and waiver provisions of Section 3.7(d) and (e) shall apply to such rejections.

(iii)The amount of the reduced monthly benefit payable to a retired ERI Hourly Participant (including for purposes of this Section an ERI Hourly Participant entitled to a Deferred Vested Pension and an ERI Hourly Participant entitled to a Pension pursuant to Section 14.4.2(f)) under this Section 14.4.3(f), shall be determined by reducing the amount of the applicable life income benefit by a percentage, determined as hereinafter provided, of the life income benefit that would have been payable to the retired ERI Hourly Participant if he had rejected a survivorship option. The percentage to be used shall be ten percent (10%) if the ERI Hourly Participant’s age and his spouse’s age are the same (the age of each determined as being the age at his or her birthday nearest the date on which the first payment of such ERI Hourly Participant’s

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benefit shall be payable). Such percentage shall be decreased by 1/2 of 1% for each year up to twenty (20) years that the spouse’s age exceeds the ERI Hourly Participant’s age and shall be increased by 1/2 of 1% for each year that the spouse’s age is less than the ERI Hourly Participant’s age.

The reductions provided in this subsectionshall be made in all monthly benefits payable to the retired ERI Hourly Participant.

(iv)The amount of the monthly survivor’s benefit payable to the surviving spouse of a retired ERI Hourly Participant for whom the survivorship option hereunder is effective shall be fifty percent (50%) of the amount of the monthly life income benefit that was or would have been payable to the retired Employee after the reduction provided in (iii) above.

(g)Special Pre-Retirement Survivor Option.

(i)The following Special Pre-Retirement Option shall be deemed to have been elected automatically by an Employee who (A) has seniority on or after January 1, 1984 and has met the vesting requirements of Section 14.4.2(c) or (B) terminates employment and is eligible for a Deferred Vested Pension under Section 14.4.3(d). The Special Pre-Retirement Survivor Option shall also be provided in respect of ERI Hourly Participants who elected such coverage pursuant to Article V, Section 7(a) of the ERI Hourly Plan.

An ERI Hourly Participant may prevent this automatic election by a specific written rejection accompanied by written spousal consent which has been witnessed by a notary public. Any rejection may be revoked at any time, or a subsequent rejection made at any time prior to commencement of benefits. Anything to the contrary notwithstanding, no rejection may be made until the Employee has attained age 35.

(ii)Under this Special Pre-Retirement Survivor Option, a reduced monthly Pension will be payable to the ERI Hourly Participant upon his subsequent retirement under the Plan, commencement of a Deferred Vested Benefit or commencement of a Pension pursuant to Section 14.4.2(f) (and the survivor’s benefit available pursuant to Section 14.4.3(f) shall be determined by reference to such reduced monthly Pension), in return for which a survivor’s benefit shall be payable to the ERI Hourly Participant’s spouse but only in the event of his death prior to his retirement, commencement of Deferred Vested Benefits, or commencement of a Pension pursuant to Section 14.4.2(f) (whichever is applicable) while the option is in effect. The survivor’s benefit shall not commence prior to the date the ERI Hourly Participant would have

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attained age 60. The amount of the spouse’s survivor’s benefit shall be equal to 50% of the life income benefit, if any, to which the ERI Hourly Participant would have been entitled if he had retired under Section 14.4.3(a), (b)(i)(B) or (d) on the day preceding his death but not prior to age 60 with the survivorship option set forth in Section 14.4.3(f) in effect.

(iii)The reduction in the monthly Pension payable to an ERI Hourly Participant will be determined by multiplying the appropriate factor from the table below by the number of months the coverage has been in effect:

Age of Employee	Reduction for Each Complete Month of Coverage While in Active Service or with Seniority Status	Reduction for Each Complete Month of Coverage While Not in Active Service Nor with Seniority Status
Under 65	.0002083 (.02083%)	.00025 (.025%)
Over 65	None	None

(h)Special Lump Sum Payment.  An ERI Hourly Participant or a surviving spouse who is entitled to a monthly benefit under this Section 14.4.3 shall be paid the actuarial equivalent of said benefit as a single lump sum in lieu of such monthly benefit, provided the lump sum is less than $3,500. In the case of an ERI Hourly Participant, the benefit described herein shall be the monthly pension payable at the later of age 65 or pension commencement age. For determining the actuarial equivalent, the UP-1984 Mortality Table shall be used, with an interest rate that is not greater than the immediate or deferred rate used by the Pension Benefit Guaranty Corporation to determine the present value of a lump sum distribution upon plan termination. The rate(s) used shall be the rate(s) in effect on the January 1 of the year in which the Annuity Starting Date occurs. The surviving spouse of an ERI Hourly Participant who, pursuant to Sections 14.4.3(f) and (g), is automatically deemed to have elected survivor benefits, shall consent in a notarized writing to any such lump sum payment.

