Form 10K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ /X/ Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1999 / / Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 [No Fee Required] Commission File Number 1-8029 THE RYLAND GROUP, INC. (Exact name of registrant as specified in its charter) Maryland 52-0849948 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 21800 Burbank Boulevard, Suite 300 Woodland Hills, California 91367 (Address of principal executive offices) Registrant's telephone number, including area code: (818) 598-4400 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, (Par Value $1.00) New York Stock Exchange Common Share Purchase Rights New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None 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 / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of the Common Stock of The Ryland Group, Inc., held by non-affiliates of the registrant (13,530,302 shares) as of February 17, 2000, was $230,860,779. The number of shares of common stock of The Ryland Group, Inc., outstanding on February 17, 2000 was 13,555,560. 1 DOCUMENTS INCORPORATED BY REFERENCE Name of Document Location in Report - ---------------- ------------------ Proxy Statement for 2000 Annual Meeting of Stockholders Parts I, III Annual Report to Shareholders for the year ended December 31, 1999 Parts II, IV Form 8-K filed September 12, 1989 Part IV Form 10-K for the year ended December 31, 1989 Part IV Form 10-K for the year ended December 31, 1990 Part IV Form 10-Q for the quarter ended June 30, 1992 Part IV Registration Statement on Form S-3, Registration 33-48071 Part IV Form 10-Q for the quarter ended June 30, 1994 Part IV Form 8-K filed October 24, 1996 Part IV Registration Statement on Form S-3, Registration 333-03791 Part IV Form 8-K filed July 2, 1996 Part IV Form 10-K for the year-ended December 31, 1996 Part IV Form 10-K for the year-ended December 31, 1997 Part IV Form 10-Q for the quarter-ended September 30, 1999 Part IV Form 10-Q for the quarter-ended June 30, 1999 Part IV 2 THE RYLAND GROUP, INC. FORM 10-K INDEX Item No. PART I Item 1. Business......................................................4 Item 2. Properties....................................................9 Item 3. Legal Proceedings.............................................9 Item 4. Submission of Matters to a Vote of Security Holders...........9 PART II Item 5. Market for the Company's Common Stock and Related Stockholder Matters............. ............................11 Item 6. Selected Financial Data......................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........................11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...11 Item 8. Financial Statements and Supplementary Data..................11 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.....................................11 PART III Item 10. Directors and Executive Officers of the Registrant...........12 Item 11. Executive Compensation.......................................12 Item 12. Security Ownership of Certain Beneficial Owners and Management...............................................12 Item 13. Certain Relationships and Related Transactions...............12 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................................13 SIGNATURES .............................................................17 INDEX OF EXHIBITS..........................................................18 3 3 PART I Item 1. Business With headquarters in Southern California, The Ryland Group, Inc. ("Ryland") is one of the nation's largest homebuilders and mortgage-finance company. Founded in 1967, the Company has built more than 170,000 homes during its 32-year history. Ryland Mortgage Company, founded in 1978, has provided mortgage-financing and related services for more than 150,000 homebuyers. Today, Ryland homes are available in 260 communities in 21 markets across the country. The Company's home prices range from $90,000 to more than $500,000. The current average price of a Ryland home is $190,000. The Company's operations span the significant aspects of the home-buying process - - from the design, construction and sale of single-family homes to mortgage-financing, title insurance, settlement and escrow services and homeowners insurance. As used herein, the term "Company" refers to The Ryland Group, Inc. and its subsidiaries, unless the context indicates otherwise. Homebuilding - ------------ Markets Ryland markets and builds homes that are constructed on-site in three - ------- regions which include 21 of the nation's strongest housing markets. The three regions are the North, South and West. As of December 31, 1999, the Company operated in the following metropolitan markets: Region Major Markets Served ------ -------------------- North: Baltimore, Washington, D.C./Northern Virginia, Chicago, Cincinnati, Indianapolis, Minneapolis South: Atlanta, Charlotte, Greenville, Orlando, West Florida, Austin, San Antonio, Dallas, Houston West: Denver, Phoenix, San Diego, Los Angeles, Bay Area, Sacramento Ryland markets detached and attached single family homes generally targeted to the entry-level, and first-time and second-time move-up buyers, as well as active adults seeking retirement housing. The Company markets through a diverse product line tailored to local styles and preferences in each of its geographic markets. The product line offered in a particular community is determined in conjunction with the land acquisition process, and is dependent upon a number of factors, including consumer preferences, competitive product offerings and the cost of building lots in a community. The Company developed 400 new home designs in 1999 - bringing to more than 1,200 the number of new floor plans the Company has introduced since 1993. The Company generally outsources architectural services to a network of architects to increase creativity and to ensure that its home designs are consistent with local market preferences. 4 4 The Company's operations in each of its homebuilding markets may differ based on a number of market-specific factors. These factors include regional economic conditions and job growth; land availability and the local land development process; consumer tastes; competition from other builders of new homes; and home resale activity. The Company considers each of these factors when entering into new markets or determining the extent of its operations and capital allocation in existing markets. Land Acquisition and Development As of December 31, 1999, the Company operated in 260 communities in 21 markets across the country. The Company's objective is to control a portfolio of building lots sufficient to meet anticipated homebuilding requirements for a period of two to three years. The land acquisition process is controlled through a corporate land approval committee to help ensure that transactions meet the Company's standards for financial performance and risk. In the ordinary course of its homebuilding business, the Company utilizes both direct acquisition and option contracts to control building lots for use in the sale and construction of homes. The Company's direct land acquisition activities include the bulk purchase of finished building lots from land developers and the purchase of undeveloped, entitled land from third parties. The Company generally does not purchase unentitled or unzoned land. Although control of lot inventory through the use of option contracts minimizes the Company's investment, such a strategy is not viable in certain markets due to the absence of third party land developers. In other markets, competitive conditions may prevent the Company from controlling quality building lots solely through the use of option contracts. In such situations, the Company may acquire undeveloped, entitled land and/or finished lots on a bulk basis. The Company utilizes the selective development of land to gain access to prime locations, increase margins and position the Company as a leader in the community through its influence over the community's character, layout and amenities. As of December 31, 1999, the Company had deposits and letters of credit outstanding of $43.2 million in connection with option and land purchase contracts having a total purchase price of $624.5 million. These options and commitments expire at various dates through 2002. Materials Costs Substantially all materials used in the construction of homes are available from a number of sources, but may fluctuate in price due to various factors. To increase purchasing efficiencies, the Company standardizes certain building materials and products in its homes and may acquire such products through national supply contracts. The Company has on occasion experienced shortages of certain materials. If shortages were to occur in the future, such shortages could result in longer construction times and higher cost than those experienced in the past. Production Management and Subcontractors Substantially all on-site construction is performed for a fixed price by independent subcontractors selected on a competitive bid basis. The Company generally requires a minimum of three competitive bids for each phase of construction. Construction activities are supervised by the Company's production supervisors who schedule and coordinate subcontractor work, monitor quality and ensure compliance with local zoning and building codes. The Company has an integrated financial and homebuilding management information system which assists in scheduling production and controlling costs. Through this system, the Company monitors the construction status and job costs incurred for each home for each phase of construction. The system provides for detailed budgeting and allows the Company to monitor and control actual costs versus construction bids for each subcontractor. The Company has, on occasion, experienced shortages of skilled labor in certain markets. If shortages were to occur in the future, such shortages could result in longer construction times and higher costs than those experienced in the past. 5 5 Marketing and Customer Service The Company generally markets it's homes to entry-level, first-time and second-time move-up buyers, and active adults seeking retirement housing, through targeted product offerings in each of the communities in which it operates. The Company's marketing strategy is determined during the land acquisition and feasibility stage of a community's development. Employees and independent real estate brokers sell the Company's homes, generally by showing furnished model homes. The Company reports a new order when a customer's sales contract is approved, and records revenue from a sale at closing. The Company normally starts construction of homes when a customer has selected a lot and floor plan and has received preliminary mortgage approval. However, construction of homes may begin prior to a sale to satisfy market demand for completed homes and to facilitate construction scheduling. The Company provides each homeowner with a comprehensive one-year warranty at the time of sale and a ten-year warranty covering loss related to structural defects. The Company believes its warranty program meets or exceeds terms customarily offered in the homebuilding industry. Financial Services - ------------------ The Ryland Mortgage Company provides mortgage-related products and services for retail customers and conducts investment activities. In recent years, the Company has repositioned the Ryland Mortgage Company to align its operations with the homebuilding divisions by: o leveraging the relationship with the Company's homebuilding segment to increase its capture rate for its homebuyer's loans; o focusing on retail mortgage loan originations and improving the efficiency of these activities through cost reduction initiatives and improved profitability per loan; o divesting non-core assets and lines of business, including the sale of loan servicing rights; and o creating value for Ryland homebuyers through innovative and competitive mortgage programs and related services. Retail Operations Loan Origination In 1999, Ryland Mortgage Company's mortgage origination operations consisted primarily of the Company's homebuilder loans, which were originated in connection with the sale of the Company's homes. During 1999, mortgage operations originated 7,106 loans totaling approximately $1.1 billion of which 88 percent were for purchases of homes built by the Company and 12 percent were for purchases of homes built by others, purchases of existing homes, or for the refinancing of existing mortgage loans. In an effort to increased its focus on the Company's homebuilders loan production, Ryland Mortgage Company made the strategic decision to reduce its third-party originations business by exiting certain markets in the first quarter of 1999. The Company has increased its focus by deploying loan officers directly to the homebuilding communities and by utilizing traffic and prospect information generated by the homebuilding sales and marketing staff. The Ryland Mortgage Company capture rate of Ryland's homebuying customers was 68 percent in 1999. 6 6 The Company arranges various types of mortgage financing including conventional, Federal Housing Administration (FHA), and Veterans Administration (VA) mortgages with various fixed- and adjustable-rate features. Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA), and Government National Mortgage Association (GNMA) approve the Company's mortgage operations. Loan Servicing The repositioning of Ryland Mortgage Company in recent years led to the sale of the majority of its loan servicing portfolio in the first quarter of 1998 and the remaining portfolio during 1999. As a result, the Company no longer services loans. Title and Escrow Services Cornerstone Title Company, a wholly owned subsidiary, provides title services primarily to the Company's homebuyers. As of December 31, 1999, Cornerstone Title had offices in Colorado, Florida, Illinois, Maryland, Ohio, Texas and Virginia. The Company also operates an escrow company in California, which performs escrow and loan closing functions primarily on homes built by the Company. During 1999, Cornerstone Title captured 91percent of the title and escrow business related to settlement of the Company's homes in the markets in which they operate. Investment Operations Ryland Mortgage Company's investment operations hold certain assets, primarily mortgage-backed securities and notes receivable, which were obtained as a result of the exercise of redemption rights on various mortgage-backed bonds previously owned by the Company's limited-purpose subsidiaries. The Company earns a net interest spread on the investment portfolio and may periodically realize gains from the sale of mortgage-backed securities from the portfolio. Real Estate and Economic Conditions - ----------------------------------- The Company is significantly affected by the cyclical nature of the homebuilding industry. The industry is sensitive to fluctuations in economic activity, interest rates and levels of consumer confidence. The effects of these fluctuations differ among the various geographic markets in which the Company operates. Higher interest rates may affect the ability of buyers to qualify for mortgage financing and decrease demand for new homes. As a result, rising interest rates generally will decrease the Company's home sales and mortgage originations. The Company's business is also affected by local economic conditions, such as employment rates and housing demand in the markets in which it builds homes. Some of the markets in which the Company operates have at times experienced a significant decline in housing demand. Inventory risk can be substantial for homebuilders. The market value of land, building lots and housing inventories fluctuates significantly as a result of changing market and economic conditions. In addition, inventory-carrying costs can be significant and can result in losses in poorly performing projects or markets. The Company must continuously seek and make acquisitions of land for expansion into new markets as well as for replacement and expansion of land inventory within its current markets. The Company employs various measures including the land approval process, and continued review by senior management designed to manage inventory risks. The Company can not assure that these measures will avoid or eliminate inventory risk. 7 7 Competition - ----------- The residential housing industry is highly competitive, and the Company competes in each of its markets with a large number of national, regional and local homebuilding companies. Some of these companies are larger than the Company and have greater financial resources. In addition, the increase in the availability of capital and financing in recent years has made it easier for both large and small homebuilders to expand and enter new markets and has increased competition. This competition could make it more difficult to acquire suitable land at acceptable prices, force an increase in selling incentives or lowering sales as dictated by local market conditions. Any of these could have an adverse impact on the Company's financial performance or results of operations. The Company also competes with other housing alternatives including existing homes and rental housing. Principal competitive factors in homebuilding are home price, design, quality, reputation, relationship with developers, accessibility of subcontractors, availability and location of lots and availability of customer financing. Regulatory and Environmental Matters - ------------------------------------ The homebuilding segment is subject to various local, state and federal laws, ordinances, rules and regulations concerning zoning, building design, construction and similar matters. These include local regulations, which impose restrictive zoning and density requirements to limit the number of homes that can be built within the boundaries of a particular area. The Company may also experience periodic delays in homebuilding projects due to building moratoria in any of the areas in which it operates. The Company is also subject to a variety of local, state and federal laws, ordinances, rules and regulations concerning the protection of health and the environment. The Company is also subject to a variety of environmental conditions that can affect its business and its homebuilding projects. The particular environmental laws which apply to any given homebuilding site vary greatly according to the site's location, environmental condition and the present and former uses of the site, and adjoining properties. Environmental laws and conditions may result in delays, may cause the Company to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas. Ryland Mortgage Company is subject to the rules and regulations of HUD, FHA, VA, FNMA, FHLMC and GNMA with respect to originating, processing, selling and servicing mortgage loans. There are other federal and state laws and regulations affecting these activities. These rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts. The Company is required to submit audited financial statements annually, and each regulatory entity has its own financial requirements. The Company's affairs are also subject to examination by these regulatory agencies and state agencies at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to the Equal Credit Opportunity Act, Federal Truth-in-Lending Act and Real Estate Settlement Procedures Act and the associated regulations which prohibit discrimination and require the disclosure of certain information to mortgagors concerning credit and settlement costs. 8 8 Employees - --------- At December 31, 1999, the Company employed 2,130 people. The Company considers its employee relations to be good. No employees are represented by a collective bargaining agreement. Item 2. Properties The Company leases office space for its corporate headquarters in Woodland Hills, California and its temporary headquarters in Columbia, Maryland. In addition, the Company leases office space in the various markets in which it operates. Item 3. Legal Proceedings Contingent liabilities may arise from the obligations incurred in the ordinary course of business, or from the usual obligations of on-site housing producers for the completion of contracts. The Company is party to various legal proceedings generally incidental to its businesses. Based on evaluation of these other matters and discussions with counsel, management believes that liabilities to the Company arising from these other matters will not have a material adverse effect on the financial condition of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1999. 9 9 Executive Officers of the Company The following sets forth certain information regarding the executive officers of the Company: Name Age Position (date elected to position) Prior Business Experience - ------------------------------------------------------------------------------- R.Chad Dreier 52 Chairman of the Board of Directors (1994), President and Chief Executive Officer of the Company (1993). Robert J. Cunnion,III 44 Senior Vice President, Human Resources of the Company (1999), Vice President, Human Resources - West Region (1993-1999). Eric E. Elder 43 Senior Vice President, Marketing of the Company (2000), Vice President, Marketing - West Region (1995-1999) David L. Fristoe 43 Senior Vice President, Controller and Chief Accounting Officer of the Company (2000), Vice President, Controller and Chief Accounting Officer of the Company (1999), Vice President, Financial Operations - West Region (1995-1999). John M. Garrity 53 Senior Vice President of the Company (1995), President of the South Region of Ryland Homes (1996), President of the Southeast Region of Ryland Homes (1994-1996). Timothy J. Geckle 47 Senior Vice President, General Counsel and Secretary of the Company (1997). Vice President, Deputy General Counsel (1995-1996). Corporate Counsel (1991-1995). Gordon A. Milne 48 Senior Vice President and Chief Financial Officer of the Company (2000). Senior Vice President of Finance and Chief Financial Officer of Agrium, Inc. (1996-1999). Division President of Occidental Petroleum Ltd. (1994-1996). Frank J. Scardina 52 Senior Vice President of the Company (1994), President of West Region of Ryland Homes (1996), President of California Region of Ryland Homes (1994-1996). Daniel G. Schreiner 42 Senior Vice President of the Company (1999), President, Ryland Mortgage Company (1998). President, Kaufman and Broad Mortgage Company (1991-1998). Kipling W. Scott 45 Senior Vice President of the Company (1995), President of the North Region of Ryland Homes (1997), President of Midwest Region of Ryland Homes (1994-1997). The board of directors elects all officers. There are no family relationships, arrangements or understandings pursuant to which any of the officers listed were elected. For a description of employment and severance arrangements with certain executive officers of the Company, see page 9 of the Proxy Statement for the 2000 Annual Meeting of Stockholders. 10 10 PART II Item 5. Market for the Company's Common Stock and Related Stockholder Matters The information required by this item is incorporated by reference from the section entitled "Common Stock Prices and Dividends" appearing on page 43 of the Annual Report to Shareholders for the year ended December 31, 1999. Item 6. Selected Financial Data The information required by this item is incorporated by reference from the section entitled "Selected Financial Data" appearing on page 21 of the Annual Report to Shareholders for the year ended December 31, 1999. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required by this item is incorporated by reference from the section entitled "Management's Discussion and Analysis of Results of Operations and Financial Condition" appearing on pages 22 through 26 of the Annual Report to Shareholders for the year ended December 31, 1999. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is incorporated by reference from the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations", Market Risk Summary, appearing on page 25 through 26 of the Annual Report to Shareholders for the year ended December 31, 1999. Item 8. Financial Statements and Supplementary Data The information required by this item is incorporated by reference from the information appearing on pages 27 through 40 and from the section entitled "Quarterly Financial Data and Common Stock Prices and Dividends" appearing on page 43 of the Annual Report to Shareholders for the year ended December 31, 1999. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure During the fiscal years ended December 31, 1999 and 1998, there were no disagreements between the Company and its accountants on any matter of accounting principle or financial statement disclosure. 11 11 PART III Item 10. Directors and Executive Officers of the Registrant Information as to the Company's Directors is incorporated by reference from pages 2 and 4 of the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders. Information as to the Company's executive officers is shown under Part I as a separate item. Item 11. Executive Compensation The information required by this item is incorporated by reference from pages 5 through 10 of the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated by reference from page 3 of the Company's Proxy Statement for its 2000 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions There are no transactions, business relationships or indebtedness required to be reported by the Company pursuant to this Item. 12 12 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements. The following consolidated financial statements of The Ryland Group, Inc., and Subsidiaries, included in the Annual Report to Shareholders for the year ended December 31, 1999, are incorporated by reference in Item 8: Consolidated Statements of Earnings - years ended December 31, 1999, 1998 and 1997. Consolidated Balance Sheets - December 31, 1999 and 1998. Consolidated Statements of Stockholders' Equity - years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Cash Flows - years ended December 31, 1999, 1998 and 1997. Notes to Consolidated Financial Statements. (a) 2. Financial Statement Schedules. (filed herewith) Page No. -------- Schedule II - Valuation and Qualifying Accounts.. ...............16 Schedules not listed above have been omitted because they are either inapplicable or the required information has been given in the financial statements or notes thereto. 13 13 (a) (a) 3. Exhibits The following exhibits are included with this report or incorporated herein by reference as indicated below: Exhibit No. 3.1 Charter of The Ryland Group, Inc., as amended. (Incorporated by reference from Form 10-K for the year ended December 31, 1989) 3.2 By-laws of The Ryland Group, Inc., as amended. (Incorporated by reference from Form 10-K for the year ended December 31, 1996) 4.1 Rights Agreement dated as of October 18, 1996, between The Ryland Group, Inc., and ChaseMellon Shareholder Services, L.L.C. (Incorporated by reference from Form 8-K filed October 24, 1996) 4.2 Articles Supplementary dated as of August 31, 1989. (Incorporated by reference from Form 8-K filed September 12, 1989) 4.3 Senior Subordinated Notes dated as of November 4, 1993. (Incorporated by reference from Registration Statement on Form S-3, Registration No. 33-48071) 4.4 Indenture dated as of June 28, 1996, between The Ryland Group, Inc., and Chemical Bank, as Trustee. (Incorporated by reference from Form 8-K filed July 2, 1996) 4.5 Senior Notes dated as of June 10, 1996. (Incorporated by reference from Registration Statement on Form S-3, Registration No. 333-03791) 4.6 Senior Subordinated Notes dated as of April 13, 1998. (Incorporated by reference from Registration Statement on Form S-3, Registration No. 33-50933 and 333-03791) 10.1 Lease Agreement between Seventy Corporate Center Limited Partnership and The Ryland Group, Inc. dated April 17, 1990. (Incorporated by reference from Form 10-K for the year ended December 31, 1990) 10.2 Lease Agreement between Kilroy Realty Group and The Ryland Group, Inc. dated December 29, 1999. (Filed herewith) 10.3* 1992 Equity Incentive Plan of The Ryland Group, Inc. (Incorporated by reference from Form 10-Q for the quarter ended June 30, 1992) 10.4* 1992 Non-Employee Director Equity Plan of The Ryland Group, Inc., as amended. (Incorporated by reference from Form 10-Q for the quarter ended June 30, 1994) 10.5 Restated Credit Agreement dated as of October 19, 1999, between The Ryland Group, Inc., and certain banks. (Incorporated by reference from Form 10-Q for the quarter ended September 30, 1999) 14 14 (a) 3. Exhibits, continued Exhibit No. 10.6 Restate Credit Agreement dated May 21, 1999, between Ryland Mortgage Company; Associates Mortgage Funding Corporation; BankOne, Texas, N.A.; and certain lenders. (Incorporated by reference from Form 10-Q for the quarter ended June 30, 1999) 10.7* Employment Agreement dates as of April 21, 1999 between R. Chad Dreier and The Ryland Group, Inc. (Incorporated by reference from Form 10-Q for the quarter ended June 30, 1999) 10.8* Senior Executive Severance Agreement, between the executive officers of the Company and The Ryland Group, Inc. (Incorporated by reference from Form 10-K for the year ended December 31, 1996) 10.9* Amendment and Restatement of the Executive and Director Deferred Compensation Plan Effective March 1, 1998. (Filed herewith) 10.10* Non-Employee Directors' Stock Unit Plan between The Ryland Group, Inc. and the Board of Directors, effective January 1, 1998. (Incorporated by reference from Form 10-K for the year ended December 31, 1997) 11 Computation of Per Share Earnings. (Filed herewith) 13 Annual Report to Shareholders for the year ended December 31, 1999. (Filed herewith) 21 Subsidiaries of the Registrant. (Filed herewith) 23 Consent of Ernst and Young LLP, Independent Auditors. (Filed herewith) 24 Power of Attorney. (Filed herewith) 27 Financial Data Schedule. (Filed herewith) * Executive Compensation Plan or Arrangement (b) There were no reports on Form 8-K filed in the fourth quarter of 1999. 15 15 The Ryland Group, Inc., and Subsidiaries SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (dollar amounts in thousands) Balance at Charged to Charged Deductions Balance at Beginning Costs and to Other and End of Description of Period Expenses Accounts Transfers Period (1) Valuation allowance: Homebuilding inventories 1999 $ 6,233 $ 2,952 $ 0 $(5,585) $ 3,600 1998 2,967 4,188 0 (922) 6,233 1997 3,052 580 0 (665) 2,967 Valuation allowance: Investment in and advances to joint ventures 1999 $ 1,000 $ 0 $ 0 $ 0 $ 1,000 1998 0 1,000 0 0 1,000 1997 6,500 0 0 (6,500) 0 (1) Balances as of December 31, 1999, 1998 and 1997, represent valuation allowances for assets to be disposed of. 16 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE RYLAND GROUP, INC. By: /s/ R. Chad Dreier March 24, 2000 ------------------------------------- R. Chad Dreier, Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer: /s/ R. Chad Dreier March 24, 2000 - ---------------------------------- R. Chad Dreier Chief Executive Officer Principal Accounting Officer: /s/ David L. Fristoe March 24, 2000 - ------------------------------------ David L. Fristoe Chief Accounting Officer Majority of the Board of Directors: R. Chad Dreier; James A. Flick, Jr.; Leslie M. Frecon; William L. Jews; William G. Kagler; Robert E. Mellor; Charlotte St. Martin. By: /s/ Timothy J. Geckle March 24, 2000 --------------------- Timothy J. Geckle As Attorney-in-Fact 17 17 Page Of Sequentially Numbered Pages -------------- INDEX OF EXHIBITS 10.2 Lease Agreement between Kilroy Realty Group and The Ryland 19-87 Group, Inc. dated December 29, 1999 10.11 Amendment and Restatement of the Executive and Director Deferred Compensation Plan Effective March 1, 1998 88-109 11 Computation of Per Share Earnings 110 13 Annual Report to Shareholders for the year ended December 31, 1999 111-133 21 Subsidiaries of the Registrant 134 23 Consent of Ernst and Young LLP, Independent Auditors 135 24 Power of Attorney 136 27 Financial Data Schedule 137 18 18

OFFICE BUILDING LEASE BETWEEN KILROY REALTY, L.P., a Delaware limited partnership LANDLORD AND THE RYLAND GROUP, INC., a Maryland corporation TENANT 19 TABLE OF CONTENTS ----------------- 1. BASIC LEASE TERMS..........................................1 2. PREMISES AND COMMON AREAS..................................2 3. TERM.......................................................3 4. POSSESSION.................................................5 5. RENT.......................................................6 6. OPERATING EXPENSES.........................................6 7. DELETED....................................................8 8. USE........................................................8 9. NOTICES....................................................9 10. BROKERS....................................................9 11. SURRENDER; HOLDING OVER....................................9 12. TAXES ON TENANT'S PROPERTY................................10 13. ALTERATIONS...............................................10 14. REPAIRS...................................................12 15. LIENS.....................................................13 16. ENTRY BY LANDLORD.........................................13 17. UTILITIES AND SERVICES....................................14 18. ASSUMPTION OF RISK AND INDEMNIFICATION....................14 19. INSURANCE.................................................15 20. DAMAGE OR DESTRUCTION.....................................17 21. EMINENT DOMAIN............................................18 22. DEFAULTS AND REMEDIES.....................................19 23. LANDLORD'S DEFAULT. .....................................22 24. ASSIGNMENT AND SUBLETTING.................................22 25. SUBORDINATION.............................................24 26. ESTOPPEL CERTIFICATE......................................25 27. INTENTIONALLY OMITTED.....................................25 28. RULES AND REGULATIONS.....................................25 29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS...................................................25 30. DEFINITION OF LANDLORD....................................26 31. WAIVER....................................................26 (i) 20 32. PARKING...................................................26 33. FORCE MAJEURE.............................................27 34. SIGNS.....................................................28 35. LIMITATION ON LIABILITY...................................28 36. FINANCIAL STATEMENTS......................................28 37. QUIET ENJOYMENT...........................................29 38. MISCELLANEOUS.............................................29 39. EXECUTION OF LEASE........................................30 ADDENDUM EXHIBITS: A-I Site Plan A-II Outline of Floor Plan of Premises B Rentable Square Feet and Usable Square Feet C Work Letter Agreement Schedule 1 Description of Base Building Schedule 2 Work Schedule D Notice of Lease Term Dates and Tenant's Percentage E Definition of Operating Expenses F Standards for Utilities and Services G Estoppel Certificate H Rules and Regulations (ii) 21 OFFICE BUILDING LEASE This OFFICE BUILDING LEASE ("Lease") is entered into as of the _______ day of December, 1999 by and between Kilroy Realty, L.P., a Delaware limited partnership ("Landlord"), and The Ryland Group, Inc., a Maryland corporation ("Tenant"). 1. BASIC LEASE TERMS. For purposes of this Lease, the following terms have the following definitions and meanings: (a) Landlord: Kilroy Realty, L.P., a Delaware limited partnership. (b) Landlord's Address (For Notices): 2250 East Imperial Highway, Suite 1200 El Segundo, California 90245 Attention: Chief Legal Officer or such other place as Landlord may from time to time designate by notice to Tenant. (c) Tenant: The Ryland Group, Inc., a Maryland corporation. (d) Tenant's Address (For Notices): Ryland Mortgage, 6300 Canoga Avenue, 14th Floor, Woodland Hills, California 91367, Attention: Bob Cunnion or such other place as Tenant may from time to time designate by notice to Landlord. (e) Development: The parcel(s) of real property located within and consisting of a portion of Calabasas Park Centre, located in the City of Calabasas (the "City"), County of Los Angeles (the "County"), State of California ("State"), as shown on the site plan attached hereto as Exhibit "A-I". (f) Building: The four (4) story westernmost office building located within the Development, which Building contains approximately One Hundred Thousand (100,000) Rentable Square Feet (subject to adjustment as provided in Exhibit "B"), with the street address of 24025 Park Sorrento, Calabasas, California. (g) Premises: Collectively, those certain premises known as Suite 400 consisting of approximately 25,324 Rentable Square Feet and 24,702 Usable Square Feet and Suite 100 consisting of approximately 7,622 Rentable Square Feet and 6,686 Usable Square Feet as generally shown on the floor plans attached hereto as Exhibit "A-II". (h) Tenant's Percentage: Tenant's percentage of the Building on an aggregate Rentable Square Foot basis, initially is thirty-two and 95/100ths percent (32.95%), subject to final determination as provided in Exhibit "B" and Exhibit "D". (i) Original Term: Six (6) years and four (4) months, subject to Tenant's right to extend the Term pursuant to the provisions of Paragraph 3 hereof. (j) (i) Estimated Commencement Date: July 1, 2000 (ii) Estimated Expiration Date: October 31, 2006. (k) Commencement Date: The date on which the Term of this Lease will commence as determined in accordance with the provisions of Exhibit "C" and as stated on Exhibit "D". (l) Initial Monthly Base Rent: Two Dollars and Fifty Cents ($2.50) times the Rentable Square Feet contained within the Premises, subject to adjustment as provided in subparagraph 1(m) below and as otherwise provided in this Lease, including the Addendum hereto. (m) Adjustment to Monthly Base Rent: Intentionally omitted. -1- 22 (n) Operating Expense Allowance: Operating Expense Allowance means Tenant's Percentage of Operating Expenses as described in Paragraph 6 below which Landlord has included in Monthly Base Rent, which, for purposes of this Lease, will be an amount equal to the Operating Expenses incurred for calendar year 2000 (the "Base Year"). (o) Security Deposit: None (p) Tenant Improvements: All tenant improvements installed or to be installed by Landlord or Tenant within the Premises to prepare the Premises for occupancy pursuant to the terms of the Work Letter Agreement attached hereto as Exhibit "C". (q) Tenant Improvement Allowance: Thirty-Five Dollars ($35) per Usable Square Foot of the Premises, to be applied as provided in the Work Letter Agreement attached hereto as Exhibit "C". (r) Permitted Use: General office uses and no other use without the express written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. (s) Parking: Tenant may use a number of parking permits equal to three (3) permits per each one thousand (1,000) Usable Square Feet within the Premises during the Original Term, at no cost to Tenant, subject to the terms and conditions of Paragraph 32 below and the Rules and Regulations regarding parking contained in Exhibit "H". One-third (1/3) of Tenant's parking permits shall be for Tenant's use in the parking space locations as depicted on Exhibit "A-I" attached hereto; all other parking permits shall be unreserved parking permits. (t) Broker(s): CB Richard Ellis, representing Landlord Travers Realty, representing Tenant (u) Guarantor(s): Intentionally omitted. (v) Interest Rate: shall mean the greater of ten percent (10%) per annum or two percent (2%) in excess of the prime lending or reference rate of Wells Fargo Bank N.A. or any successor bank in effect on the twenty-fifth (25th) day of the calendar month immediately prior to the event giving rise to the Interest Rate imposition; provided, however, the Interest Rate will in no event exceed the maximum interest rate permitted to be charged by applicable law. (w) Exhibits: "A" through "H", inclusive, which Exhibits are attached to this Lease and incorporated herein by this reference. As provided in Paragraph 3 below, a completed version of Exhibit "D" will be delivered to Tenant after Landlord delivers possession of the Premises to Tenant. (x) Addendum Paragraphs: 1 through 3, inclusive, which Addendum Paragraphs are attached to this Lease and incorporated herein by this reference. This Paragraph 1 represents a summary of the basic terms and definitions of this Lease. In the event of any inconsistency between the terms contained in this Paragraph 1 and any specific provision of this Lease, the terms of the more specific provision shall prevail. 2. PREMISES AND COMMON AREAS. (a) Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Premises as improved or to be improved with the Tenant Improvements described in the Work Letter Agreement, a copy of which is attached hereto as Exhibit "C". (b) Mutual Covenants. Landlord and Tenant agree that the letting and hiring of the Premises is upon and subject to the terms, covenants and conditions contained in this Lease and each party covenants as a material part of the consideration for this Lease to keep and perform their respective obligations under this Lease. -2- 23 (c) Tenant's Use of Common Areas. During the Term of this Lease, Tenant shall have the nonexclusive right to use in common with Landlord and all persons, firms and corporations conducting business in the Development and their respective customers, guests, licensees, invitees, subtenants, employees and agents (collectively, "Development Occupants"), subject to the terms of this Lease, the Rules and Regulations referenced in Paragraph 28 below and all covenants, conditions and restrictions now or hereafter affecting the Development, the following common areas of the Building and/or the Development (collectively, the "Common Areas"): (i) The Building's common entrances, hallways, lobbies, public restrooms on multi-tenant floors, elevators, stairways and accessways, loading docks, ramps, drives and platforms and any passageways and serviceways thereto, and the common pipes, conduits, wires and appurtenant equipment within the Building which serve the Premises (collectively, "Building Common Areas"); and (ii) The parking facilities of the Development which serve the Building (subject to the provisions of Exhibit "H"), loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, plaza areas, fountains and similar areas and facilities situated within the Development and appurtenant to the Building which are not reserved for the exclusive use of any Development Occupants (collectively, "Development Common Areas"). (d) Landlord's Reservation of Rights. Provided Tenant's use of and access to the Premises and parking to be provided to Tenant under this Lease is not interfered with in an unreasonable manner, Landlord reserves for itself and for all other owner(s) and operator(s) of the Development Common Areas and the balance of the Development, the right from time to time to: (i) install, use, maintain, repair, replace and relocate pipes, ducts, conduits, wires and appurtenant meters and equipment above the ceiling surfaces, below the floor surfaces, within the walls and in the central core areas of the Building; (ii) make changes to the design and layout of the Development, including, without limitation, changes to buildings, driveways, entrances, loading and unloading areas, direction of traffic, landscaped areas and walkways, and, subject to the parking provisions contained in Paragraph 32 and Exhibit "H", parking permits and parking areas; and (iii) use or close temporarily the Building Common Areas, the Development Common Areas and/or other portions of the Development while engaged in making improvements, repairs or alterations to the Building, the Development, or any portion thereof. 3. TERM. (a) Original Term. The term of this Lease ("Original Term") will be for the period designated in subparagraph 1(i), commencing on the Commencement Date, and ending on the last day of the month in which the expiration of such period occurs, including any extensions of the Term pursuant to any provision of this Lease or written agreement of the parties. Notwithstanding the foregoing, if the Commencement Date falls on any day other than the first day of a calendar month then the Term of this Lease will be measured from the first day of the month following the month in which the Commencement Date occurs. Each consecutive twelve (12) month period of the Term of this Lease, commencing on the Commencement Date, will be referred to herein as a "Lease Year". Landlord's Notice of Lease Term Dates and Tenant's Percentage ("Notice"), in the form of Exhibit "D" attached hereto, will set forth the Commencement Date, the date upon which the Term of this Lease shall end, the Rentable Square Feet within the Premises and the Building, and Tenant's Percentage and will be delivered to Tenant after Landlord delivers possession of the Premises to Tenant. The Notice will be binding upon Tenant unless Tenant objects to the Notice in writing within five (5) days of Tenant's receipt of the Notice. (b) Extension. Subject to the terms of this Paragraph 3, Landlord hereby grants to Tenant one (1) option ("Extension Option") to extend the original Term as to the entire Premises only for an additional period of five (5) years ("Option Term"), on the same terms, covenants and conditions as provided for in the Lease for the original Term, except that the economic Lease terms during the Option Term shall be as set forth in this Paragraph 3. (c) Rent for Option Term. Monthly Base Rent at the beginning of the Option Term shall be adjusted to equal the "fair market" determined based on the parameters described in subparagraph 3(e) below; provided, however, in no event shall the Monthly Base Rent be decreased after such adjustment to an amount less than the Monthly Base Rent payable in the month immediately preceding the Option Term. -3- 24 (d) Exercise of Option. The Extension Option must be exercised, if at all, by written notice ("Extension Notice") delivered by Tenant to Landlord no later than the date which is four hundred twenty-five (425) days prior to the expiration of the original Term. (e) Determination of Monthly Base Rent. The "fair market" determination as described in this Paragraph 3 shall mean the annual amount per square foot, projected during the Option Term (including any applicable rent increases during the Option Term), that a willing, comparable, renewal tenant (excluding sublease and assignment transactions), would pay and that a willing, comparable landlord would accept for comparable space in a comparable Class "A" building located in the City of Calabasas or Warner Center (the "Comparison Market Area"). Comparable space shall consist of such space of comparable quality and improvements as are located within the Building, taking into account the age, quality, layout of the Premises, the parking rights available to Tenant and Tenant's Authorized Users, and also taking into account items that professional real estate brokers customarily consider, such as who is paying for taxes and insurance, rental rates, availability, tenant size and other factors typically considered by Landlord or lessors of similar facilities, and shall include consideration given to tenant improvement allowance, free rent or other concessions but only to the extent such concessions are generally available to renewal tenants in the Comparison Market Area. (f) Tenant Review Period and Election to Cancel Exercise of Extension Option. Within thirty (30) days following Tenant's due and timely exercise of the Extension Option as provided herein, Landlord shall provide Tenant with written notice of Landlord's good faith determination of fair market for the Premises for the applicable Option Term determined by taking into account the matters described in subparagraph 3(e) above. Within sixty (60) days ("Negotiation Period") after receipt of Landlord's notice of the fair market determination, Landlord and Tenant shall meet in a good faith effort to agree upon the fair market for the Premises for the Option Term but without any obligation to so agree. If Landlord and Tenant fail to reach agreement on such fair market determination prior to the expiration of the Negotiation Period (the "Outside Agreement Date"), then Tenant, within five (5) days of the expiration of the Negotiation Period, may cancel and nullify the Extension Option by delivering written notice of such election to Landlord. In the event of Tenant's failure to so elect to cancel and nullify the Extension Option within such five (5) day period, Landlord and Tenant shall submit their respective good faith determinations of fair market for the Premises for the relevant period of time to appraisal in accordance with the provisions below. (g) Appointment of Appraisers. Landlord and Tenant shall each appoint one (1) independent, unaffiliated appraiser who is by profession a licensed real estate broker who has been active over the five (5) year period ending on the date of such appointment in the leasing of office space located in the Comparison Market Area. Each such appraiser shall be appointed within fifteen (15) days after the Outside Agreement Date. If the two (2) appraisers so appointed do not within fifteen (15) days of the date of the appointment of the last appointed appraiser agree upon whether Landlord's or Tenant's last submitted (on the Outside Agreement Date) fair market determination, then said appraisers within five (5) days thereafter shall agree upon and appoint a third appraiser who shall be qualified under the same criteria for qualification of the initial two (2) appraisers. (h) Third Appraiser. The third appraiser shall determine whether the parties shall use Landlord's or Tenant's last submitted (on the Outside Agreement Date) fair market determination, and shall notify Landlord and Tenant thereof. The determination of the third appraiser shall be limited solely to the issue of whether Landlord's or Tenant's last submitted (on the Outside Agreement Date) fair market determination is the closest to the actual fair market for such area as solely determined by the third appraiser, taking into account the requirements specified above. The decision of the third appraiser shall be final and binding upon Landlord and Tenant. (i) Failure to Appoint Appraiser. If either Landlord or Tenant fails to appoint an appraiser within the time period specified in subparagraph 3(g) hereinabove, the appraiser appointed by one of them shall, within fifteen (15) days following the date on which the party failing to appoint an appraiser could have last appointed such appraiser, reach a decision based upon the procedures set forth above (i.e., by selecting either Landlord's or Tenant's last submitted [on the Outside Agreement Date] fair market determination) and shall notify Landlord and Tenant thereof, and such appraiser's decision shall be final and binding upon Landlord and Tenant. -4- 25 (j) Failure to Appoint Third Appraiser. If the two (2) appraisers selected by Landlord and Tenant fail to agree upon and timely appoint a third appraiser, both appraisers shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association based upon the procedures set forth above (i.e., by selecting either Landlord's or Tenant's last submitted [on the Outside Agreement Date] fair market determination). (k) Delay In Determination of Fair Market Rent. If the process described in this Paragraph 3 has not resulted in a selection of Landlord's or Tenant's fair market determinations by the commencement of the applicable Option Term, then the average of the fair market determinations estimated by Landlord or Tenant shall be used until a final decision has been reached by the appropriate appraiser, with an appropriate rental credit and other adjustments for any overpayments of Base Rent or other amounts if the appropriate appraiser selects Tenant's estimate of fair market. (l) Cost of Appraisers. The cost of each party's appraiser shall be the responsibility of the party selecting such appraiser, and the cost of the third appraiser (and, if necessary, arbitration) shall be shared by Landlord and Tenant equally. (m) Deleted. (n) Deleted. (o) Effect of Default. Tenant shall have no right to exercise the Extension Option, notwithstanding any provision of the grant of the Extension Option to the contrary, and Tenant's exercise of the Extension Option may be nullified by Landlord and deemed of no further force or effect, if (i) Tenant shall be in default of any monetary obligation or material non-monetary obligation under the terms of this Lease as of Tenant's exercise of the Extension Option in question or at any time after the exercise of such Option and prior to the commencement of the Option Term, or (ii) Landlord has given Tenant two (2) or more notices of default, whether or not such defaults are subsequently cured, during any twelve (12) consecutive month period of the Lease. 