SECTION 14.4.3(h) OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1,
EFFECTIVE AS OF JANUARY 1, 2000, BY REPLACING THE THIRD AND FOURTH
SENTENCES WITH THE FOLLOWING:

“For purposes of this section, the actuarial equivalent shall be calculated using the Applicable Interest Rate under Section 417(e) of the Code for the second full calendar month before the date of distribution, and the Applicable Mortality Table under Section 417(e) of the Code.

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Notwithstanding the preceding sentence, the present value of the accrued lump sum retirement benefit due an Employee who is entitled to a monthly benefit under this Section 14.4.3 shall not be less than the present value of such Participant’s vested accrued benefit as of December 31, 1999 utilizing an interest rate that is not greater than the immediate or deferred rate, in effect on January 1 of the year in which the Annuity Starting Date occurs, used by the Pension Benefit Guaranty Corporation to determine the present value of a lump sum distribution upon plan termination) and the UP-1984 Mortality Table.”

(i)Other Benefits.  No benefits are payable under the Plan upon the death of an ERI Hourly Participant, except pursuant to valid election of an option pursuant to Section 14.4.3(g), or as otherwise provided under Section 14.4.3(f). No benefits are payable under the Plan upon termination of employment of an ERI Hourly Participant who does not satisfy any of the eligibility requirements set forth in Section 14.4.2.

SECTION 14.4.3 OF THE PLAN WAS AMENDED BY AMENDMENT NO. 1,
EFFECTIVE AS OF JANUARY 1, 1998, BY SUBSTITUTING THE NUMBER “$5,000” FOR THE NUMBER “$3,500”
WHEREVER THE LATTER APPEARS THEREIN.

Section 14.4.4Loss of Credited Service and Eligibility Service.

An ERI Hourly Participant will lose all Credited Service and Eligibility Service for purposes of this Plan (and if reemployed, shall be considered a new employee for the purposes of this Plan):

(a)If before becoming entitled to a Pension benefit under the Plan, he quits, is discharged or released, of if his seniority is broken for any other reason, and

(b)If he receives compensation from the Company for less than 500 hours (computed as set forth in Section 2 of Article IV of the ERI Plan as in effect on December 31, 1988) in the calendar year when such quit, discharge, release, or loss of seniority occurs or in the next following calendar year. Any such occurrence is hereinafter referred to as a “Break in Service.”  If an ERI Hourly Participant referred to in subparagraph (a) above is reemployed prior to incurring a “Break in Service,” no loss of Credited Service or Eligibility Service will be deemed to have occurred.

Notwithstanding the foregoing, however:

(c)An ERI Hourly Participant retired under the Plan who again becomes entitled to accrue Eligibility Service will have his Credited Service and Eligibility Service at the time of original retirement reinstated; and

96

(d)If an ERI Hourly Participant has a Break in Service and is subsequently reemployed by the Company and earns not less than one year of Eligibility Service, the Eligibility Service and Credited Service he had when the Break in Service occurred shall be restored to him.

Section 14.4.5Social Security Benefit.

In determining benefits under the Plan, the Social Security Benefit shall be assumed to be the amount applicable to any month for which a benefit is payable under this Plan to an ERI Hourly Participant under the Old Age and Disability Insurance provisions of the Federal Social Security Act, as from time to time amended, for the benefit of the ERI Hourly Participant, excluding payments for wives and dependents.

An ERI Hourly Participant shall be deemed to be eligible for a Social Security Benefit even though the ERI Hourly Participant either does not apply for, or loses part or all of such payments through delay in applying for them, by entering into covered employment or otherwise.

Section 14.4.6Integrated Benefits.

(a)Notwithstanding any other provisions of the Plan, in determining the portion of the benefit payable out of the Trust Fund to any ERI Hourly Participant, a deduction shall be made unless waived by the Company (which term for purposes of this Section 14.4.6 shall mean the Company as defined in Section 1.14 and any entity required to be treated as under common control with such Company pursuant to sections 414(b), (c), (m) or (o) of the Code), equivalent to all or any part of any of the following benefits payable to such ERI Hourly Participant by reason of any law of the United States, or any political subdivision thereof, which has been or shall be enacted, provided that such deductions shall be to the extent that such benefits have been provided by premiums, taxes, or other payments paid by or at the expense of the Company:

(i)Workers’ Compensation (except fixed statutory payments for the loss of any bodily member).

(ii)Disability benefits (other than those payable on the basis of “need,” because of military service, or under the Federal Social Security Act).

(b)Notwithstanding any other provisions of the Plan, in determining the retirement benefit payable out of the Trust Fund to any ERI Hourly Participant, no benefit shall be payable for any month for which the retired ERI Hourly Participant is receiving weekly accident or sickness benefits under any plan to which the Company shall have contributed; for any month for which the retired ERI Hourly Participant is receiving such accident or sickness benefits for part of the month, a proportionate amount of the monthly retirement benefit otherwise payable shall be paid for that part of the month for which the retired ERI Hourly Participant receives no such accident or sickness benefits.

97

(c)Any lump sum payment of integrated Benefits payable to an ERI Hourly Participant shall be pro-rated on a monthly basis from the date of payment thereof and no Pension shall be payable until said sum as thus pro-rated is exhausted.

Section 14.4.7Disability.

(a)An ERI Hourly Participant shall be deemed to be totally and permanently disabled when, on the basis of satisfactory medical evidence, he is found to be totally and presumably permanently prevented from engaging in gainful occupation or employment for wage or profit as a result of a physical or mental condition either occupational or nonoccupational in cause.

(b)Any disabled retired ERI Hourly Participant may be required to submit to medical examination, at any time during retirement prior to age 65, but not more often than semi-annually, to determine whether he is eligible for continuance of the Disability Retirement Pension. If on the basis of such examination, it is found that he is no longer disabled, or if he engages in gainful employment, except for purposes of rehabilitation as determined by the Board, his Disability Retirement Pension will cease. In the event the disabled retired ERI Hourly Participant refuses to submit to medical examination, his Pension will be discontinued until he submits to examination.

ARTICLE XV

SPECIAL VESTING RULES IN CONNECTION
WITH CORPORATE OFFICE SHUTDOWN
AND COMPANY STREAMLINING

Notwithstanding any other provision of this Plan, (a) each Participant who was actively employed at the Henley Properties corporate office in La Jolla, California as of March 30, 1990 and whose employment is terminated by Henley Properties in connection with the shutdown of that office, and (b) each Participant whose employment with Signal Landmark is terminated in connection with the streamlining of that company’s operations, shall be fully vested in his Accrued Benefit.

IN WITNESS WHEREOF, the Plan is executed this  21st  day of December, 2001.

CALIFORNIA COASTAL COMMUNITIES, INC.
By:	//s// R J Pacini

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EX-10.3

Exhibit 10.3

CALIFORNIA COASTAL COMMUNITIES, INC. RETIREMENT PLAN

AMENDMENT NO. 1

The California Coastal Communities, Inc. Retirement Plan (“Plan”), which was executed December 21, 2001, and which has been amended for EGTRRA in a separate amendment, is hereby further amended by this Amendment No. 1, in order to incorporate changes required as part of the IRS determination letter process.  This Amendment No. 1 does not amend the EGTRRA Amendment, which was executed on December 19, 2001.

1.     Effective January 1, 1997, a new Section 1.30A is added to the Plan to read as follows:

Highly Compensated Employee.  “Highly Compensated Employee” means (a) any 5% owner during the current Plan Year or the preceding Plan Year (“look back year”), and (b) any Employee receiving Compensation within the meaning of Section 6.1 of the Plan in the look back year in excess of $80,000, as indexed pursuant to Code Section 414(q).

2.     Effective January 1, 1995, a new  Section 6.3.3 is added to the Plan, to read as follows:

GATT.