4. POSSESSION. (a) Delivery of Possession. Landlord agrees to deliver possession of the Premises to Tenant in accordance with the terms of the Work Letter Agreement attached hereto as Exhibit "C". Notwithstanding the foregoing, Landlord will not be obligated to deliver possession of the Premises to Tenant (but Tenant will be liable for rent if Landlord can otherwise deliver the Premises to Tenant) until Landlord has received from Tenant all of the following: (i) a copy of this Lease fully executed by Tenant and the guaranty of Tenant's obligations under this Lease, if any, executed by the Guarantor(s); (ii) the first installment of Monthly Base Rent; (iii) executed copies of policies of insurance or certificates thereof as required under Paragraph 19 of this Lease; (iv) copies of all governmental permits and authorizations, if any, required in connection with Tenant's operation of its business within the Premises; and (v) if Tenant is a corporation or partnership, such evidence of due formation, valid existence and authority as Landlord may reasonably require, which may include, without limitation, a certificate of good standing, certificate of secretary, articles of incorporation, statement of partnership, or other similar documentation. (b) Condition of Premises. Prior to the Commencement Date and in accordance with the Work Letter Agreement attached hereto as Exhibit "C", Landlord and Tenant will jointly conduct a walk-through inspection of the Premises and will jointly prepare a punch-list ("Punch-List") of items required to be installed by Landlord under the Work Letter Agreement which require finishing or correction. The Punch-List will not include any items of damage to the Premises caused by Tenant's move-in or early entry, if permitted, which damage will be corrected or repaired by Landlord, at Tenant's expense or, at Landlord's election, by Tenant, at Tenant's expense. Other than the items specified in the Punch-List, by taking possession of the Premises, Tenant will be deemed to have accepted the Premises in its condition on the date of delivery of possession and to have acknowledged that the Tenant Improvements have been installed as required by the Work Letter Agreement and that there are no additional items needing work or repair. Landlord will cause all items in the Punch-List to be repaired or corrected within thirty (30) days following the preparation of the Punch-List or as soon as practicable after the preparation of the Punch-List. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, the Development or any portions thereof or with respect to the suitability of same for the conduct of Tenant's business and Tenant further acknowledges that Landlord will have no obligation to construct or complete any additional buildings or improvements within the Development. -5- 26 (c) Representations By Landlord. Landlord hereby represents and warrants as follows: (i) the Building, as of the Commencement Date shall comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date; provided, however, this warranty shall not apply to any Tenant Improvements which Tenant shall cause to be installed within the Premises; and (ii) Landlord has not caused any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises, the Building and/or the Common Areas. In the event Tenant does not provide Landlord with a written notice of a non-compliance with the representations and warranties set forth in this subparagraph 4(c) within six (6) months of the Commencement Date, Landlord's representations and warranties set forth in this subparagraph 4(c) shall be deemed to have no further force or effect. 5. RENT. (a) Monthly Base Rent. Tenant agrees to pay Landlord the Monthly Base Rent for the Premises (subject to adjustment as hereinafter provided) in advance on the first day of each calendar month during the Term without prior notice or demand, except that Tenant agrees to pay the Monthly Base Rent for the first month of the Term directly to Landlord concurrently with Tenant's delivery of the executed Lease to Landlord. If the Term of this Lease commences or ends on a day other than the first day of a calendar month, then the rent for such period will be prorated in the proportion that the number of days this Lease is in effect during such period bears to the number of days in such month. All rent must be paid to Landlord, without any deduction or offset, in lawful money of the United States of America, at the address designated by Landlord or to such other person or at such other place as Landlord may from time to time designate in writing. Monthly Base Rent will be adjusted during the Term of this Lease as provided in subparagraph l(m). (b) Additional Rent. All amounts and charges to be paid by Tenant hereunder, including, without limitation, payments for Operating Expenses, insurance, repairs and parking, will be considered additional rent for purposes of this Lease, and the word "rent" as used in this Lease will include all such additional rent unless the context specifically or clearly implies that only Monthly Base Rent is intended. (c) Late Payments. Late payments of Monthly Base Rent and/or any item of additional rent will be subject to interest and a late charge as provided in subparagraph 22(f) below. 6. OPERATING EXPENSES. (a) Operating Expenses. In addition to Monthly Base Rent, commencing on the first anniversary of the Commencement Date and continuing throughout the Term of this Lease, Tenant agrees to pay Landlord as additional rent in accordance with the terms of this Paragraph 6, Tenant's Percentage of Operating Expenses as defined in Exhibit "E" attached hereto to the extent Tenant's Percentage of Operating Expenses exceeds Tenant's Operating Expense Allowance. (b) Estimate Statement. Prior to the Commencement Date and on or about March 1st of each subsequent calendar year during the Term of this Lease, Landlord will endeavor to deliver to Tenant a statement ("Estimate Statement") wherein Landlord will estimate both the Operating Expenses and Tenant's Percentage of Operating Expenses for the then current calendar year. If the estimate of Tenant's Percentage of Operating Expenses in the Estimate Statement exceeds Tenant's Operating Expense Allowance, Tenant agrees to pay Landlord, as "Additional Rent", one-twelfth (1/12th) of such excess each month thereafter, beginning with the next installment of rent due, until such time as Landlord issues a revised Estimate Statement or the Estimate Statement for the succeeding calendar year; except that, concurrently with the regular monthly rent payment next due following the receipt of each such Estimate Statement, Tenant agrees to pay Landlord an amount equal to one monthly installment of such excess (less any applicable Operating Expenses already paid) multiplied by the number of months from January, in the current calendar year, to the month of such rent payment next due, all months inclusive. If at any time during the Term of this Lease, but not more often than quarterly, Landlord reasonably determines that Tenant's Percentage of Operating Expenses for the current calendar year will be greater than the amount set forth in the then current Estimate Statement, Landlord may issue a revised Estimate Statement and Tenant agrees to pay Landlord, within ten (10) days of receipt of the revised Estimate Statement, the difference between the amount owed by Tenant under such revised Estimate Statement and the amount owed by Tenant under the original Estimate Statement for the portion of the then current calendar year which has expired. Thereafter Tenant agrees to pay Tenant's Percentage of Operating Expenses based on such revised Estimate Statement until Tenant receives the next calendar year's Estimate Statement or a new revised Estimate Statement for the current calendar year. In the event Tenant's Percentage of Operating Expenses for any calendar year is less than Tenant's Operating Expense Allowance, Tenant will not be entitled to a credit against any rent, additional rent or Tenant's Percentage of future Operating Expenses payable hereunder. -6- 27 (c) Actual Statement. By March 1st of each calendar year during the Term of this Lease (commencing March 1 in the calendar year following the base year for Operating Expenses, if applicable), Landlord will also endeavor to deliver to Tenant a statement ("Actual Statement") which states the actual Operating Expenses for the preceding calendar year. If the Actual Statement reveals that Tenant's Percentage of the actual Operating Expenses is more than the total Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Tenant agrees to pay Landlord the difference in a lump sum within ten (10) days of receipt of the Actual Statement. If the Actual Statement reveals that Tenant's Percentage of the actual Operating Expenses is less than the Additional Rent paid by Tenant for Operating Expenses on account of the preceding calendar year, Landlord will credit any overpayment toward the next monthly installment(s) of Tenant's Percentage of the Operating Expenses due under this Lease. (d) Miscellaneous. Any delay or failure by Landlord in delivering any Estimate Statement or Actual Statement pursuant to this Paragraph 6 will not constitute a waiver of its right to require an increase in rent nor will it relieve Tenant of its obligations pursuant to this Paragraph 6, except that Tenant will not be obligated to make any payments based on such Estimate Statement or Actual Statement until ten (10) days after receipt of such Estimate Statement or Actual Statement. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Percentage of the actual Operating Expenses for the year in which this Lease terminates, Tenant agrees to promptly pay any increase due over the estimated expenses paid and, conversely, any overpayment made in the event said expenses decrease shall promptly be rebated by Landlord to Tenant. Such obligation will be a continuing one which will survive the expiration or earlier termination of this Lease. Prior to the expiration or sooner termination of the Lease Term and Landlord's acceptance of Tenant's surrender of the Premises, Landlord will have the right to estimate the actual Operating Expenses for the then current Lease Year and to collect from Tenant prior to Tenant's surrender of the Premises, Tenant's Percentage of any excess of such actual Operating Expenses over the estimated Operating Expenses paid by Tenant in such Lease Year. (e) Tenant's Audit Rights. Notwithstanding anything to the contrary contained in this Lease, if Tenant reasonably disputes any amounts set forth in any Actual Statement described above in this Paragraph 6, Tenant will have the right no later than sixty (60) days following receipt of an Actual Statement to cause Landlord's general ledger of accounts with respect to the immediately preceding calendar year only to be audited by a nationally recognized firm of certified public accountants reasonably approved by Landlord, at no cost or expense to Landlord, by a certified public accountant mutually acceptable to Landlord and Tenant and which has prior experience in the review of financial statements and which shall not have provided primary accounting services to Tenant within the last three (3) years and which shall not be retained by Tenant on a contingency basis; provided, however, Tenant shall not have the right to perform any such audit more than one (1) time for any calendar year during the Lease Term, provided further, if any other tenant(s) shall have already initiated an audit of the Operating Expenses during such calendar year, Landlord shall have the right at its option to limit Tenant's audit to a review of such other audit(s) and any reasonable and specific concerns Tenant may have with any such audit(s) and Tenant shall not be entitled to reopen Landlord's general ledger of accounts regarding Operating Expenses for such calendar year except with respect to such reasonable and specific concerns of Tenant concerning such other audit(s). Any audit conducted by or on behalf of Tenant shall be performed within ninety (90) days and shall be conducted at Landlord's office during Landlord's normal business hours and in the manner so as to minimize interference with Landlord's business operations. Landlord shall have no obligation and Tenant shall have no right to make photocopies of any of Landlord's ledgers, invoices or other items. Tenant's audit shall be limited to an on-site review of Landlord's general ledger of accounts. The amounts payable under this Paragraph 6 by Landlord to Tenant or to Tenant to Landlord, as the case may be, will be appropriately adjusted on the basis of such audit. If such audit discloses an overstatement of Operating Expenses in excess of five percent (5%) for such calendar year, Tenant will receive a credit against Tenant's future Operating Expense obligations for the reasonable costs of such audit; otherwise the cost of such audit including Landlord's costs incurred in complying with such audit shall be borne by Tenant. Tenant agrees to keep, and to cause in its account and employee to keep, all information revealed by any audit of Landlord's books and records strictly confidential and not to disclose any such information or permit any such information to be disclosed to anyone other than Landlord, unless compelled to do so by a court of law. -7- 28 7. DELETED. 8. USE. (a) Tenant's Use of the Premises. The Premises may be used for the use or uses set forth in subparagraph 1(r) only, and Tenant will not use or permit the Premises to be used for any other purpose without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Nothing in this Lease will be deemed to give Tenant any exclusive right to such use in the Building or the Development. (b) Compliance. At Tenant's sole cost and expense, Tenant agrees to procure, maintain and hold available for Landlord's inspection, all governmental licenses and permits required for the proper and lawful conduct of Tenant's business from the Premises, if any. Tenant agrees not to use, alter or occupy the Premises or allow the Premises to be used, altered or occupied in violation of, and Tenant, at its sole cost and expense, agrees to use and occupy the Premises and cause the Premises to be used and occupied in compliance with: (i) any and all laws, statutes, zoning restrictions, ordinances, rules, regulations, orders and rulings now or hereafter in force and any requirements of any insurer, insurance authority or duly constituted public authority having jurisdiction over the Premises, the Building or the Development now or hereafter in force, (ii) the requirements of the Board of Fire Underwriters and any other similar body, (iii) the Certificate of Occupancy issued for the Building. Tenant shall not use or permit the Premises to be used for any purpose which would cause a violation of any recorded covenants, conditions and restrictions and similar regulatory agreements, if any, which affect the use, occupation or alteration of the Premises, the Building and/or the Development. Tenant agrees to comply with the Rules and Regulations referenced in Paragraph 28 below. Tenant agrees not to do or permit anything to be done in or about the Premises which will in any manner obstruct or interfere with the rights of other tenants or occupants of the Development, or injure or unreasonably annoy them, or use or allow the Premises to be used for any unlawful or unreasonably objectionable purpose. Tenant agrees not to cause, maintain or permit any nuisance or waste in, on, under or about the Premises or elsewhere within the Development. Notwithstanding anything contained in this Lease to the contrary, all transferable development rights related in any way to the Development are and will remain vested in Landlord, and Tenant hereby waives any rights thereto. (c) Hazardous Materials. Except for ordinary and general office supplies typically used in the ordinary course of business within office buildings, such as copier toner, liquid paper, glue, ink and common household cleaning materials (some or all of which may constitute "Hazardous Materials" as defined in this Lease), Tenant agrees not to cause or permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises, the Building, the Common Areas or any other portion of the Development by Tenant, its agents, employees, subtenants, assignees, licensees, contractors or invitees (collectively, "Tenant's Parties"), without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Upon the expiration or earlier termination of this Lease, Tenant agrees to promptly remove from the Premises, the Building and the Development, at its sole cost and expense, any and all Hazardous Materials, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises, the Building and/or the Development or any portion thereof by Tenant or any of Tenant's Parties. To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "Landlord Indemnified Parties") from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees and court costs) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises, the Building or any other portion of the Development and which are caused or permitted by Tenant or any of Tenant's Parties. Tenant agrees to promptly notify Landlord of any release of Hazardous Materials at the Premises, the Building or any other portion of the Development which Tenant becomes aware of during the Term of this Lease, whether caused by Tenant or any other persons or entities. In the event of any release of Hazardous Materials caused or permitted by Tenant or any of Tenant's Parties, Landlord shall have the right, but not the obligation, to cause Tenant to immediately take all steps Landlord deems necessary or appropriate to remediate such release and prevent any similar future release to the satisfaction of Landlord and Landlord's mortgagee(s). As used in this Lease, the term "Hazardous Materials" shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter designated under any law, statute, ordinance, rule, regulation, order or ruling of any agency of the State, the United States Government or any local governmental authority, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls ("PCBs"), and freon and other chlorofluorocarbons. The provisions of this subparagraph 8(c) will survive the expiration or earlier termination of this Lease. -8- 29 9. NOTICES. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery (including delivery by overnight courier or an express mailing service) or by mail, if sent by registered or certified mail. Notices to Tenant shall be sufficient if delivered to Tenant at the address designated in subparagraph 1(d) and notices to Landlord shall be sufficient if delivered to Landlord at the address designated in subparagraph 1(b). Either party may specify a different address for notice purposes by written notice to the other, except that the Landlord may in any event use the Premises as Tenant's address for notice purposes. 10. BROKERS. The parties acknowledge that the broker(s) who negotiated this Lease are stated in subparagraph 1(t). Each party represents and warrants to the other, that, to its knowledge, no other broker, agent or finder (a) negotiated or was instrumental in negotiating or consummating this Lease on its behalf, and (b) is or might be entitled to a commission or compensation in connection with this Lease. Landlord and Tenant each agree to promptly indemnify, protect, defend and hold harmless the other from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorneys' fees and court costs) resulting from any breach by the indemnifying party of the foregoing representation, including, without limitation, any claims that may be asserted by any broker, agent or finder undisclosed by the indemnifying party. The foregoing mutual indemnity shall survive the expiration or earlier termination of this Lease. 11. SURRENDER; HOLDING OVER. (a) Surrender. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not constitute a merger, and shall, at the option of Landlord, operate as an assignment to Landlord of any or all subleases or subtenancies. Upon the expiration or earlier termination of this Lease, Tenant agrees to peaceably surrender the Premises to Landlord broom clean and in a state of first-class order, repair and condition, ordinary wear and tear and casualty damage (if this Lease is terminated as a result thereof pursuant to Paragraph 20) excepted, with all of Tenant's personal property and Alterations (as defined in Paragraph 13) removed from the Premises to the extent required under Paragraph 13 and all damage caused by such removal repaired as required by Paragraph 13. Prior to the date Tenant is to actually surrender the Premises to Landlord, Tenant agrees to give Landlord reasonable prior notice of the exact date Tenant will surrender the Premises so that Landlord and Tenant can schedule a walk-through of the Premises to review the condition of the Premises and identify the Alterations and personal property which are to remain upon the Premises and which items Tenant is to remove, as well as any repairs Tenant is to make upon surrender of the Premises. The delivery of keys to any employee of Landlord or to Landlord's agent or any employee thereof alone will not be sufficient to constitute a termination of this Lease or a surrender of the Premises. -9- 30 (b) Holding Over. Tenant will not be permitted to hold over possession of the Premises after the expiration or earlier termination of the Term without the express written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. If Tenant holds over after the expiration or earlier termination of the Term, Landlord may, at its option, treat Tenant as a tenant at sufferance only, and such continued occupancy by Tenant shall be subject to all of the terms, covenants and conditions of this Lease, so far as applicable, except that the Monthly Base Rent for any such holdover period shall be equal to the greater of (i) one hundred twenty-five percent (125%) of the Monthly Base Rent in effect under this Lease immediately prior to such holdover, or (ii) the then currently scheduled rental rate for comparable space in the Building, in either event prorated on a daily basis. Acceptance by Landlord of rent after such expiration or earlier termination will not result in a renewal of this Lease. The foregoing provisions of this Paragraph 11 are in addition to and do not affect Landlord's right of re-entry or any rights of Landlord under this Lease or as otherwise provided by law. If Tenant fails to surrender the Premises upon the expiration of this Lease in accordance with the terms of this Paragraph 11 despite demand to do so by Landlord, Tenant agrees to promptly indemnify, protect, defend and hold Landlord harmless from all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including attorneys' fees and costs), including, without limitation, costs and expenses incurred by Landlord in returning the Premises to the condition in which Tenant was to surrender it and claims made by any succeeding tenant founded on or resulting from Tenant's failure to surrender the Premises. The provisions of this subparagraph 11(b) will survive the expiration or earlier termination of this Lease. 12. TAXES ON TENANT'S PROPERTY. Tenant agrees to pay before delinquency, all taxes and assessments (real and personal) levied against (a) any personal property or trade fixtures placed by Tenant in or about the Premises (including any increase in the assessed value of the Premises based upon the value of any such personal property or trade fixtures); and (b) any Tenant Improvements or Alterations in the Premises (whether installed and/or paid for by Landlord or Tenant) to the extent such items are assessed at a valuation higher than the valuation at which tenant improvements conforming to Landlord's building standard tenant improvements are assessed. If any such taxes or assessments are levied against Landlord or Landlord's property, Landlord may, after written notice to Tenant (and under proper protest if requested by Tenant) pay such taxes and assessments, in which event Tenant agrees to reimburse Landlord all amounts paid by Landlord within ten (10) business days after demand by Landlord; provided, however, Tenant, at its sole cost and expense, will have the right, with Landlord's cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes and assessments so paid under protest. 13. ALTERATIONS. After installation of the initial Tenant Improvements for the Premises pursuant to Exhibit "C", Tenant may, at its sole cost and expense, make alterations, additions, improvements and decorations to the Premises (collectively, "Alterations") subject to and upon the following terms and conditions: (a) Prohibited Alterations. Tenant may not make any Alterations which: (i) affect any area outside the Premises; (ii) affect the Building's structure, equipment, services or systems, or the proper functioning thereof, or Landlord's access thereto; (iii) affect the outside appearance, character or use of the Building or the Building Common Areas; (iv) in the reasonable opinion of Landlord, lessen the value of the Building; or (v) will violate or require a change in any occupancy certificate applicable to the Premises. (b) Landlord's Approval. Before proceeding with any Alterations which are not prohibited in subparagraph 13(a) above, Tenant must first obtain Landlord's written approval of the plans, specifications and working drawings for such Alterations, which approval Landlord will not unreasonably withhold or delay; provided, however, Landlord's prior approval will not be required for any such Alterations which are not prohibited by subparagraph 13(a) above and which cost less than Fifty Thousand Dollars ($50,000.00) in the aggregate in any calendar year as long as (i) Tenant delivers to Landlord notice and a copy of any final plans, specifications and working drawings for any such Alterations at least ten (10) days prior to commencement of the work thereof, and (ii) the other conditions of this Paragraph 13 are satisfied, excluding any bonding requirements, but including, without limitation, conforming to Landlord's rules, regulations and insurance requirements which govern contractors. Landlord's approval of plans, specifications and/or working drawings for Alterations will not create any responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with applicable permits, laws, rules and regulations of governmental agencies or authorities. In approving any Alterations, Landlord reserves the right to require Tenant to provide Landlord with additional reasonable security for the removal of such Alterations by Tenant as may be required by this Lease. Landlord reserves the right to post Notices of Non-Responsibility with respect to any Alterations performed by Tenant. -10- 31 (c) Contractors. Alterations may be made or installed only by contractors and subcontractors which have been approved by Landlord, which approval Landlord will not unreasonably withhold or delay; provided, however, Landlord reserves the right to require that Landlord's contractor for the Building be given the opportunity to bid for any Alteration work. Before proceeding with any Alterations, Tenant agrees to provide Landlord with ten (10) days prior written notice and Tenant's contractors must obtain and maintain, on behalf of Tenant and at Tenant's sole cost and expense: (i) all necessary governmental permits and approvals for the commencement and completion of such Alterations; and (ii) if requested by Landlord, a completion and lien indemnity bond, or other surety, reasonably satisfactory to Landlord for such Alterations. Throughout the performance of any Alterations, Tenant agrees to obtain, or cause its contractors to obtain, workers compensation insurance and general liability insurance in compliance with the provisions of Paragraph 19 of this Lease. (d) Manner of Performance. All Alterations must be performed: (i) in accordance with the approved plans, specifications and working drawings; (ii) in a lien-free and first-class and workmanlike manner; (iii) in compliance with all applicable permits, laws, statutes, ordinances, rules, regulations, orders and rulings now or hereafter in effect and imposed by any governmental agencies and authorities which assert jurisdiction; (iv) in such a manner so as not to interfere with the occupancy of any other tenant in the Building, nor impose any additional expense upon nor delay Landlord in the maintenance and operation of the Building; and (v) at such times, in such manner, and subject to such rules and regulations as Landlord may from time to time reasonably designate. (e) Ownership. The Tenant Improvements, including, without limitation, all affixed sinks, dishwashers, microwave ovens and other fixtures, and all Alterations will become the property of Landlord and will remain upon and be surrendered with the Premises at the end of the Term of this Lease; provided, however, Landlord may, by written notice delivered to Tenant concurrently with Landlord's approval of the final working drawings for any Alterations, identify those Alterations which Landlord will require Tenant to remove at the end of the Term of this Lease. Landlord may also require Tenant to remove Alterations which Landlord did not have the opportunity to approve as provided in this Paragraph 13. If Landlord requires Tenant to remove any Alterations, Tenant, at its sole cost and expense, agrees to remove the identified Alterations on or before the expiration or earlier termination of this Lease and repair any damage to the Premises caused by such removal (or, at Landlord's option, Tenant agrees to pay to Landlord all of Landlord's costs of such removal and repair). (f) Plan Review. Tenant agrees to pay Landlord, as additional rent, the reasonable costs of professional services and costs for general conditions of Landlord's third party consultants if utilized by Landlord (but not Landlord's "in-house" personnel) for review of all plans, specifications and working drawings for any Alterations, within ten (10) business days after Tenant's receipt of invoices either from Landlord or such consultants. In addition, Tenant agrees to pay Landlord, within ten (10) business days after completion of any Alterations, a fee to cover Landlord's costs of supervising and administering the installation of any non-structural Alterations, in the amount of three percent (3%) of the cost of such Alterations, but in no event less than Two Hundred Fifty Dollars ($250.00). (g) Personal Property. All articles of personal property owned by Tenant or installed by Tenant at its expense in the Premises (including Tenant's business and trade fixtures, furniture, movable partitions and equipment [such as telephones, copy machines, computer terminals, refrigerators and facsimile machines]) will be and remain the property of Tenant, and must be removed by Tenant from the Premises, at Tenant's sole cost and expense, on or before the expiration or earlier termination of this Lease. Tenant agrees to repair any damage caused by such removal at its cost on or before the expiration or earlier termination of this Lease. -11- 32 (h) Removal of Alterations. If Tenant fails to remove by the expiration or earlier termination of this Lease all of its personal property, or any Alterations identified by Landlord for removal, Landlord may, at its option, treat such failure as a hold-over pursuant to subparagraph 11(b) above, and/or Landlord may (without liability to Tenant for loss thereof) treat such personal property and/or Alterations as abandoned and, at Tenant's sole cost and expense, and in addition to Landlord's other rights and remedies under this Lease, at law or in equity: (a remove and store such items; and/or (b) upon ten (10) days prior notice to Tenant, sell, discard or otherwise dispose of all or any such items at private or public sale for such price as Landlord may obtain or by other commercially reasonable means. Tenant shall be liable for all costs of disposition of Tenant's abandoned property and Landlord shall have no liability to Tenant with respect to any such abandoned property. Landlord agrees to apply the proceeds of any sale of any such property to any amounts due to Landlord under this Lease from Tenant (including Landlord's attorneys' fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant. 14. REPAIRS. (a) Landlord's Obligations. Landlord agrees to repair and maintain the structural portions of the Building and the plumbing, heating, ventilating, air conditioning, elevator and electrical systems installed or furnished by Landlord, unless such maintenance and repairs are (i) attributable to items installed in Tenant's Premises which are above standard interior improvements (such as, for example, custom lighting, special HVAC and/or electrical panels or systems, kitchen or restroom facilities and appliances constructed or installed within Tenant's Premises) or (ii) caused in part or in whole by the act, neglect or omission of any duty by Tenant, its agents, servants, employees or invitees, in which case Tenant will pay to Landlord, as additional rent, the reasonable cost of such maintenance and repairs. Landlord will not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. Except as provided in Paragraph 20, Tenant will not be entitled to any abatement of rent and Landlord will not have any liability by reason of any injury to or interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances and equipment therein. Tenant waives the right to make repairs at Landlord's expense under any law, statute, ordinance, rule, regulation, order or ruling (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Sections 1941 and 1942 and any successor statutes or laws of a similar nature). (b) Tenant's Obligations. Tenant agrees to keep, maintain and preserve the Premises in first class condition and repair and, when and if needed, at Tenant's sole cost and expense, to make all repairs to the Premises and every part thereof. Any such maintenance and repairs will be performed by Landlord's contractor, or at Landlord's option, by such contractor or contractors as Tenant may choose from an approved list to be submitted by Landlord. Tenant agrees to pay all costs and expenses incurred in such maintenance and repair within seven (7) days after billing by Landlord or such contractor or contractors. Tenant agrees to cause any mechanics' liens or other liens arising as a result of work performed by Tenant or at Tenant's direction to be eliminated as provided in Paragraph 15 below. Except as provided in subparagraph 14(a) above, Landlord has no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof. (c) Tenant's Failure to Repair. If Tenant refuses or neglects to repair and maintain the Premises properly as required hereunder to the reasonable satisfaction of Landlord, Landlord, at any time following thirty (30) days from the date on which Landlord makes a written demand on Tenant to effect such repair and maintenance, may enter upon the Premises and make such repairs and/or maintenance, and upon completion thereof, Tenant agrees to pay to Landlord as additional rent, Landlord's costs for making such repairs plus an amount not to exceed ten percent (10%) of such costs for overhead, within thirty (30) days of receipt from Landlord of a written itemized bill therefor. Any amounts not reimbursed by Tenant within such thirty (30) day period will bear interest at the Interest Rate until paid by Tenant. -12- 33 (d) Landlord Repairs/Default. Notwithstanding anything to the contrary contained in Paragraph 14(a) regarding repairs or Landlord's default, if Tenant provides written notice to Landlord of an event or circumstance relative to the Premises which requires the action of Landlord with respect to repair and/or maintenance, and Landlord fails to provide such action within a reasonable period of time, given the circumstances, after the receipt of such written notice, but in no event earlier than thirty (30) days after receipt of such written notice, unless Landlord is specifically required to act in less than thirty (30) days pursuant to a specific provision of this Lease or because of an emergency by any provision hereof, then Tenant may proceed to take the required action upon delivery of an additional written notice to Landlord specifying Tenant is taking such required action, including the date of such action to be taken, the cost of such action, and the projected completion date, and if such action was required under the terms of this Lease to be taken by Landlord, then Tenant shall be entitled to prompt reimbursement by Landlord of Tenant's reasonable, actual, documented costs and expenses in taking such action plus interest thereon at the Interest Rate. In the event Tenant takes such action, and such work in the Premises will affect the Building's life safety system, heating, ventilating and air conditioning systems and elevator systems, or the structural integrity of the Building, Tenant shall use only those contractors used by Landlord in the Building for work on such systems or other contractors approved by Landlord. Further, if Landlord does not deliver a detailed written objection to Tenant within thirty (30) days after receipt of an invoice by Tenant of its costs of taking action which Tenant claims should have been taken by Landlord, and if such invoice from Tenant sets forth a reasonably particularized breakdown of its costs and expenses in connection with taking such action on behalf of Landlord, then Tenant shall be entitled to deduct from rental payable by Tenant under this Lease, the amount set forth in such invoice. If, however, Landlord delivers to Tenant within thirty (30) days after receipt of Tenant's invoice, a written objection to the payment of such invoice, setting forth with reasonable particularity Landlord's reasons for its claim that such action did not have to be taken by Landlord pursuant to the terms of this Lease, then Tenant shall not be entitled to such deduction from rental, but as Tenant's sole remedy, Tenant may proceed to claim a default by Landlord or, if elected by either Landlord or Tenant, the matter shall proceed to resolution by the selection of an arbitrator to resolve the dispute, which arbitrator shall be selected and qualified pursuant to the rules of the American Arbitration Association, and whose costs shall be paid for by the losing party, unless it is not clear that there is a "losing party," in which event the costs of arbitration shall be shared equally. Judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 15. LIENS. Tenant agrees not to permit any mechanic's, materialmen's or other liens to be filed against all or any part of the Development, the Building or the Premises, nor against Tenant's leasehold interest in the Premises, by reason of or in connection with any repairs, alterations, improvements or other work contracted for or undertaken by Tenant or any other act or omission of Tenant or Tenant's agents, employees, contractors, licensees or invitees. At Landlord's request, Tenant agrees to provide Landlord with enforceable, conditional and final lien releases (or other evidence reasonably requested by Landlord to demonstrate protection from liens) from all persons furnishing labor and/or materials at the Premises. Landlord will have the right at all reasonable times to post on the Premises and record any notices of non-responsibility which it deems necessary for protection from such liens. If any such liens are filed, Tenant will, at its sole cost, promptly cause such liens to be released of record or bonded so that it no longer affects title to the Development, the Building or the Premises. If Tenant fails to cause any such liens to be so released or bonded within ten (10) days after filing thereof, such failure will be deemed a material breach by Tenant under this Lease without the benefit of any additional notice or cure period described in Paragraph 22 below, and Landlord may, without waiving its rights and remedies based on such breach, and without releasing Tenant from any of its obligations, cause such liens to be released by any means it shall deem proper, including payment in satisfaction of the claims giving rise to such liens. Tenant agrees to pay to Landlord within ten (10) days after receipt of invoice from Landlord, any sum paid by Landlord to remove such liens, together with interest at the Interest Rate from the date of such payment by Landlord. 16. ENTRY BY LANDLORD. Landlord and its employees and agents will at all times have the right to enter the Premises to inspect the same, to supply janitorial service and any other service to be provided by Landlord to Tenant hereunder, to show the Premises to prospective purchasers or tenants, to post notices of nonresponsibility, and/or to repair the Premises as permitted or required by this Lease. In exercising such entry rights, Landlord will endeavor to minimize, as reasonably practicable, the interference with Tenant's business, and will provide Tenant with reasonable advance notice of any such entry (except in emergency situations). Landlord may, in order to carry out such purposes, erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed. Landlord will at all times have and retain a key with which to unlock all doors in the Premises, excluding Tenant's vaults and safes. Landlord will have the right to use any and all means which Landlord may reasonably deem proper to open said doors in an emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord by any of said means, or otherwise, will not be construed or deemed to be a forcible or unlawful entry into the Premises, or an eviction of Tenant from the Premises. Landlord will not be liable to Tenant for any damages or losses for any entry by Landlord. -13- 34 17. UTILITIES AND SERVICES. Throughout the Term of the Lease so long as the Premises are occupied, Landlord agrees to furnish or cause to be furnished to the Premises the utilities and services described in the Standards for Utilities and Services attached hereto as Exhibit "F", subject to the conditions and in accordance with the standards set forth therein. Landlord may require Tenant from time to time to provide Landlord with a list of Tenant's employees and/or agents which are authorized by Tenant to subscribe on behalf of Tenant for any additional services which may be provided by Landlord. Any such additional services will be provided to Tenant at Tenant's cost. Landlord will not be liable to Tenant for any failure to furnish any of the foregoing utilities and services if such failure is caused by all or any of the following: (i) accident, breakage or repairs; (ii) strikes, lockouts or other labor disturbance or labor dispute of any character; (iii) governmental regulation, moratorium or other governmental action or inaction; (iv) inability despite the exercise of reasonable diligence to obtain electricity, water or fuel; or (v) any other cause beyond Landlord's reasonable control. In addition, in the event of any stoppage or interruption of services or utilities, Tenant shall not be entitled to any abatement or reduction of rent (except as expressly provided in subparagraphs 20(f) or 21(b) if such failure results from a damage or taking described therein), no eviction of Tenant will result from such failure and Tenant will not be relieved from the performance of any covenant or agreement in this Lease because of such failure. In the event of any failure, stoppage or interruption thereof, Landlord agrees to diligently attempt to resume service promptly. If Tenant requires or utilizes more water or electrical power than is considered reasonable or normal by Landlord, Landlord may at its option require Tenant to pay, as additional rent, the cost, as fairly determined by Landlord, incurred by such extraordinary usage and/or Landlord may install separate meter(s) for the Premises, at Tenant's sole expense, and Tenant agrees thereafter to pay all charges of the utility providing service and Landlord will make an appropriate adjustment to Tenant's Operating Expenses calculation to account for the fact Tenant is directly paying such metered charges, provided Tenant will remain obligated to pay its proportionate share of Operating Expenses subject to such adjustment. Notwithstanding the provisions of this Paragraph 17, if for more than three (3) consecutive business days following written notice to Landlord, there is no elevator service to the Premises, or no HVAC or electricity to the Premises, or such an interruption of other essential utilities and building services, such as fire protection or water, so that any portion of the Premises cannot be used by Tenant, in Tenant's judgment reasonably exercised, then Tenant's rent shall thereafter be abated until the Premises are again usable by Tenant in proportion to the extent to which Tenant's use of the Premises is interfered with; provided, however, that if Landlord is diligently pursuing the repair of such utilities or services and Landlord provides substitute services reasonably suitable for Tenant's purposes, as for example, bringing in portable air-conditioning equipment, then there shall not be any abatement of rent. This provision shall not apply in case of damage to, or destruction of, the Premises, which shall be governed by a separate provision of this Lease. 18. ASSUMPTION OF RISK AND INDEMNIFICATION. (a) Assumption of Risk. Tenant, as a material part of the consideration to Landlord, hereby agrees that neither Landlord nor any Landlord Indemnified Parties (as defined in subparagraph 8(c) above) will be liable to Tenant for, and Tenant expressly assumes the risk of and waives any and all claims it may have against Landlord or any Landlord Indemnified Parties with respect to, (i) any and all damage to property or injury to persons in, upon or about the Premises, the Building or the Development resulting from any act or omission (except for the grossly negligent or intentionally wrongful act or omission) of Landlord, (ii) any such damage caused by other tenants or persons in or about the Building or the Development, or caused by quasi-public work, (iii) any damage to property entrusted to employees of the Building, (iv) any loss of or damage to property by theft or otherwise, or (v) any injury or damage to persons or property resulting from any casualty, explosion, falling plaster or other masonry or glass, steam, gas, electricity, water or rain which may leak from any part of the Building or any other portion of the Development or from the pipes, appliances or plumbing works therein or from the roof, street or subsurface or from any other place, or resulting from dampness. Notwithstanding anything to the contrary contained in this Lease, neither Landlord nor any Landlord Indemnified Parties will be liable for consequential damages arising out of any loss of the use of the Premises or any equipment or facilities therein by Tenant or any Tenant Parties or for interference with light or other incorporeal hereditaments. Tenant agrees to give prompt notice to Landlord in case of fire or accidents in the Premises or the Building, or of defects therein or in the fixtures or equipment. -14- 35 (b) Indemnification. Except to the extent that the Indemnified Claim would be covered by insurance coverage maintained by Landlord and would not cause an increase to applicable premiums charged for Landlord's insurance policy(ies), Tenant will be liable for, and agrees, to the maximum extent permissible under applicable law, to promptly indemnify, protect, defend and hold harmless Landlord and all Landlord Indemnified Parties, from and against, any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs, including attorneys' fees and court costs (collectively, "Indemnified Claims"), arising or resulting from (i) any act or omission of Tenant or any Tenant Parties (as defined in subparagraph 8(c) above); (ii) the use of the Premises and Common Areas and conduct of Tenant's business by Tenant or any Tenant Parties, or any other activity, work or thing done, permitted or suffered by Tenant or any Tenant Parties, in or about the Premises, the Building or elsewhere within the Development; and/or (iii) any default by Tenant of any obligations on Tenant's part to be performed under the terms of this Lease. In case any action or proceeding is brought against Landlord or any Landlord Indemnified Parties by reason of any such Indemnified Claims, Tenant, upon notice from Landlord, agrees to promptly defend the same at Tenant's sole cost and expense by counsel approved in writing by Landlord, which approval Landlord will not unreasonably withhold. (c) Survival; No Release of Insurers. Tenant's indemnification obligations under subparagraph 18(b) will survive the expiration or earlier termination of this Lease. Tenant's covenants, agreements and indemnification obligation in subparagraphs 18(a) and 18(b) above, are not intended to and will not relieve any insurance carrier of its obligations under policies required to be carried by Tenant pursuant to the provisions of this Lease. 19. INSURANCE. (a) Tenant's Insurance. On or before the earlier to occur of (i) the Commencement Date, or (ii) the date Tenant commences any work of any type in the Premises pursuant to this Lease (which may be prior to the Commencement Date), and continuing throughout the entire Term hereof and any other period of occupancy, Tenant agrees to keep in full force and effect, at its sole cost and expense, the following insurance: (i) "All Risks" property insurance including at least the following perils: fire and extended coverage, smoke damage, vandalism, malicious mischief, sprinkler leakage (including earthquake sprinkler leakage). This insurance policy must be upon all property owned by Tenant, for which Tenant is legally liable, or which is installed at Tenant's expense, and which is located in the Building including, without limitation, any Tenant Improvements which satisfy the foregoing qualification and any Alterations, and all furniture, fittings, installations, fixtures and any other personal property of Tenant, in an amount not less than the full replacement cost thereof. If there is a dispute as to full replacement cost, the decision of Landlord or any mortgagee of Landlord will be presumptive. (ii) One (1) year insurance coverage for business interruption and loss of income and extra expense insuring the same perils described in subparagraph 19(a)(i) above, in such amounts as will reimburse Tenant for any direct or indirect loss of earnings attributable to any such perils including prevention of access to the Premises, Tenant's parking areas or the Building as a result of any such perils. (iii) Commercial General Liability Insurance or Comprehensive General Liability Insurance (on an occurrence form) insuring bodily injury, personal injury and property damage including the following divisions and extensions of coverage: Premises and Operations; Owners and Contractors protective; blanket contractual liability (including coverage for Tenant's indemnity obligations under this Lease); products and completed operations; liquor liability (if Tenant serves alcohol on the Premises); and fire and water damage legal liability in an amount sufficient to cover the replacement value of the Premises, including Tenant Improvements, that are rented under the terms of this Lease. Such insurance must have the following minimum limits of liability: bodily injury, personal injury and property damage - $1,000,000 each occurrence, provided that if liability coverage is provided by a Commercial General Liability policy the general aggregate limit shall apply separately and in total to this location only (per location general aggregate), and provided further, such minimum limits of liability may be adjusted from year to year to reflect increases in coverages as recommended by Landlord's insurance carrier as being prudent and commercially reasonable for tenants of first class office buildings comparable to the Building, rounded to the nearest five hundred thousand dollars. -15- 36 (iv) Comprehensive Automobile Liability insuring bodily injury and property damage arising from all owned, non-owned and hired vehicles, if any, with minimum limits of liability of $1,000,000 per accident. (v) Worker's Compensation as required by the laws of the State of California with the following minimum limits of liability: Coverage A - statutory benefits; Coverage B - $1,000,000 per accident and disease. (vi) Any other form or forms of insurance as Tenant or Landlord or any mortgagees of Landlord may reasonably require from time to time in form, in amounts, and for insurance risks against which, a prudent tenant would protect itself, but only to the extent coverage for such risks and amounts are available in the insurance market at commercially acceptable rates. Landlord makes no representation that the limits of liability required to be carried by Tenant under the terms of this Lease are adequate to protect Tenant's interests and Tenant should obtain such additional insurance or increased liability limits as Tenant deems appropriate. (b) Supplemental Tenant Insurance Requirements. (i) All policies must be in a form reasonably satisfactory to Landlord and issued by an insurer admitted to do business in the State of California. (ii) All policies must be issued by insurers with a policyholder rating of "A" and a financial rating of "X" in the most recent version of Best's Key Rating Guide. (iii) All policies must contain a requirement to notify Landlord (and Landlord's property manager and any mortgagees or ground lessors of Landlord who are named as additional insureds, if any) in writing not less than thirty (30) days prior to any material change, reduction in coverage, cancellation or other termination thereof. Tenant agrees to deliver to Landlord, as soon as practicable after placing the required insurance, but in any event within the time frame specified in subparagraph 19(a) above, certificate(s) of insurance and/or if required by Landlord, certified copies of each policy evidencing the existence of such insurance and Tenant's compliance with the provisions of this Paragraph 19. Tenant agrees to cause replacement policies or certificates to be delivered to Landlord not less than thirty (30) days prior to the expiration of any such policy or policies. If any such initial or replacement policies or certificates are not furnished within the time(s) specified herein, Tenant will be deemed to be in material default under this Lease without the benefit of any additional notice or cure period provided in subparagraph 22(a)(ii) below, and Landlord will have the right, but not the obligation, to procure such insurance as Landlord deems necessary to protect Landlord's interests at Tenant's expense. If Landlord obtains any insurance that is the responsibility of Tenant under this Paragraph 19, Landlord agrees to deliver to Tenant a written statement setting forth the cost of any such insurance and showing in reasonable detail the manner in which it has been computed and Tenant agrees to promptly reimburse Landlord for such costs as additional rent. (iv) General Liability and Automobile Liability policies under subparagraphs 19(a)(iii) and 19(a)(iv) must name Landlord and Landlord's property manager (and at Landlord's request, Landlord's mortgagees and ground lessors of which Tenant has been informed in writing) as additional insureds and must also contain a provision that the insurance afforded by such policy is primary insurance and any insurance carried by Landlord and Landlord's property manager or Landlord's mortgagees or ground lessors, if any, will be excess over and non-contributing with Tenant's insurance. (c) Tenant's Use. Tenant will not keep, use, sell or offer for sale in or upon the Premises any article which may be prohibited by any insurance policy periodically in force covering the Building or the Development Common Areas. If Tenant's occupancy or business in, or on, the Premises, whether or not Landlord has consented to the same, results in any increase in premiums for the insurance periodically carried by Landlord with respect to the Building or the Development Common Areas or results in the need for Landlord to maintain special or additional insurance, Tenant agrees to pay Landlord the cost of any such increase in premiums or special or additional coverage as additional rent within ten (10) days after being billed therefor by Landlord. In determining whether increased premiums are a result of Tenant's use of the Premises, a schedule issued by the organization computing the insurance rate on the Building, the Development Common Areas or the Tenant Improvements showing the various components of such rate, will be conclusive evidence of the several items and charges which make up such rate. Tenant agrees to promptly comply with all reasonable requirements of the insurance authority or any present or future insurer relating to the Premises. -16- 37 (d) Cancellation of Landlord's Policies. If any of Landlord's insurance policies are cancelled or cancellation is threatened or the coverage reduced or threatened to be reduced in any way because of the use of the Premises or any part thereof by Tenant or any assignee or subtenant of Tenant or by anyone Tenant permits on the Premises and, if Tenant fails to remedy the condition giving rise to such cancellation, threatened cancellation, reduction of coverage, threatened reduction of coverage, increase in premiums, or threatened increase in premiums, within forty-eight (48) hours after notice thereof, Tenant will be deemed to be in material default of this Lease and Landlord may, at its option, either terminate this Lease or enter upon the Premises and attempt to remedy such condition, and Tenant shall promptly pay Landlord the reasonable costs of such remedy as additional rent. If Landlord is unable, or elects not to remedy such condition, then Landlord will have all of the remedies provided for in this Lease in the event of a default by Tenant. (e) Waiver of Subrogation. Tenant's property insurance shall contain a clause whereby the insurer waives all rights of recovery by way of subrogation against Landlord. Tenant shall also obtain and furnish evidence to Landlord of the waiver by Tenant's worker's compensation insurance carrier of all rights of recovery by way of subrogation against Landlord. 20. DAMAGE OR DESTRUCTION. (a) Partial Destruction. If the Premises or the Building are damaged by fire or other casualty to an extent not exceeding twenty-five percent (25%) of the full replacement cost thereof, and Landlord's contractor reasonably estimates in a writing delivered to Landlord and Tenant that the damage thereto may be repaired, reconstructed or restored to substantially its condition immediately prior to such damage within one hundred eighty (180) days from the date of such casualty, and Landlord will receive insurance proceeds sufficient to cover the costs of such repairs, reconstruction and restoration (including proceeds from Tenant and/or Tenant's insurance which Tenant is required to deliver to Landlord pursuant to subparagraph 20(e) below to cover Tenant's obligation for the costs of repair, reconstruction and restoration of any portion of the Tenant Improvements and any Alterations for which Tenant is responsible under this Lease), then Landlord agrees to commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease will continue in full force and effect. (b) Substantial Destruction. Any damage or destruction to the Premises or the Building which Landlord is not obligated to repair pursuant to subparagraph 20(a) above will be deemed a substantial destruction. In the event of a substantial destruction, Landlord may elect to either (i) repair, reconstruct and restore the portion of the Building or the Premises damaged by such casualty, in which case this Lease will continue in full force and effect, subject to Tenant's termination right contained in subparagraph 20(d) below; or (ii) terminate this Lease effective as of the date which is thirty (30) days after Tenant's receipt of Landlord's election to so terminate. (c) Notice. Under any of the conditions of subparagraphs 20(a) or 20(b) above, Landlord agrees to give written notice to Tenant of its intention to repair or terminate, as permitted in such paragraphs, within the earlier of thirty (30) days after the occurrence of such casualty, or fifteen (15) days after Landlord's receipt of the estimate from Landlord's contractor (the applicable time period to be referred to herein as the "Notice Period"). (d) Tenant's Termination Rights. If Landlord elects to repair, reconstruct and restore pursuant to subparagraph 20(b)(i) hereinabove, and if Landlord's contractor estimates that as a result of such damage, Tenant cannot be given reasonable use of and access to the Premises within two hundred seventy (270) days after the date of such damage, then Tenant may terminate this Lease effective upon delivery of written notice to Landlord within ten (10) days after Landlord delivers notice to Tenant of its election to so repair, reconstruct or restore. -17- 38 (e) Tenant's Costs and Insurance Proceeds. In the event of any damage or destruction of all or any part of the Premises, Tenant agrees to immediately (i) notify Landlord thereof, and (ii) deliver to Landlord all property insurance proceeds received by Tenant with respect to any Tenant Improvements installed by or at the cost of Tenant and any Alterations, but excluding proceeds for Tenant's furniture, fixtures, equipment and other personal property, whether or not this Lease is terminated as permitted in this Paragraph 20, and Tenant hereby assigns to Landlord all rights to receive such insurance proceeds. If, for any reason (including Tenant's failure to obtain insurance for the full replacement cost of any Tenant Improvements installed by or at the cost of Tenant and any Alterations from any and all casualties), Tenant fails to receive insurance proceeds covering the full replacement cost of any Tenant Improvements installed by or at the cost of Tenant and any Alterations which are damaged, Tenant will be deemed to have self-insured the replacement cost of such items, and upon any damage or destruction thereto, Tenant agrees to immediately pay to Landlord the full replacement cost of such items, less any insurance proceeds actually received by Landlord from Landlord's or Tenant's insurance with respect to such items. (f) Abatement of Rent. In the event of any damage, repair, reconstruction and/or restoration described in this Paragraph 20, rent will be abated or reduced, as the case may be, from the date of such casualty, in proportion to the degree to which Tenant's use of the Premises is impaired during such period of repair until such use is restored. Except for abatement of rent as provided hereinabove, Tenant will not be entitled to any compensation or damages for loss of, or interference with, Tenant's business or use or access of all or any part of the Premises or for lost profits or any other consequential damages of any kind or nature, which result from any such damage, repair, reconstruction or restoration. (g) Inability to Complete. Notwithstanding anything to the contrary contained in this Paragraph 20, if Landlord is obligated or elects to repair, reconstruct and/or restore the damaged portion of the Building or the Premises pursuant to subparagraphs 20(a) or 20(b)(i) above, but is delayed from completing such repair, reconstruction and/or restoration beyond the date which is sixty (60) days after the date estimated by Landlord's contractor for completion thereof by reason of any causes (other than delays caused by Tenant, its subtenants, employees, agents or contractors or delays which are beyond the reasonable control of Landlord as described in Paragraph 33 which delays in no event shall exceed a total of ninety (90) days), then either Landlord or Tenant may elect to terminate this Lease upon ten (10) days prior written notice given to the other after the expiration of such sixty (60) day period. (h) Damage Near End of Term. Landlord and Tenant shall each have the right to terminate this Lease if any damage to the Premises occurs during the last twelve (12) months of the Term of this Lease where Landlord's contractor estimates in a writing delivered to Landlord and Tenant that the repair, reconstruction or restoration of such damage cannot be completed within sixty (60) days after the date of such casualty. If either party desires to terminate this Lease under this subparagraph 20(h), it shall provide written notice to the other party of such election within ten (10) days after receipt of Landlord's contractor's repair estimates. (i) Waiver of Termination Right. Landlord and Tenant agree that the foregoing provisions of this Paragraph 20 are to govern their respective rights and obligations in the event of any damage or destruction and supersede and are in lieu of the provisions of any applicable law, statute, ordinance, rule, regulation, order or ruling now or hereafter in force which provide remedies for damage or destruction of leased premises (including, without limitation, to the extent the Premises are located in California, the provisions of California Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 and any successor statute or laws of a similar nature). (j) Termination. Upon any termination of this Lease under any of the provisions of this Paragraph 20, the parties will be released without further obligation to the other from the date possession of the Premises is surrendered to Landlord except for items which have accrued and are unpaid as of the date of termination and matters which are to survive any termination of this Lease as provided in this Lease. 21. EMINENT DOMAIN. (a) Substantial Taking. If the whole of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy of the Premises, as contemplated by this Lease, is taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, either party will have the right to terminate this Lease effective as of the date possession is required to be surrendered to such authority. Further, if more than twenty-five percent (25%) of the parking facilities servicing the Building are taken for public or quasi-public purposes by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, and Landlord does not provide reasonable substitute parking within ninety (90) days of such appropriation, Tenant shall have the right to terminate this Lease effective as of the expiration of such ninety (90) day period. -18- 39 (b) Partial Taking; Abatement of Rent. In the event of a taking of a portion of the Premises which does not substantially interfere with Tenant's use and occupancy of the Premises, then, neither party will have the right to terminate this Lease and Landlord will thereafter proceed to make a functional unit of the remaining portion of the Premises (but only to the extent Landlord receives proceeds therefor from the condemning authority), and rent will be abated with respect to the part of the Premises which Tenant is deprived of on account of such taking. Notwithstanding the immediately preceding sentence to the contrary, if any part of the Building or the Development is taken (whether or not such taking substantially interferes with Tenant's use of the Premises), Landlord may terminate this Lease upon thirty (30) days prior written notice to Tenant if Landlord also terminates the leases of the other tenants of the Building which are leasing comparably sized space for comparable lease terms. (c) Condemnation Award. In connection with any taking of the Premises or the Building, Landlord will be entitled to receive the entire amount of any award which may be made or given in such taking or condemnation, without deduction or apportionment for any estate or interest of Tenant, it being expressly understood and agreed by Tenant that no portion of any such award will be allowed or paid to Tenant for any so-called bonus or excess value of this Lease, and such bonus or excess value will be the sole property of Landlord. Tenant agrees not to assert any claim against Landlord or the taking authority for any compensation because of such taking (including any claim for bonus or excess value of this Lease); provided, however, if any portion of the Premises is taken, Tenant will have the right to recover from the condemning authority (but not from Landlord) any compensation as may be separately awarded or recoverable by Tenant for the taking of Tenant's furniture, fixtures, equipment and other personal property within the Premises, for Tenant's relocation expenses, and for any loss of goodwill or other damage to Tenant's business by reason of such taking. (d) Temporary Taking. In the event of taking of the Premises or any part thereof for temporary use, (i) this Lease will remain unaffected thereby and rent will abate for the duration of the taking in proportion to the extent Tenant's use of the Premises is interfered with, and (ii) Landlord will be entitled to receive such portion or portions of any award made for such use provided that if such taking remains in force at the expiration or earlier termination of this Lease, Tenant will then pay to Landlord a sum equal to the reasonable cost of performing Tenant's obligations under Paragraph 11 with respect to surrender of the Premises and upon such payment Tenant will be excused from such obligations. For purpose of this subparagraph 21(d), a temporary taking shall be defined as a taking for a period of ninety (90) days or less. 22. DEFAULTS AND REMEDIES. (a) Defaults. The occurrence of any one or more of the following events will be deemed a default by Tenant: (i) The failure by Tenant to make any payment of rent or additional rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure continues for a period of ten (10) days after written notice thereof from Landlord to Tenant; provided, however, that any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, the provisions of California Code of Civil Procedure Section 1161 regarding unlawful detainer actions or any successor statute or law of a similar nature). (ii) The failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in subparagraph 22(a)(i) or above, where such failure continues (where no other period of time is expressly provided) for a period of thirty (30) days after written notice thereof from Landlord to Tenant. The provisions of any such notice will be in lieu of, and not in addition to, any notice required under applicable law (including, without limitation, to the extent the Premises are located in California, California Code of Civil Procedure Section 1161 regarding unlawful detainer actions and any successor statute or similar law). If the nature of Tenant's default is such that more than ten (10) days are reasonably required for its cure, then Tenant will not be deemed to be in default if Tenant, with Landlord's concurrence, commences such cure within such ten (10) day period and thereafter diligently prosecutes such cure to completion. -19- 40 (iii) (A) The making by Tenant of any general assignment for the benefit of creditors; (B) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (C) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (D) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within thirty (30) days. (b) Landlord's Remedies; Termination. In the event of any default by Tenant, in addition to any other remedies available to Landlord at law or in equity under applicable law (including, without limitation, to the extent the Premises are located in California, the remedies of Civil Code Section 1951.4 and any successor statute or similar law), Landlord will have the immediate right and option to terminate this Lease and all rights of Tenant hereunder. If Landlord elects to terminate this Lease then, to the extent permitted under applicable law, Landlord may recover from Tenant (i) The worth at the time of award of any unpaid rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rent loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the Term after the time of award exceeds the amount of such rent loss that Tenant proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which, in the ordinary course of things, results therefrom including, but not limited to: attorneys' fees and costs; brokers' commissions; the costs of refurbishment, alterations, renovation and repair of the Premises, and removal (including the repair of any damage caused by such removal) and storage (or disposal) of Tenant's personal property, equipment, fixtures, Alterations, the Tenant Improvements and any other items which Tenant is required under this Lease to remove but does not remove, as well as the unamortized value of any reduced rent (amortized over the Original Term, with interest thereon at the Interest Rate), reduced rent, free parking, reduced rate parking or other costs or economic concessions provided, paid, granted or incurred by Landlord pursuant to this Lease. The unamortized value of such concessions shall be determined by taking the total value of such concessions and multiplying such value by a fraction, the numerator of which is the number of months of the Lease Term not yet elapsed as of the date on which the Lease is terminated, and the denominator of which is the total number of months of the Lease Term. As used in subparagraphs 22(b)(i) and 22(b)(ii) above, the "worth at the time of award" is computed by allowing interest at the Interest Rate. As used in subparagraph 22(b)(iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (c) Landlord's Remedies; Re-Entry Rights. In the event of any default by Tenant, in addition to any other remedies available to Landlord under this Lease, at law or in equity, Landlord will also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere and/or disposed of at the sole cost and expense of and for the account of Tenant in accordance with the provisions of subparagraph 13(h) of this Lease or any other procedures permitted by applicable law. No re-entry or taking possession of the Premises by Landlord pursuant to this subparagraph 22(c) will be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. -20- 41 (d) Landlord's Remedies; Re-Letting. In the event of the vacation or abandonment of the Premises by Tenant or in the event that Landlord elects to re-enter the Premises or takes possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease, Landlord may from time to time, without terminating this Lease, either recover all rent as it becomes due or relet the Premises or any part thereof on terms and conditions as Landlord in its sole and absolute discretion may deem advisable with the right to make alterations and repairs to the Premises in connection with such reletting. If Landlord elects to relet the Premises, then rents received by Landlord from such reletting will be applied: first, to the payment of any indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting; third, to the payment of the cost of any alterations and repairs to the Premises incurred in connection with such reletting; fourth, to the payment of rent due and unpaid hereunder and the residue, if any, will be held by Landlord and applied to payment of future rent as the same may become due and payable hereunder. Should that portion of such rents received from such reletting during any month, which is applied to the payment of rent hereunder, be less than the rent payable during that month by Tenant hereunder, then Tenant agrees to pay such deficiency to Landlord immediately upon demand therefor by Landlord. Such deficiency will be calculated and paid monthly. (e) Landlord's Remedies; Performance for Tenant. All covenants and agreements to be performed by Tenant under any of the terms of this Lease are to be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant fails to pay any sum of money owed to any party other than Landlord, for which it is liable under this Lease, or if Tenant fails to perform any other act on its part to be performed hereunder, and such failure continues for ten (10) days after notice thereof by Landlord, Landlord may, without waiving or releasing Tenant from its obligations, but shall not be obligated to, make any such payment or perform any such other act to be made or performed by Tenant. Tenant agrees to reimburse Landlord upon demand for all sums so paid by Landlord and all necessary incidental costs, together with interest thereon at the Interest Rate, from the date of such payment by Landlord until reimbursed by Tenant. This remedy shall be in addition to any other right or remedy of Landlord set forth in this Paragraph 22. (f) Late Payment. If Tenant fails to pay any installment of rent within seven (7) days of when due or if Tenant fails to make any other payment for which Tenant is obligated under this Lease within seven (7) days of when due, such late amount will accrue interest at the Interest Rate and Tenant agrees to pay Landlord as additional rent such interest on such amount from the date such amount becomes due until such amount is paid. In addition, Tenant agrees to pay to Landlord concurrently with such late payment amount, as additional rent, a late charge equal to three percent (3%) of the amount due to compensate Landlord for the extra costs Landlord will incur as a result of such late payment. Notwithstanding the foregoing, Landlord hereby agrees to waive the late charge applicable to the first instance in which Tenant fails to timely pay any installment of rent or other payment for which Tenant is obligated under this Lease during any twelve (12) month period. The parties agree that (i) it would be impractical and extremely difficult to fix the actual damage Landlord will suffer in the event of Tenant's late payment, (ii) such interest and late charge represents a fair and reasonable estimate of the detriment that Landlord will suffer by reason of late payment by Tenant, and (iii) the payment of interest and late charges are distinct and separate in that the payment of interest is to compensate Landlord for the use of Landlord's money by Tenant, while the payment of late charges is to compensate Landlord for Landlord's processing, administrative and other costs incurred by Landlord as a result of Tenant's delinquent payments. Acceptance of any such interest and late charge will not constitute a waiver of the Tenant's default with respect to the overdue amount, or prevent Landlord from exercising any of the other rights and remedies available to Landlord. If Tenant incurs a late charge more than three (3) times in any period of twelve (12) months during the Lease Term, then, notwithstanding that Tenant cures the late payments for which such late charges are imposed, Landlord will have the right to require Tenant thereafter to pay all installments of Monthly Base Rent quarterly in advance throughout the remainder of the Lease Term. (g) Landlord's Security Interest. Tenant hereby grants to Landlord a lien and security interest on all property of Tenant now or hereafter placed in or upon the Premises including, but not limited to, all fixtures, machinery, equipment, furnishings and other articles of personal property, and all proceeds of the sale or other disposition of such property (collectively, the "Collateral") to secure the payment of all rent to be paid by Tenant pursuant to this Lease. Such lien and security interest shall be in addition to any landlord's lien provided by law. This Lease shall constitute a security agreement under the Commercial Code of the State so that Landlord shall have and may enforce a security interest in the Collateral. Tenant agrees to execute as debtor and deliver such financing statement or statements and any further documents as Landlord may now or hereafter reasonably request to protect such security interest pursuant to such code. Landlord may also at any time file a copy of this Lease as a financing statement. Landlord, as secured party, shall be entitled to all rights and remedies afforded as secured party under such code, which rights and remedies shall be in addition to Landlord's liens and rights provided by law or by the other terms and provisions of this Lease. -21- 42 (h) Rights and Remedies Cumulative. All rights, options and remedies of Landlord contained in this Lease will be construed and held to be cumulative, and no one of them will be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law or in equity, whether or not stated in this Lease. Nothing in this Paragraph 22 will be deemed to limit or otherwise affect Tenant's indemnification of Landlord pursuant to any provision of this Lease. 23. LANDLORD'S DEFAULT. Landlord will not be in default in the performance of any obligation required to be performed by Landlord under this Lease unless Landlord fails to perform such obligation within thirty (30) days after the receipt of written notice from Tenant specifying in detail Landlord's failure to perform; provided however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance, then Landlord will not be deemed in default if it commences such performance within such thirty (30) day period and thereafter diligently pursues the same to completion. Upon any default by Landlord, Tenant may exercise any of its rights provided at law or in equity, subject to the limitations on liability set forth in Paragraph 35 of this Lease. 24. ASSIGNMENT AND SUBLETTING. (a) Restriction on Transfer. Except as expressly provided in this Paragraph 24, Tenant will not, either voluntarily or by operation of law, assign or encumber this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any party other than Tenant (any such assignment, encumbrance, sublease or the like will sometimes be referred to as a "Transfer"), without the prior written consent of Landlord, which consent Landlord will not unreasonably withhold. (b) Corporate and Partnership Transfers. For purposes of this Paragraph 24, if Tenant is a corporation, partnership or other entity, any transfer, assignment, encumbrance or hypothecation of twenty-five percent (25%) or more (individually or in the aggregate) of any stock or other ownership interest in such entity, and/or any transfer, assignment, hypothecation or encumbrance of any controlling ownership or voting interest in such entity, will be deemed a Transfer and will be subject to all of the restrictions and provisions contained in this Paragraph 24. Notwithstanding the foregoing, the immediately preceding sentence will not apply to any transfers of stock of Tenant if Tenant is a publicly-held corporation and such stock is transferred publicly over a recognized security exchange or over-the-counter market. (c) Permitted Controlled Transfers. Notwithstanding the provisions of this Paragraph 24 to the contrary, Tenant may assign this Lease or sublet the Premises or any portion thereof ("Permitted Transfer"), without Landlord's consent and without extending any sublease termination option to Landlord, to any parent, subsidiary or affiliate corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from a merger or consolidation with Tenant, or to any person or entity which acquires all the assets of Tenant's business as a going concern, provided that: (i) at least twenty (20) days prior to such assignment or sublease, Tenant delivers to Landlord the financial statements and other financial and background information of the assignee or sublessee described in subparagraph 24(d) below; (ii) if an assignment, the assignee assumes, in full, the obligations of Tenant under this Lease (or if a sublease, the sublessee of a portion of the Premises or Term assumes, in full, the obligations of Tenant with respect to such portion); (iii) the financial net worth of the assignee or sublessee as of the time of the proposed assignment or sublease equals or exceeds that of Tenant as of the date of execution of this Lease; (iv) Tenant remains fully liable under this Lease; and (v) the use of the Premises under Paragraph 8 remains unchanged. (d) Transfer Notice. If Tenant desires to effect a Transfer, then at least thirty (30) days prior to the date when Tenant desires the Transfer to be effective (the "Transfer Date"), Tenant agrees to give Landlord a notice (the "Transfer Notice"), stating the name, address and business of the proposed assignee, sublessee or other transferee (sometimes referred to hereinafter as "Transferee"), reasonable information (including references) concerning the character, ownership, and financial condition of the proposed Transferee, the Transfer Date, any ownership or commercial relationship between Tenant and the proposed Transferee, and the consideration and all other material terms and conditions of the proposed Transfer, all in such detail as Landlord may reasonably require. If Landlord reasonably requests additional detail, the Transfer Notice will not be deemed to have been received until Landlord receives such additional detail, and Landlord may withhold consent to any Transfer until such information is provided to it. -22- 43 (e) Landlord's Options. Within fifteen (15) days of Landlord's receipt of any Transfer Notice, and any additional information requested by Landlord concerning the proposed Transferee's financial responsibility, Landlord will elect to do one of the following (i) consent to the proposed Transfer; (ii) refuse such consent, which refusal shall be on reasonable grounds including, without limitation, those set forth in subparagraph 24(f) below; or (iii) terminate this Lease in the event of a proposed assignment of this Lease or a subletting as to the entire Premises for substantially all of the remaining Term, and to recapture the Premises for reletting by Landlord. (f) Reasonable Disapproval. Landlord and Tenant hereby acknowledge that Landlord's disapproval of any proposed Transfer pursuant to subparagraph 24(e) will be deemed reasonably withheld if based upon any reasonable factor, including, without limitation, any or all of the following factors: (i) if the Building is less than seventy percent (70%) occupied, if the net effective rent payable by the Transferee (adjusted on a rentable square foot basis) is less than the net effective rent then being quoted by Landlord for new leases in the Building for comparable size space for a comparable period of time; (ii) the proposed Transferee is a governmental entity; (iii) the portion of the Premises to be sublet or assigned is irregular in shape with inadequate means of ingress and egress; (iv) the use of the Premises by the Transferee (A) is not permitted by the use provisions in Paragraph 8 hereof, (B) violates any exclusive use granted by Landlord to another tenant in the Building, or (C) otherwise poses a risk of increased liability to Landlord; (v) the Transfer would likely result in a significant and inappropriate increase in the use of the parking areas or Development Common Areas by the Transferee's employees or visitors, and/or significantly increase the demand upon utilities and services to be provided by Landlord to the Premises; (vi) the Transferee does not have the financial capability to fulfill the obligations imposed by the Transfer and this Lease; (vii) the Transferee is not in Landlord's reasonable opinion consistent with Landlord's desired tenant mix; or (viii) the Transferee poses a business or other economic risk which Landlord deems unacceptable. (g) Additional Conditions. A condition to Landlord's consent to any Transfer of this Lease will be the delivery to Landlord of a true copy of the fully executed instrument of assignment, sublease, transfer or hypothecation, and, in the case of an assignment, the delivery to Landlord of an agreement executed by the Transferee in form and substance reasonably satisfactory to Landlord, whereby the Transferee assumes and agrees to be bound by all of the terms and provisions of this Lease and to perform all of the obligations of Tenant hereunder. As a condition for granting its consent to any assignment or sublease, Landlord may require that the assignee or sublessee remit directly to Landlord on a monthly basis, all monies due to Tenant by said assignee or sublessee. As a condition to Landlord's consent to any sublease, such sublease must provide that it is subject and subordinate to this Lease and to all mortgages; that Landlord may enforce the provisions of the sublease, including collection of rent; that in the event of termination of this Lease for any reason, including without limitation a voluntary surrender by Tenant, or in the event of any reentry or repossession of the Premises by Landlord, Landlord may, at its option, either (i) terminate the sublease, or (ii) take over all of the right, title and interest of Tenant, as sublessor, under such sublease, in which case such sublessee will attorn to Landlord, but that nevertheless Landlord will not (1) be liable for any previous act or omission of Tenant under such sublease, (2) be subject to any defense or offset previously accrued in favor of the sublessee against Tenant, or (3) be bound by any previous modification of any sublease made without Landlord's written consent, or by any previous prepayment by sublessee of more than one month's rent. (h) Excess Rent. If Landlord consents to any assignment of this Lease, Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%) of all sums and other consideration payable to and for the benefit of Tenant by the assignee on account of the assignment, as and when such sums and other consideration are due and payable by the assignee to or for the benefit of Tenant (or, if Landlord so requires, and without any release of Tenant's liability for the same, Tenant agrees to instruct the assignee to pay such sums and other consideration directly to Landlord). If for any sublease, Tenant receives rent or other consideration, either initially or over the term of the sublease, in excess of the rent fairly allocable to the portion of the Premises which is subleased based on square footage, Tenant agrees to pay to Landlord as additional rent fifty percent (50%) of the excess of each such payment of rent or other consideration received by Tenant promptly after its receipt. In calculating excess rent or other consideration which may be payable to Landlord under this paragraph, Tenant will be entitled to deduct commercially reasonable third party brokerage commissions and attorneys' fees and other amounts reasonably and actually expended by Tenant in connection with such assignment or subletting if acceptable written evidence of such expenditures is provided to Landlord. -23- 44 (i) Termination Rights. If Tenant requests Landlord's consent to any assignment of this Lease or a subletting of all the Premises for substantially all of the remaining Term, Landlord will have the right, as provided in subparagraph 24(e), to terminate this Lease effective as of the date Tenant proposes to assign this Lease or sublet the entire Premises. Landlord will exercise such termination right, if at all, by giving written notice to Tenant within thirty (30) days of receipt by Landlord of the financial responsibility information required by this Paragraph 24. Tenant understands and acknowledges that the option, as provided in this Paragraph 24, to terminate this Lease in the event Tenant proposes to sublet the entire Premises for substantially all of the remaining Term or proposes to assign this Lease rather than approve such subletting or assignment is a material inducement for Landlord's agreeing to lease the Premises to Tenant upon the terms and conditions herein set forth. (j) No Release. No Transfer will release Tenant of Tenant's obligations under this Lease or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. Landlord may require that any Transferee remit directly to Landlord on a monthly basis, all monies due Tenant by said Transferee. However, the acceptance of rent by Landlord from any other person will not be deemed to be a waiver by Landlord of any provision hereof. Consent by Landlord to one Transfer will not be deemed consent to any subsequent Transfer. In the event of default by any Transferee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such Transferee or successor. Landlord may consent to subsequent assignments of this Lease or sublettings or amendments or modifications to this Lease with assignees of Tenant, without notifying Tenant, or any successor of Tenant, and without obtaining its or their consent thereto and any such actions will not relieve Tenant of liability under this Lease. (k) Administrative and Attorneys' Fees. If Tenant effects a Transfer or requests the consent of Landlord to any Transfer (whether or not such Transfer is consummated), then, upon demand, Tenant agrees to pay Landlord a non-refundable administrative fee of Two Hundred Fifty Dollars ($250.00), plus any reasonable attorneys' and paralegal fees incurred by Landlord in connection with such Transfer or request for consent (whether attributable to Landlord's in-house attorneys or paralegals or otherwise) not to exceed One Hundred Dollars ($100.00) for each one thousand (1,000) rentable square feet of area contained within the Premises or portion thereof to be assigned or sublet. Acceptance of the Two Hundred Fifty Dollar ($250.00) administrative fee and/or reimbursement of Landlord's attorneys' and paralegal fees will in no event obligate Landlord to consent to any proposed Transfer. 25. SUBORDINATION. At the election of Landlord or any mortgagee or beneficiary with a deed of trust encumbering the Building and/or the Development, or any lessor of a ground or underlying lease with respect to the Building, this Lease will be subject and subordinate at all times to: (i) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Building; and (ii) the lien of any mortgage or deed of trust which may now exist or hereafter be executed for which the Building, the Development or any leases thereof, or Landlord's interest and estate in any of said items, is specified as security; provided, however, as a condition to the subordination of this Lease to any ground lease, mortgage or deed of trust, the applicable ground lessor or mortgagee shall agree that Tenant's right to possession of the Premises will not be disturbed as long as Tenant is not in default under this Lease. Notwithstanding the foregoing, Landlord reserves the right to subordinate any such ground leases or underlying leases or any such liens to this Lease. If any such ground lease or underlying lease terminates for any reason or any such mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, at the election of Landlord's successor in interest, Tenant agrees to attorn to and become the tenant of such successor in which event Tenant's right to possession of the Premises will not be disturbed as long as Tenant is not in default under this Lease. Tenant hereby waives its rights under any law which gives or purports to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event of any such foreclosure proceeding or sale. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form reasonably required by Landlord, any additional documents evidencing the priority or subordination of this Lease and Tenant's attornment agreement with respect to any such ground lease or underlying leases or the lien of any such mortgage or deed of trust. If Tenant fails to sign and return any such documents within ten (10) days of receipt, Tenant will be in default hereunder. -24- 45 26. ESTOPPEL CERTIFICATE. (a) Tenant's Obligations. Within ten (10) days following any written request which Landlord may make from time to time, Tenant agrees to execute and deliver to Landlord a statement, in a form substantially similar to the form of Exhibit "G" attached hereto or as may reasonably be required by Landlord's lender, certifying: (i) the date of commencement of this Lease; (ii) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, and stating the date and nature of such modifications); (iii) the date to which the rent and other sums payable under this Lease have been paid; (iv) that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant's statement; and (v) such other matters reasonably requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph 26 may be relied upon by any mortgagee, beneficiary, purchaser or prospective purchaser of the Building or any interest therein. (b) Tenant's Failure to Deliver. Tenant's failure to deliver such statement within such time will be conclusive upon Tenant (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord's performance, and (iii) that not more than one (1) month's rent has been paid in advance. Without limiting the foregoing, if Tenant fails to deliver any such statement within such ten (10) day period, Landlord may deliver to Tenant an additional request for such statement and Tenant's failure to deliver such statement to Landlord within ten (10) days after delivery of such additional request will constitute a default under this Lease. Tenant agrees to indemnify and protect Landlord from and against any and all claims, damages, losses, liabilities and expenses (including attorneys' fees and costs) attributable to any failure by Tenant to timely deliver any such estoppel certificate to Landlord as required by this Paragraph 26. 27. INTENTIONALLY OMITTED. 28. RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply with the "Rules and Regulations", a copy of which is attached hereto and incorporated herein by this reference as Exhibit "H", and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord. Landlord agrees to use reasonable efforts (but shall not be obligated to institute or threaten to institute any litigation) to cause other tenants of the Building and the Development to comply with the Rules and Regulations; provided, however, that Landlord will not be responsible to Tenant for the violation or non-performance by any other tenant or occupant of the Building or the Development of any of the Rules and Regulations. 29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS. (a) Modifications. If, in connection with Landlord's obtaining or entering into any financing or ground lease for any portion of the Building or the Development, the lender or ground lessor requests modifications to this Lease, Tenant, within ten (10) days after request therefor, agrees to execute an amendment to this Lease incorporating such modifications, provided such modifications are reasonable and do not increase the obligations of Tenant under this Lease or adversely affect the leasehold estate created by this Lease and are otherwise reasonably acceptable to Tenant. (b) Cure Rights. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises or ground lessor of Landlord whose address has been furnished to Tenant, and Tenant agrees to offer such beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the default (including with respect to any such beneficiary or mortgagee, time to obtain possession of the Premises, subject to this Lease and Tenant's rights hereunder, by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure). -25- 46 30. DEFINITION OF LANDLORD. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, means and includes only the owner or owners, at the time in question, of the fee title of the Premises or the lessees under any ground lease, if any. In the event of any transfer, assignment or other conveyance or transfers of any such title (other than a transfer for security purposes only), Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) will be automatically relieved from and after the date of such transfer, assignment or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, so long as the transferee assumes in writing all such covenants and obligations of Landlord arising after the date of such transfer. Landlord and Landlord's transferees and assignees have the absolute right to transfer all or any portion of their respective title and interest in the Development, the Building, the Premises and/or this Lease without the consent of Tenant, and such transfer or subsequent transfer will not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 31. WAIVER. The waiver by either party of any breach of any term, covenant or condition herein contained will not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained, nor will any custom or practice which may develop between the parties in the administration of the terms hereof be deemed a waiver of or in any way affect the right of either party to insist upon performance in strict accordance with said terms. The subsequent acceptance of rent or any other payment hereunder by Landlord will not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. No acceptance by Landlord of a lesser sum than the basic rent and additional rent or other sum then due will be deemed to be other than on account of the earliest installment of such rent or other amount due, nor will any endorsement or statement on any check or any letter accompanying any check be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or other amount or pursue any other remedy provided in this Lease. The consent or approval of Landlord to or of any act by Tenant requiring Landlord's consent or approval will not be deemed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar acts by Tenant. 32. PARKING. (a) Grant of Parking Rights. So long as this Lease is in effect and provided Tenant is not in default hereunder, Landlord grants to Tenant and Tenant's Authorized Users (as defined below) a license to use the number and type of parking permits designated in subparagraph 1(s) subject to the terms and conditions of this Paragraph 32 and the Rules and Regulations regarding parking contained in Exhibit "H" attached hereto. Tenant agrees to submit to Landlord or, at Landlord's election, directly to Landlord's parking operator with a copy to Landlord, written notice in a form reasonably specified by Landlord containing the names, home and office addresses and telephone numbers of those persons who are authorized by Tenant to use Tenant's parking permits on a monthly basis ("Tenant's Authorized Users") and shall use its best efforts to identify each vehicle of Tenant's Authorized Users by make, model and license number. Tenant agrees to deliver such notice prior to the beginning of the Term of this Lease and to periodically update such notice as well as upon specific request by Landlord or Landlord's parking operator to reflect changes to Tenant's Authorized Users or their vehicles. (b) Visitor Parking. So long as this Lease is in effect, Tenant's visitors and guests will be entitled to use those specific parking areas which are designated for short term visitor parking and which are located within the surface parking area(s), if any, and/or within the parking structure(s) which serve the Building. During the Original Term of this Lease, visitor parking will be made available at no charge to Tenant's visitors and guests. Tenant, at its sole cost and expense, may elect to validate such parking for its visitors and guests. All such visitor parking will be on a non-exclusive, in common basis with all other visitors and guests of the Development. -26- 47 (c) Use of Parking Permits. Tenant will not use or allow any of Tenant's Authorized Users to use any parking permits which have been specifically assigned by Landlord to other tenants or occupants or for other uses such as visitor parking or which have been designated by any governmental entity as being restricted to certain uses. Tenant will not be entitled to increase or reduce its parking privileges applicable to the Premises during the Term of the Lease except as follows: If at any time Tenant desires to increase or reduce the number of parking permits allocated to it under the terms of this Lease, Tenant must notify Landlord in writing of such desire and Landlord will have the right, in its sole and absolute discretion, to either (a) approve such requested increase in the number of parking permits allocated to Tenant (with an appropriate increase to the additional rent payable by Tenant for such additional permits based on the then prevailing parking rates), (b) approve such requested decrease in the number of parking permits allocated to Tenant (with an appropriate reduction in the additional rent payable by Tenant for such eliminated parking permits based on the then prevailing parking rates), or (c) disapprove such requested increase or decrease in the number of parking permits allocated to Tenant. Promptly following receipt of Tenant's written request, Landlord will provide Tenant with written notice of its decision including a statement of any adjustments to the additional rent payable by Tenant for parking under the Lease, if applicable. (d) General Provisions. Except as otherwise expressly set forth in subparagraph 1(s), Landlord reserves the right to set and increase monthly fees and/or daily and hourly rates for parking privileges from time to time during the Term of the Lease. Landlord may assign any unreserved and unassigned parking permits and/or make all or any portion of such spaces reserved, if Landlord reasonably determines that it is necessary for orderly and efficient parking or for any other reasonable reason. Failure to pay the rent for any particular parking permits or failure to comply with any terms and conditions of this Lease applicable to parking may be treated by Landlord as a default under this Lease and, in addition to all other remedies available to Landlord under the Lease, at law or in equity, Landlord may elect to recapture such parking permits for the balance of the Term of this Lease if Tenant does not cure such failure within the applicable cure period set forth in Paragraph 22 of this Lease. In such event, Tenant and Tenant's Authorized Users will be deemed visitors for purposes of parking space use and will be entitled to use only those parking areas specifically designated for visitor parking subject to all provisions of this Lease applicable to such visitor parking use. Except in connection with an assignment or sublease expressly permitted under the terms of this Lease, Tenant's parking rights and privileges described herein are personal to Tenant and may not be assigned or transferred, or otherwise conveyed, without Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. In any event, under no circumstances may Tenant's parking rights and privileges be transferred, assigned or otherwise conveyed separate and apart from Tenant's interest in this Lease. (e) Cooperation with Traffic Mitigation Measures. Tenant agrees to use its reasonable, good faith efforts to cooperate in traffic mitigation programs which may be undertaken by Landlord independently, or in cooperation with local municipalities or governmental agencies or other property owners in the vicinity of the Building. Such programs may include, but will not be limited to, carpools, vanpools and other ridesharing programs, public and private transit, flexible work hours, preferential assigned parking programs and programs to coordinate tenants within the Development with existing or proposed traffic mitigation programs. (f) Parking Rules and Regulations. Tenant and Tenant's Authorized Users shall comply with all rules and regulations regarding parking set forth in Exhibit "H" attached hereto and Tenant agrees to cause its employees, subtenants, assignees, contractors, suppliers, customers and invitees to comply with such rules and regulations. Landlord reserves the right from time to time to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems reasonably necessary for the operation of the parking facilities. 33. FORCE MAJEURE. If either Landlord or Tenant is delayed, hindered in or prevented from the performance of any act required under this Lease by reason of strikes, lock-outs, labor troubles, inability to procure standard materials, failure of power, restrictive governmental laws, regulations or orders or governmental action or inaction (including failure, refusal or delay in issuing permits, approvals and/or authorizations which is not the result of the action or inaction of the party claiming such delay), riots, civil unrest or insurrection, war, fire, earthquake, flood or other natural disaster, unusual and unforeseeable delay which results from an interruption of any public utilities (e.g., electricity, gas, water, telephone) or other unusual and unforeseeable delay not within the reasonable control of the party delayed in performing work or doing acts required under the provisions of this Lease, then performance of such act will be excused for the period of the delay and the period for the performance of any such act will be extended for a period equivalent to the period of such delay. The provisions of this Paragraph 33 will not operate to excuse Tenant from prompt payment of rent or any other payments required under the provisions of this Lease. -27- 48 34. SIGNS. Prior to the Commencement Date, Landlord will designate the location on the Premises for one "eyebrow" Tenant identification sign and one additional Tenant identification sign on the monument sign adjacent to the Building. Tenant's rights to such signage shall be subject to all applicable governmental approvals. Tenant agrees to have Landlord install and maintain Tenant's identification sign in such designated location in accordance with this Paragraph 34 at Tenant's sole cost and expense. Tenant has no right to install Tenant identification signs in any other location in, on or about the Premises or the Development and will not display or erect any other signs, displays or other advertising materials that are visible from the exterior of the Building or from within the Building in any interior or exterior common areas. The size, design, color and other physical aspects of any and all permitted sign(s) will be subject to (i) Landlord's written approval prior to installation, which approval may be withheld in Landlord's discretion, (ii) any covenants, conditions or restrictions governing the Premises, and (iii) any applicable municipal or governmental permits and approvals. Tenant will be solely responsible for all costs for installation, maintenance, repair and removal of any Tenant identification sign(s). If Tenant fails to remove Tenant's sign(s) upon termination of this Lease and repair any damage caused by such removal, Landlord may do so at Tenant's sole cost and expense. Tenant agrees to reimburse Landlord for all costs incurred by Landlord to effect any installation, maintenance or removal on Tenant's account, which amount will be deemed additional rent, and may include, without limitation, all sums disbursed, incurred or deposited by Landlord including Landlord's costs, expenses and actual attorneys' fees with interest thereon at the Interest Rate from the date of Landlord's demand until paid by Tenant. At no cost to Tenant, Landlord shall appropriately include the name of Tenant and its principal employees on the Building directory. Any maintenance costs of Building Directory shall constitute an Operating Expense. Any sign rights granted to Tenant under this Lease are personal to Tenant and may not be assigned, transferred or otherwise conveyed to any assignee or subtenant of Tenant without Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. 35. LIMITATION ON LIABILITY. Notwithstanding anything to the contrary contained in this Lease, in consideration of the benefits accruing hereunder, Tenant on behalf of itself and all successors and assigns of Tenant covenants and agrees that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (a) Tenant's recourse against Landlord for monetary damages will be limited to Landlord's interest in the Building, subject to the prior rights of any Mortgagee, including, Landlord's interest in the rents of the Building and any insurance proceeds payable to Landlord; (b) except as may be necessary to secure jurisdiction of the partnership or company, no partner or member of Landlord shall be sued or named as a party in any suit or action and no service of process shall be made against any partner or member of Landlord; (c) no partner or member of Landlord shall be required to answer or otherwise plead to any service of process; (d) no judgment will be taken against any partner or member of Landlord and any judgment taken against any partner or member of Landlord may be vacated and set aside at any time after the fact; (e) no writ of execution will be levied against the assets of any partner or member of Landlord; (f) the obligations under this Lease do not constitute personal obligations of the individual members, partners, directors, officers or shareholders of Landlord, and Tenant shall not seek recourse against the individual members, partners, directors, officers or shareholders of Landlord or any of their personal assets for satisfaction of any liability in respect to this Lease; and (g) these covenants and agreements are enforceable both by Landlord and also by any partner or member of Landlord. 36. FINANCIAL STATEMENTS. Prior to the execution of this Lease by Landlord and at any time during the Term of this Lease upon ten (10) days prior written notice from Landlord, Tenant agrees to provide Landlord with a current financial statement for Tenant and any guarantors of Tenant and financial statements for the two (2) years prior to the current financial statement year for Tenant and any guarantors of Tenant. Such statements are to be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, audited by an independent certified public accountant. -28- 49 37. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon Tenant paying the rent required under this Lease and paying all other charges and performing all of the covenants and provisions on Tenant's part to be observed and performed under this Lease, Tenant may peaceably and quietly have, hold and enjoy the Premises in accordance with this Lease without hindrance or molestation by Landlord or its employees or agents. 38. MISCELLANEOUS. (a) Conflict of Laws. This Lease shall be governed by and construed solely pursuant to the laws of the State of California, without giving effect to choice of law principles thereunder. (b) Successors and Assigns. Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. (c) Professional Fees and Costs. If either Landlord or Tenant should bring suit against the other with respect to this Lease, then all costs and expenses, including without limitation, actual professional fees and costs such as appraisers', accountants' and attorneys' fees and costs, incurred by the party which prevails in such action, whether by final judgment or out of court settlement, shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. As used herein, attorneys' fees and costs shall include, without limitation, attorneys' fees, costs and expenses incurred in connection with any (i) postjudgment motions; (ii) contempt proceedings; (iii) garnishment, levy, and debtor and third party examination; (iv) discovery; and (v) bankruptcy litigation. (d) Terms and Headings. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (e) Time. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. (f) Prior Agreement; Amendments. This Lease constitutes and is intended by the parties to be a final, complete and exclusive statement of their entire agreement with respect to the subject matter of this Lease. This Lease supersedes any and all prior and contemporaneous agreements and understandings of any kind relating to the subject matter of this Lease. There are no other agreements, understandings, representations, warranties, or statements, either oral or in written form, concerning the subject matter of this Lease. No alteration, modification, amendment or interpretation of this Lease shall be binding on the parties unless contained in a writing which is signed by both parties. (g) Separability. The provisions of this Lease shall be considered separable such that if any provision or part of this Lease is ever held to be invalid, void or illegal under any law or ruling, all remaining provisions of this Lease shall remain in full force and effect to the maximum extent permitted by law. (h) Recording. Neither Landlord nor Tenant shall record this Lease nor a short form memorandum thereof without the consent of the other. (i) Counterparts. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. (j) Nondisclosure of Lease Terms. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees, agents and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any newspaper or other publication or any other tenant or apparent prospective tenant of the Building or other portion of the Development, or real estate agent, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease. -29- 50 (k) Non-Discrimination. Tenant acknowledges and agrees that there shall be no discrimination against, or segregation of, any person, group of persons, or entity on the basis of race, color, creed, religion, age, sex, marital status, national origin, or ancestry in the leasing, subleasing, transferring, assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion thereof. 39. EXECUTION OF LEASE. (a) Joint and Several Obligations. If more than one person executes this Lease as Tenant, their execution of this Lease will constitute their covenant and agreement that (i) each of them is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant, and (ii) the term "Tenant" as used in this Lease means and includes each of them jointly and severally. The act of or notice from, or notice or refund to, or the signature of any one or more of them, with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, expiration, termination or modification of this Lease, will be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of them had so acted or so given or received such notice or refund or so signed. (b) Tenant as Corporation or Partnership. If Tenant executes this Lease as a corporation or partnership, then Tenant and the persons executing this Lease on behalf of Tenant represent and warrant that such entity is duly qualified and in good standing to do business in California and that the individuals executing this Lease on Tenant's behalf are duly authorized to execute and deliver this Lease on its behalf, and in the case of a corporation, in accordance with a duly adopted resolution of the board of directors of Tenant, a copy of which is to be delivered to Landlord on execution hereof, if requested by Landlord, and in accordance with the by-laws of Tenant, and, in the case of a partnership, in accordance with the partnership agreement and the most current amendments thereto, if any, copies of which are to be delivered to Landlord on execution hereof, if requested by Landlord, and that this Lease is binding upon Tenant in accordance with its terms. (c) Examination of Lease. Submission of this instrument by Landlord to Tenant for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed by their duly authorized representatives as of the date first above written. TENANT: LANDLORD: THE RYLAND GROUP, INC., KILROY REALTY, L.P., a Maryland corporation a Delaware limited partnership By: KILROY REALTY CORPORATION, By: /s/ Robert J. Cunnion III a Maryland corporation ------------------------- Its: General Partner Print Name: Robert J. Cunnion III --------------------- Print Title: Senior Vice President By: /s/ Jeffrey C. Hawken --------------------- -------------------------------- Print Name: Jeffrey C. Hawken By: /s/ Frank J. Scardina ------------------------ ------------------------- Print Title: Chief Operating Officer Print Name: Frank J. Scardina ----------------------- --------------------- Print Title: Senior Vice President --------------------- By:/s/ C. Hugh Greenup -------------------------------- Print Name: C. Hugh Greenup ------------------------ Print Title: Executive Vice-President ------------------------ -30- 51 ADDENDUM This LEASE ADDENDUM ("Addendum") is attached to, incorporated into and amends and supplements that certain Office Building Lease (the "Lease") entered into as of the _____ day of December, 1999, by and between Kilroy Realty, L.P., a Delaware limited partnership ("Landlord"), and The Ryland Group, Inc., a Maryland corporation ("Tenant"). Landlord and Tenant agree that notwithstanding anything contained in the Lease to the contrary, the Lease as modified by the provisions set forth in this Addendum represents the full negotiated agreement of the parties, and the provisions of this Addendum will be deemed to be a part of the Lease and will supersede any contrary or conflicting provision in the Lease and prevail and control for all purposes. This Addendum, together with the Lease itself, and all other Exhibits, Riders and Addenda attached thereto represents the fully integrated and binding agreement of the parties. All references in the Lease and in this Addendum to "Lease" are to be construed to mean the Lease as amended and supplemented by this Addendum. All terms used in this Addendum, unless specifically defined in this Addendum, have the same meaning as such terms have in the Lease. 1. BUILDING. Prior to the Commencement Date, Landlord shall cause the Building to be constructed pursuant to the specifications attached as Schedule "1" to the Work Letter Agreement attached hereto as Exhibit "C". 2. RIGHT OF FIRST OFFER TO LEASE ADDITIONAL SPACE. (a) Exercise of Right. Provided Tenant is not in default under this Lease at the time Tenant attempts to exercise Tenant's right of First Offer, Tenant shall have a continuing right of first offer to lease ("Tenant's Right of First Offer"), any space in the first (1st) or second (2nd) floors of the Building, to the extent such space is available, or becomes available for lease to third parties after the expiration of any existing lease for such space during the Lease Term, including the expiration of all renewal or extension options, and after the existing tenant or occupant vacates such space ("First Offer Space"). Tenant's Right of First Offer is subject and subordinate to the rights of all other existing tenants of the Building with prior expansion or lease rights relative to any such First Offer Space. (b) Tenant Request. Promptly following written request ("Tenant Request") by Tenant (which may not be given more than twice in any twelve (12) consecutive month period), Landlord will give Tenant written notice of the availability of any First Offer Space and the date the existing tenant or occupant, if any, is expected to vacate such space ("Landlord's Availability Notice"). Within five (5) days following delivery of Landlord's Availability Notice, Tenant will have the right to request from Landlord in writing a written statement setting forth the basic economic terms, including, but not limited to, Landlord's determination of the Monthly Base Rent, tenant improvement allowance, if any, and all other economic terms and conditions (collectively, the "Economic Terms"), upon which Landlord is willing to lease the First Offer Space desired by Tenant, either to Tenant or to a third party. Such Economic Terms will represent Landlord's reasonable determination of the fair market rental rate for such First Offer Space. Such fair market rental rate will mean the annual amount per rentable square foot, projected during the relevant period, that a willing, comparable, non-equity tenant (excluding sublease and assignment transactions) would pay, and a willing, comparable landlord of a comparable Class "A" quality office building located in the Calabasas area would accept, at arm's length (what Landlord is accepting in current transactions for the Building may be considered), for space of comparable size, quality and floor height as the leased area at issue taking into account the age, quality and layout of the existing improvements in the leased area at issue and taking into account items that professional real estate brokers customarily consider, including, but not limited to, rental rates, office space availability, tenant size, tenant improvement allowances, operating expenses and allowance, parking charges, free rent, reduced rent, free parking, reduced parking, and any other lease concessions, if any, then being charged or granted by Landlord or the lessors of such similar office buildings. (c) Within ten (10) business days after receipt of the Economic Terms from Landlord, Tenant must give Landlord written notice pursuant to which Tenant shall elect to either: (i) lease such First Offer Space upon such Economic Terms and the same non-Economic Terms as set forth in the Lease with respect to the Premises; (ii) refuse to lease such First Offer Space, specifying that such refusal is not based upon the Economic Terms, but upon Tenant's lack of need for such First Offer Space, in which event Landlord may at any time thereafter lease such First Offer Space to any party upon any terms Landlord deems appropriate; or (iii) refuse to lease the First Offer Space, specifying that such refusal is based upon the Economic Terms, in which event Tenant will also specify revised Economic Terms upon which Tenant is willing to lease such First Offer Space (provided that Tenant may not specify a different lease term for the First Offer Space). Tenant's failure to timely choose either clause 2(c)(i), clause 2(c)(ii) or clause 2(c)(iii) above will be deemed to be Tenant's choice of clause 2(c)(ii) above. ADDENDUM -1- 52 (d) If Tenant gives Landlord notice pursuant to clause 2(c)(iii) above, Landlord may elect, within five (5) days following receipt of such notice from Tenant, either to: (i) lease such First Offer Space to Tenant upon such revised Economic Terms proposed by Tenant, and the same other non-Economic Terms as set forth in this Lease; or (ii) lease the First Offer Space at any time thereafter to any third party upon terms which are not substantially more favorable to said party than the Economic Terms originally proposed by Landlord. Landlord's failure to timely choose either clause 2(d)(i) or clause 2(d)(ii) above will be deemed to be Landlord's choice of clause 2(d)(ii) above. (e) If Tenant chooses (or is deemed to have chosen) clause 2(c)(ii) above, or if Landlord chooses (or is deemed to have chosen) clause 2(d)(ii) above, Tenant's Right to Lease any First Offer Space will be null and void until Tenant once again validly delivers to Landlord a Tenant Request, in which event, the procedures and sequences set forth above will be followed. If Tenant exercises its Right of First Offer as provided herein, the parties will promptly thereafter execute an amendment to the Lease to include the First Offer Space in the Premises and to document the lease terms thereof. 3. BENEFICIAL OCCUPANCY. Notwithstanding the provisions of the Lease regarding the payment of Monthly Base Rent, Landlord hereby agrees that Tenant shall have the beneficial use of the Premises with a fifty percent (50%) abatement of Monthly Base Rent for a period of one hundred twenty (120) days from the Commencement Date (the "Beneficial Occupancy Period"); provided, however, in the event that Tenant defaults under the terms of the Lease at any time during the Term of the Lease, and such default remains uncured following the expiration of any applicable curative periods under the Lease, all such abated Monthly Base Rent for the Beneficial Occupancy Period shall become immediately due and payable by Tenant to Landlord. IN WITNESS WHEREOF, the parties hereto have executed this Addendum as of the day and year of execution of the Lease. TENANT: LANDLORD: THE RYLAND GROUP, INC., KILROY REALTY, L.P., a Maryland corporation a Delaware limited partnership By: KILROY REALTY CORPORATION, By: /s/ Robert J. Cunnion III a Maryland corporation ------------------------- Its: General Partner Print Name: Robert J. Cunnion III --------------------- Print Title: Senior Vice President By: /s/ Jeffrey C. Hawken --------------------- -------------------------------- Print Name: Jeffrey C. Hawken By: /s/ Frank J. Scardina ------------------------ ------------------------- Print Title: Chief Operating Officer Print Name: Frank J. Scardina ----------------------- --------------------- Print Title: Senior Vice President --------------------- By:/s/ C. Hugh Greenup -------------------------------- Print Name: C. Hugh Greenup ------------------------ Print Title: Executive Vice-President ------------------------ ADDENDUM -2- 53 EXHIBIT "A-1" SITE PLAN [Legend to Calabasas Park Centre Parking here] EXHIBIT "A-1" 54 EXHIBIT "A-1" SITE PLAN [Site Plan here] EXHIBIT "A-1" 55 EXHIBIT "A-II" OUTLINE OF FLOOR PLAN OF PREMISES [Outline of Floor Plan of Premises here] EXHIBIT "A-II" 56 RENTABLE SQUARE FEET AND USABLE SQUARE FEET 1. The term "Rentable Square Feet" as used in the Lease will be deemed to include: (a) with respect to the Premises, the usable area of the Premises determined in accordance with the Method for Measuring Floor Area in Office Buildings, ANSI Z65.1-1996 (the "BOMA Standard"), plus a pro rata portion of the main lobby area on the ground floor and all elevator machine rooms, electrical and telephone equipment rooms and mail delivery facilities and other areas used by all tenants of the Building, if any, plus (i) for single tenancy floors, all the area covered by the elevator lobbies, corridors, special stairways, restrooms, mechanical rooms, electrical rooms and telephone closets on such floors, or (ii) for multiple tenancy floors, a pro-rata portion of all of the area covered by the elevator lobbies, corridors, special stairways, restrooms, mechanical rooms, electrical rooms and telephone closets on such floor; and (b) with respect to the Building, the total rentable area for all floors in the Building computed in accordance with the provisions of subparagraph 1(a) above. In calculating the "Rentable Square Feet" of the Premises or the Building, the area contained within the exterior walls of the Building stairs, fire towers, vertical ducts, elevator shafts, flues, vents, stacks and major pipe shafts will be excluded. 2. The term "Usable Square Feet" as used in Exhibit "C" with respect to the Premises will be deemed to include the usable area of the Premises as determined in accordance with the BOMA Standard. 3. For purposes of establishing Tenant's Percentage, Tenant's Operating Expense Allowance, and Monthly Base Rent as shown in Paragraph 1 of the Lease, the number of Rentable Square Feet of the Premises is deemed to be as set forth in subparagraph 1(g) of the Lease, and the number of Rentable Square Feet of the Building is deemed to be as set forth in subparagraph 1(f) of the Lease. For purposes of establishing the amount of the Tenant Improvement Allowance in Exhibit "C", the number of Usable Square Feet of the Premises is deemed to be as set forth in subparagraph 1(g). Following the completion of the "Tenant Improvement Work" (as defined in the Work Letter Agreement), Landlord shall cause Landlord's architect to determine the actual number of Rentable Square Feet of the Premises, and the Building, and the actual number of Usable Square Feet of the Premises respectively, based upon the criteria set forth in Paragraph 1 and Paragraph 2 above, and thereupon Tenant's Percentage, Monthly Base Rent and the Tenant Improvement Allowance will be adjusted accordingly. EXHIBIT "B" -1- 57 WORK LETTER AGREEMENT [ALLOWANCE] This WORK LETTER AGREEMENT ("Work Letter Agreement") is entered into as of the___ day of ___________, 1999 by and between Kilroy Realty, L.P., a Delaware limited partnership ("Landlord"), and The Ryland Group, Inc., a Maryland corporation ("Tenant"). R E C I T A L S : - - - - - - - - A. Concurrently with the execution of this Work Letter Agreement, Landlord and Tenant have entered into that certain Office Building Lease (the "Lease") covering certain premises (the "Premises") more particularly described in Exhibit "A" attached to the Lease. All terms not defined herein have the same meaning as set forth in the Lease. To the extent applicable, the provisions of the Lease are incorporated herein by this reference. B. In order to induce Tenant to enter into the Lease, Landlord and Tenant hereby agree as follows: A G R E E M E N T : - - - - - - - - - 1. BASE BUILDING; TENANT IMPROVEMENTS. The Base Building shall be completed by Landlord in accordance with the specifications set forth in Schedule "1" attached hereto, on or before the date shown on the Work Schedule attached hereto as Schedule "2", subject to Force Majeure Delays and any Tenant Delays, and in accordance with the Work Schedule described in Paragraph 2. As used in the Lease and this Work Letter Agreement, the term "Tenant Improvements" or "Tenant Improvement Work" means those items of general tenant improvement construction shown on the Final Plans (described in Paragraph 4 below). 2. WORK SCHEDULE. Attached hereto as Schedule "2" is a schedule ("Work Schedule") which will set forth the timetable for the planning and completion of the installation of the Base Building and Tenant Improvements. The Work Schedule will set forth each of the various items of work to be done by Landlord for the completion of the Base Building and shall further provide for the various items to be done or approval to be given by Landlord and Tenant in connection with the completion of the Tenant Improvements. The Work Schedule will become the basis for completing the Base Building and the Tenant Improvements. All plans and drawings required by this Work Letter Agreement and all work performed pursuant thereto are to be prepared and performed in accordance with the Work Schedule. 3. CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following person(s) as Landlord's representative ("Landlord's Representative") to act for Landlord in all matters covered by this Work Letter Agreement: Stephen Stock. Tenant hereby appoints the following person(s) as Tenant's representative ("Tenant's Representative") to act for Tenant in all matters covered by this Work Letter Agreement: Maggie Mandel. All communications with respect to the matters covered by this Work Letter Agreement are to be made to Landlord's Representative or Tenant's Representative, as the case may be, in writing in compliance with the notice provisions of the Lease. Either party may change its representative under this Work Letter Agreement at any time by written notice to the other party in compliance with the notice provisions of the Lease. 4. TENANT IMPROVEMENT PLANS (a) Preparation of Space Plans. In accordance with the Work Schedule, Tenant agrees to meet with Tenant's architect and/or space planner (the "Tenant's Architect") for the purpose of promptly preparing preliminary space plans for the layout of Premises ("Space Plans"). The Space Plans are to be sufficient to convey the architectural design of the Premises and layout of the Tenant Improvements therein and are to be submitted to Landlord in accordance with the Work Schedule for Landlord's approval. If Landlord reasonably disapproves any aspect of the Space Plans, Landlord will advise Tenant in writing of such disapproval and the reasons therefor in accordance with the Work Schedule. Tenant will then submit to Landlord for Landlord's approval, in accordance with the Work Schedule, a redesign of the Space Plans incorporating the revisions reasonably required by Landlord. EXHIBIT "C" -1- 58 (b) Preparation of Final Plans. Based on the approved Space Plans, and in accordance with the Work Schedule, Tenant's Architect will prepare and complete architectural plans, drawings and specifications and complete engineered mechanical, structural and electrical working drawings for all of the Tenant Improvements for the Premises (collectively, the "Final Plans"). The Final Plans will show: (a) the subdivision (including partitions and walls), layout, lighting, finish and decoration work (including carpeting and other floor coverings) for the Premises; (b) all internal and external communications and utility facilities which will require conduiting or other improvements from the Base Building shell work and/or within common areas; and (c) all other specifications for the Tenant Improvements. The Final Plans will be submitted to Landlord for signature to confirm that they are consistent with the Space Plans. If Landlord reasonably disapproves any aspect of the Final Plans based on any inconsistency with the Space Plans, Landlord agrees to advise Tenant in writing of such disapproval and the reasons therefor within the time frame set forth in the Work Schedule. In accordance with the Work Schedule, Tenant will then cause Tenant's Architect to redesign the Final Plans incorporating the revisions reasonably requested by Landlord so as to make the Final Plans consistent with the Space Plans. (c) Requirements of Tenant's Final Plans. Tenant's Final Plans will include locations and complete dimensions, and the Tenant Improvements, as shown on the Final Plans, will: (i) be compatible with the Base Building and with the design, construction and equipment of the Building; (ii) if not comprised of the Landlord's Building standards set forth those certain Outline Specifications for Calabasas Park Centre dated January 29, 1999 (the "Standards"), then compatible with and of at least equal quality as the Standards and approved by Landlord; (iii) comply with all applicable laws, ordinances, rules and regulations of all governmental authorities having jurisdiction, and all applicable insurance regulations; (iv) not require Building service beyond the level normally provided to other tenants in the Building and will not overload the Building floors; and (v) be of a nature and quality consistent with the overall objectives of Landlord for the Building, as determined by Landlord in its reasonable but subjective discretion. (d) Submittal of Final Plans. Once approved by Landlord and Tenant, Tenant's Architect will submit the Final Plans to the appropriate governmental agencies for plan checking and the issuance of a building permit. Tenant's architect, with Tenant's cooperation, will make any changes to the Final Plans which are requested by the applicable governmental authorities to obtain the building permit. After approval of the Final Plans no further changes may be made without the prior written approval of both Landlord and Tenant. Tenant shall pay any excess costs resulting from the design and/or construction of such changes. (e) Changes to Shell of Building. If the Final Plans or any amendment thereof or supplement thereto shall require changes in the Base Building, the increased cost of the Base Building work caused by such changes will be paid for by Tenant or charged against the "Allowance" described in Paragraph 5 below. (f) Work Cost Estimate and Statement. Prior to the commencement of construction of any of the Tenant Improvements shown on the Final Plans, Tenant will submit to Landlord a written estimate of the cost to complete the Tenant Improvement Work, which written estimate will be based on the Final Plans taking into account any modifications which may be required to reflect changes in the Final Plans required by the City or County in which the Premises are located and based on the lowest bid submitted by reputable tenant improvement contractors selected by Tenant and reasonably approved by Landlord (the "Work Cost Estimate"). Submission and approval of the Work Cost Estimate will proceed in accordance with the Work Schedule. Upon Landlord's approval of the Work Cost Estimate (such approved Work Cost Estimate to be hereinafter known as the "Work Cost Statement"), Tenant will have the right to purchase materials and to commence the construction of the items included in the Work Cost Statement pursuant to Paragraph 6 hereof. If the total costs reflected in the Work Cost Statement exceed the Allowance described in Paragraph 5 below, Tenant agrees to pay such excess to Tenant's Contractor (defined below). The contractor selected by Landlord and Tenant through the competitive bidding process is referred to herein as "Tenant's Contractor". Tenant's written construction agreement with Tenant's Contractor shall be subject to Landlord's prior review and approval. EXHIBIT "C" -2- 59 5. PAYMENT FOR THE TENANT IMPROVEMENTS (a) Allowance. Landlord hereby grants to Tenant a tenant improvement allowance of Thirty-Five Dollars ($35) per Usable Square Foot of the Premises (the "Allowance"). The Allowance shall be paid to Tenant in accordance with Paragraph 12 below and the Allowance is to be used only for: (i) Payment of the cost of preparing the Space Plans and the Final Plans, including mechanical, electrical, plumbing and structural drawings and of all other aspects necessary to complete the Final Plans. (ii) The payment of plan check, permit and license fees relating to construction of the Tenant Improvements. (iii)Construction of the Tenant Improvements, including, without limitation, the following: (aa) Installation within the Premises of all partitioning, doors, floor coverings, ceilings, wall coverings and painting, millwork and similar items; (bb) All electrical wiring, lighting fixtures, outlets and switches, and other electrical work necessary for the Premises; (cc) The furnishing and installation of all duct work, terminal boxes, diffusers and accessories necessary for the heating, ventilation and air conditioning systems within the Premises, including the cost of meter and key control for after-hour air conditioning; (dd) Any additional improvements to the Premises required for Tenant's use of the Premises including, but not limited to, odor control, special heating, ventilation and air conditioning, noise or vibration control or other special systems or improvements; (ee) All fire and life safety control systems such as fire walls, sprinklers, halon, fire alarms, including piping, wiring and accessories, necessary for the Premises; (ff) All plumbing, fixtures, pipes and accessories necessary for the Premises; (gg) Testing and inspection costs; and (hh) Fees for Landlord's supervising of the completion of the Tenant Improvement Work in the amount of one and one-half (1 1/2%) of the Allowance, and the cost and fees of the Tenant's Contractor including, but not limited to, fees and costs attributable to general conditions. Tenant may secure the representation of third party professionals (whose fees shall be deducted from the Allowance) to assist with project planning, construction management, coordination of third-party professionals and design. Parking, utilities and other building services shall not be charged during Tenant's construction of the Tenant Improvements or during the Beneficial Occupancy Period (as defined in Paragraph 7 of the Addendum to the Lease). EXHIBIT "C" -3- 60 (b) Excess Costs. The cost of each item referenced in Paragraph 5(a) above shall be charged against the Allowance. If the Work Cost exceeds the Allowance, Tenant agrees to timely pay to Tenant's Contractor such excess. In no event will the Allowance be used to pay for Tenant's furniture, artifacts, equipment, telephone systems or any other item of personal property which is not affixed to the Premises. (c) Changes. If, after the Final Plans have been prepared and the Work Cost Statement has been established, Tenant requires any changes or substitutions to the Final Plans, any additional costs related thereto including fees for Tenant's Contractor are to be paid by Tenant to Tenant's Contractor prior to the commencement of construction of the changed or substituted Tenant Improvements. Any changes to the Final Plans will be subject to the review and approval of Landlord and Tenant in the manner set forth in Paragraph 4 above and will, if necessary, require the Work Cost Statement to be revised and agreed upon between Landlord and Tenant in the manner set forth in subparagraph 4(f) above. Landlord will have the right to decline Tenant's request for a change to the Final Plans if such changes are inconsistent with the provisions of Paragraph 4 above, or if the change would unreasonably delay construction of the Tenant Improvements and the Commencement Date of the Lease. Landlord hereby agrees to respond to Tenant's request for changes or substitutions to the Final Plans within five (5) business days of Tenant's written request therefor. (d) Governmental Cost Increases. If increases in the cost of the Tenant Improvements as set forth in the Work Cost Statement are due to requirements of any governmental agency, Tenant agrees to pay the amount of such increase; provided, however, that Landlord will first apply toward any such increase any remaining balance of the Allowance. (e) Unused Allowance Amounts. Any unused portion of the Allowance upon completion of the Tenant Improvements will not be refunded to Tenant or be available to Tenant as a credit against any obligations of Tenant under the Lease unless Tenant has paid for excess costs as described in subparagraphs 5(b), 5(c) or 5(d), in which case the unused Allowance may be applied toward such excess cost amounts and paid to Tenant. (f) Additional Payment By Landlord. In addition to the "Allowance" Landlord shall reimburse Tenant for reasonable out-of-pocket costs and expenses incurred by Tenant directly in connection with the preparation of the Space Plans, including but not limited to, any preliminary space plans for the Premises Tenant may have caused to be professionally prepared prior to execution of the Lease; provided, however, Tenant must deliver to Landlord written evidence of such costs and expenses no later than the Commencement Date and provided further that, in no event shall Landlord's obligation to reimburse Tenant exceed Ten One Hundredths Dollars ($0.10) per Usable Square Foot of the Premises. 6. CONSTRUCTION OF TENANT IMPROVEMENTS. In accordance with the Work Schedule, Tenant's Contractor will commence and diligently proceed with the construction of the Tenant Improvements, subject to Tenant Delays (as described in Paragraph 9 below) and Force Majeure Delays (as described in Paragraph 10 below). Tenant shall cause Tenant's Contractor to coordinate at all times with Landlord's Contractor with respect to the completion of the Base Building. Tenant or Tenant's Contractor's failure to do so shall constitute a Tenant Delay for purposes of Paragraph 9 hereinbelow. 7. DELIVERY OF MATERIALS TO THE PREMISES; UTILITIES. Tenant shall cause Tenant's Contractor to deliver construction materials to the Premises located on the fourth (4th) floor through the Building windows which shall be "popped out" by Landlord's contractor. Construction materials for the Premises located on the first (1st) floor shall be delivered through the back door of the Building. Tenant hereby acknowledges that Tenant shall be required to provide temporary restroom facilities, and temporary power for the construction of the Tenant Improvements, at Tenant's sole cost and expense. EXHIBIT "C" -4- 61 8. COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION (a) Commencement Date. The Term of the Lease will commence on the date (the "Commencement Date") which is the earlier of: (i) July 1, 2000; (ii) the date Tenant moves into the Premises to commence operation of its business in all or any portion of the Premises; or (iii) the date the Tenant Improvements have been "substantially completed" (as defined below). If substantial completion of the Tenant Improvements is delayed as a result of Landlord's failure to deliver the Premises on or before the date set forth in the Work Schedule (other than by reason of any Tenant Delays), then the Commencement Date as otherwise established pursuant to subparagraph 8(a)(i) will be extended by the number of days of such delays. Notwithstanding the foregoing, the Commencement Date shall not be deemed to have occurred until all parking areas to be made available for Tenant's use as of the Commencement Date, have been completed and all landscaping required for the issuance of a temporary Certificate of Occupancy or equivalent approval from the local government authority permitting Tenant's occupancy of the Premises shall have been completed. (b) Substantial Completion; Punch-List. For purposes of subparagraph 8(a) above, the Tenant Improvements will be deemed to be "substantially completed" when Tenant's Contractor certifies in writing to Landlord and Tenant that : (a) Tenant has reasonable access to the Premises; (b) Tenant's Contractor has substantially performed all of the Tenant Improvement Work required to be performed by Tenant under this Work Letter Agreement, other than decoration and minor "punch-list" type items and adjustments which do not materially interfere with Tenant's access to or use of the Premises; and (c) a temporary certificate of occupancy or other required equivalent approval from the local governmental authority permitting occupancy of the Premises has been issued. Tenant's construction contract with Tenant's Contractor shall require Tenant's Contractor to timely issue the foregoing certification. Within ten (10) days after receipt of such certificate from Tenant's Contractor, Landlord and Tenant will conduct a walk-through inspection of the Premises with Tenant's Contractor and provide to Tenant's Contractor a written punch-list specifying those decoration and other punch-list items which require completion, which items Tenant's Contractor will thereafter diligently complete. (c) Delivery of Possession. Landlord agrees to deliver possession of the Premises to Tenant to permit Tenant's Contractor to commence the construction of the Tenant Improvements in accordance with the Work Schedule attached hereto as "Schedule 2", subject to Force Majeure Delays (not to exceed one hundred eighty (180) days) and any Tenant Delays. On the date that the Premises shall be delivered to Tenant's Contractor, the Building shall be closed in and secured. 9. TENANT DELAYS. For purposes of this Work Letter Agreement, "Tenant Delays" means any delay in the completion of the Tenant Improvements resulting from any or all of the following: (a) Tenant's failure or the failure of Tenant's Architect or Tenant's Contractor to timely perform any of their respective obligations pursuant to this Work Letter Agreement, including any failure to complete, on or before the due date therefor, any action item which is Tenant's responsibility pursuant to the Work Schedule delivered by Landlord to Tenant pursuant to this Work Letter Agreement; (b) Tenant's changes to Space Plans or Final Plans after Landlord's approval thereof; (c) Tenant's request for materials, finishes, or installations which are not readily available or which are incompatible with the Standards; (d) any delay of Tenant in making payment to Landlord for Tenant's share of the Work Cost; or (e) any other act or failure to act by Tenant, Tenant's employees, agents, Tenant's Architect, Tenant's Contractor, independent contractors, consultants and/or any other person performing or required to perform services on behalf of Tenant. 