Effective December 31, 1993, benefit accruals under this Plan were frozen.  Consequently, this Section 6.3.3 is to apply prospectively, only, to benefits (if any) accrued under the Plan after the date (if ever) that benefit accruals under the Plan cease to be frozen and after December 31, 1994 (the “GATT effective date”).

For purposes of applying Code Section 415(b) to a benefit that is not payable in the form of an annual straight life annuity within the meaning of Code Section 415(b)(2)(A) and that is not subject to Code Section 417(e)(3), the equivalent annual benefit determined in Step 1, below will be no greater than the lesser of the age-adjusted dollar limit determined in Step 2 below and the Code Section 415(b) compensation limitation determined in Step 3, below.

STEP1:  Under Code Section 415(b)(2)(B), determine the annual benefit in the form of a straight life annuity commencing at the same age that is actuarially equivalent to the plan benefit.  This equivalent annual benefit will be the greater of the equivalent annual benefit computed using the interest rate and mortality table outlined in the Plan’s definition of Actuarial Equivalent, and the equivalent annual benefit computed using a 5% interest rate assumption and the Applicable Mortality Table under Section 417(e) of the Code.  This step will not apply to a benefit that is not required to be converted to a straight life annuity pursuant to Code Section 415(b)(2)(B) (for example a qualified joint and survivor annuity).

STEP 2:  Under Code Section 415(b)(2)(C) or (D), determine the Code Section 415(b) dollar limitation that applies at the age the benefit is payable (age-adjusted dollar limit).  The age-adjusted dollar limit will be the annual benefit that is actuarially equivalent to an annual benefit equal to the Code Section 415(b) dollar limitation payable at the participant’s Social Security Retirement Age.

If the age at which the benefit is payable is 62 or greater, and less than the participant’s Social Security Retirement Age, the age-adjusted dollar limit will be as determined for this age pursuant to Section 6.3.2 of the Plan.

If the age at which the benefit is payable is less than 62, the reduced age-adjusted dollar limit will be the lesser of the equivalent amount computed under Section 6.3.2 of the Plan for this age and the amount computed using 5% interest and the Applicable Mortality Table under Section 417(e) of the Code.  To the extent a forfeiture does not occur upon death, the mortality decrement may be ignored prior to age 62 and must be ignored after Social Security Retirement Age.

If the age at which the benefit is payable is greater than the participant’s Social Security Retirement Age, the increased age-adjusted dollar limit will be the lesser of the equivalent amount computed under Section 6.3.2 of the Plan for this age and the equivalent amount computed using 5% interest and the Applicable Mortality Table under Code Section 417(e).

2

STEP 3:  Determine the participant’s Code Section 415(b) compensation limitation.  This limitation is equal to the participant’s compensation (within the meaning of Section 6.1 of the Plan) averaged over the consecutive 3-year period producing the highest average, as provided in Code Section 415(b)(3).

IN WITNESS WHEREOF, this Amendment No. 1 is executed this 26 day of June, 2002.

California Coastal Communities, Inc.
By:	//s// R J Pacini
Raymond J. Pacini
President and
Chief Executive Officer

3

EX-31.1

Exhibit 31.1

SECTION 302 CERTIFICATION

I, Raymond J. Pacini, certify that:

1.I have reviewed this quarterly report on Form 10-Q of California Coastal Communities, Inc.;

2.Based on my knowledge, this quarterly 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 quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 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:  August 8, 2006

/s/ Raymond J. Pacini

Raymond J. Pacini

Chief Executive Officer

EX-31.2

Exhibit 31.2

SECTION 302 CERTIFICATION

I, Sandra G. Sciutto, certify that:

1.I have reviewed this quarterly report on Form 10-Q of California Coastal Communities, Inc.;

2.Based on my knowledge, this quarterly 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 quarterly report;

3.Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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 quarterly 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 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:  August 8, 2006

/s/ Sandra G. Sciutto

Sandra G. Sciutto

Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of California Coastal Communities, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in their respective capacity as an officer, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of their respective knowledge, that:

·the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

·the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 8, 2006

/s/ Raymond J. Pacini

Raymond J. Pacini

Chief Executive Officer

/s/ Sandra G. Sciutto

Sandra G. Sciutto

Senior Vice President and

Chief Financial Officer