10. FORCE MAJEURE DELAYS. For purposes of this Work Letter, "Force Majeure Delays" means any actual delay in the construction of the Tenant Improvements, which is beyond the reasonable control of Landlord or Tenant, as the case may be, as described in Paragraph 33 of the Lease. EXHIBIT "C" -5- 62 11. OTHER CONSTRUCTION PROVISIONS. (a) Compliance With Paragraph 13. Tenant shall comply with the applicable provisions of Paragraph 13 of the Lease which do not conflict with this Work Letter Agreement, as if the Tenant Improvement Work were an "Alteration" under Paragraph 13 of the Lease, including but not limited to, contractor's insurance requirements and lien-free work requirements. (b) Good and Workmanlike Construction. Tenant shall use its best efforts to cause the Tenant Improvement Work to be constructed in a good and workmanlike manner in substantial conformity with the Final Plans, and in substantial compliance with all applicable laws, regulations, building codes and governmental orders pertaining thereto. (c) Entry For Inspection. At all times during the course of constructing the Tenant Improvement Work, Landlord shall have the right to enter the Premises to inspect Tenant's construction activities. (d) Indemnity. Tenant hereby indemnifies and agrees to defend and hold Landlord harmless from and against any and all suits, claims, actions, losses, costs or expenses of any nature whatsoever, together with reasonable attorneys' fees for counsel of Landlord's choice, arising out of or in connection with the Tenant Improvement Work or the performance of the Tenant Improvement Work (including, but not limited to, claims for breach of warranty, personal injury or property damage). (e) Defects. Landlord shall have no responsibility for the Tenant Improvement Work and Tenant will remedy, at Tenant's own expense, and be responsible for any and all defects in the Tenant Improvement Work whether the same shall affect the Tenant Improvement Work in particular or any parts of the Building in general. (f) No Interference. All of Tenant's contractors, subcontractors, employees, servants and agents must work in harmony with and shall not interfere with any labor employed by Landlord, or Landlord's contractors with respect to any portion of the Building. 12. DISBURSEMENT OF ALLOWANCE. Provided Tenant is not in default under the Lease, Landlord shall disburse the Allowance (or the unexpended portion of the Allowance as of the date of this Amendment), to Tenant to reimburse Tenant for the actual Tenant Improvement Work Cost which Tenant incurs in connection with the construction of the Tenant Improvements in accordance with the following: (a) Initial Disbursements. Ninety percent (90%) of the portion of the Allowance requested in the Draw Request (defined below) shall be disbursed to Tenant not more frequently than monthly when Landlord has received the following "Evidence of Completion and Payment": (i) Tenant has delivered to Landlord a draw request ("Draw Request") in a form satisfactory to Landlord and Landlord's lender with respect to the Tenant Improvements specifying that the requisite portion of the Tenant Improvement Work has been completed, together with invoices, receipts and bills evidencing the costs and expenses set forth in such Draw Request and evidence of payment by Tenant for all costs which are payable in connection with such Tenant Improvement Work covered by the Draw Request. The Draw Request shall constitute a representation by Tenant that the Tenant Improvement Work identified therein has been completed in a good and workmanlike manner and in accordance with the Final Plans and the Work Schedule and has been paid for; (ii) The architect for the Tenant Improvements has certified to Landlord that the Tenant Improvements have been completed to the level indicated in the Draw Request in accordance with the Final Plans; (iii)Tenant has delivered to Landlord such other evidence of Tenant's payment of Tenant's contractor and subcontractors for the portions of the Tenant Improvement Work covered by the Draw Request and the absence of any liens generated by such portions of the Tenant Improvement Work as may be required by Landlord (i.e., either unconditional lien releases in accordance with California Civil Code Section 3262 or release bond(s) in accordance with California Civil Code Sections 3143 and 3171); EXHIBIT "C" -6- 63 (iv) Landlord or Landlord's architect or construction representative has inspected the Tenant Improvements and determined that the portion of Tenant Improvement Work covered by the Draw Request has been completed in a good and workmanlike manner; (b) Final Disbursement. The final disbursement of the balance of the Allowance shall be disbursed to Tenant only when Landlord has received Evidence of Completion and Payment as to all of Tenant Improvement Work as provided hereinabove and the following conditions have been satisfied: (i) Thirty-five (35) days shall have elapsed following the filing of a valid notice of completion by Tenant for the Tenant Improvements, or Tenant shall have delivered to Landlord unconditional lien releases from Tenant's Contractor and all subcontractors, satisfactory to cause Landlord's title insurance company to deliver an endorsement to Landlord's owner's title policy insuring against the existence of any mechanics' liens arising from the completion of the Tenant Improvement Work; (ii) A certificate of occupancy for the Tenant Improvements and the Premises has been issued by the appropriate governmental body and such certificate of occupancy is in Landlord's possession; (iii)Tenant shall have delivered to Landlord one set of reproducible "As Built" plans for the Tenant Improvements; (iv) Tenant shall have accepted possession of the Premises and commenced business operations in the Premises in accordance with the provisions of the Lease; and (v) The satisfaction of any other requirements or conditions which may be required or imposed by Landlord's lender with respect to the construction of the Tenant Improvements. (c) Excess Costs. All Work Costs in excess of the Allowance shall be paid by Tenant. EXHIBIT "C" -7- 64 IN WITNESS WHEREOF, the undersigned Landlord and Tenant have caused this Work Letter Agreement to be duly executed by their duly authorized representatives as of the date of the Lease. TENANT: LANDLORD: THE RYLAND GROUP, INC., KILROY REALTY, L.P., a Maryland corporation a Delaware limited partnership By: KILROY REALTY CORPORATION, By: /s/ Robert J. Cunnion III a Maryland corporation ------------------------- Its: General Partner Print Name: Robert J. Cunnion III --------------------- Print Title: Senior Vice President By: /s/ Jeffrey C. Hawken --------------------- -------------------------------- Print Name: Jeffrey C. Hawken By: /s/ Frank J. Scardina ------------------------ ------------------------- Print Title: Chief Operating Officer Print Name: Frank J. Scardina ----------------------- --------------------- Print Title: Senior Vice President --------------------- By:/s/ C. Hugh Greenup -------------------------------- Print Name: C. Hugh Greenup ------------------------ Print Title: Executive Vice-President ------------------------ EXHIBIT "C" -8- 65 SCHEDULE "1" DESCRIPTION OF BASE BUILDING The following is a description of the Base Improvements for the Premises. Any items not specifically identified are intended to be included with the Tenant Improvements. The Building shall be a four (4) story steel frame building with an exterior finish insulation system (EFIS) providing a combination of "punched" window openings and synthetic or lime plaster stucco wall to include the following items: 1) Completed men's and women's restrooms to include full height ceramic tile on wet walls and complete tile on the entire floor with a floor drain that will coordinate with tenant's finish plans. The restrooms shall contain high quality fixtures and mirrors, adequately sized, the countertops shall be of man-made stone" material provided at Landlord's expense. Restrooms shall conform to all applicable code requirements and shall include toilet partitions, accessories (waste paper receptacles, toilet paper dispensers). All restroom signage required by applicable building codes shall be provided at Landlord's expense. To the extent Tenant elects to up-grade restroom countertop material, Tenant shall receive a credit to the Allowance in the amount of the cost attributable to the Base Building restroom countertop material. 2) Completed telephone/electrical closets on each floor, properly vented and lighted. Tenant's telephone and communication equipment to be located in Tenant's lease space. Provisions for fiber optic cable brought to main building telephone room with distribution by Tenant. Tenant electrical panels will be located on each floor with distribution to Tenant's space by Tenant. 3) Completed and painted stairwells to include any required lighting, excluding exit lighting within the Premises. 4) Completed package variable volume mechanical system on the roof of the Building, properly installed with all electrical and plumbing completed, noise and vibration attenuated cooling capacity of approximately three (3) tons of refrigeration for every 1,000 rentable square feet in the Building which will enable the inside temperature to be consistent with the mechanical design. The roof shall be penetrated with supply and return ducts (properly insulated with sound boots or other methods where required to attenuate noise and vibration) and the main supply duct installed on each floor in the building shell. 5) The main building lobby shall be complete and finished with stone or tile floor, fabric wall covering and drywall ceiling with downlights. 6) The core and stairwell vestibules and the elevator lobbies shall be sheet-rocked throughout the Building. All sheet-rock shall be properly taped, mudded, sanded to a smooth finish, paint ready. The perimeter of the inside exterior walls shall have completed studs with insulation installed prior to Tenant Improvements at Landlord's expense. Interior columns in lease space will be left exposed. Required corridor walls will be finished on corridor side only. 1/2 the cost of corridor and demising partitions will be charged against the Allowance. 7) All floors shall be delivered finished smooth (wall to wall) and shall be flat to a level of one-quarter (1/4) inch over ten (10) feet in any direction (noncumulative). The floors shall be ready to accept floor covering, with only minor floor-floating required. 8) The Premises shall be provided with pagers, smoke detectors, sprinkler risers, mainlines, branch lines and heads as required by local codes for unoccupied space. The cost of any modifications to base system shall be deducted from the Tenant Improvement Allowance. 9) An electrical system shall be properly installed in each Building using high quality components of between 1600 and 3000 amps, 480/277 volt, 3 phase, 4 wire service located in properly completed electrical rooms. Primary electrical service to the Building shall be installed and wired with pad mounted transformer in an acceptable location. Adequate power shall be transformed for house power (to include but not be limited to exterior lighting, landscaping controls, parking lot lighting, etc.) SCHEDULE "1" to EXHIBIT "C" -1- 66 10) The loading capacity of all "upper" floors shall be a minimum live load of eighty (80) pounds per square foot and a minimum dead load of twenty (20) pounds per square foot. 11) A minimum of two (2), four (4) inch empty conduits shall be installed between the Building and the adjacent building to be developed within the Development, for future voice and data communication connections. 12) Three (3) elevators of adequate size and capacity to serve the building will be provided to service all four (4) floors. SCHEDULE "1" to EXHIBIT "C" -2- 67 Schedule "2" WORK SCHEDULE Preparation and approval of the Space Plans, Final Plans and the Work Cost Statement shall proceed as indicated below. ACTION RESPONSIBILITY DUE DATE ------ -------------- -------- (i) Submission of the Space Tenant 30 days after Plans Lease execution (ii) Delivery of written Landlord 3 days after (i) notice approving or disapproving Space Plans (iii) Submission, if Tenant 5 days after (ii) necessary, of redesign of Space Plans (iv) Delivery of written Landlord 1 day after (iii) notice of final approval of Space Plans (if (iii) is necessary) (v) Submission of Final Tenant 35 days after (iv) Plans to Landlord (vi) Delivery of written Landlord 3 days after (v) notice approving or disapproving Final Plans (vii) Submission, if Tenant 5 days after (vi) necessary, of redesign of Final Plans (viii) Delivery of written Landlord 1 day after (vii) notice of final approval of Final Plans (if (vii) is necessary) (ix) Submission of Work Cost Tenant 15 days after estimate to Landlord Final Plans submitted (x) Delivery of written Landlord 3 days after (ix) notice of final approval of Work Cost Statement. (xi) Submit for permit Tenant At time Plans approval submitted to Landlord (xii) Delivery of space to Landlord 04/01/00 Tenant for commencement of Tenant Improvements (xiii) Completion of Base Landlord 05/18/00 Building (xiv) Completion of Tenant Tenant 07/01/00 Improvements SCHEDULE "2" to EXHIBIT "C" -1- 68 NOTICE OF LEASE TERM DATES AND TENANT'S PERCENTAGE To:___________________________________ ___________________________________ ___________________________________ Date:_________________________________ Re: Lease dated __________________________________, 19___ (the "Lease"), between ______________________________, Landlord, and __________________________, Tenant, concerning Suite _________ located at ________________________________ (the "Premises"). To Whom It May Concern: In accordance with the subject Lease, we wish to advise and/or confirm as follows: 1. That the Premises have been accepted by the Tenant as being substantially complete in accordance with the subject Lease and that there is no deficiency in construction except as may be indicated on the "Punch-List" prepared by Landlord and Tenant, a copy of which is attached hereto. 2. That the Tenant has possession of the subject Premises and acknowledges that under the provisions of the Lease the Commencement Date is ____________________, and the Term of the Lease will expire on ________________. 3. That in accordance with the Lease, rent commenced to accrue on __________. 4. If the Commencement Date of the Lease is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter will be for the full amount of the monthly installment as provided for in the Lease. 5. Rent is due and payable in advance on the first day of each and every month during the Term of the Lease. Your rent checks should be made payable to ____________________________________ at___________________________________. 6. The number of Rentable Square Feet within the Premises is ____________ square feet as determined by Landlord's architect in accordance with the terms of the Lease. 7. The number of Rentable Square Feet within the Building is ____________ square feet as determined by Landlord's architect in accordance with the terms of the Lease. 8. Tenant's Percentage, as adjusted based upon the number of Rentable Square Feet within the Premises, is _______%. LANDLORD: ____________________________________, a __________________________________ By: ________________________________ Print Name: ____________________ Print Title: ___________________ By: ________________________________ Print Name: ____________________ Print Title: ___________________ SAMPLE ONLY [NOT FOR EXECUTION] EXHIBIT "D" -1- 69 DEFINITION OF OPERATING EXPENSES 1. Items Included in Operating Expenses. The term "Operating Expenses" as used in the Lease to which this Exhibit "E" is attached means: all costs and expenses of operation and maintenance of the Building and the Common Areas (as such terms are defined in the Lease), calculated assuming the Building is ninety-five percent (95%) occupied, including the following costs by way of illustration but not limitation, but excluding those items specifically set forth in Paragraph 3 below: (a) Real Property Taxes and Assessments (as defined in Paragraph 2 below) and any taxes or assessments imposed in lieu thereof; (b) any and all assessments imposed with respect to the Building pursuant to any covenants, conditions and restrictions affecting the Development, the Common Areas or the Building; (c) water and sewer charges and the costs of electricity, heating, ventilating, air conditioning and other utilities; (d) utilities surcharges and any other costs, levies or assessments resulting from statutes or regulations promulgated by any government or quasi-government authority in connection with the use, occupancy or alteration of the Building or the Premises or the parking facilities serving the Building or the Premises; (e) costs of insurance obtained by Landlord; (f) waste disposal and janitorial services; (g) labor; (h) costs incurred in the management of the Building, including, without limitation: (i) supplies, (ii) wages and salaries (and payroll taxes and similar governmental charges related thereto) of employees used in the management, operation and maintenance of the Building, (iii) Building management office rental, supplies, equipment and related operating expenses, and (iv) a management/administrative fee (not to exceed prevailing market rates for comparable buildings and developments) determined as a percentage of the annual gross revenues of the Building exclusive of the proceeds of financing or a sale of the Building and an administrative fee for the management of the Development Common Area determined as a percentage of Development Common Area Operating Expenses; (i) supplies, materials, equipment and tools including rental of personal property used for maintenance; (j) repair and maintenance of the elevators and the structural portions of the Building, including the plumbing, heating, ventilating, air-conditioning and electrical systems installed or furnished by Landlord; (k) maintenance, costs and upkeep of all parking and Development Common Areas; (l) depreciation of personal property used in maintenance; (m) amortization of all capitalized expenditures which are: (i) reasonably intended to produce a reduction in operating charges or energy consumption; or (ii) required under any governmental law or regulation that was not applicable to the Building at the time it was originally constructed; or (iii) for replacement of any Building equipment needed to operate the Building at the same quality levels as prior to the replacement. All such costs shall be amortized over such reasonable period as Landlord shall determine, on a consistent basis and in accordance with multi-story office building industry standards of competing first-class office buildings, with a return on capital at the then current market rate per annum on the unamortized balance, or at such higher rate as may have reasonably been paid by Landlord on funds borrowed for the purpose of constructing such capital improvements. (n) costs and expenses of gardening and landscaping; EXHIBIT "E" -1- 70 (o) maintenance of signs; (p) personal property taxes levied on or attributable to personal property used in connection with the Building or the Common Areas; (q) reasonable accounting, audit, verification, legal and other consulting fees; (r) costs and expenses of repairs, resurfacing, repairing, maintenance, painting, lighting, cleaning, refuse removal, security and similar items, including appropriate reserves; and (s) any other costs or expenses applicable to the ownership, leasing and/or management of the Building and/or the Development. When calculating Operating Expenses for purposes of establishing Tenant's Operating Expense Allowance, Operating Expenses shall not include Real Property Taxes and Assessments attributable to special assessments, charges, costs, or fees or due to modifications or changes in governmental laws or regulations including, but not limited to, the institution of a split tax roll, and shall exclude market-wide labor-rate increases due to extraordinary circumstances including, but not limited to, boycotts and strikes and utility increases due to extraordinary circumstances including, but not limited to, conservation surcharges, boycotts, embargoes or other shortages. Landlord shall keep books and records showing the Operating Expenses in accordance with a system of accounts and accounting practices consistently maintained by Landlord on a year-to-year basis in compliance with such provisions of this Lease as may affect such accounts (the "Accounting Practices"). Operating Expenses applicable to Common Areas servicing the Building and other buildings in the Development shall be allocated to the Building on a straight pro-rata basis with the Building bearing its share in the proportion that the Rentable Square Foot of the Building bears to the total Rentable Square Footage of all buildings sharing such Common Areas. 2. Real Property Taxes and Assessments. The term "Real Property Taxes and Assessments", as used in this Exhibit "E", means: any form of assessment, license fee, license tax, business license fee, commercial rental tax, levy, charge, improvement bond, tax or similar imposition imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, as against any legal or equitable interest of Landlord in the Premises, Building, Common Areas or the Development (as such terms are defined in the Lease), adjusted to reflect an assumption that the Building is fully assessed for real property tax purposes as a completed building ready for occupancy, including the following by way of illustration but not limitation: (a) any tax on Landlord's "right" to rent or "right" to other income from the Premises or as against Landlord's business of leasing the Premises; (b) any assessment, tax, fee, levy or charge in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of real property tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies and charges be included within the definition of "real property taxes" for the purposes of this Lease; (c) any assessment, tax, fee, levy or charge allocable to or measured by the area of the Premises or other premises in the Building or the rent payable by Tenant hereunder or other tenants of the Building, including, without limitation, any gross receipts tax or excise tax levied by state, city or federal government, or any political subdivision thereof, with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof but not on Landlord's other operations; (d) any assessment, tax, fee, levy or charge upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and/or EXHIBIT "E" -2- 71 (e) any assessment, tax, fee, levy or charge by any governmental agency related to any transportation plan, fund or system (including assessment districts) instituted within the geographic area of which the Building is a part. Notwithstanding the foregoing, if at any time after the Commencement Date, the amount of Real Property Taxes and Assessments decreases, then for purposes of all subsequent Lease Years, including the Lease Year in which such decrease in Real Property Taxes and Assessments occurs, Tenant's Operating Expense Allowance shall be decreased by an amount equal to such decrease in Real Property Taxes and Assessments. Further, notwithstanding the foregoing, in the event Landlord obtains earthquake insurance coverage following the Base Year causing an increase to Operating Expenses, then the Operating Expenses for the Base Year shall be deemed to have been increased by the amount of the applicable premiums attributable to such coverage. Conversely, in the event that the amount of Operating Expenses decreases due to Landlord's subsequent election to eliminate earthquake coverage, or in the event of a reduction in the cost of providing utilities, security and/or other services to the Building and/or Development for any reason, Operating Expenses for Base Year shall be deemed to have been decreased by the amount equal to any such decrease. 3. Items Excluded From Operating Expenses. Notwithstanding the provisions of Paragraphs 1 and 2 above to the contrary, "Operating Expenses" will not include: (a) Landlord's federal or state income, franchise, inheritance or estate taxes; (b) any ground lease rental; (c) costs incurred by Landlord for the repair of damage to the Building to the extent that Landlord is reimbursed by insurance (and for this purpose Landlord shall not be deemed to have been reimbursed with respect to any deductible), or condemnation proceeds or by tenants, warrantors or other third persons; (d) depreciation, amortization and interest payments, except as specifically provided herein, and except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party, where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as determined in accordance with the Accounting Practices; (e) brokerage commissions, finders' fees, attorneys' fees, space planning costs and other costs incurred by Landlord in leasing or attempting to lease space in the Building; (f) costs of a capital nature, including, without limitation, capital improvements, capital replacements, capital repairs, capital equipment and capital tools, all as determined in accordance with the Accounting Practices; provided, however, the capital expenditures set forth in subparagraph 1(m) above will in any event be included in the definition of Operating Expenses; (g) interest, principal, points and fees on debt or amortization on any mortgage, deed of trust or other debt encumbering the Building or the Development; (h) costs, including permit, license and inspection costs, incurred with respect to the installation of tenant improvements for tenants in the Building (including the original Tenant Improvements for the Premises), or incurred in renovating or otherwise improving, decorating, painting or redecorating space for tenants or other occupants of the Building, including space planning and interior design costs and fees; (i) attorneys' fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants of the Building; provided, however, that Operating Expenses will include those attorneys' fees and other costs and expenses incurred in connection with negotiations, disputes or claims relating to items of Operating Expenses, enforcement of rules and regulations of the Building, and such other matters relating to the maintenance of standards required of Landlord under the Lease; (j) except for the administrative/management fees described in subparagraph 1(h) above, costs of Landlord's general corporate overhead; EXHIBIT "E" -3- 72 (k) all items and services for which Tenant or any other tenant in the Building reimburses Landlord (other than through operating expense pass-through provisions); (l) electric power costs for which any tenant directly contracts with the local public service company; provided, however, for purposes of this subparagraph 3(l), in calculating the cost of electrical power consumed by tenants of the Building, the applicable rentable square feet occupied by tenants who separately contract for electrical power shall be excluded from the denominator when determining all other tenants' pro-rata share of the costs of such electrical power. (m) costs arising from Landlord's charitable or political contributions. EXHIBIT "E" -4- 73 STANDARDS FOR UTILITIES AND SERVICES The following standards for utilities and services are in effect. Landlord reserves the right to adopt nondiscriminatory modifications and additions hereto. Subject to the terms and conditions of the Lease and provided Tenant remains in occupancy of the Premises, Landlord will provide or make available the following utilities and services: 1. Provide non-attended automatic elevator facilities Monday through Friday, except holidays, from 8 a.m. to 6 p.m., and have one elevator available for Tenant's use at all other times. 2. On Monday through Friday, except holidays, from 8 a.m. to 6 p.m. and on Saturday from 8 a.m. to 12 Noon (and other times for a reasonable additional charge to be fixed by Landlord), ventilate the Premises and furnish air conditioning or heating on such days and hours, when in the reasonable judgment of Landlord it may be required for the comfortable occupancy of the Premises. The air conditioning system achieves maximum cooling when the window coverings are extended to the full length of the window opening and adjusted to a 45o angle upwards. Landlord will not be responsible for room temperatures if Tenant does not keep all window coverings in the Premises extended to the full length of the window opening and adjusted to a 45o angle upwards whenever the system is in operation. Tenant agrees to cooperate fully at all times with Landlord, and to abide by all reasonable regulations and requirements which Landlord may prescribe for the proper function and protection of said air conditioning system. Tenant agrees not to connect any apparatus, device, conduit or pipe to the chilled and hot water air conditioning supply lines of the Building. Tenant further agrees that neither Tenant nor its servants, employees, agents, visitors, licensees or contractors shall at any time enter the mechanical installations or facilities of the Building or the Development or adjust, tamper with, touch or otherwise in any manner affect said installations or facilities. The cost of maintenance and service calls to adjust and regulate the air conditioning system will be charged to Tenant if the need for maintenance work results from either Tenant's adjustment of room thermostats or Tenant's failure to comply with its obligations under this Exhibit, including keeping window coverings extended to the full length of the window opening and adjusted to a 45o angle upwards. Such work will be charged at hourly rates equal to then-current journeyman's wages for air conditioning mechanics. During the Original Term, Landlord shall provide "after-hours" HVAC service to the Premises at a cost equal to Thirty-Five Dollars ($35.00) per hour, per floor, subject to adjustment based on actual increases or decreases in Landlord's applicable rates. 3. Landlord will make available to the Premises, 24 hours per day, seven days a week, electric current as required by the Building standard office lighting and fractional horsepower office business machines including copiers, personal computers and word processing equipment in an amount not to exceed four (4) watts per square foot per normal business day. Tenant agrees, should its electrical installation or electrical consumption be in excess of the aforesaid quantity or extend beyond normal business hours, to reimburse Landlord monthly for the measured consumption at the average cost per kilowatt hour charged to the Building during the period. If a separate meter is not installed at Tenant's cost, such excess cost will be established by an estimate agreed upon by Landlord and Tenant, and if the parties fail to agree, such cost will be established by an independent licensed engineer selected by Landlord and approved by Tenant (such approval not to be unreasonably withheld, conditioned or delayed), , whose fee shall be shared equally by Landlord and Tenant. Tenant agrees not to use any apparatus or device in, upon or about the Premises (other than standard office business machines, personal computers and word processing equipment) which may in any way increase the amount of such services usually furnished or supplied to said Premises, and Tenant further agrees not to connect any apparatus or device with wires, conduits or pipes, or other means by which such services are supplied, for the purpose of using additional or unusual amounts of such services without the written consent of Landlord. Should Tenant use the same to excess, the refusal on the part of Tenant to pay upon demand of Landlord the amount established by Landlord for such excess charge will constitute a breach of the obligation to pay rent under this Lease and will entitle Landlord to the rights therein granted for such breach. Tenant's use of electric current will never exceed the capacity of the feeders to the Building, or the risers or wiring installation and Tenants will not install or use or permit the installation or use of any computer or electronic data processing equipment in the Premises (except standard office business machines, personal computers and word processing equipment) without the prior written consent of Landlord. EXHIBIT "F" -1- 74 4. Water will be available in public areas for drinking and lavatory purposes only, but if Tenant requires, uses or consumes water for any purpose in addition to ordinary drinking and lavatory purposes, Landlord may install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant agrees to pay Landlord for the cost of the meter and the cost of the installation thereof and throughout the duration of Tenant's occupancy Tenant will keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense, in default of which Landlord may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant. Tenant agrees to pay for water consumed, as shown on such meter, as and when bills are rendered, and on default in making such payment, Landlord may pay such charges and collect the same from Tenant. Any such costs or expenses incurred, or payments made by Landlord for any of the reasons or purposes hereinabove stated will be deemed to be additional rent payable by Tenant and collectible by Landlord as such. 5. Landlord will provide cleaning and janitorial services to the Premises Monday through Friday in accordance with the specifications attached hereto as Schedule 1. 6. Landlord reserves the right to stop service of the elevator, plumbing, ventilation, air conditioning and electrical systems, when necessary, by reason of accident or emergency or for repairs, alterations or improvements, when in the judgment of Landlord such actions are desirable or necessary to be made, until said repairs, alterations or improvements shall have been completed. Landlord shall use commercially reasonable efforts to minimize disruptions to Tenant's use of the Premises, subject to the limitations hereinafter set forth. Landlord will have no responsibility or liability for failure to supply elevator facilities, plumbing, ventilating, air conditioning or electric service, when prevented from so doing by strike or accident or by any cause beyond Landlord's reasonable control, or by laws, rules, orders, ordinances, directions, regulations or by reason of the requirements of any federal, state, county or municipal authority or failure of gas, oil or other suitable fuel supply or inability by exercise of reasonable diligence to obtain gas, oil or other suitable fuel supply. It is expressly understood and agreed that any covenants on Landlord's part to furnish any services pursuant to any of the terms, covenants, conditions, provisions or agreements of this Lease, or to perform any act or thing for the benefit of Tenant, will not be deemed breached if Landlord is unable to furnish or perform the same by virtue of a strike or labor trouble or any other cause whatsoever beyond Landlord's control. EXHIBIT "F" -2- 75 SCHEDULE 1 TO STANDARDS FOR UTILITIES AND SERVICES Landlord will provide janitor service to the Premises, provided the same are used exclusively as offices, and are kept reasonably in order by Tenant, and unless otherwise agreed to by Landlord and Tenant no one other than persons approved by Landlord shall be permitted to enter the Premises for such purposes. If the Premises are not used exclusively as offices, they will be kept clean and in order by Tenant, at Tenant's expense, and to the satisfaction of Landlord, and by persons approved by Landlord. Tenant agrees to pay to Landlord the cost of removal of any of Tenant's refuse and rubbish to the extent that the same exceeds the refuse and rubbish usually attendant upon the use of the Premises as offices. Landlord shall perform the herein-specified cleaning and janitorial services for the Premises, which services shall be performed under the following terms and general conditions: 1) Keep employed skilled and competent employees to perform the services set forth herein and provide all manpower required to maintain the Building in a neat and clean condition. Provide that any employee who causes any breach of peace or other disturbance or who is otherwise found to be unacceptable to Manager shall be immediately discharged or transferred and thereafter replaced by Contractor. 2) Require that all employees present a clean and neat appearance at all times. 3) Report all damage, breakage and/or apparent plumbing or electrical problems to Manager immediately. 4) Report any evidence of security breaches to Manager immediately. 5) Maintain all janitors' closets, mop sinks and storerooms in a safe and clean condition at all times. 6) Work behind locked doors (unless otherwise requested by Manager) during the entire cleaning operation. Only the cleaning person assigned to clean an area and the janitorial supervisory staff shall be admitted to such areas. The janitorial staff shall not admit anyone into such premises. 7) Turn off all lighting as soon as possible each night, lock doors and set alarm, if such alarm is provided by Tenant. 8) All nightly services will be performed Monday through Friday, after 6:00 p.m., (52) weeks per year, except on those holidays listed below: New Year's Day President's Day Martin Luther King's Birthday Memorial Day Independence Day Labor Day Thanksgiving Christmas Main Entrance Lobbies (Five Nights Per Week) a. Sweep and wet mop all interior hard floor surfaces (stone, ceramic, tile, granite, etc.). All carpeted areas to be vacuumed. b. All glass at entry doors and fixed glass panels surrounding entry ways shall be cleaned three (3) times per day at a minimum (once before 8:30 a.m., the second between 10:30 a.m. and 11:00 a.m. and the third after 1:00 p.m.). c. Wipe down nightly with an approved chemically treated cloth all metal surfaces within the lobby areas. SCHEDULE "1" to EXHIBIT "F" -1- 76 d. All painted or vinyl covered wall surfaces are to be dusted nightly using an approved chemically treated cloth. Remove all finger marks and smudges nightly. e. High dust all painted or vinyl covered wall surfaces and soots, electrical fixtures, air conditioning outlets (supply and return) with an approved chemically treated cloth, quarterly. f. All trash receptacles (inside and outside) and cigarette urns (interior and exterior) shall be cleaned nightly. g. Contractor is responsible to install plastic liners in receptacles (daily, nightly as required), and replace sand in cigarette urns with clean sand (daily, nightly as required). h. All rain mats are to be thoroughly cleaned nightly when used during the day. Mats are to be shampooed as directed by Manager, as required. Wet floor caution signage and rain mats will be put out on all non-carpeted main entrances lobby areas at the first indication of a wet condition. Floors will be constantly monitored until wet condition no longer exists at which time mats and signs will be removed and floors cleaned as needed. i. Daytime staff shall continuously monitor these areas to insure that they are clean and neat at all times. Spillage shall be cleaned as soon as possible, cigarette urns and trash receptacles to be checked continuously to insure no large accumulations occur, elevators shall be vacuumed, finger marks and smudges removed. j. Remove gum and foreign matter and mop spillage on sight as required. k. Public telephone stations are to be damp wiped; remove all finger marks and smudges daily. l. Brush with a lint brush and/or detail vacuum all fabric covered chairs, if applicable. m. Dust all mailbox faces and remove any smudges. n. Dust all baseboards. Public Corridors and Elevator Lobbies (Five nights per week) a. All painted or vinyl covered wall surfaces are to be dusted nightly. Remove all fingerprints and smudges nightly. b. Sweep and damp mop all hard floor surfaces (stone, terrazzo, ceramic tile, granite pavers, etc.) and other unwaxed flooring nightly. Sweep and dust mop all interior wood floor surfaces. c. Resilient floor surfaces are to be damp mopped and spray buffed nightly. d. Resilient floor surfaces are to be machine stripped and refinished with a non-slip floor finish monthly. e. Stairwells, landings, handrails, and exit enclosures will be swept, damp mopped and dusted once per week. Police nightly. Wash landings and treads monthly. f. Carpeted areas are to be vacuumed nightly and spot cleaned weekly, or as necessary. g. High dust and/or damp wash all electrical fixtures, doorframes and air conditioning fixtures quarterly. h. Drinking fountains are to be cleaned, sanitized and polished nightly. i. Public telephones are to be dusted and sanitized nightly. SCHEDULE "1" to EXHIBIT "F" -2- 77 j. Cigarette urns (inside and outside) are to be cleaned nightly. Contractor is responsible to provide clean sand, as required. k. Fire hose and/or extinguisher cabinets are to be damp wiped (inside) and glass polished (inside and outside) once per month. 1. Wash walls in corridors annually as directed by Manager. m. Dust all baseboards weekly. Elevators (Five nights per week) a. Clean all saddles, hatch and cab doors, doorframes and directional lights at main entry lobbies nightly. Saddles shall be polished nightly. b. Interior wall surfaces of cab, selector panels, bases, rails and floor indicator panel are to be cleaned nightly with an approved, chemically treated cloth. c. Interior carpets (if installed) are to be vacuumed nightly and spot cleaned as required. Carpets are to be dry shampooed every two weeks, including spares as requested. d. Elevator cabs, with resilient floor surfaces, are to e swept, wet mopped and spray buffed nightly. Floors are to be machine stripped and refinished once per month, at a minimum. e. Clean and polish saddles and door frames on floors above main lobby level once per week. Door tracks are to be vacuumed nightly on floors above the main lobby level, and smudges and hand marks removed from doors and frames. General Office (Five nights per week) a. Sweep and damp mop all hard floor surfaces (stone, ceramic, tile, granite pavers, etc.), uncarpeted raised floors and other types of unwaxed flooring. Sweep and dust mop all interior wood floor surfaces. b. Sweep and damp mop all vinyl, asphalt, rubber and similar types of flooring using an approved, chemically treated cloth. c. Vacuum all rugs and carpeted areas (including carpeted raised floors). Sweep or vacuum all internal stairways. d. Hand dust and wipe clean with damp or chemically treated cloth all furniture, file cabinets, equipment and windowsills. e. Dust and sanitize all telephones. f. Dust all chair rails, trim, etc. g. Remove all gum and foreign matter on sight. h. Empty and clean all waste receptacles and remove wastepaper and waste materials to be designated area. i. Damp dust interiors of all waste disposal receptacles, wash as necessary. j. Wash clean, sanitize and polish dry all water fountains and water coolers. Wash clean and rinse dry all chalkboards. k. Clean all glass furniture tops. Brush with a lint brush and/or detail vacuum all fabric-covered chairs. l. Remove hand marks on elevator hatchway doors. SCHEDULE "1" to EXHIBIT "F" -3- 78 m. Spot wash interior partition glass and door glass to remove smudge marks weekly. n. Wash all interior glass, both sides, monthly. o. Adjust all window treatment to uniform standard as directed by Manager. p. Stairs, landings, and handrails will be dusted and swept nightly and damp mopped once per week at night. q. Cleaning of kitchen and serving areas excluding clean out of refrigerators, dishwashers or washing of dishes. r. Any area designated, as a vending area will be kept free from spillage and damp mopped. s. Cleaning operations are to be scheduled so that an absolute minimum of lights are to be left on at all times. Upon completion of the cleaning, all lights must be turned off. t. Remove finger marks from all painted or vinyl covered surfaces near light switches, entrance doors, etc., nightly. u. Dust all lampshades nightly. v. Dust all picture frames, charts, similar hangings that were not reached in nightly cleaning, quarterly. Vacuum or dust all books in place, quarterly. w. Dust all vertical surfaces, such as walls, partitions, doors and other surfaces not reached in nightly cleaning quarterly. x. Dust exterior lighting fixtures semi-annually. Wash and dry thoroughly all light fixtures (including reflectors, globes, diffusers and trim) annually. y. Dust all window treatment monthly. z. Dust clothes closets, shelving and coat racks once per month. Dust all storage areas (including shelves and contents in place) and damp mop floor areas, semi-annually. aa. Damp wash and dry thoroughly all air conditioning louvers, grills, etc. not reach nightly cleaning, annually. Lavatories (Five nights per week) a. Wet mop floors using germicidal detergent, and rinse dry, being careful to leave bases in a clean, dry condition. b. Clean and polish mirrors. c. Clean and polish all bright work, using non-abrasive, non tarnishing, non-corrosive cleaners. d. Clean all bowls and urinals using a germicide, non-injurious cleaner, taking care to clean all surfaces of toilet seats and cleaning deep into traps under rims. e. Clean all basins and vanities using non-abrasive, non-tarnishing, non-corrosive cleaners and polishing vanities dry. f. Empty and clean sanitary disposal receptacles and provide waste paper bag in receptacles. g. Clean and wash waste receptacles and dispensers. Remove all waste products to a designated area and provide plastic bag in receptacles. SCHEDULE "1" to EXHIBIT "F" -4- 79 h. Dust and clean partitions and walls, removing all finger marks and graffiti using non-abrasive cleaners. i. Inspect all restrooms during day and keep same in neat and clean condition at all times. Replenish paper products and soap as necessary. j. Restock soap, toilet tissue, sanitary products, paper towels and liners for receptacles. k. Night supervisor to collect coins from all sanitary product machines on a biweekly schedule and file a written report as to date, location and amount of collection. Coins and report shall be delivered to Manager as collected. 1. All lights are to be turned off when cleaning is complete. m. Clean and wash all partitions every two (2) months. n. Wax floors once per month. o. Hand dust and clean all tile walls once each month, more often if necessary or directed. Wash walls annually. p. High dust all pipes, light fixtures and door frames quarterly. Damp wash and dry thoroughly all louvers, grilles, etc. Quarterly. Wash and dry thoroughly all light fixtures (including reflectors, globes, diffusers and trim) annually. Building Service Areas (Five nights per week) a. Janitorial closets and other such service areas will be wet mopped and rinsed dry once per week. b. Janitor's sink, including bright work, will be cleaned using a non-abrasive, non-corrosive, non-tarnishing cleaner once per week. c. Floors in janitor's closets and other such service areas will be swept clean nightly. d. All service corridors, fire control room, engineering closets shall be swept, damp mopped, spray buffed or vacuumed nightly or as directed by Manager. e. Trash, paper, or refuse of any kind is not to be stored or left in janitor's closets at any time but in a designated location as directed by Manager. f. Mops, sponges, or washing cloths are to be rinsed thoroughly and stored neatly. Supplies and other cleaning equipment are to be stored neatly in designated storage areas as directed by Manager. Lighting Landlord shall replace building standard light bulbs which are burned out, upon request by Tenant. SCHEDULE "1" to EXHIBIT "F" -5- 80 ESTOPPEL CERTIFICATE The undersigned, __________________________________________ ("Tenant"), hereby certifies to___________________________________________________________________, as follows: 1. Attached hereto is a true, correct and complete copy of that certain lease dated _____________________, 199_, between___________________________ , a __________________________ ("Landlord") and Tenant (the "Lease"), regarding the premises located at _________________________________________ (the "Premises"). The Lease is now in full force and effect and has not been amended, modified or supplemented, except as set forth in Paragraph 4 below. 2. The Term of the Lease commenced on ____________________________, 19__ 3. The Term of the Lease will expire on __________________________, 19__. 4. The Lease has: (Initial one) (____) not been amended, modified, supplemented, extended, renewed or assigned. (____) been amended, modified, supplemented, extended, renewed or assigned by the following described terms or agreements, copies of which are attached hereto: ______________________________________________________________________________ ______________________________________________________________________________ 5. Tenant has accepted and is now in possession of the Premises. 6. Tenant and Landlord acknowledge that Landlord's interest in the Lease will be assigned to ________________________________________________ and that no modification, adjustment, revision or cancellation of the Lease or amendments thereto shall be effective unless written consent of is obtained, and that until further notice, payments under the Lease may continue as heretofore. 7. The amount of Monthly Base Rent is $_________________________. 8. The amount of Security Deposit (if any) is $___________________. No other security deposits have been made except as follows:___________________________. 9. Tenant is paying the full lease rental which has been paid in full as of the date hereof. No rent or other charges under the Lease have been paid for more than thirty (30) days in advance of its due date except as follows: ____________________________________________________________________________. 10. All work required to be performed by Landlord under the Lease has been completed except as follows: ____________________________________________________________________________. 11. There are no defaults on the part of the Landlord or Tenant under the Lease except as follows: ____________________________________________________________________________. 12. Neither Landlord nor Tenant has any defense as to its obligations under the Lease and claims no set-off or counterclaim against the other party except as follows: ____________________________________________________________________________. 13. Tenant has no right to any concession (rental or otherwise) or similar compensation in connection with renting the space it occupies other than as provided in the Lease except as follows: ____________________________________________________________________________. EXHIBIT "G" -1- 81 All provisions of the Lease and the amendments thereto (if any) referred to above are hereby ratified. The foregoing certification is made with the knowledge that__________________ ___________ is relying upon the representations herein made in funding a loan to Landlord in purchasing the Premises. IN WITNESS WHEREOF, this certificate has been duly executed and delivered by the authorized officers of the undersigned as of________________, 19__. TENANT: _____________________________, a _____________________________ By:____________________________ Print Name: _______________ SAMPLE ONLY Title: ____________________ [NOT FOR EXECUTION] By:____________________________ Print Name: _______________ Title: ____________________ EXHIBIT "G" -2- 82 RULES AND REGULATIONS A. General Rules and Regulations. The following rules and regulations govern the use of the Building and the Development Common Areas. Tenant will be bound by such rules and regulations and agrees to cause Tenant's Authorized Users, its employees, subtenants, assignees, contractors, suppliers, customers and invitees to observe the same. 1. Except as specifically provided in the Lease to which these Rules and Regulations are attached, no sign, placard, picture, advertisement, name or notice may be installed or displayed on any part of the outside or inside of the Building or the Development without the prior written consent of Landlord. Landlord will have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls are to be printed, painted, affixed or inscribed at the expense of Tenant and under the direction of Landlord by a person or company designated or approved by Landlord. 2. If Landlord objects in writing to any curtains, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the Premises, or placed on any windowsill, which is visible from the exterior of the Premises, Tenant will immediately discontinue such use. Tenant agrees not to place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises including from within any interior common areas. 3. Tenant will not obstruct any sidewalks, halls, passages, exits, entrances, elevators, escalators, or stairways of the Development. The halls, passages, exits, entrances, elevators and stairways are not open to the general public, but are open, subject to reasonable regulations, to Tenant's business invitees. Landlord will in all cases retain the right to control and prevent access thereto of all persons whose presence in the reasonable judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Development and its tenants, provided that nothing herein contained will be construed to prevent such access to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal or unlawful activities. No tenant and no employee or invitee of any tenant will go upon the roof of the Building. 4. Landlord expressly reserves the right to absolutely prohibit solicitation, canvassing, distribution of handbills or any other written material, peddling, sales and displays of products, goods and wares in all portions of the Development except as may be expressly permitted under the Lease. Landlord reserves the right to restrict and regulate the use of the common areas of the Development and Building by invitees of tenants providing services to tenants on a periodic or daily basis including food and beverage vendors. Such restrictions may include limitations on time, place, manner and duration of access to a tenant's premises for such purposes. Without limiting the foregoing, Landlord may require that such parties use service elevators, halls, passageways and stairways for such purposes to preserve access within the Building for tenants and the general public. 5. Landlord reserves the right to require tenants to periodically provide Landlord with a written list of any and all business invitees which periodically or regularly provide goods and services to such tenants at the premises. Landlord reserves the right to preclude all vendors from entering or conducting business within the Building and the Development if such vendors are not listed on a tenant's list of requested vendors. 6. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 8 a.m. the following business day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building or has a pass or is properly identified. Tenant will be responsible for all persons for whom it requests passes and will be liable to Landlord for all acts of such persons. Landlord will not be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. EXHIBIT "H" -1- 83 7. The directory of the Building or the Development will be provided exclusively for the display of the name and location of tenants only and Landlord reserves the right to exclude any other names therefrom. 8. All cleaning and janitorial services for the Development and the Premises will be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord will be employed by Tenant or permitted to enter the Development for the purpose of cleaning the same. Tenant will not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. 9. Landlord will furnish Tenant, free of charge, with two keys to each entry door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install any new additional lock or bolt on any door of the Premises. Tenant, upon the termination of its tenancy, will deliver to Landlord the keys to all doors which have been furnished to Tenant, and in the event of loss of any keys so furnished, will pay Landlord therefor. 10. If Tenant requires telegraphic, telephonic, burglar alarm, satellite dishes, antennae or similar services, it will first obtain Landlord's approval, and comply with, Landlord's reasonable rules and requirements applicable to such services, which may include separate licensing by, Landlord. 11. Freight elevator(s) will be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord, in its discretion, deems appropriate. No equipment, materials, furniture, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. Tenant's initial move in and subsequent deliveries of bulky items, such as furniture, safes and similar items will, unless otherwise agreed in writing by Landlord, be made during the hours of 6:00 p.m. to 6:00 a.m. or on Saturday or Sunday. Deliveries during normal office hours shall be limited to normal office supplies and other small items. No deliveries will be made which impede or interfere with other tenants or the operation of the Building. 12. Tenant will not place a load upon any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord will have the right to reasonably prescribe the weight, size and position of all safes, heavy equipment, files, materials, furniture or other property brought into the Building. Heavy objects will, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight, which platforms will be provided at Tenant's expense. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to any tenants in the Building or Landlord, are to be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devises sufficient to eliminate noise or vibration. Tenant will be responsible for all structural engineering required to determine structural load, as well as the expense thereof. The persons employed to move such equipment in or out of the Building must be reasonably acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property will be repaired at the expense of Tenant. 13. Tenant will not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant will not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor will Tenant bring into or keep in or about the Premises any birds or animals. 14. Tenant will not use any method of heating or air conditioning other than that supplied by Landlord without Landlord's prior written consent. EXHIBIT "H" -2- 84 15. Tenant will not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice, and will refrain from attempting to adjust controls. Tenant will keep corridor doors closed, and shall keep all window coverings pulled down. 16. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. Without the prior written consent of Landlord, which Landlord may deny with or without cause, Tenant will not use the name, photograph or likeness of the Building or the Development in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 17. Tenant will close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and lighting or gas before Tenant and its employees leave the Premises. Tenant will be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 18. The toilet rooms, toilets, urinals, wash bowls and other apparatus will not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from any violation of this rule will be borne by the tenant who, or whose employees or invitees, break this rule. Cleaning of equipment of any type is prohibited. Shaving is prohibited. 19. Tenant will not sell, or permit the sale at retail of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant will not use the Premises for any business or activity other than that specifically provided for in this Lease. Tenant will not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Landlord's prior written consent, which consent Landlord may withhold in its sole and absolute discretion. 20. Tenant will not install any radio or television antenna, loudspeaker, or other devices on the roof(s) or exterior walls of the Building or the Development. Tenant will not interfere with radio or television broadcasting or reception from or in the Development or elsewhere. Tenant may install a satellite dish on the roof of the Building in a location reasonably designated by Landlord and in conformity with conditions as Landlord may reasonably impose, provided that Tenant complies with Landlord's reasonable rules and requirements therefor, repairs all damages caused by the installation, servicing and/or repair of such satellite dish and complies with all applicable governmental requirements with respect thereto. 21. Except for the ordinary hanging of pictures and wall decorations, Tenant will not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof, except in accordance with the provisions of the Lease pertaining to alterations. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant will not cut or bore holes for wires. Tenant will not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. 22. Deleted. 23. Landlord reserves the right to exclude or expel from the Development any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building. 24. Tenant will store all its trash and garbage within its Premises or in other facilities provided by Landlord. Tenant will not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal is to be made in accordance with directions issued from time to time by Landlord. 25. The Premises will not be used for lodging or for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral or objectionable purpose. No cooking will be done or permitted on the Premises without Landlord's consent, except the use by Tenant of Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, and the use of a microwave oven for employees use will be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. EXHIBIT "H" -3- 85 26. Neither Tenant nor any of its employees, agents, customers and invitees may use in any space or in the public halls of the Building or the Development any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant will not bring any other vehicles of any kind into the Building. 27. Tenant agrees to comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 28. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 29. To the extent Landlord reasonably deems it necessary to exercise exclusive control over any portions of the Common Areas for the mutual benefit of the tenants in the Building or the Development, Landlord may do so subject to reasonable, non-discriminatory additional rules and regulations. 30. Landlord may prohibit smoking in the Building and may require Tenant and any of its employees, agents, clients, customers, invitees and guests who desire to smoke, to smoke within designated smoking areas within the Development. 31. Tenant's requirements will be attended to only upon appropriate application to Landlord's asset management office for the Development by an authorized individual of Tenant. Employees of Landlord will not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord. 32. These Rules and Regulations are in addition to, and will not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of the Lease. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord will be construed as a waiver of such Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Development. 33. Landlord reserves the right to make such other and reasonable and non-discriminatory Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Development and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations herein above stated and any additional reasonable and non-discriminatory rules and regulations which are adopted. Tenant is responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. B. Parking Rules and Regulations. The following rules and regulations govern the use of the parking facilities which serve the Building. Tenant will be bound by such rules and regulations and agrees to cause its employees, subtenants, assignees, contractors, suppliers, customers and invitees to observe the same: 1. Tenant will not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, subtenants, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. No vehicles are to be left in the parking areas overnight and no vehicles are to be parked in the parking areas other than normally sized passenger automobiles, motorcycles and pick-up trucks. No extended term storage of vehicles is permitted. 2. Vehicles must be parked entirely within painted stall lines of a single parking stall. 3. All directional signs and arrows must be observed. EXHIBIT "H" -4- 86 4. The speed limit within all parking areas shall be five (5) miles per hour. 5. Parking is prohibited: (a) in areas not striped for parking; (b) in aisles or on ramps; (c) where "no parking" signs are posted; (d) in cross-hatched areas; and (e) in such other areas as may be designated from time to time by Landlord or Landlord's parking operator. 6. Landlord reserves the right, without cost or liability to Landlord, to tow any vehicle if such vehicle's audio theft alarm system remains engaged for an unreasonable period of time. 7. Washing, waxing, cleaning or servicing of any vehicle in any area not specifically reserved for such purpose is prohibited. 8. Landlord may refuse to permit any person to park in the parking facilities who violates these rules with unreasonable frequency, and any violation of these rules shall subject the violator's car to removal, at such car owner's expense. Tenant agrees to use its best efforts to acquaint its employees, subtenants, assignees, contractors, suppliers, customers and invitees with these parking provisions, rules and regulations. 9. Parking stickers, access cards, or any other device or form of identification supplied by Landlord as a condition of use of the parking facilities shall remain the property of Landlord. Parking identification devices, if utilized by Landlord, must be displayed as requested and may not be mutilated in any manner. The serial number of the parking identification device may not be obliterated. Parking identification devices, if any, are not transferable and any device in the possession of an unauthorized holder will be void. Landlord reserves the right to refuse the sale of monthly stickers or other parking identification devices to Tenant or any of its agents, employees or representatives who willfully refuse to comply with these rules and regulations and all unposted city, state or federal ordinances, laws or agreements. 10. Loss or theft of parking identification devices or access cards must be reported to the management office in the Development immediately, and a lost or stolen report must be filed by the Tenant or user of such parking identification device or access card at the time. Landlord has the right to exclude any vehicle from the parking facilities that does not have a parking identification device or valid access card. Any parking identification device or access card which is reported lost or stolen and which is subsequently found in the possession of an unauthorized person will be confiscated and the illegal holder will be subject to prosecution. 11. All damage or loss claimed to be the responsibility of Landlord must be reported, itemized in writing and delivered to the management office located within the Development within ten (10) business days after any claimed damage or loss occurs. Any claim not so made is waived. Landlord is not responsible for damage by water or fire, or for the acts or omissions of others, or for articles left in vehicles. In any event, the total liability of Landlord, if any, is limited to Two Hundred Fifty Dollars ($250.00) for all damages or loss to any car. Landlord is not responsible for loss of use. 12. The parking operators, managers or attendants are not authorized to make or allow any exceptions to these rules and regulations, without the express written consent of Landlord. Any exceptions to these rules and regulations made by the parking operators, managers or attendants without the express written consent of Landlord will not be deemed to have been approved by Landlord. 13. Landlord reserves the right, without cost or liability to Landlord, to tow any vehicles which are used or parked in violation of these rules and regulations. 14. Landlord reserves the right from time to time to modify and/or adopt such other reasonable and non-discriminatory rules and regulations for the parking facilities as it deems reasonably necessary for the operation of the parking facilities. EXHIBIT "H" -5- 87

THE RYLAND GROUP, INC. EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION PLAN Amendment and Restatement Effective as of March 1, 1998 88 THE RYLAND GROUP, INC. EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION PLAN Amendment and Restatement Effective as of March 1, 1998 TABLE OF CONTENTS ARTICLE 1 --------- DEFINITIONS ----------- 1.1 ACCOUNT.....................................................1 ------- 1.2 BENEFICIARY.................................................1 ----------- 1.3 CODE........................................................1 ---- 1.4 COMPENSATION................................................1 ------------ 1.5 COMPENSATION DEFERRAL ACCOUNT...............................2 ----------------------------- 1.6 COMPENSATION DEFERRALS......................................2 ---------------------- 1.7 DESIGNATION DATE............................................2 ---------------- 1.8 EFFECTIVE DATE..............................................2 -------------- 1.9 ELIGIBLE INDIVIDUAL.........................................2 ------------------- 1.10 EMPLOYER....................................................2 -------- 1.11 EMPLOYER CONTRIBUTION CREDIT ACCOUNT........................2 ------------------------------------ 1.12 EMPLOYER CONTRIBUTION CREDITS...............................2 ----------------------------- 1.13 ENTRY DATE..................................................2 ---------- 1.14 PARTICIPANT.................................................2 ----------- 1.15 PARTICIPANT ENROLLMENT AND ELECTION FORM....................3 ---------------------------------------- 1.16 PLAN........................................................3 ---- 1.17 PLAN YEAR...................................................3 --------- 1.18 TRUST.......................................................3 ----- 1.19 TRUSTEE.....................................................3 ------- 1.20 VALUATION DATE..............................................3 -------------- ARTICLE 2 --------- ELIGIBILITY AND PARTICIPATION ----------------------------- 2.1 REQUIREMENTS................................................3 ------------ 2.2 RE-EMPLOYMENT, ETC..........................................3 ------------------ 2.3 CHANGE OF EMPLOYMENT CATEGORY...............................3 ----------------------------- i 89 ARTICLE 3 --------- CONTRIBUTIONS AND CREDITS ------------------------- 3.1 EMPLOYER CONTRIBUTION CREDITS...............................4 ----------------------------- 3.2 PARTICIPANT COMPENSATION DEFERRALS..........................5 ---------------------------------- 3.3 CONTRIBUTIONS TO THE TRUST..................................6 -------------------------- ARTICLE 4 --------- ALLOCATION OF FUNDS ------------------- 4.1 ALLOCATION OF DEEMED EARNINGS OR LOSSES ON ACCOUNTS.........7 --------------------------------------------------- 4.2 ACCOUNTING FOR DISTRIBUTIONS................................7 ---------------------------- 4.3 SEPARATE ACCOUNTS...........................................7 ----------------- 4.4 INTERIM VALUATIONS..........................................7 ------------------ 4.5 DEEMED INVESTMENT DIRECTIONS OF PARTICIPANTS................8 -------------------------------------------- 4.6 EXPENSES....................................................8 -------- 4.7 TAXES.......................................................9 ----- ARTICLE 5 --------- ENTITLEMENT TO BENEFITS ----------------------- 5.1 FIXED PAYMENT DATES; TERMINATION OF EMPLOYMENT..............9 ---------------------------------------------- 5.2 HARDSHIP DISTRIBUTIONS......................................9 ----------------------- 5.3 APPLICATION TO TRUSTEE.....................................10 ----------------------- 5.4 RE-EMPLOYMENT OF RECIPIENT, ETC............................10 -------------------------------- ARTICLE 6 --------- DISTRIBUTION OF BENEFITS ------------------------ 6.1 AMOUNT.....................................................10 ------ 6.2 METHOD OF PAYMENT..........................................10 ----------------- 6.3 DEATH BENEFITS.............................................11 -------------- 6.4 WITHHOLDING................................................11 ----------- ii 90 ARTICLE 7 --------- BENEFICIARIES; PARTICIPANT DATA ------------------------------- 7.1 DESIGNATION OF BENEFICIARIES...............................11 ---------------------------- 7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS ------------------------------------------- AND BENEFICIARIES; INABILITY TO LOCATE -------------------------------------- PARTICIPANTS OR BENEFICIARIES..............................12 ----------------------------- ARTICLE 8 --------- ADMINISTRATION -------------- 8.1 ADMINISTRATIVE AUTHORITY...................................12 ------------------------ 8.2 UNIFORMITY OF DISCRETIONARY ACTS...........................13 -------------------------------- 8.3 LITIGATION.................................................13 ---------- 8.4 CLAIMS PROCEDURE...........................................13 ---------------- ARTICLE 9 --------- AMENDMENT --------- 9.1 RIGHT TO AMEND.............................................15 -------------- 9.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION OF PLAN.......15 ---------------------------------------------------- ARTICLE 10 ---------- TERMINATION ----------- 10.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN..............15 --------------------------------------------- 10.2 AUTOMATIC TERMINATION OF PLAN..............................15 ----------------------------- 10.3 SUSPENSION OF DEFERRALS....................................15 ----------------------- 10.4 ALLOCATION AND DISTRIBUTION................................15 --------------------------- 10.5 SUCCESSOR TO EMPLOYER......................................16 --------------------- ARTICLE 11 ---------- THE TRUST --------- 11.1 ESTABLISHMENT OF TRUST.....................................16 ----------------------- iii 91 ARTICLE 12 ---------- MISCELLANEOUS ------------- 12.1 LIMITATIONS ON LIABILITY OF EMPLOYER.......................16 ------------------------------------ 12.2 CONSTRUCTION...............................................16 ------------ 12.3 SPENDTHRIFT PROVISION......................................17 --------------------- iv 92 THE RYLAND GROUP, INC. EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION PLAN Amendment and Restatement Effective as of March 1, 1998 RECITALS -------- This Amendment and Restatement of The Ryland Group, Inc. Executive and Director Deferred Compensation Plan (the "Plan"), is adopted by The Ryland Group, Inc. (the "Employer"), effective as of March 1, 1998. The Plan is maintained for the benefit of certain of the Employer's executive employees and Directors. When originally adopted on March 1, 1997, the Plan constituted an amendment and restatement of each of the following plans, all of which were merged into this Plan: The Ryland Group, Inc. Deferred Compensation Savings Plan; The Ryland Group, Inc. Salary Deferral Plan; and The Ryland Group, Inc. Unfunded Deferred Director Fee Plan. The purpose of the Plan is to offer participants an opportunity to elect to defer the receipt of compensation in order to provide deferred compensation benefits taxable pursuant to section 451 of the Internal Revenue Code of 1986, as amended (the "Code"), and to provide a deferred compensation vehicle to which the Employer may credit certain amounts on behalf of participants. The Plan is intended to be a "top-hat" plan under sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974 ("ERISA"). The purpose of this Amendment and Restatement of the Plan is to reflect in the Plan certain amendments to the Plan adopted since the Plan's original effective date. Accordingly, the following Amendment and Restatement of the Plan is adopted. ARTICLE 1 --------- DEFINITIONS ----------- 1.1 ACCOUNT means the balance credited to a Participant's or Beneficiary's Plan account, including contribution credits and deemed income, gains and losses credited thereto. A Participant's or Beneficiary's Account shall be determined as of the date of reference. 1.2 BENEFICIARY means any person or person so designated in accordance with the provisions of Article 7. 1.3 CODE means the Internal Revenue Code of 1986 and the regulations thereunder, as amended from time to time. 1 93 1.4 COMPENSATION means the total current cash and, in the case of a member of the Board of Directors, Stock Unit Plan remuneration and retainer fees payable in common stock of the Employer paid by the Employer to an Eligible Individual with respect to his or her service for the Employer. 1.5 COMPENSATION DEFERRAL ACCOUNT is defined in Section 3.2. 1.6 COMPENSATION DEFERRALS is defined in Section 3.2. 1.7 DESIGNATION DATE means the date or dates as of which a designation of deemed investment directions by an individual pursuant to Section 4.5, or any change in a prior designation of deemed investment directions by an individual pursuant to Section 4.5, shall become effective. The Designation Dates in any Plan Year shall be designated by the Employer. 1.8 EFFECTIVE DATE means the general effective date of the Plan, which shall be March 1, 1997. 1.9 ELIGIBLE INDIVIDUAL means, for any Plan Year (or applicable portion thereof), a person who is determined by the Employer, or its designee, to be a member of a select group of management or highly compensated employees of the Employer or a member of the Employer's Board of Directors and who is designated by the Employer, or its designee, to be an Eligible Individual under the Plan. By each December 31, the Employer, or its designee, shall notify those individuals, if any, who will be Eligible Individuals for the next Plan Year. If the Employer, or its designee, determines that an individual first becomes an Eligible Individual during a Plan Year, the Employer, or its designee, shall notify such individual of its determination and of the date during the Plan Year on which the individual shall first become an Eligible Individual. 1.10 EMPLOYER means The Ryland Group, Inc. and its successors and assigns unless otherwise herein provided, or any other corporation or business organization which, with the consent of The Ryland Group, Inc., or its successors or assigns, assumes the Employer's obligations hereunder, or any other corporation or business organization which agrees, with the consent of The Ryland Group, Inc., to become a party to the Plan. 1.11 EMPLOYER CONTRIBUTION CREDIT ACCOUNT is defined in Section 3.1. 1.12 EMPLOYER CONTRIBUTION CREDITS is defined in Section 3.1. 1.13 ENTRY DATE with respect to an individual means the first day of the pay period following the date on which the individual first becomes an Eligible Individual. 1.14 PARTICIPANT means any person so designated in accordance with the provisions of Article 2, including, where appropriate according to the context of the Plan, any former employee or former member of the Board of Directors who is or may become (or whose Beneficiaries may become) eligible to receive a benefit under the Plan. 2 94 1.15 PARTICIPANT ENROLLMENT AND ELECTION FORM means the form or forms on which a Participant elects to defer Compensation hereunder and/or on which the Participant makes certain other designations as required thereon. 1.16 PLAN means this The Ryland Group, Inc. Executive and Director Deferred Compensation Plan, an amendment, restatement and consolidation of The Ryland Group, Inc. Deferred Compensation Savings Plan, The Ryland Group, Inc. Salary Deferral Plan, and The Ryland Group, Inc. Unfunded Deferred Director Fee Plan, as amended from time to time. 1.17 PLAN YEAR means the twelve (12) month period ending on the December 31 of each year during which the Plan is in effect. 1.18 TRUST means the Trust established pursuant to Article 11. 1.19 TRUSTEE means the trustee of the Trust established pursuant to Article 11. 1.20 VALUATION DATE means the last day of each Plan Year and any other date that the Employer, in its sole discretion, designates as a Valuation Date. ARTICLE 2 --------- ELIGIBILITY AND PARTICIPATION ----------------------------- 2.1 REQUIREMENTS. Every Eligible Individual on the Effective Date shall be eligible to become or continue as a Participant on the Effective Date. Every other Eligible Individual shall be eligible to become a Participant on the first Entry Date occurring on or after the date on which he or she becomes an Eligible Individual. No individual shall become a Participant, however, if he or she is not an Eligible Individual on the date his or her participation is to begin. Participation in the Participant Compensation Deferral feature of the Plan is voluntary. In order to participate in the Participant Compensation Deferral feature of the Plan, an otherwise Eligible Individual must make written application in such manner as may be required by Section 3.2 and by the Employer and must agree to make Compensation Deferrals as provided in Article 3. 2.2 RE-EMPLOYMENT, ETC. If a Participant whose employment or Director status with the Employer is terminated is subsequently re-employed by or subsequently becomes a Director of the Employer, he or she shall become a Participant in accordance with the provisions of Section 2.1. 2.3 CHANGE OF EMPLOYMENT CATEGORY. During any period in which a Participant remains in the employ of the Employer, but ceases to be an Eligible Individual, he or she shall not be eligible to make Compensation Deferrals hereunder. 3 95 ARTICLE 3 --------- CONTRIBUTIONS AND CREDITS ------------------------- 3.1 EMPLOYER CONTRIBUTION CREDITS. There shall be established and maintained a separate Employer Contribution Credit Account in the name of each Participant who is an employee of the Employer. Such Account shall be credited or debited, as applicable, with (a) amounts equal to the Employer's Contribution Credits credited to that Account, if any; (b) any deemed earnings and losses (to the extent realized, based upon deemed fair market value of the Account's deemed assets) allocated to that Account; and (c) expenses and/or taxes charged to that Account. The Employer's Contribution Credits attributable to a Participant who is an employee of the Employer shall consist of the following: (i) matching contribution amounts for each pay period (but contributed with a frequency determined by the Employer) equal to the Participant's Participant Compensation Deferral amounts for that pay period, provided however that the total Employer matching contribution amounts under the Employer's 401(k) plan and this Plan for any pay period shall not exceed six percent (6%) of the Participant's Compensation from the Employer for that pay period; and (ii) for a particular year, any discretionary Employer contribution amounts that the Employer wishes to contribute, but is prohibited under applicable law from contributing, as discretionary Employer contribution amounts, under the Employer's 401(k) plan. Notwithstanding the foregoing, any matching contributions credited to a Participant's Account with respect to any pay period in excess of the limit provided in paragraph (i) above, as determined by the Employer in good faith, shall be returned to the Employer With respect to service credited prior to January 1, 1998, a Participant shall become vested in amounts credited to his or her Employer Contribution Account pursuant to the following vesting schedule: Years of Service Vested Percentage ---------------- ----------------- Less than 2 0% 2 25% 3 50% 4 75% 5 100% 4 96 With respect to service credited on or after January 1, 1998, a Participant shall become vested in amounts credited to his or her Employer Contribution Credit Account pursuant to the following vesting schedule: Years of Service Vested Percentage ---------------- ----------------- Less than 1 0% 1 20% 2 40% 3 60% 4 80% 5 100% For purposes of the foregoing, each Participant will be credited with one Year of Service for each twelve (12) month period of his employment with, or service as a member of the Board of Directors of, the Employer. Notwithstanding the foregoing, a Participant will become immediately vested in amounts credited to his or her Employer Contribution Account upon his or her death, his or her total and permanent disability (as determined by the Employer, in its discretion), his or her retirement from service to the Employer on or after age sixty-five (65), or a "Change in Control" of the Employer. For this purpose, a Change in Control shall occur upon any of the following: (i) the acquisition by any person, other than the Employer or any employee benefit plan(s) of the Employer, of beneficial ownership of twenty percent (20%) or more of the combined voting power of the Employer's then outstanding voting securities; (ii) the first purchase under a tender offer or exchange offer, other than an offer by the Employer or any employee benefit plan(s) of the Employer, pursuant to which shares of common stock of the Employer have been purchased; (iii)during any period of two (2) consecutive years, individuals who, at the beginning of such period constitute the Board of Directors of the Employer cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Employer of each new Director was approved by a vote of at least two-thirds (2/3rds) of the Directors then still in office who were Directors at the beginning of the period; or (iv) approval by stockholders of the Employer of a merger, consolidation, liquidation or dissolution of the Employer, or the sale of all or substantially all of the assets of the Employer. 5 97 3.2 PARTICIPANT COMPENSATION DEFERRALS. In accordance with rules established by the Employer, a Participant may elect to defer Compensation which is not yet payable and which would otherwise be paid to the Participant. Amounts so deferred will be considered a Participant's "Compensation Deferrals". Ordinarily, a Participant shall make such an election with respect to a coming twelve (12) month Plan Year during the period beginning on the December 1 and ending on the December 31 of the prior Plan Year, or during such other period established by the Employer. Compensation Deferrals shall be made through regular payroll or retainer/meeting fee deductions and/or through an election by the Participant to defer a bonus payment not yet payable to him or her at the time of the election. The Participant may reduce his or her regular payroll or retainer/meeting fee deduction Compensation Deferral amount for a particular year as of, and by written notice delivered to the Employer at least thirty (30) days prior to, the beginning of any regular payroll period, with such reduction being first effective for Compensation to be earned in that payroll period. In the case of bonus payment deferrals, the Participant may reduce his or her bonus payment deferral percentage for a particular year by giving notice to the Employer of the reduced bonus payment Compensation Deferral amount prior to the date the applicable bonus is first due to be paid. Once made, a Compensation Deferral regular payroll or retainer/meeting fee deduction election shall continue in force indefinitely, until reduced by the Participant as aforesaid or until changed by the Participant for a coming year on a subsequent Participant Enrollment and Election Form provided by the Employer. A bonus payment reduction election, or a reduction thereof pursuant to the foregoing, shall continue in force only for the Plan Year for which the election is first effective. Compensation Deferrals shall be deducted by the Employer from the pay of a deferring Participant. There shall be established and maintained by the Employer a separate Compensation Deferral Account in the name of each Participant to which shall be credited or debited: (a) amounts equal to the Participant's Compensation Deferrals; (b) amounts equal to any deemed earnings or losses (to the extent realized, based upon deemed fair market value of the Account's deemed assets) attributable or allocable thereto; and (c) expenses and/or taxes charged to that Account. A Participant shall at all times be 100% vested in amounts credited to his or her Participant Compensation Deferral Account. 3.3 CONTRIBUTIONS TO THE TRUST. Amounts shall be contributed by the Employer to the Trust maintained under Section 11.1 equal to the amounts required to be credited to the Participant's Account under Sections 3.1 and 3.2. The Employer shall make a good faith effort to contribute these amounts to the Trust as soon as is practicable after such amounts are determined. Employer contributions to the Trust shall be made in cash, Stock Unit Plan credits, or in common stock of the Employer. 6 98 ARTICLE 4 --------- ALLOCATION OF FUNDS ------------------- 4.1 ALLOCATION OF DEEMED EARNINGS OR LOSSES ON ACCOUNTS. Subject to Section 4.5, each Participant shall have the right to direct the Employer as to how amounts in his or her Plan Account shall be deemed to be invested. Subject to such limitations as may from time to time be required by law, imposed by the Employer or the Trustee or contained elsewhere in the Plan, and subject to such operating rules and procedures as may be imposed from time to time by the Employer, prior to the date on which a direction will become effective, the Participant shall have the right to direct the Employer as to how amounts in his or her Account shall be deemed to be invested. The Employer shall direct the Trustee to invest the account maintained in the Trust on behalf of the Participant pursuant to the deemed investment directions the Employer properly has received from the Participant. The value of the Participant's Account shall be equal to the value of the account maintained under the Trust on behalf of the Participant. As of each valuation date of the Trust, the Participant's Account will be credited or debited to reflect the Participant's deemed investments of the Trust. The Participant's Plan Account will be credited or debited with the increase or decrease in the realizable net asset value or credited interest, as applicable, of the designated deemed investments, as follows. As of each Valuation Date, an amount equal to the net increase or decrease in realizable net asset value or credited interest, as applicable (as determined by the Employer or the Trustee, as applicable), of each deemed investment option within the Account since the preceding Valuation Date shall be allocated among all Participants' Accounts deemed to be invested in that investment option in accordance with the ratio which the portion of the Account of each Participant which is deemed to be invested within that investment option, determined as provided herein, bears to the aggregate of all amounts deemed to be invested within that investment option. 4.2 ACCOUNTING FOR DISTRIBUTIONS. As of the date of any distribution hereunder, the distribution made hereunder to the Participant or his or her Beneficiary or Beneficiaries shall be charged to such Participant's Account. Such amounts shall be charged on a pro rata basis against the investments of the Trust in which the Participant's Account is deemed to be invested. 4.3 SEPARATE ACCOUNTS. A separate account under the Plan shall be established and maintained hereunder to reflect the Account for each Participant with sub-accounts to show separately the applicable deemed investments of the Account. 7 99 4.4 INTERIM VALUATIONS. If it is determined by the Employer that the value of a Participant's Account as of any date on which distributions are to be made differs materially from the value of the Participant's Account on the prior Valuation Date upon which the distribution is to be based, the Employer, in its discretion, shall have the right to designate any date in the interim as a Valuation Date for the purpose of revaluing the Participant's Account so that the Account will, prior to the distribution, reflect its share of such material difference in value. 4.5 DEEMED INVESTMENT DIRECTIONS OF PARTICIPANTS. Subject to such limitations as may from time to time be required by law, imposed by the Employer or the Trustee or contained elsewhere in the Plan, and subject to such operating rules and procedures as may be imposed from time to time by the Employer, prior to and effective for each Designation Date, each Participant may communicate to the Employer a direction as to how his or her Plan Accounts should be deemed to be invested among such categories of deemed investments as may be made available by the Employer hereunder. Such direction shall designate the percentage (in any whole percent multiples) of the Participant's Plan Account which is requested to be deemed to be invested in such categories of deemed investments. Notwithstanding any contrary provision of the Plan, Participants shall not have the right to direct the deemed investment of deferrals of director retainer fees that otherwise would have been payable in common stock of the Employer. Rather, deferrals of director retainer fees that otherwise would have been payable in common stock of the Employer shall at all times be deemed to be invested in common stock of the Employer. An election concerning deemed investment choices shall continue indefinitely until changed by the Participant in a manner specified by the Employer. If the Employer receives an initial or revised deemed investment direction which it deems to be incomplete, unclear or improper, the Participant's investment direction then in effect shall remain in effect (or, in the case of a deficiency in an initial deemed investment direction, the Participant shall be deemed to have filed no deemed investment direction) until the next Designation Date, unless the Employer provides for, and permits the application of, corrective action prior thereto. If the Employer possesses (or is deemed to possess as provided above) at any time directions as to the deemed investment of less than all of a Participant's Account, the Participant shall be deemed to have directed that the undesignated portion of the Account be deemed to be invested in a money market, fixed income, stable value or similar fund made available under the Plan as determined by the Employer in its discretion. Each Participant hereunder, as a condition to his or her participation hereunder, agrees to indemnify and hold harmless the Employer and its agents and representatives from any losses or damages of any kind relating to the deemed investment of the Participant's Account hereunder. Each reference in this Section to a Participant shall be deemed to include, where applicable, a reference to a Beneficiary. 8 100 4.6 EXPENSES. Expenses, including Trustee fees, allocable to the administration or operation of an Account maintained under the Plan shall be paid by the Employer unless, in the discretion of the Employer, the Employer elects to charge such expenses, or any portion thereof, against the appropriate Participant's Account or Participants' Accounts. If an expense, or any portion thereof, is charged against a Participant's Account, at the discretion of the Employer, such expense, or portion thereof, either (i) will reduce the contribution to the Trust under Section 3.3 next due to be made by the Employer in respect of the Account, or (ii) will be paid from the Trust to the Employer out of assets of the Trust corresponding to the Participant's Account hereunder. 4.7 TAXES. Any taxes generated by earnings in an Account, as determined by the Employer, shall be paid by the Employer unless, in the discretion of the Employer, the Employer elects to charge such taxes against the appropriate Participant's Account or Participants' Accounts. If a tax amount is charged against a Participant's Account, at the discretion of the Employer, such expense either (i) will reduce the contribution to the Trust under Section 3.3 next due to be made by the Employer in respect of the Account, or (ii) will be paid from the Trust to the Employer out of assets of the Trust corresponding to the Participant's Account. ARTICLE 5 --------- ENTITLEMENT TO BENEFITS ----------------------- 5.1 FIXED PAYMENT DATES; TERMINATION OF EMPLOYMENT. On his or her Participant Enrollment and Election Form, a Participant may select a fixed payment date for the payment or commencement of payment of his or her vested Account, which will be valued and payable according to the provisions of Article 6. Such payment dates may be extended to later dates so long as elections to so extend are made by the Participant prior to the then applicable fixed date. Such payment dates may not be accelerated. Alternatively, on his or her Participant Enrollment and Election Form, a Participant may select payment or commencement of payment of his or her vested Account at his or her termination of employment or Director status with the Employer, or at the earlier of a fixed payment date or his or her termination of employment or Director status with the Employer. In either of these cases, the extension and non-acceleration rules discussed above shall apply to such fixed payment date and/or termination of employment date, as applicable. Any fixed payment date elected by a Participant as provided above must be no earlier than the January 1 of the third calendar year after the calendar year in which the election is made. If a Participant does not select a payment date or dates as aforesaid, his or her vested account shall be distributed or commence to be distributed, as provided in Article 6, at the termination of his or her employment or Director status with the Employer. 5.2 HARDSHIP DISTRIBUTIONS. In the event of financial hardship of the Participant, as hereinafter defined, the Participant may apply to the Employer for the distribution of all or any part of his or her vested Account. The Employer shall consider the circumstances of each such case, and the best interests of the Participant and his or her family, and shall have the right, in its sole discretion, if applicable, to allow such distribution, or, if applicable, to direct a distribution of part of the amount requested, or to refuse to allow any distribution. Upon a finding of financial hardship, the Employer shall make the appropriate distribution to the Participant from amounts held by the Employer in respect of the Participant's vested Account. In no event shall the aggregate amount of the distribution exceed either the full value of the Participant's vested Account or the amount determined by the Employer to be necessary to alleviate the Participant's financial hardship (which financial hardship may be considered to include any taxes due because of the distribution occurring because of this Section), and which is not reasonably available from other resources of the Participant. For purposes of this Section, the value of the Participant's vested Account shall be determined as of the date of the distribution. 9 101 "Financial hardship" means (a) a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent (as defined in Code section 152(a)) of the Participant, (b) loss of the Participant's property due to casualty, or (c) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, each as determined to exist by the Employer. A distribution may be made under this Section only with the consent of the Employer. 5.3 APPLICATION TO TRUSTEE. On the date or dates on which a Participant or Beneficiary is entitled to payment under Section 5.1, the Participant or Beneficiary need not make application for payment to the Employer, but instead may make application for payment directly to the Trustee who shall pay the Participant or Beneficiary the appropriate amount directly from the Trust without the consent of the Employer. The Trustee shall report the amount of each such payment, and any withholding thereon, to the Employer. 5.4 RE-EMPLOYMENT OF RECIPIENT, ETC.. If a Participant receiving installment distributions pursuant to Section 6.2 is re-employed by the Employer (or becomes a member of the Employer's Board of Directors), the remaining distributions due to the Participant shall be suspended until such time as the Participant (or his or her Beneficiary) once again becomes eligible for benefits under Section 5.1 or 5.2, at which time such distribution shall commence, subject to the limitations and conditions contained in this Plan. ARTICLE 6 --------- DISTRIBUTION OF BENEFITS ------------------------ 6.1 AMOUNT. A Participant (or his or her Beneficiary) shall become entitled to receive, on or about the date or dates selected by the Participant on his or her Participant Enrollment and Election Form or, if none, on or about the date of the Participant's termination of employment or Director status with the Employer (or earlier as provided in Article 5), a distribution in an aggregate amount equal to the Participant's vested Account. Any payment due hereunder from the Trust which is not paid by the Trust for any reason will be paid by the Employer from its general assets. 10 102 6.2 METHOD OF PAYMENT. (a) Cash Or In-Kind Payments. Payments under the Plan shall be made in cash or in-kind, as elected by the Participant, as permitted by the Employer and the Trustee in their sole and absolute discretion and subject to applicable restrictions on transfer as may be applicable legally or contractually. Notwithstanding the foregoing, payments in respect of Stock Unit Plan credits that are deemed to be invested in common stock of the Employer, that are held in a Participant's Account, will be paid in the form of Employer common stock (except as otherwise permitted by the Employer). (b) Timing and Manner of Payment. In the case of distributions to a Participant or his or her Beneficiary by virtue of an entitlement pursuant to Sections 5.1, an aggregate amount equal to the Participant's vested Account will be paid by the Trust or the Employer, as provided in Section 6.1, in a lump sum or in five (5) or ten (10) substantially equal annual installments (adjusted for gains and losses), as selected by the Participant as provided in Article 5. If a Participant fails to designate properly the manner of payment of the Participant's benefit under the Plan, such payment will be in a lump sum. If the whole or any part of a payment hereunder is to be in installments, the total to be so paid shall continue to be deemed to be invested pursuant to Sections 4.1 and 4.5 under such procedures as the Employer may establish, in which case any deemed income, gain, loss or expense or tax allocable thereto (as determined by the Trustee, in its discretion) shall be reflected in the installment payments, in such equitable manner as the Trustee shall determine. 6.3 DEATH BENEFITS. If a Participant dies before terminating his or her employment or Director status with the Employer and before the commencement of payments to the Participant hereunder, the entire value of the Participant's Account shall be paid, at the time(s) selected by the Participant under Article 5 and in the manner provided in Section 6.2, to the person or persons designated in accordance with Section 7.1. Upon the death of a Participant after payments hereunder have begun but before he or she has received all payments to which he or she is entitled under the Plan, the remaining benefit payments shall be paid to the person or persons designated in accordance with Section 7.1, in the manner in which such benefits were payable to the Participant. 6.4 WITHHOLDING. All distributions under the Plan are subject to any applicable tax withholding, as determined by the Employer in its discretion. ARTICLE 7 --------- BENEFICIARIES; PARTICIPANT DATA ------------------------------- 7.1 DESIGNATION OF BENEFICIARIES. Each Participant from time to time may designate any person or persons (who may be named contingently or successively) to receive such benefits as may be payable under the Plan upon or after the Participant's death, and such designation may be changed from time to time by the Participant by filing a new designation. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Employer, and will be effective only when filed in writing with the Employer during the Participant's lifetime. 11 103 In the absence of a valid Beneficiary designation, or if, at the time any benefit payment is due to a Beneficiary, there is no living Beneficiary validly named by the Participant, the Employer shall pay any such benefit payment to the Participant's spouse, if then living, but otherwise to the Participant's then living descendants, if any, per stirpes, but, if none, to the Participant's estate. In determining the existence or identity of anyone entitled to a benefit payment, the Employer may rely conclusively upon information supplied by the Participant's personal representative, executor or administrator. If a question arises as to the existence or identity of anyone entitled to receive a benefit payment as aforesaid, or if a dispute arises with respect to any such payment, then, notwithstanding the foregoing, the Employer, in its sole discretion, may distribute such payment to the Participant's estate without liability for any tax or other consequences which might flow therefrom, or may take such other action as the Employer deems to be appropriate. 7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND BENEFICIARIES; INABILITY TO LOCATE PARTICIPANTS OR BENEFICIARIES. Any communication, statement or notice addressed to a Participant or to a Beneficiary at his or her last post office address as shown on the Employer's records shall be binding on the Participant or Beneficiary for all purposes of the Plan. The Employer shall not be obliged to search for any Participant or Beneficiary beyond the sending of a registered letter to such last known address. If the Employer notifies any Participant or Beneficiary that he or she is entitled to an amount under the Plan and the Participant or Beneficiary fails to claim such amount or make his or her location known to the Employer within three (3) years thereafter, then, except as otherwise required by law, if the location of one or more of the next of kin of the Participant is known to the Employer, the Employer may direct distribution of such amount to any one or more or all of such next of kin, and in such proportions as the Employer determines. If the location of none of the foregoing persons can be determined, the Employer shall have the right to direct that the amount payable shall be deemed to be a forfeiture, except that the dollar amount of the forfeiture, unadjusted for deemed gains or losses in the interim, shall be paid by the Employer if a claim for the benefit subsequently is made by the Participant or the Beneficiary to whom it was payable. If a benefit payable to an unlocated Participant or Beneficiary is subject to escheat pursuant to applicable state law, the Employer shall not be liable to any person for any payment made in accordance with such law. ARTICLE 8 --------- ADMINISTRATION -------------- 8.1 ADMINISTRATIVE AUTHORITY. Except as otherwise specifically provided herein, the Employer, acting through its Board of Directors or the designee or designees thereof, shall have the sole responsibility for and the sole control of the operation and administration of the Plan, and shall have the power and authority to take all action and to make all decisions and interpretations which may be necessary or appropriate in order to administer and operate the Plan, including, without limiting the generality of the foregoing, the power, duty and responsibility to: 12 104 (a) Resolve and determine all disputes or questions arising under the Plan, and to remedy any ambiguities, inconsistencies or omissions in the Plan. (b) Adopt such rules of procedure and regulations as in its opinion may be necessary for the proper and efficient administration of the Plan and as are consistent with the Plan. (c) Implement the Plan in accordance with its terms and the rules and regulations adopted as above. (d) Make determinations with respect to the eligibility of any Eligible Individual as a Participant and make determinations concerning the crediting of Plan Accounts. (e) Appoint any persons or firms, or otherwise act to secure specialized advice or assistance, as it deems necessary or desirable in connection with the administration and operation of the Plan, and the Employer shall be entitled to rely conclusively upon, and shall be fully protected in any action or omission taken by it in good faith reliance upon, the advice or opinion of such firms or persons. The Employer shall have the power and authority to delegate from time to time by written instrument all or any part of its duties, powers or responsibilities under the Plan, both ministerial and discretionary, as it deems appropriate, to any person or committee, and in the same manner to revoke any such delegation of duties, powers or responsibilities. Any action of such person or committee in the exercise of such delegated duties, powers or responsibilities shall have the same force and effect for all purposes hereunder as if such action had been taken by the Employer. Further, the Employer may authorize one or more persons to execute any certificate or document on behalf of the Employer, in which event any person notified by the Employer of such authorization shall be entitled to accept and conclusively rely upon any such certificate or document executed by such person as representing action by the Employer until such notified person shall have been notified of the revocation of such authority. 8.2 UNIFORMITY OF DISCRETIONARY ACTS. Whenever in the administration or operation of the Plan discretionary actions by the Employer are required or permitted, such actions shall be consistently and uniformly applied to all persons similarly situated, and no such action shall be taken which shall discriminate in favor of any particular person or group of persons. 8.3 LITIGATION. Except as may be otherwise required by law, in any action or judicial proceeding affecting the Plan, no Participant or Beneficiary shall be entitled to any notice or service of process, and any final judgment entered in such action shall be binding on all persons interested in, or claiming under, the Plan. 8.4 CLAIMS PROCEDURE. Any person claiming a benefit under the Plan (a "Claimant") shall present the claim, in writing, to the Employer or the Trustee, and the Employer or the Trustee shall respond in writing. If the claim is denied, the written notice of denial shall state, in a manner calculated to be understood by the Claimant: 13 105 (a) The specific reason or reasons for the denial, with specific references to the Plan provisions on which the denial is based; (b) A description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation of why such material or information is necessary; and (c) An explanation of the Plan's claims review procedure. The written notice denying or granting the Claimant's claim shall be provided to the Claimant within ninety (90) days after the Employer's or Trustee's receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension is required, written notice of the extension shall be furnished by the Employer or Trustee to the Claimant within the initial ninety (90) day period and in no event shall such an extension exceed a period of ninety (90) days from the end of the initial ninety (90) day period. Any extension notice shall indicate the special circumstances requiring the extension and the date on which the Employer or Trustee expects to render a decision on the claim. Any claim not granted or denied within the period noted above shall be deemed to have been denied. Any Claimant whose claim is denied, or deemed to have been denied under the preceding sentence (or such Claimant's authorized representative), may, within sixty (60) days after the Claimant's receipt of notice of the denial, or after the date of the deemed denial, request a review of the denial by notice given, in writing, to the Employer or Trustee. Upon such a request for review, the claim shall be reviewed by the Employer or Trustee (or its designated representative) which may, but shall not be required to, grant the Claimant a hearing. In connection with the review, the Claimant may have representation, may examine pertinent documents, and may submit issues and comments in writing. The decision on review normally shall be made within sixty (60) days of the Employer's receipt of the request for review. If an extension of time is required due to special circumstances, the Claimant shall be notified, in writing, by the Employer or Trustee, and the time limit for the decision on review shall be extended to one hundred twenty (120) days. The decision on review shall be in writing and shall state, in a manner calculated to be understood by the Claimant, the specific reasons for the decision and shall include references to the relevant Plan provisions on which the decision is based. The written decision on review shall be given to the Claimant within the sixty (60) day (or, if applicable, the one hundred twenty (120) day) time limit discussed above. If the decision on review is not communicated to the Claimant within the sixty (60) day (or, if applicable, the one hundred twenty (120) day) period discussed above, the claim shall be deemed to have been denied upon review. All decisions on review shall be final and binding with respect to all concerned parties. 14 106 ARTICLE 9 --------- AMENDMENT --------- 9.1 RIGHT TO AMEND. The Employer, by written instrument executed by a duly authorized representative of the Employer, shall have the right to amend the Plan, at any time and with respect to any provisions hereof, and all parties hereto or claiming any interest hereunder shall be bound by such amendment; provided, however, that no such amendment shall deprive a Participant or a Beneficiary of a right accrued hereunder prior to the date of the amendment. 9.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION OF PLAN. Notwithstanding the provisions of Section 9.1, the Plan may be amended by the Employer at any time, retroactively if required in the opinion of the Employer, in order to ensure that the Plan is characterized as "top-hat" plan as described under ERISA sections 201(2), 301(a)(3), and 401(a)(1), and to conform the Plan to the provisions and requirements of any applicable law (including ERISA and the Code). No such amendment shall be considered prejudicial to any interest of a Participant or a Beneficiary hereunder. ARTICLE 10 ---------- TERMINATION ----------- 10.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN. The Employer reserves the right to terminate the Plan and/or its obligation to make further credits to Plan Accounts. The Employer also reserves the right to suspend the operation of the Plan for a fixed or indeterminate period of time. 10.2 AUTOMATIC TERMINATION OF PLAN. The Plan automatically shall terminate upon the dissolution of the Employer, or upon its merger into or consolidation with any other corporation or business organization if there is a failure by the surviving corporation or business organization to adopt specifically and agree to continue the Plan. 10.3 SUSPENSION OF DEFERRALS. In the event of a suspension of the Plan, the Employer shall continue all aspects of the Plan, other than Compensation Deferrals and Employer Contribution Credits, during the period of the suspension, in which event payments hereunder will continue to be made during the period of the suspension in accordance with Articles 5 and 6. 15 107 10.4 ALLOCATION AND DISTRIBUTION. This Section shall become operative on a complete termination of the Plan. The provisions of this Section also shall become operative in the event of a partial termination of the Plan, as determined by the Employer, but only with respect to that portion of the Plan attributable to the Participants to whom the partial termination is applicable. Upon the effective date of any such event, notwithstanding any other provisions of the Plan, no persons who were not theretofore Participants shall be eligible to become Participants, the value of the interest of all Participants and Beneficiaries shall be determined and, after deduction of estimated expenses in liquidating and, if applicable, paying Plan benefits, paid to them as soon as is practicable after such termination. 10.5 SUCCESSOR TO EMPLOYER. Any corporation or other business organization which is a successor to the Employer by reason of a consolidation, merger or purchase of substantially all of the assets of the Employer shall have the right to become a party to the Plan by adopting the same by resolution of the entity's board of directors or other appropriate governing body. If, within ninety (90) days from the effective date of such consolidation, merger or sale of assets, such new entity does not become a party hereto, as above provided, the Plan automatically shall be terminated, and the provisions of Section 10.4 shall become operative. ARTICLE 11 ---------- THE TRUST --------- 11.1 ESTABLISHMENT OF TRUST. The Employer shall establish the Trust with the Trustee pursuant to such terms and conditions as are set forth in the Trust agreement to be entered into between the Employer and the Trustee. The Trust is intended to be treated as a "grantor" trust under the Code and the establishment of the Trust is not intended to cause the Participant to realize current income on amounts contributed thereto, and the Trust shall be so interpreted. ARTICLE 12 ---------- MISCELLANEOUS ------------- 12.1 LIMITATIONS ON LIABILITY OF EMPLOYER. Neither the establishment of the Plan nor any modification thereof, nor the creation of any account under the Plan, nor the payment of any benefits under the Plan shall be construed as giving to any Participant or other person any legal or equitable right against the Employer, or any officer or employer thereof except as provided by law or by any Plan provision. The Employer does not in any way guarantee any Participant's Account from loss or depreciation, whether caused by poor investment performance of a deemed investment or the inability to realize upon an investment due to an insolvency affecting an investment vehicle or any other reason. In no event shall the Employer, or any successor, employee, officer, director or stockholder of the Employer, be liable to any person on account of any claim arising by reason of the provisions of the Plan or of any instrument or instruments implementing its provisions, or for the failure of any Participant, Beneficiary or other person to be entitled to any particular tax consequences with respect to the Plan, or any credit or distribution hereunder. 16 108 12.2 CONSTRUCTION. If any provision of the Plan is held to be illegal or void, such 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 said illegal or invalid provision had never been inserted herein. For all purposes of the Plan, where the context admits, the singular shall include the plural, and the plural shall include the singular. Headings of Articles and Sections herein are inserted only for convenience of reference and are not to be considered in the construction of the Plan. The laws of the State of Maryland shall govern, control and determine all questions of law arising with respect to the Plan and the interpretation and validity of its respective provisions, except where those laws are preempted by the laws of the United States. Participation under the Plan will not give any Participant the right to be retained in the service of the Employer nor any right or claim to any benefit under the Plan unless such right or claim has specifically accrued hereunder. The Plan is intended to be and at all times shall be interpreted and administered so as to qualify as a top-hat plan (as aforesaid), and no provision of the Plan shall be interpreted so as to give any individual any right in any assets of the Employer which right is greater than the rights of a general unsecured creditor of the Employer. 12.3 SPENDTHRIFT PROVISION. No amount payable to a Participant or a Beneficiary under the Plan will, except as otherwise specifically provided by law, be subject in any manner to anticipation, alienation, attachment, garnishment, sale, transfer, assignment (either at law or in equity), levy, execution, pledge, encumbrance, charge or any other legal or equitable process, and any attempt to do so will be void; nor will any benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements or torts of the person entitled thereto. Further, (i) the withholding of taxes from Plan benefit payments, (ii) the recovery under the Plan of overpayments of benefits previously made to a Participant or Beneficiary, (iii) if applicable, the transfer of benefit rights from the Plan to another plan, or (iv) the direct deposit of benefit payments to an account in a banking institution (if not actually part of an arrangement constituting an assignment or alienation) shall not be construed as an assignment or alienation. In the event that any Participant's or Beneficiary's benefits hereunder are garnished or attached by order of any court, the Employer or Trustee may bring an action or a declaratory judgment in a court of competent jurisdiction to determine the proper recipient of the benefits to be paid under the Plan. During the pendency of said action, any benefits that become payable shall be held as credits to the Participant's or Beneficiary's Account or, if the Employer or Trustee prefers, paid into the court as they become payable, to be distributed by the court to the recipient as the court deems proper at the close of said action. IN WITNESS WHEREOF, the Employer has caused this Amendment and Restatement of the Plan to be executed and its seal to be affixed hereto, effective as of the 1st day of March, 1998. ATTEST/WITNESS THE RYLAND GROUP, INC. /S/ Kelly Elinsky By: /S/ Edward W. Gold (SEAL) - ---------------------------------- ------------------------------ Print: Kelly Elinsky Print Name: Edward W. Gold Date: April 13, 1999 17 109

Exhibit 11 Computation of Per Share Earnings December 31, December 31, December 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Basic: Net earnings before extraordinary item $66,695 $43,592 $21,882 Extraordinary item, net of tax 0 (3,326) 0 ------------- ------------- ------------ Net earnings 66,695 40,266 21,882 Adjustment for dividends on convertible preferred shares (831) (1,000) (1,630) ------------- ------------- ------------ Net earnings applicable to common stockholders $65,864 $39,266 $20,252 Weighted average common shares outstanding 14,678,925 14,709,404 15,227,829 Net earnings per share before extraordinary item $4.49 $2.90 $1.33 Extraordinary item 0.00 (0.23) 0.00 ------------- ------------- ------------ Net earnings per share $4.49 $2.67 $1.33 ============= ============= ============ Diluted: Net earnings before extraordinary item $66,695 $43,592 $21,882 Extraordinary item, net of tax 0 (3,326) 0 ------------- ------------- ------------ Net earnings 66,695 40,266 21,882 Adjustment for dividends on convertible preferred shares 0 0 (1,630) ------------- ------------- ------------ Net earnings applicable to common stockholders $66,695 $40,266 $20,252 ============= ============= ============ Weighted average common shares outstanding 14,678,925 14,709,404 15,227,829 Common stock equivalents: Stock options 292,580 316,640 69,577 Equity Incentive plan 149,622 113,894 107,661 Convertible preferred stock (1) 384,255 463,374 0 ------------- ------------- ------------ Total 15,505,382 15,603,312 15,405,067 ============= ============= ============ Net earnings per share before extraordinary item $4.30 $2.79 $1.32 Extraordinary item 0.00 (0.21) 0.00 ------------- ------------- ------------ Net earnings per share $4.30 $2.58 $1.32 ============= ============= ============ (1) The assumed conversion of preferred shares was dilutive for the years ended December 31, 1999 and 1998. For the year ending December 31, 1997 the net earnings was adjusted for dividends on convertible preferred shares as the adjustment for incremental dividends related to the assumed conversion of convertible preferred shares would be anti-dilutive. 110

THE RYLAND GROUP, INC. AND SUBSIDIARIES Selected Financial Data (amounts in millions, except share data) unaudited 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ ANNUAL RESULTS Revenues Homebuilding $ 1,959 $ 1,695 $ 1,557 $ 1,473 $ 1,458 Financial services and limited-purpose subsidiaries 50 70 93 107 127 ------- ------- ------- ------- ------- Total 2,009 1,765 1,650 1,580 1,585 Cost of sales-- homebuilding 1 1,633 1,429 1,346 1,277 1,325 Selling, general and administrative expenses 239 216 211 203 211 Interest expense 28 45 57 74 91 ------- ------- ------- ------- ------- Earnings (loss) from continuing operations before taxes 109 75 36 26 (42) Tax expense (benefit) 42 32 14 10 (17) ------- ------- ------- ------- ------- Net earnings (loss) from continuing operations before extraordinary item 67 43 22 16 (25) Discontinued operations, net of taxes 2 0 0 0 0 22 Extraordinary item, extinguishment of debt 3 0 (3) 0 0 0 ------- ------- ------- ------- ------- Net earnings (loss) $ 67 $ 40 $ 22 $ 16 $ (3) - ------------------------------------------------------------------------------------------------------------------ YEAR-END POSITION Assets Housing inventories $ 823 $ 642 $ 555 $ 575 $ 538 Mortgage loans, held-for-sale 40 159 200 180 285 Mortgage-backed securities and notes receivable 99 112 153 144 113 Collateral for bonds payable of limited-purpose subsidiaries 40 92 142 214 375 Other assets 246 210 233 226 270 ------- ------- ------- ------- ------- Total assets $ 1,248 $ 1,215 $ 1,283 $ 1,339 $ 1,581 - ------------------------------------------------------------------------------------------------------------------ Liabilities Long-term debt $ 378 $ 308 $ 310 $ 354 $ 397 Short-term notes payable 157 223 341 326 367 Bonds payable of limited-purpose subsidiaries 37 88 137 207 365 Other liabilities 290 250 190 142 151 ------- ------- ------- ------- ------- Total liabilities $ 862 $ 869 $ 978 $ 1,029 $ 1,280 - ------------------------------------------------------------------------------------------------------------------ Stockholders' equity $ 386 $ 346 $ 305 $ 310 $ 301 - ------------------------------------------------------------------------------------------------------------------ PER COMMON SHARE DATA Basic Net earnings (loss) from continuing operations before extraordinary item $ 4.49 $ 2.90 $ 1.33 $ 0.88 $ (1.78) Net earnings (loss) $ 4.49 $ 2.67 $ 1.33 $ 0.88 $ (0.31) Diluted Net earnings (loss) from continuing operations before extraordinary item $ 4.30 $ 2.79 $ 1.32 $ 0.87 $ (1.78) Net earnings (loss) $ 4.30 $ 2.58 $ 1.32 $ 0.87 $ (0.31) Dividends declared $ 0.16 $ 0.16 $ 0.27 $ 0.60 $ 0.60 Stockholders' equity $ 27.22 $ 22.83 $ 20.31 $ 19.00 $ 18.69 - ------------------------------------------------------------------------------------------------------------------ 1. 1995 reflects a $45 million pretax charge related to homebuilding inventories and investments in unconsolidated joint ventures. 2. The Company sold its institutional mortgage securities administration business in the second quarter of 1995. Results from discontinued operations include a second-quarter gain on this sale and the results of operations for the first half of 1995. 3. The Company reported an extraordinary after-tax charge of $3.3 million in 1998 which was related to a loss on the early extinguishment of debt. 21 111 THE RYLAND GROUP, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Results of Operations and Financial Condition THE COMPANY Operations of The Ryland Group and its subsidiaries ("the Company") consist of two business segments: homebuilding and financial services. The Company's homebuilding segment constructs and sells single-family attached and detached homes in 21 markets. The financial services segment provides mortgage-related products and services for retail customers and conducts investment activities. RESULTS OF OPERATIONS Consolidated The Company reported record consolidated net earnings from operations of $66.7 million, or $4.49 per share ($4.30 per share diluted), for 1999, compared to consolidated net earnings (before extraordinary item) of $43.6 million, or $2.90 per share ($2.79 per share diluted), for 1998 and consolidated net earnings of $21.9 million, or $1.33 per share ($1.32 per share diluted), for 1997. The homebuilding segment reported pretax earnings of $120.8 million for 1999, compared to pretax earnings of $80.1 million for 1998 and pretax earnings of $35.2 million for 1997. Homebuilding results in 1999 increased from 1998 primarily due to higher gross profit margins combined with increased closing volume and lower interest expense. Homebuilding results in 1998 increased from 1997 also due to higher gross profit margins combined with increased closing volume and lower interest expense. The financial services segment reported pretax earnings of $11.8 million for 1999, compared to $5.7 million (excluding a $6.1 million gain on the bulk sale of servicing rights) reported for the full year 1998 and $15.6 million reported for 1997. The increase in 1999 from 1998, excluding the $6.1 million gain, was due to cost-reduction initiatives and lower interest expense. The decrease in 1998 from 1997 was primarily attributable to a significant reduction in the Company's loan servicing operations due to portfolio sales in 1997 and in the first quarter of 1998. Corporate expenses represent the costs of corporate functions which support the business segments. Corporate expenses of $23.3 million for 1999 and $16.7 million for 1998 increased $6.6 million and $2.4 million, respectively, from prior year levels, primarily resulting from increases in incentive compensation attributable to higher earnings levels in 1999 and 1998 and charges totaling $3.4 million in 1999, relating to the relocation of the corporate office to California. The Company's limited-purpose subsidiaries no longer issue mortgage-backed securities and mortgage-participation securities, but they continue to hold collateral for previously issued mortgage-backed bonds in which the Company maintains a residual interest. Revenues, expenses and portfolio balances continue to decline as mortgage collateral pledged to secure the bonds decreases due to scheduled payments, prepayments and exercises of early redemption provisions. Revenues have approximated expenses for the last three years. HOMEBUILDING SEGMENT Results of operations for the homebuilding segment are summarized as follows (amounts in thousands, except average closing price): 1999 1998 1997 - ----------------------------------------------------------------- Revenues Residential $1,937,387 $1,664,267 $1,527,107 Other 21,445 30,238 30,219 ---------- ---------- ---------- Total 1,958,832 1,694,505 1,557,326 Gross profit 325,738 265,742 211,185 Selling, general and administrative expenses 193,193 168,004 152,071 Interest expense 11,715 17,681 23,964 ---------- ---------- ---------- Homebuilding pretax earnings $ 120,830 $ 80,057 $ 35,150 Average closing price $ 190,000 $ 185,000 $ 182,000 - ----------------------------------------------------------------- Homebuilding revenues increased 16 percent in 1999, compared to 1998, due to a 13 percent increase in closings and an increase in the average closing price. The increase in closings in 1999 was due to a higher backlog at the beginning of the year and an increase in homes sold during the year. Homebuilding revenues increased 9 percent in 1998, compared to 1997, due to a 7 percent increase in closings and an increase in the average closing price. Homebuilding results included pretax gains from land sales of $0.7 million, $1.2 million and $4.8 million in 1999, 1998 and 1997, respectively. Gross profit margins from home sales averaged 16.8 percent for 1999, an increase from the 15.9 percent for 1998 and a significant increase from the 13.5 percent for 1997. The improvement was primarily due to increased closings from newer communities, which had more profitable land positions and a more cost-effective product. Sales price increases and Company initiatives to reduce direct construction costs also contributed to improved margins. Selling, general and administrative expenses as a percent of revenues were 9.9 percent for 1999 and 1998 and 9.8 percent for 1997. This slight increase from 1997 was primarily due to higher selling costs associated with increased closings and a higher incentive compensation expense resulting from improved earnings. Interest expense decreased $6.0 million, or 34 percent in 1999, compared to 1998, due to lower effective rates paid on borrowings and an increase in the amount of interest capitalized on land under development. Interest expense decreased 26 percent in 1998, compared to 1997, due to lower average homebuilding borrowings, lower effective rates paid on borrowings and an increase in the amount of interest capitalized on land under development. 22 112 HOMEBUILDING OPERATIONAL DATA - --------------------------------------------------------------- New Orders (Units) % Closings (Units) % 1999 1998 Change 1999 1998 Change - --------------------------------------------------------------- North 2,917 2,776 5 2,801 2,670 5 South 5,235 4,205 25 4,981 3,877 28 West 2,256 2,449 (8) 2,411 2,447 (1) ------ ------ ------ ------ ------ ------ Total 10,408 9,430 10 10,193 8,994 13 - --------------------------------------------------------------- Outstanding Contracts Outstanding Contracts December 31, 1999 December 31, 1998 - -------------------------------------------------------------------------------------- Dollars Dollars % in Average in Average Units Change Millions Price Units Millions Price - -------------------------------------------------------------------------------------- North 1,211 11 $ 227 $187,000 1,095 $ 213 $194,000 South 2,068 14 361 174,000 1,814 312 172,000 West 388 (29) 103 266,000 543 128 235,000 -------- -------- -------- -------- -------- -------- -------- Total 3,667 6 $ 691 $188,000 3,452 $ 653 $189,000 - -------------------------------------------------------------------------------------- New orders increased 10 percent in 1999, compared to 1998. In the West region, sales were down primarily due to an exit from the Portland and Salt Lake markets. As of December 31, 1999, the Company had outstanding contracts for 3,667 units, an increase of 6 percent from year-end 1998, due to the increase in new orders during the year. Outstanding contracts represent the Company's backlog of sold but not closed homes, which are generally built and closed, subject to cancellation, over the subsequent two quarters. The $691 million value of outstanding contracts increased 6 percent from year-end 1998. FINANCIAL SERVICES SEGMENT Revenues and expenses of the Company's financial services segment are summarized as follows (amounts in thousands): 1999 1998 1997 - ------------------------------------------------------------ Retail revenues: Interest and net origination fees $ 5,595 $ 7,524 $ 7,651 Gains on sales of mortgages and servicing rights 17,598 22,667 21,968 Loan servicing 1,581 7,675 24,464 Title/escrow 9,036 8,723 6,394 ------- ------- ------- Total retail revenues 33,810 46,589 60,477 Revenues from investment operations 9,776 13,796 16,452 ------- ------- ------- Total revenues $43,586 $60,385 $76,929 Expenses: General and administrative 21,905 32,023 43,454 Interest 9,843 16,574 17,890 ------- ------- ------- Total expenses 31,748 48,597 61,344 ------- ------- ------- Pretax earnings $11,838 $11,788 $15,585 - ------------------------------------------------------------ Pretax earnings by line of business were as follows (amounts in thousands): 1999 1998 1997 - ------------------------------------------------------------ Retail $ 9,180 $ 7,915 $10,093 Investments 2,658 3,873 5,492 ------- ------- ------- Total $11,838 $11,788 $15,585 - ------------------------------------------------------------ FINANCIAL SERVICES OPERATIONAL DATA 1999 1998 1997 - ------------------------------------------------------------- Retail operations: Number of mortgage originations 7,106 8,412 7,248 Dollars (in millions) $1,100 $1,200 $1,005 Percent of total originations from Ryland Homes 68% 70% 66% Investment operations: Portfolio average balance (in millions) $ 98 $ 139 $ 153 - ------------------------------------------------------------- Revenues and general and administrative expenses for the financial services segment decreased for the year ended December 31, 1999, compared with 1998. The decreases were primarily due to a decline in loan servicing operations which were related to loan servicing portfolio sales in the first quarter of 1998 and a decrease in originations. An increase in profitability per loan more than offset the effect of lower originations and reduced servicing income. Revenues and general and administrative expenses for financial services decreased for the year ended 1998, compared with 1997, due in part to a decline in loan servicing operations which were related to loan servicing portfolio sales in 1997 and during the first quarter of 1998. 23 113 Interest expense decreased 41 percent for the year ended December 31, 1999, compared with 1998, primarily due to a decrease in the warehouse holding period for mortgage loans before they were sold in the secondary market and a lower investment portfolio balance. Interest expense decreased 7 per cent for the year ended 1998, compared with 1997, primarily due to a decrease in the warehouse holding period for mortgage loans before they were sold in the secondary market. Retail operations include residential mortgage origination, loan servicing, title, escrow and homeowners insurance services for retail customers. Retail operations reported pretax earnings of $9.2 million for 1999, compared with $7.9 million for 1998 and $10.1 million for 1997. The Company sold the majority of its loan servicing portfolio in the first quarter of 1998 and realized a $6.1 million pretax gain, net of expenses and liabilities related to the sale of servicing. Mortgage originations decreased in 1999 by 16 percent from 1998 primarily due to a decrease in third-party originations, partially offset by a higher closing volume from homebuilder originations. The decrease in 1999 from 1998 was primarily attributable to the Company's decision to exit certain third-party origination markets. The number of mortgage originations for 1998 increased by 16 percent from 1997 due to a higher closing volume from homebuilder loan originations and higher refinancing activity. Investment operations holds certain assets, primarily mortgage-backed securities, which were obtained as a result of the exercise of redemption rights on various mortgage-backed bonds previously owned by the Company's limited-purpose subsidiaries. Pretax earnings from investment operations were $2.7 million for 1999, compared with $3.9 million for 1998 and $5.5 million for 1997. Pretax earnings decreased $1.2 million in 1999, compared with 1998, primarily due to a lower average portfolio balance which resulted in a decline in interest and other income. The decline in 1998 was also due to a lower average portfolio balance which resulted in a decline in interest income, and due to the fact that 1997 results included $0.8 million of other income related to the redemption of certain securities. FINANCIAL CONDITION AND LIQUIDITY Cash requirements for the Company's homebuilding and financial services segments are generally provided from outside borrowings and internally generated funds. The Company believes that its current sources of cash are sufficient to finance its current requirements. The homebuilding segment's borrowings include senior notes, senior subordinated notes, an unsecured revolving credit facility and nonrecourse secured notes payable. Senior and senior subordinated notes outstanding totaled $308 million as of December 31, 1999 and 1998. The Company uses its unsecured revolving credit facility to finance increases in its homebuilding inventory and working capital. In October 1999, the Company increased its bank revolving credit agreement from $300 million to $375 million. This new facility will mature in October 2003. There was $70 million in outstanding borrowings under this facility as of December 31, 1999, and no outstanding borrowings under this facility as of December 31, 1998. The Company had letters of credit outstanding under this facility totaling $49 million at December 31, 1999, and $34 million at December 31, 1998. To finance land purchases, the Company may also use seller-financed, nonrecourse secured notes payable. At December 31, 1999 and 1998, there were no material outstanding seller-financed notes payable. Housing inventories increased to $823 million as of December 31, 1999, from $642 million as of December 31, 1998. This increase reflects a higher sold inventory, related to the increase in year-end backlog, and an increase in land under development and improved lots commensurate with growth. The increase in inventory was funded with internally generated funds and borrowings under the revolving credit facility. The financial services segment uses cash generated from operations and borrowing arrangements to finance its operations. The financial services segment renewed its three-year bank credit facility, which provides up to $200 million for mortgage warehouse funding and matures in May 2002. Other borrowing arrangements as of December 31, 1999, included repurchase agreement facilities aggregating $150 million and a $35 million revolving credit facility used to finance investment portfolio securities. At December 31, 1999 and 1998, combined borrowings of the financial services segment outstanding under all agreements were $157 million and $223 million, respectively. Mortgage loans, notes receivable and mortgage-backed securities held by the limited-purpose subsidiaries were pledged as collateral for previously issued mortgage-backed bonds, the terms of which provided for the retirement of all bonds from the proceeds of the collateral. The source of cash for the bond payments was cash received from the mortgage loans, notes receivable and mortgage-backed securities. The Ryland Group has not guaranteed the debt of either the financial services segment or the limited-purpose subsidiaries. During 1999, the Company repurchased approximately 1,188,000 shares of its outstanding common stock at a cost of approximately $27 million. As of December 31, 1999, the Company had Board authorization to repurchase up to an additional 770,200 shares of its outstanding common stock. In addition, in February 2000, the Board of Directors approved the repurchase of up to one million shares of the Company's outstanding common stock. The Company's stock repurchase program has been funded through internally generated funds. 24 114 YEAR 2000 READINESS DISCLOSURE The Company did not experience any disruptions to its systems or business related to the Year 2000 remediation. The Company completed its Year 2000 remediation efforts, and its business systems are Year 2000 compliant. The costs of achieving Year 2000 compliance aggregated between $1 to $2 million. MARKET RISK SUMMARY The following table provides information about the Company's significant financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on implied forward rates as of the reporting date. INTEREST RATE SENSITIVITY Principal Amount by Expected Maturity Fair Value (dollars in thousands) 2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99 - ------------------------------------------------------------------------------------------------------------------------------------ HOMEBUILDING Liabilities Long-term debt (fixed rate) $ 8,000 $100,000 $ 200,000 $308,000 $295,080 Average interest rate 10.5% 9.6% 9.4% 9.5% Long-term debt (variable rate) $ 70,000 1 $ 70,000 $ 70,000 Average interest rate Various 2 Various 2 FINANCIAL SERVICES Assets Mortgage loans, held-for-sale (fixed rate) $ 30,913 $ 30,913 $ 31,398 Average interest rate 6.2% 6.2% Mortgage loans, held-for-sale (variable rate) $ 9,607 $ 9,607 $ 9,758 Average interest rate 7.2% 7.2% Mortgage-backed securities, available-for-sale $ 6,508 $ 4,983 $ 3,824 $ 2,933 $ 2,252 $ 7,617 $ 28,117 $ 29,823 Average interest rate 9.3% 9.4% 9.4% 9.5% 9.5% 9.6% 9.5% Mortgage-backed securities, held-to-maturity $ 4,036 $ 2,949 $ 2,158 $ 1,582 $ 1,161 $ 3,248 $ 15,134 $ 15,911 Average interest rate 8.7% 8.7% 8.7% 8.7% 8.8% 8.8% 8.7% Notes receivable, whole loans and funds held by trustee $ 13,356 $10,028 $ 7,549 $ 5,689 $ 4,291 $13,379 $ 54,292 $ 57,433 Average interest rate 9.2% 9.2% 9.2% 9.3% 9.3% 9.4% 9.3% Liabilities Short-term notes payable (variable rate) $ 97,234 $ 60,224 3 $157,458 $157,458 Average interest rate Various 2 Various 2 Various 2 Off balance sheet financial instruments Forward-delivery contracts: Notional amount $ 30,000 $ 30,000 $ 298 Average interest rate 7.3% 7.3% Commitments to originate mortgage loans: Notional amount $ 18,880 $ 18,880 $ 3,292 Average interest rate 7.7% 7.7% - ------------------------------------------------------------------------------------------------------------------------------------ 1. Includes borrowings under the unsecured revolving credit facility, which expires in 2003. The Company does not represent that such borrowings will be outstanding until 2003. 2. Variable interest rate available to the Company is based upon LIBOR, Federal Funds or Prime Rate plus the specified margin over LIBOR, Federal Funds or Prime Rate. 3. Includes borrowings under the mortgage warehouse facility. The Company does not represent such borrowings will be outstanding until 2002. 25 115 Interest rate risk is the primary market risk facing the Company. Interest rate risk not only arises principally in the Company's financial services segment, but also in respect to the homebuilding segment's long-term debt. The Company enters into forward-delivery contracts and may, at times, use other hedging contracts to mitigate its exposure to movements in interest rates on mortgage loan commitments and mortgage loans held-for-sale. The selection of these hedging contracts is based upon a marketing strategy which establishes a risk tolerance level. The major factors influencing the use of hedging contracts include general market conditions, interest rates, types of mortgages originated and the percentage of mortgage loan commitments expected to be funded. The market risk assumed while holding the hedging contracts generally mitigates the market risk associated with mortgage loan commitments and mortgage loans held-for-sale. In managing interest rate risk, the Company does not speculate on the direction of interest rates. Although collateral for bonds payable and bonds payable of the limited-purpose subsidiaries are subject to interest rate risk, the Company has not guaranteed nor is otherwise obligated with respect to these bond issues and, therefore, has no risk of loss. Note: Certain statements in this annual report may be "forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. Forward-looking statements are based on various factors and assumptions that include risks and uncertainties, the completion and profitability of sales reported, the market for homes generally and in areas where the Company operates, the availability and cost of land, changes in economic conditions and interest rates, availability and increases in raw material and labor costs, consumer confidence, government regulations, and general competitive and industry related factors, all or each of which may cause actual results to differ materially. 26 116 THE RYLAND GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Year ended December 31, (amounts in thousands, except share data) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ REVENUES Homebuilding: Residential revenue $ 1,937,387 $ 1,664,267 $ 1,527,107 Other revenue 21,445 30,238 30,219 ------------ ------------ ------------ Total homebuilding revenue 1,958,832 1,694,505 1,557,326 Financial services 43,586 60,385 76,929 Limited-purpose subsidiaries 6,848 10,598 15,551 ------------ ------------ ------------ Total revenues 2,009,266 1,765,488 1,649,806 EXPENSES Homebuilding: Cost of sales 1,633,094 1,428,763 1,346,141 Selling, general and administrative 193,193 168,004 152,071 Interest 11,715 17,681 23,964 ------------ ------------ ------------ Total homebuilding expenses 1,838,002 1,614,448 1,522,176 Financial services: General and administrative 21,905 32,023 43,454 Interest 9,843 16,574 17,890 ------------ ------------ ------------ Total financial services expenses 31,748 48,597 61,344 Limited-purpose subsidiaries 6,848 10,598 15,551 Corporate 23,332 16,687 14,265 ------------ ------------ ------------ Total expenses 1,899,930 1,690,330 1,613,336 Earnings before taxes and extraordinary item 109,336 75,158 36,470 Tax expense 42,641 31,566 14,588 ------------ ------------ ------------ NET EARNINGS BEFORE EXTRAORDINARY ITEM 66,695 43,592 21,882 Extraordinary item-- loss on early extinguishment of debt (net of taxes of $2,217) 0 (3,326) 0 ------------ ------------ ------------ NET EARNINGS $ 66,695 $ 40,266 $ 21,882 - ------------------------------------------------------------------------------------------------------- Preferred dividends $ 831 $ 1,000 $ 1,630 Net earnings applicable to common stockholders $ 65,864 $ 39,266 $ 20,252 NET EARNINGS PER COMMON SHARE Basic: Net earnings before extraordinary item $ 4.49 $ 2.90 $ 1.33 Extraordinary item 0 (0.23) 0 ------------ ------------ ------------ Net earnings per common share $ 4.49 $ 2.67 $ 1.33 Diluted: Net earnings before extraordinary item $ 4.30 $ 2.79 $ 1.32 Extraordinary item 0 (0.21) 0 ------------ ------------ ------------ Net earnings per common share $ 4.30 $ 2.58 $ 1.32 Average common shares outstanding: Basic 14,678,925 14,709,404 15,227,829 Diluted 15,505,382 15,603,312 15,405,067 - ------------------------------------------------------------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. 27 117 THE RYLAND GROUP, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, (amounts in thousands, except share data) 1999 1998 - ----------------------------------------------------------------------------------------- ASSETS Homebuilding: Cash and cash equivalents $ 36,297 $ 48,100 Housing inventories: Homes under construction 432,735 373,012 Land under development and improved lots 389,946 268,750 ---------- ---------- Total inventories 822,681 641,762 Property, plant and equipment 26,619 26,818 Purchase price in excess of net assets acquired 21,710 23,473 Other assets 48,064 38,515 ---------- ---------- 955,371 778,668 Financial Services: Cash and cash equivalents 33,629 1,684 Mortgage loans, held-for-sale 40,520 158,611 Mortgage-backed securities and notes receivable 99,249 111,654 Other assets 16,326 14,734 ---------- ---------- 189,724 286,683 Other Assets: Collateral for bonds payable of limited-purpose subsidiaries 39,633 92,403 Net deferred taxes 32,134 31,384 Other 31,461 26,260 ---------- ---------- TOTAL ASSETS $1,248,323 $1,215,398 LIABILITIES Homebuilding: Accounts payable and other liabilities $ 208,133 $ 173,370 Long-term debt 378,000 308,152 ---------- ---------- 586,133 481,522 Financial Services: Accounts payable and other liabilities 7,211 16,473 Short-term notes payable 157,458 223,058 ---------- ---------- 164,669 239,531 Other Liabilities: Bonds payable of limited-purpose subsidiaries 37,339 87,980 Other 73,645 60,082 ---------- ---------- TOTAL LIABILITIES 861,786 869,115 ---------- ---------- STOCKHOLDERS' EQUITY: Convertible preferred stock, $1 par value: Authorized-- 1,400,000 shares Issued-- 350,137 shares (416,744 for 1998) 350 417 Common stock, $1 par value: Authorized -- 78,600,000 shares Issued-- 13,850,819 shares (14,751,753 for 1998) 13,851 14,752 Paid-in capital 71,730 93,193 Retained earnings 299,547 236,011 Accumulated other comprehensive income 1,059 1,910 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 386,537 346,283 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,248,323 $1,215,398 - ----------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. 28 118 THE RYLAND GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity ACCUMULATED OTHER TOTAL PREFERRED COMMON PAID-IN RETAINED COMPREHENSIVE DUE FROM STOCKHOLDERS' (amounts in thousands, except share data) STOCK STOCK CAPITAL EARNINGS INCOME RSOP TRUST EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT JANUARY 1, 1997 $862 $15,853 $116,652 $184,678 $2,758 $(10,354) $310,449 Comprehensive income: Net earnings 21,882 21,882 Other comprehensive income, net of tax: Unrealized gains/(losses) on mortgage- backed securities, net of taxes of $(184) (276) (276) Total comprehensive income 21,606 Preferred stock dividends (per share $2.21) (1,630) (1,630) Common stock dividends (per share $0.27) (4,155) (4,155) Repurchase of common stock (1,689) (23,824) (25,513) Conversions of preferred stock (110) 110 (1,474) (1,474) Retirement of preferred stock and related RSOP debt (249) (9,293) (1,850) 11,392 0 Reclassification of preferred paid-in capital and related RSOP receivable 2,400 (6,037) (3,637) RSOP debt repayments 4,999 4,999 Employee stock plans (248,017 shares) 248 4,041 189 4,478 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 503 14,522 88,502 199,114 2,482 0 305,123 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net earnings 40,266 40,266 Other comprehensive income, net of tax: Unrealized gains/(losses) on mortgage- backed securities, net of taxes of $(381) (572) (572) Total comprehensive income 39,694 Preferred stock dividends (per share $2.21) (1,000) (1,000) Common stock dividends (per share $0.16) (2,369) (2,369) Repurchase of common stock (353) (6,676) (7,029) Conversions and retirements of preferred stock (86) 73 (1,446) (1,459) Reclassification of preferred paid-in capital 3,242 3,242 Employee stock plans (509,580 shares) 510 9,571 10,081 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1998 417 14,752 93,193 236,011 1,910 0 346,283 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net earnings 66,695 66,695 Other comprehensive income, net of tax: Unrealized gains/(losses) on mortgage- backed securities, net of taxes of $(543) (851) (851) Total comprehensive income 65,844 Preferred stock dividends (per share $2.21) (831) (831) Common stock dividends (per share $0.16) (2,328) (2,328) Repurchase of common stock (1,188) (25,938) (27,126) Conversions and retirements of preferred stock (67) 63 (896) (900) Reclassification of preferred paid-in capital 612 612 Employee stock plans (223,800 shares) 224 4,759 4,983 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1999 $350 $13,851 $ 71,730 $299,547 $1,059 $ 0 $386,537 - ------------------------------------------------------------------------------------------------------------------------------------ See Notes to Consolidated Financial Statements. 29 119 THE RYLAND GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Year ended December 31, (amounts in thousands) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 66,695 $ 40,266 $ 21,882 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 28,010 25,586 31,396 Loss on early extinguishment of debt 0 5,543 0 Changes in assets and liabilities, net of effects from acquisition: (Increase) decrease in inventories (178,590) (67,828) 19,759 Net change in other assets, payables and other liabilities 34,971 95,272 31,657 Decrease (increase) in mortgage loans held-for-sale 118,091 41,246 (19,708) Other operating activities, net (10,039) 354 (849) --------- --------- --------- Net cash provided by operating activities 59,138 140,439 84,137 CASH FLOWS FROM INVESTING ACTIVITIES Net additions to property, plant and equipment (29,026) (22,734) (17,568) Principal reduction of mortgage collateral 28,940 39,887 41,537 Net principal reduction of mortgage-backed securities, available-for-sale 11,629 10,899 11,969 Sales of mortgage-backed securities, available-for-sale 0 10,935 2,222 Net principal reduction of mortgage-backed securities, held-to-maturity 15,689 19,942 15,064 Decrease (increase) in funds held by trustee 7,843 8,796 (6,808) Acquisition of The Regency Organization 0 (17,885) 0 Other investing activities, net (232) 767 239 --------- --------- --------- Net cash provided by investing activities 34,843 50,607 46,655 CASH FLOWS FROM FINANCING ACTIVITIES Cash proceeds of long-term debt 70,000 98,955 2,475 Reduction of long-term debt (152) (106,836) (46,522) (Decrease) increase in short-term notes payable (65,600) (117,574) 14,982 Bond principal payments (51,883) (50,162) (71,009) Common and preferred stock dividends (3,249) (3,399) (7,320) Common stock repurchases (27,126) (7,028) (25,513) Otherfinancing activities, net 4,171 8,651 9,538 --------- --------- --------- Net cash used for financing activities (73,839) (177,393) (123,369) Net increase in cash and cash equivalents 20,142 13,653 7,423 Cash and cash equivalents at beginning of year 49,784 36,131 28,708 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 69,926 $ 49,784 $ 36,131 - --------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest (net of capitalized interest) $ 53,518 $ 50,866 $ 54,452 Cash paid for income taxes (net of refunds) $ 40,683 $ 19,143 $ 5,887 - --------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements. 30 120 THE RYLAND GROUP, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (amounts in thousands, except share data, unless otherwise noted) NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of The Ryland Group and its wholly owned subsidiaries ("the Company"). Intercompany transactions have been eliminated in consolidation. Certain amounts in the consolidated statements of prior years have been reclassified to conform to the 1999 presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts re ported in the financial statements and accompanying notes. Actual results could differ from these estimates. Per Share Data Basic net earnings per common share is computed by dividing net earnings, after considering preferred stock dividend requirements, by the weighted-average number of common shares outstanding. Diluted net earnings per common share additionally gives effect to dilutive common stock equivalent shares, including the assumed conversion of preferred shares held by The Ryland Group Retirement Savings Opportunity Plan Trust ("RSOP Trust") into common stock. The effect of the RSOP Trust was dilutive for the years ended December 31, 1999 and 1998. For the year ended December 31, 1997, the conversion of preferred shares was not assumed due to an anti-dilutive effect. Income Taxes The Company files a consolidated federal income tax return. Certain items of income and expense are included in one period for financial reporting purposes and another for income tax purposes. Deferred income taxes are provided in recognition of these differences. Deferred tax assets and liabilities are determined based on enacted tax rates and are subsequently adjusted for changes in these rates. A change in deferred tax assets or liabilities results in a charge or credit to deferred tax expense. Homebuilding Revenues Homebuilding revenues are recognized when home sales are closed and title passes to the customer. Service Liabilities Service and warranty costs are estimated and accrued at the time a home closes. Housing Inventories Housing inventories consist principally of homes under construction and land under development and improved lots. Inventories to be held and used are stated at cost, unless a community is determined to be impaired, in which case the impaired inventories are written down to fair value. Write-downs of impaired inventories to fair value are recorded as adjustments to the cost basis of the respective inventory. Inventories to be disposed of are stated at the lower of cost or fair value less cost to sell and are reported net of valuation reserves. Valuation reserves related to inventories to be disposed of amounted to $3.6 million at December 31, 1999, and $6.2 million at December 31, 1998. The net carrying value of the related inventories amounted to $6.0 million and $16.2 million at December 31, 1999 and 1998, respectively. Costs of inventory include direct costs of land, material acquisition, home construction and related direct overhead expenses. Interest and taxes are capitalized during the land development stage. The costs of acquiring and developing land and constructing certain related amenities are allocated to the parcels to which these costs relate. The following table is a summary of capitalized interest: 1999 1998 - -------------------------------------------------------------- Capitalized interest as of January 1, $ 21,600 $ 23,644 Interest capitalized 24,397 18,601 Interest amortized to cost of sales (19,027) (20,645) -------- -------- Capitalized interest as of December 31, $ 26,970 $ 21,600 - -------------------------------------------------------------- Property, Plant and Equipment Property, plant and equipment, which includes model home furnishings, are carried at cost less accumulated depreciation and amortization. Depreciation is provided for, principally, by the straight-line method over the estimated useful lives of the assets. Model home furnishings are amortized over the life of the community as homes are closed. Purchase Price in Excess of Net Assets Acquired Costs in excess of net assets of acquired businesses (goodwill) are being amortized on a straight-line basis over their estimated useful lives for periods of up to 30 years. The Company periodically evaluates the businesses to which goodwill relates, on an undiscounted cash flow method, in order to assess whether the carrying value of goodwill has not been impaired. 31 121 Mortgage Loans Held-For-Sale Mortgage loans held-for-sale are reported net of discounts and are valued at the lower of cost or market determined on an aggregate basis. Any gain or loss on the sale of the loans is recognized at the time of sale. Mortgage-Backed Securities The Company classifies its mortgage-backed securities into two categories: held-to-maturity and available-for-sale. Management determines the appropriate classification of these securities at the time of purchase and re-evaluates such designations as of each balance sheet date. Mortgage-backed securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities classified as held-to-maturity are stated at amortized cost. Securities classified as available-for-sale are measured at fair value, with unrealized gains and losses, net of tax, reflected as accumulated other comprehensive income in stockholders' equity. Loan Origination Fees, Costs and Mortgage Discounts Loan origination fees, net of related direct origination costs, and loan discount points are deferred as an adjustment to the carrying value of related mortgage loans held-for-sale and are recognized in income upon the sale of the mortgage loans. Hedging Contracts The Company enters into forward-delivery contracts, options on forward-delivery contracts, futures contracts and options on futures contracts, as an end user, for the purpose of minimizing its exposure to movements in interest rates on mortgage loan commitments and mortgage loans held-for-sale. These contracts primarily represent commitments or options to purchase or sell mortgages or securities, generally within 90 days and at a specified price or yield. Forward-delivery contracts and futures are commitments only and, as such, are not recorded on the Company's balance sheet or statement of earnings. Option premiums are deferred when paid and recognized as an adjustment to gains on sales of mortgages over the lives of the options on a straight-line basis. Changes in the fair value of contracts are deferred and included in mortgage loans held-for-sale. Changes in fair value are recognized in income as an adjustment to gains on sales of mortgages when the mortgages and securities are sold. The Company entered into an interest rate swap and collar agreement to moderate the interest rate risks inherent in the financing of its investment securities. During the term of the agreement, net settlements were accrued and recognized as an adjustment to interest expense. The agreement was not required to be marked to market and, therefore, was not recorded on the Company's balance sheet. Mortgage Servicing Rights Retained mortgage servicing rights on originated loans were capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing revenue. As of December 31, 1999, the Company no longer services mortgage loans. Stock-Based Compensation The Company has elected to follow the intrinsic value method to account for compensation expense which is related to the award of stock options and to furnish the pro forma disclosures required under Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-based Compensation." Since stock option awards are granted at prices no less than the fair-market value of the shares at the date of grant, no compensation expense is recognized. New Accounting Pronouncements FAS 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging Activities." In June 1999, the Financial Accounting Standards Board delayed, for one year, the effective date of FAS 133 to all years beginning after June 15, 2000. FAS 133 requires all derivatives to be recorded on the balance sheet at fair value and establishes new accounting procedures for hedges that will effect the timing of recognition and the manner in which hedging gains and losses are recognized in the Company's financial statements. The Company has not completed its evaluation of FAS 133; however, management does not anticipate that the adoption of FAS 133 will have a material impact on the Com pany's earnings or financial position. The Company currently expects to adopt FAS 133 on January 1, 2001. 32 122 NOTE B: EARNINGS PER SHARE RECONCILIATION The following table sets forth the computation of basic and diluted earnings per share before extraordinary item: 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Numerator: Net earnings before extraordinary item $ 66,695 $ 43,592 $ 21,882 Preferred stock dividends (831) (1,000) (1,630) ------------ ------------ ------------ Numerator for basic earnings per share-- earnings before extraordinary item available to common stockholders 65,864 42,592 20,252 Effect of dilutive securities-- preferred stock dividends 831 1,000 0 ------------ ------------ ------------ Numerator for diluted earnings per share-- earnings before extraordinary item available to common stockholders $ 66,695 $ 43,592 $ 20,252 Denominator: Denominator for basic earnings per share-- weighted-average shares 14,678,925 14,709,404 15,227,829 Effect of dilutive securities: Stock options 292,580 316,640 69,577 Conversion of preferred shares 384,255 463,374 0 Equity incentive plan 149,622 113,894 107,661 ------------ ------------ ------------ Dilutive potential common shares 826,457 893,908 177,238 Denominator for diluted earnings per share-- adjusted weighted-average shares and assumed conversions 15,505,382 15,603,312 15,405,067 BASIC EARNINGS PER COMMON SHARE Net earnings per share before extraordinary item $ 4.49 $ 2.90 $ 1.33 DILUTED EARNINGS PER COMMON SHARE Net earnings per share before extraordinary item $ 4.30 $ 2.79 $ 1.32 - ----------------------------------------------------------------------------------------------------------- The assumed conversion of preferred shares was dilutive for the years ended December 31, 1999 and 1998. For the year ended December 31, 1997, the conversion of preferred shares was not assumed due to an anti-dilutive effect. NOTE C: SEGMENT INFORMATION The Company is a leading national homebuilder and mortgage-relatedfinancial servicesfirm. As one of the largest single-family on-site homebuilders in the United States, the Company builds homes in 21 markets. The Company's homebuilding segment specializes in the sale and construction of single-family attached and detached housing. The financial services segment provides mortgage-related products and services for retail customers, including loan origination, title, escrow and homeowners insurance services, and also conducts investment activities. The Company evaluates performance and allocates resources based on a number of factors, including segment pretax earnings. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies (see Note A). Certain corporate expenses are allocated to the homebuilding and financial services segments. In addition, amounts related to the limited-purpose subsidiaries are combined with corporate expenses and corporate assets in the following table as "Other." 1999 1998 1997 - ----------------------------------------------------------------- Revenues Homebuilding $ 1,958,832 $ 1,694,505 $ 1,557,326 Financial services 43,586 60,385 76,929 Other 6,848 10,598 15,551 ----------- ----------- ----------- Total $ 2,009,266 $ 1,765,488 $ 1,649,806 - ----------------------------------------------------------------- Pretax Earnings Homebuilding $ 120,830 $ 80,057 $ 35,150 Financial services 11,838 11,788 15,585 Corporate and other (23,332) (16,687) (14,265) ----------- ----------- ----------- Total $ 109,336 $ 75,158 $ 36,470 - ----------------------------------------------------------------- Depreciation and Amortization Homebuilding $ 23,398 $ 23,166 $ 23,479 Financial services 810 895 5,901 Corporate and other 3,802 1,525 2,016 ----------- ----------- ----------- Total $ 28,010 $ 25,586 $ 31,396 - ----------------------------------------------------------------- Identifiable Assets Homebuilding $ 955,371 $ 778,668 $ 671,229 Financial services 189,724 286,683 410,902 Corporate and other 103,228 150,047 201,278 ----------- ----------- ----------- Total $ 1,248,323 $ 1,215,398 $ 1,283,409 - ----------------------------------------------------------------- 33 123 NOTE D: ASSETS OF FINANCIAL SERVICES AND LIMITED-PURPOSE SUBSIDIARIES Financial Services Mortgage loans held-for-sale consist of loans collateralized by first mortgages or first deeds of trust on single-family attached or detached homes. Mortgage-backed securities and notes receivable consist of GNMA certificates, FNMA mortgage pass-through certificates, FHLMC participation certificates, notes receivable secured by mortgage-backed securities, whole loans and funds held by trustee. During the first quarter of 1998, the Company sold the majority of its loan servicing portfolio. The Company realized a $6.1 million pre-tax gain, net of expenses and liabilities, related to the sale of servicing. During 1999, the Company sold the remaining portion of its loan servicing portfolio. At December 31, 1998, the loan servicing portfolio consisted of approximately 2,500 loans, with a principal balance of $301 million. Limited-Purpose Subsidiaries Collateral for bonds payable consists of mortgage-backed securities, notes receivable secured by mortgage-backed securities and mortgage loans, fixed-rate mortgage loans, and funds held by trustee. Mortgage-backed securities consist of GNMA certificates, FNMA mortgage pass-through certificates and FHLMC participation certificates. All principal and interest on collateral is remitted directly to a trustee and is available for payment on the bonds. The components of collateral for bonds payable at December 31 are summarized as follows: 1999 1998 - ------------------------------------------------------------- Mortgage-backed securities $27,092 $59,915 Notes receivable 4,019 15,423 Mortgage loans 2,893 4,699 Funds held by trustee 5,838 13,681 Mortgage discounts (209) (1,315) ------- ------- Total $39,633 $92,403 - ------------------------------------------------------------- Neither the Company nor its homebuilding and financial services subsidiaries have guaranteed or are otherwise obligated with respect to these bond issues. Mortgage-Backed Securities: Unrealized Gains and Losses Mortgage-backed securities are held by the financial services segment and reported in the balance sheet caption, "Mortgage-backed securities and notes receivable." They are also held by the limited-purpose subsidiaries and reported in the balance sheet caption, "Collateral for bonds payable." The following is a consolidated summary of mortgage-backed securities classified as available-for-sale and held-to-maturity as of: GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE - ---------------------------------------------------------------------- December 31, 1999 Available-for-sale $ 28,962 $ 1,953 $ 215 $ 30,700 Held-to-maturity 41,331 2,352 0 43,683 -------- -------- -------- -------- Total $ 70,293 $ 4,305 $ 215 $ 74,383 December 31, 1998 Available-for-sale $ 40,802 $ 3,299 $ 116 $ 43,985 Held-to-maturity 56,463 4,642 0 61,105 -------- -------- -------- -------- Total $ 97,265 $ 7,941 $ 116 $105,090 - ---------------------------------------------------------------------- NOTE E: FINANCIAL SERVICES SHORT-TERM NOTES PAYABLE Financial services had outstanding borrowings at December 31 as follows: 1999 1998 - ------------------------------------------------------------- Mortgage warehouse facility $ 60,224 $106,699 Repurchase agreements 77,619 64,320 Revolving credit agreement 19,615 52,039 -------- -------- Total outstanding borrowings $157,458 $223,058 - ------------------------------------------------------------- The financial services segment renewed its three-year bank credit facility, which provides up to $200 million for mortgage warehouse funding and matures in May 2002. Borrowings outstanding under this bank facility totaling $60,224 at December 31, 1999, were collateralized by mortgage loans held-for-sale and cash proceeds from loan sales totaling $72,876. Borrowings outstanding under this bank facility totaling $106,699 at December 31, 1998, were collateralized by mortgage loans held-for-sale with outstanding principal balances of $121,079. The effective interest rates on these borrowings were 3.4 percent, 4.1 percent and 3.0 percent for 1999, 1998 and 1997, respectively. The agreement contains certain financial covenants, which the Company met at December 31, 1999. 34 124 The repurchase agreements represent short-term borrowings of $77,619 and $64,320 in 1999 and 1998, respectively, that are collateralized by mortgage loans, mortgage-backed securities and investments in securities issued by one of the Company's limited-purpose subsidiaries. The outstanding collateral balances at December 31, 1999 and 1998 were $78,554 and $64,129, respectively. As of December 31, 1999, $30 million of the Company's variable-rate short-term borrowings had been effectively converted by interest rate swap-and-collar agreements to fixed-rate borrowings. The notional amount of the swap-and-collar agreements declined to $30 million in 1999 and will expire in October 2000. Effective interest rates on the repurchase agreements, including the effect of the interest rate swap-and-collar agreements, were 3.7 percent, 5.9 percent and 6.0 percent for 1999, 1998 and 1997, respectively. In March 1999, the Company renewed and extended a revolving credit facility used to finance investment securities in the financial services segment. The facility, previously $100 million, was renewed at $50 million and was reduced by $5 million quarterly to a base of $35 million at December 31, 1999. The agreement extends through March 2000, bears interest at market rates and is collateralized by investment portfolio securities. Borrowings outstanding under this facility, totaling $19,615 and $52,039, were collateralized by investment portfolio securities with principal balances of $20,025 and $52,700 at December 31, 1999 and 1998, respectively. The weighted-average interest rates at the end of the period on all short-term borrowings were 5.6 percent and 5.3 percent for 1999 and 1998, respectively. The weighted-average interest rates during the period on all short-term borrowings were 3.6 percent, 5.2 percent and 4.6 percent for 1999, 1998 and 1997, respectively. NOTE F: OFF-BALANCE SHEET FINANCIAL INSTRUMENTS RELATED TO MORTGAGE LOAN ORIGINATIONS The Company is a party to financial instruments in the normal course of business. The financial services segment uses financial instruments to meet the financing needs of its customers and reduce its exposure to fluctuations in interest rates. These instruments involve, to varying degrees, elements of credit and market risk not recognized in the consolidated balance sheets. The Company has no derivative financial instruments that are held for trading purposes. The contract or notional amounts of these financial instruments as of December 31 were as follows: 1999 1998 - ------------------------------------------------------------- Commitments to originate mortgage loans $18,880 $ 33,859 Hedging contracts: Forward-delivery contracts $30,000 $163,000 Others 5,000 4,000 - ------------------------------------------------------------- In addition, to protect against exposure to interest rate fluctuations on mortgage loan commitments, the Company contracted with various parties to deliver $69,286 and $12,308 in adjustable and fixed-rate mortgage loans at December 31, 1999 and 1998, respectively, for a specified price on a best-efforts basis. Commitments to originate mortgage loans represent loan commitments with customers at market rates up to 120 days before settlement. Loan commitments have no carrying value on the balance sheet. These commitments expose the Company to market risk as a result of increases in mortgage interest rates. The amount of risk is limited to the difference between the contract price and current market value, and it is mitigated by fees collected from the customer and by the Company's hedging activities. Loan commitments had interest rates ranging from 6.5 percent to 12.1 percent as of December 31, 1999, and 6.0 percent to 10.3 percent as of December 31, 1998. Hedging contracts are regularly entered into by the Company for the purpose of mitigating its exposure to movements in interest rates on mortgage loan commitments and mortgage loans held-for-sale. The selection of these hedging contracts is based upon the Company's secondary marketing strategy, which establishes a risk tolerance level. The major factors influencing the use of the various hedging contracts include general market conditions, interest rate, types of mortgages originated and the percentage of mortgage loan commitments expected to be funded. The market risk assumed while holding the hedging contracts generally mitigates the market risk associated with the mortgage loan commitments and mortgage loans held-for-sale. The Company is exposed to credit related losses in the event of nonperformance by counterparties to certain hedging contracts. Credit risk is limited to those instances where the Company is in a net unrealized gain position. The Company manages this credit risk by entering into agreements with counterparties meeting its credit standards and by monitoring position limits. 35 125 NOTE G: FAIR VALUES OF FINANCIAL INSTRUMENTS The Company's financial instruments, both on and off the balance sheet, are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated using present value or other valuation techniques. Estimated fair values are significantly affected by the assumptions used, including the discount rate and estimates of cash flows. In that regard, derived fair-value estimates cannot be substantiated by comparison to independent markets and, in many cases, cannot be realized in immediate settlement of the instruments. The table below sets forth the carrying values and fair values of the Company's financial instruments, except for those financial instruments noted below for which the carrying values approximate fair values at the end of the year. It excludes non-financial instruments and, accordingly, the aggregate fair-value amounts presented do not represent the underlying value of the Company. 1999 1998 ----------------------------------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE - ----------------------------------------------------------------------------------------------------------- HOMEBUILDING Liabilities Senior notes $ 108,000 $ 111,080 $ 108,000 $ 116,140 Senior subordinated notes 200,000 184,000 200,000 197,000 FINANCIAL SERVICES Assets Mortgage loans, held-for-sale $ 40,520 $ 41,156 $ 158,611 $ 161,030 Mortgage-backed securities, available-for-sale 29,823 29,823 36,414 36,414 Mortgage-backed securities, held-to-maturity 15,134 15,911 4,826 5,147 Notes receivable, whole loans and funds held by trustee 54,292 57,433 70,414 76,224 Off-balance sheet financial instruments Commitments to originate mortgage loans -- 3,292 -- 155 Forward-delivery contracts -- 298 -- (441) Other hedging contracts -- (45) -- (404) OTHER ASSETS Collateral for bonds payable of the limited-purpose subsidiaries $ 39,633 $ 41,605 $ 92,403 $ 98,341 OTHER LIABILITIES Bonds payable of the limited-purpose subsidiaries $ 37,339 $ 41,045 $ 87,980 $ 97,344 - ----------------------------------------------------------------------------------------------------------- The Company used the following methods and assumptions in estimating fair values: o Cash and cash equivalents, secured notes payable, loan servicing receivables, funds held by trustee, revolving credit agreements and short-term notes payable: The carrying amounts reported in the balance sheet approximate fair values. o Senior notes, senior subordinated notes, mortgage loans held-for-sale, mortgage-backed securities, notes receivable and whole loans, various hedging contracts if settled on December 31, 1999 and 1998, and mortgage loan com mitments: The fair values of these financial instruments are based on quoted market prices for similar financial instruments. 36 126 NOTE H: LIMITED-PURPOSE SUBSIDIARIES' BONDS PAYABLE The Company's limited-purpose subsidiaries no longer issue mortgage-backed bonds and mortgage-participation securities. Previously, they issued mortgage-backed bonds, and the Com pany retained residual interests in some of these bonds. Payments are made on the bonds on a scheduled basis in amounts relating to corresponding payments received on the underlying mortgage collateral. The following table sets forth information with respect to the limited-purpose subsidiaries' bonds payable outstanding at December 31: 1999 1998 - --------------------------------------------------------------- Bonds payable, net of discounts: 1999--$1,276; 1998--$2,517 $37,339 $87,980 Range of interest rates 7.25%-12.625% 7.25%-12.625% Stated maturities 2009-2019 2006-2019 - --------------------------------------------------------------- NOTE I: LONG-TERM DEBT Long-term debt consists of the following: December 31, 1999 1998 - ------------------------------------------------------------- Senior subordinated notes $200,000 $200,000 Senior notes 108,000 108,000 Revolving credit facility and other 70,000 152 -------- -------- $378,000 $308,152 - ------------------------------------------------------------- During October 1999, the Company increased its unsecured revolving credit facility from $300 million to $375 million. This new facility will mature in October 2003. Borrowings under this agreement bear interest at variable short-term rates. The effective interest rate was 6.8 percent for 1999 and 1998 and 7.1 percent for 1997. At December 31, 1999, the Company had $70 million of borrowings under the credit agreement at an average rate of 7.7 percent. There were no amounts outstanding under this agreement at December 31, 1998. The Company has $100 million of 9.625 percent senior subordi nated notes outstanding, due June 2004, with interest payable semiannually, which may be redeemed at the option of the Company, in whole or in part, at any time on or after December 1, 2000. The Company has $100 million of 8.25 percent senior subordinated notes, due April 2008, with interest payable semiannually, which may be redeemed at the option of the Company, in whole or in part, at any time on or after April 1, 2003. In July 1998, the Company redeemed $100 million of 10.5 percent senior subordinated notes due 2002 at the stated call price of 103.94 percent of par. As a result, the Company recognized an extraordinary loss on early extinguishment of debt in 1998 of $3.3 million (net of a $2.2 million income tax benefit). Senior subordinated notes are subordinated to all existing and future senior debt of the Company. The Company has $100 million of 10.5 percent senior notes due July 2006, with interest payable semiannually, which may be redeemed at the option of the Company, in whole or in part, at any time on or after July 1, 2001. At December 31, 1999, the Company also had $8 million of senior notes bearing a fixed rate of 10.5 percent which mature in August 2000. Maturities of long-term debt for the nextfive years are as follows: 2000-$8,000; 2001 through 2002-$0; 2003-$70,000; 2004-$100,000. The bank credit agreement, senior subordinated indenture agreements and senior note agreements contain certain financial covenants. Under the loan covenants, the Company had $93.0 million of retained earnings available for dividends at December 31, 1999. At December 31, 1999, the Company was in compliance with its covenants. NOTE J: INCOME TAXES The Company's expense for income taxes is summarized as follows: Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------- Current: Federal $36,633 $22,453 $14,931 State 6,335 4,491 3,167 ------- ------- ------- Total current 42,968 26,944 18,098 Deferred: Federal (279) 3,852 (2,896) State (48) 770 (614) ------- ------- ------- Total deferred (327) 4,622 (3,510) ------- ------- ------- Total expense $42,641 $31,566 $14,588 - ------------------------------------------------------------- The following table reconciles the statutory federal income tax rate to the Company's effective income tax rate: Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------ Income taxes at federal statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal tax 4.0 4.5 4.5 Other, net 0.0 2.5 0.5 ---- ---- ---- Effective rate 39.0% 42.0% 40.0% - ------------------------------------------------------------ 37 127 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows: 1999 1998 - ------------------------------------------------------------- Deferred tax assets: Inventory valuation differences, operating reserves and accruals $34,297 $35,501 Other 1,693 1,863 ------- ------- Total deferred tax assets 35,990 37,364 Deferred tax liabilities: Gross profit from sales reported on the installment method (1,581) (2,377) Deferred gains (519) (1,830) Other (1,756) (1,773) ------- ------- Total deferred tax liabilities (3,856) (5,980) ------- ------- Net deferred tax asset $32,134 $31,384 - ------------------------------------------------------------- The Company has determined that no valuation allowance for the deferred tax asset is required due to tax carrybacks currently available. The Company had a current tax liability of $11,104 and $9,761 as of December 31, 1999 and 1998, respectively. NOTE K: STOCKHOLDERS' EQUITY Preferred Stock On August 31, 1989, the Company sold 1,267,327 shares of non-transferable convertible preferred stock, par value $1.00, to the RSOP Trust for $31.5625 per share, or an aggregate purchase price of approximately $40,000. Each share of preferred stock pays an annual cumulative dividend of $2.21. During 1999, 1998 and 1997, the Company paid $831, $1,000 and $1,630, respectively, in dividends on the preferred stock. Each share of preferred stock entitles the holder to a number of votes equal to the shares into which the stock is convertible, and preferred stockholders generally vote together with common stockholders on all matters. Under the RSOP Trust, at the option of the trustee, the Com pany may be obligated to redeem the preferred stock to satisfy distribution obligations to or investment elections of its participants. For purposes of these redemptions, the value of each share of preferred stock is determined monthly by an independent appraiser, with a minimum guaranteed value of $25.25 per share. The Company may issue common stock to satisfy this redemption obligation, with any excess redemption price to be paid in cash. At December 31, 1999 and 1998, the maximum cash obligation for such redemptions was shown outside of stockholders' equity as part of other liabilities. This obligation was calculated assuming that all preferred shares outstanding were submitted for redemption. Based upon the appraised value of each share of preferred stock ($33.81 and $39.37) and the market value of each share of common stock ($23.06 and $28.88) at December 31, 1999 and 1998, respectively, the redemption obligation was $3,764 and $4,376 at December 31, 1999 and 1998, respectively. During 1999 and 1998, 63,573 and 73,415 shares of preferred stock, respectively, were converted into shares of common stock, and 3,034 and 12,674 shares of preferred stock, respectively, were retired (see Note L). Common Share Purchase Rights In 1996, the Company adopted a revised shareholder rights plan under which the Company distributed one common share purchase right for each share of common stock outstanding on January 13, 1997. Each right entitles the holder to purchase one share of common stock at an exercise price of $70. The rights become exercisable 10 business days after any party acquires or announces an offer to acquire 20 percent or more of the Company's common stock. The rights expire January 13, 2007, and are redeemable at $0.01 per right at any time before 10 business days following the time that any party acquires 20 percent or more of the Company's common stock. In the event that the Company enters into a merger or other business combination, or if a substantial amount of its assets are sold after the time that the rights become exercisable, the holder will receive, upon exercise, shares of the common stock of the surviving or acquiring company having a market value of twice the exercise price. Until the earlier of the time that the rights become exercisable, are redeemed or expire, the Company will issue one right with each new share of common stock issued. NOTE L: EMPLOYEE INCENTIVE AND STOCK PLANS Retirement Savings Opportunity Plan (RSOP) In 1989, the Company established a retirement and employee stock ownership plan that purchased shares of preferred stock from the Company. The purchase of preferred stock by the plan was financed by a $40,000 loan from the Company. The interest rate on the loan was 9.99 percent and through September, 1997, the loan was being repaid by the plan through dividends received on preferred stock and Company contributions. On October 1, 1997, the Company purchased 248,881 shares of preferred stock at fair market value from the plan, representing preferred shares that secured the loan and had not been released for allocation to participants' accounts. The plan used the proceeds to pay off the related loan balance and the Company retired the preferred shares. The RSOP Trust incurred interest on the loan in 1997 of $930. As of December 31, 1999, 350,137 shares of preferred stock were allocated to participants' accounts. As of January 1, 1998, participants received cash and no longer received preferred stock in connection with Company matching contributions to their accounts. 38 128 All full-time employees are eligible to participate in the RSOP beginning the first pay period of the quarter, following 30 days of employment. Pursuant to Section 401(k) of the Internal Revenue Code, the plan permits deferral of a portion of a participant's income into a variety of investment options. Compensation expense reflects the Company's matching contributions to its employees 401(k) contributions. Total compensation expense related to this plan amounted to $5,068, $3,549 and $4,039 in 1999, 1998 and 1997, respectively. Equity Incentive Plan and Other Related Plans The Company's 1992 Equity Incentive Plan permits it to provide equity incentives in the form of stock options, stock appreciation rights, performance shares, restricted stock and other stock-based awards to employees. Under this plan, options are granted to purchase shares at prices not less than the fair-market value of the shares at the date of grant. The options are exercisable at various dates over one- to 10-year periods. Stock options granted during 1999 generally have a maximum term of 10 years and vest over three years. At the beginning of each year, 2.5 percent of the number of common shares outstanding at the beginning of the year are authorized for grants of options and other equity instruments. Under the Company's Non-Employee Director Equity Plan, stock options are granted to directors to purchase shares at prices not less than the fair-market value of the shares at the date of grant. A maximum of 100,000 shares of common stock has been reserved for issuance under this plan. The following is a summary of transactions relating to all stock option plans for each year ended December 31: 1999 1998 1997 ----------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - ---------------------------------------------------------------------------------------------------------------------- Options outstanding at beginning of year 1,840,400 $18.17 1,932,560 $15.71 1,783,738 $16.70 Granted 690,250 24.51 637,000 23.88 619,500 13.49 Exercised (183,725) 17.08 (540,350) 16.13 (211,110) 16.33 Forfeited (108,295) 22.13 (188,810) 18.07 (252,068) 16.47 Expired 0 0 0 0 (7,500) 26.00 ---------- ----- ---------- ----- ---------- ----- Options outstanding at end of year 2,238,630 20.02 1,840,400 18.02 1,932,560 15.71 Available for future grant 71,794 320,143 478,309 ---------- ----- ---------- ----- ---------- ----- Total shares reserved 2,310,424 2,160,543 2,410,869 Options exercisable at December 31 1,130,805 17.18 864,795 16.61 966,065 17.39 Prices related to options exercised during the year $11.50-$24.13 $12.88-$24.13 $13.50-$20.75 - ---------------------------------------------------------------------------------------------------------------------- A summary of stock options outstanding and exercisable as of December 31, 1999, follows: OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------------------------------------------------------------------------- Range of Weighted Weighted Weighted Exercise Number Average Remaining Average Number Average Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price - ---------------------------------------------------------------------------------------------------------------------- $12.75 to $15.00 770,775 6.40 $13.98 633,565 $14.14 $15.25 to $23.50 665,535 6.32 $21.30 422,575 $20.25 $23.88 to $29.94 802,320 9.01 $24.78 74,665 $25.60 - ---------------------------------------------------------------------------------------------------------------------- 39 129 The Company has adopted the disclosure-only provisions of FAS 123. Accordingly, no compensation expense has been recognized for stock option plans. Had compensation expense for these plans been determined based on fair value at the grant date for awards, consistent with the provisions of FAS 123, in 1999, 1998 and 1997, the Company's net earnings and net earnings per share would have been reduced to the pro-forma amounts indicated in the following table: 1999 1998 1997 - ------------------------------------------------------------- Net earnings-- as reported $66,695 $40,266 $21,882 Net earnings-- pro forma $64,471 $38,761 $20,808 Basic net earnings per share-- as reported $ 4.49 $ 2.67 $ 1.33 Basic net earnings per share-- pro forma $ 4.34 $ 2.57 $ 1.26 Diluted net earnings per share-- as reported $ 4.30 $ 2.58 $ 1.32 Diluted net earnings per share-- pro forma $ 4.20 $ 2.48 $ 1.25 - ------------------------------------------------------------- The fair value of each option grant is estimated on the grant dates, using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: a risk-free interest rate of 5.2 percent, 5.4 percent and 6.3 percent; an expected volatility factor for the market price of the Company's common stock of 34 percent, 35 percent and 34 percent; a dividend yield of 0.7 percent, 0.7 percent and 1.2 percent; and an expected life of 4 years, 5 years and 5 years. The weighted-average fair value as of the grant date for options granted in 1999, 1998 and 1997 was $7.95, $9.11 and $4.90, respectively. NOTE M: COMMITMENTS AND CONTINGENCIES Commitments In the normal course of business, the Company acquires rights under option agreements to purchase land for use in future homebuilding operations. As of December 31, 1999, the Com pany had deposits and letters of credit outstanding of $43,178 for options and land purchase contracts having a total purchase price of $624,481. Rent expense primarily relates to office facilities, model home furniture and equipment. 1999 1998 1997 - --------------------------------------------------------------------- Total rent expense $ 13,581 $ 14,142 $10,634 Less income from subleases (2,149) (1,447) 0 -------- -------- ------- Net rental expense $ 11,432 $ 12,695 $10,634 - --------------------------------------------------------------------- Future minimum rental commitments under non-cancelable leases with remaining terms in excess of one year are as follows: - ------------------------------------------------------------- 2000 $10,280 2001 9,982 2002 6,840 2003 3,478 2004 2,434 After 2004 2,044 ------- Subtotal $35,058 Less sublease income (3,385) ------- Total lease commitments $31,673 - ------------------------------------------------------------- Contingencies Contingent liabilities may arise from obligations incurred in the ordinary course of business or from the usual obligations of on-site housing producers for the completion of contracts. Some municipalities require the Company to issue development bonds or maintain letters of credit to assure completion of public facilities within a project. Total development bonds at December 31, 1999, were $209,635, and total deposits and letters of credit at December 31, 1999, were $28,287. The Company is party to various legal proceedings generally incidental to its businesses. Based on evaluation of these matters and discussions with counsel, management believes that liabilities to the Company arising from these matters will not have a material adverse effect on the financial condition of the Company. 40 130 THE RYLAND GROUP, INC. AND SUBSIDIARIES Report of Independent Auditors BOARD OF DIRECTORS AND STOCKHOLDERS THE RYLAND GROUP, INC. We have audited the accompanying consolidated balance sheets of The Ryland Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Ryland Group, Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst and Young LLP Baltimore, Maryland January 26, 2000 41 131 THE RYLAND GROUP, INC. AND SUBSIDIARIES Report of Management Management of the Company is responsible for the integrity and accuracy of the financial statements and all other annual report information. The financial statements are prepared in conformity with generally accepted accounting principles and include amounts based on management's judgments and estimates. The accounting systems, which record, summarize and report financial information, are supported by internal control systems, which are designed to provide reasonable assurance, at an appropriate cost, that the assets are safeguarded and that transactions recorded in accordance with Company policies and procedures. Proper selection, training and development of personnel also contribute to the effectiveness of the internal control systems. These systems are the responsibility of management and are regularly tested by the Company's internal auditors. The external auditors also review and test the effectiveness of these systems to the extent they deem necessary to express an opinion on the consolidated financial statements. The Audit Committee of the Board of Directors periodically meets with management, the internal auditors and the external auditors to review accounting, auditing and financial matters. Both the internal auditors and the external auditors have unrestricted access to the Audit Committee. /s/ David L. Fristoe David L. Fristoe Senior Vice President, Controller and Chief Accounting Officer 42 132 THE RYLAND GROUP, INC. AND SUBSIDIARIES Quarterly Financial Data and Common Stock Prices and Dividends (amounts in thousands, 1999 1998 except share data) unaudited Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31 - ------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED RESULTS Revenue $595,647 $507,175 $502,405 $404,039 $541,086 $ 462,246 $425,851 $336,305 Earnings before taxes and extraordinary item 34,153 29,736 28,578 16,869 30,335 22,295 14,711 7,817 Income tax expense 13,320 11,597 10,976 6,748 12,783 9,772 5,884 3,127 -------- -------- -------- -------- -------- --------- -------- -------- Net earnings before extraordinary item 20,833 18,139 17,602 10,121 17,552 12,523 8,827 4,690 Extraordinary item-- loss on early extinguishment of debt (net of taxes of $2,217) 0 0 0 0 0 (3,326) 0 0 -------- -------- -------- -------- -------- --------- -------- -------- Net earnings $ 20,833 $ 18,139 $ 17,602 $ 10,121 $ 17,552 $ 9,197 $ 8,827 $ 4,690 Basic net earnings per common share $ 1.45 $ 1.21 $ 1.17 $ 0.67 $ 1.18 $ 0.61 $ 0.58 $ 0.30 Diluted net earnings per common share $ 1.40 $ 1.15 $ 1.12 $ 0.65 $ 1.12 $ 0.59 $ 0.57 $ 0.29 Weighted average common shares outstanding Basic 14,198 14,856 14,851 14,810 14,691 14,667 14,758 14,713 Diluted 14,901 15,741 15,762 15,669 15,611 15,521 15,599 15,245 - ------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK PRICES AND DIVIDENDS The Ryland Group lists its common shares on the New York Stock Exchange, trading under the symbol RYL. The table below presents high and low market prices and dividend information for the Company. The number of common stockholders of record as of February 17, 2000, was 13,555,560. (See Note I for dividend restrictions.) Dividends Dividends Declared Declared 1999 High Low Per Share 1998 High Low Per Share - ---------------------------------------------------------------------------------------------------------------------------- First quarter $28 5/16 $22 5/8 $0.04 First quarter $29 13/16 $21 1/2 $0.04 Second quarter 30 22 7/8 0.04 Second quarter 27 11/16 19 1/2 0.04 Third quarter 30 7/16 22 1/4 0.04 Third quarter 27 5/16 19 3/4 0.04 Fourth quarter 24 1/16 19 15/16 0.04 Fourth quarter 29 1/8 20 7/8 0.04 - ---------------------------------------------------------------------------------------------------------------------------- 43 133

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RYLAND GROUP INC. FORM 10-K FOR THE PERIOD ENDED 12/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 12-MOS DEC-31-1999 DEC-31-1999 69,926 99,249 40,520 0 822,681 0 26,619 0 1,248,323 0 194,797 0 350 13,851 372,336 1,248,323 1,958,832 2,009,266 1,633,094 1,848,231 23,332 0 28,367 109,336 42,641 66,695 0 0 0 66,695 4.49 4.30