-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UgNjQiiMB5PuzrTSdYllfVwDWnqZP9osiYtEpF62fHGowah4o2tWA3pDEVDFjiyO v6NXpAPvVIAU695rcCnRTg== 0000085974-97-000003.txt : 19970321 0000085974-97-000003.hdr.sgml : 19970321 ACCESSION NUMBER: 0000085974-97-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RYLAND GROUP INC CENTRAL INDEX KEY: 0000085974 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 520849948 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08029 FILM NUMBER: 97559977 BUSINESS ADDRESS: STREET 1: 11000 BROKEN LAND PARKWAY CITY: COLUMBIA STATE: MD ZIP: 21044 BUSINESS PHONE: 4107157000 FORMER COMPANY: FORMER CONFORMED NAME: RYAN JAMES P CO DATE OF NAME CHANGE: 19720414 10-K405 1 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, 1996 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 Identification No.) of incorporation or organization) 11000 Broken Land Parkway Columbia, Maryland 21044 (Address of principal executive offices) Registrant's telephone number, including area code: (410) 715-7000 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 (Sec.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. /X/ The aggregate market value of the Common Stock of The Ryland Group, Inc., held by non-affiliates of the registrant (15,671,097 shares) as of March 4, 1997, was $199,806,487. The number of shares of common stock of The Ryland Group, Inc., outstanding on March 4, 1997, was 15,896,988. DOCUMENTS INCORPORATED BY REFERENCE Name of Document Location in Report - ---------------- ------------------ Proxy Statement for 1997 Annual Meeting of Stockholders Parts I, III Annual Report to Shareholders for the year ended December 31, 1996 Parts II, IV Form 8-K filed September 12, 1989 Part IV Form 10-K for the year ended December 31, 1989 Part IV Registration Statement on Form S-3, Registration 33-28692 Part IV Form 8-K filed December 31, 1990 Part IV Form 8-K filed August 6, 1992 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 10-K for the year-ended December 31, 1995 Part IV Form 8-K filed July 2, 1996 Part IV THE RYLAND GROUP, INC. FORM 10-K INDEX Page PART I. Number ------ Item 1. Business 4 Item 2 Properties 11 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II. Item 5. Market for the Company's Common Stock and Related Stockholder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III. Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management 15 Item 13. Certain Relationships and Related Transactions 15 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8- K 16 SIGNATURES 20 INDEX OF EXHIBITS 21 PART I Item 1. Business. The Ryland Group, Inc. (the "Company"), is a leading national homebuilder and mortgage-related financial services firm. Established in 1967, the Company builds homes and provides mortgage services in 24 divisions in 20 states and is one of the largest single-family on-site homebuilders in the United States. The Company's homebuilding segment specializes in the sale and construction of single-family attached and detached housing. The financial services segment, whose business is conducted through Ryland Mortgage Company and its subsidiaries (RMC), complements the Company's homebuilding activities by providing various mortgage-related products and services for retail customers including loan origination, loan servicing, title and escrow services. The financial services segment also conducts investment activities. HOMEBUILDING - ------------ MARKETS The homebuilding segment markets and builds homes that are constructed on-site in five regions which are comprised of 24 divisions across the nation. As of December 31, 1996, the Company operated in the following metropolitan markets: Region Major Markets Served Mid-Atlantic Baltimore, Delaware Valley/Philadelphia, Washington, D.C./ Northern Virginia Midwest Chicago, Cincinnati, Indianapolis, Minneapolis Southeast Atlanta, Charlotte, Greenville, Orlando, Tampa Southwest Austin, Dallas, Houston, San Antonio West Denver, Los Angeles/Pacific Inland, Phoenix, Portland, Sacramento, Salt Lake City, San Diego, San Jose Bay Area Effective January 1996, the Company consolidated the West and California regions into a new West region. The homebuilding segment sells under the name of Brock Homes in Southern California (except for San Diego where the Company sells under the Ryland Homes name), Larchmont Homes in Sacramento, California, Scott Felder Homes in certain Texas markets and Ryland Homes in all other areas. The Company markets detached and attached single family homes generally targeted to the entry level, first-and second-time move-up home buyer 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 the community. In 1996, the Company's average closing price was $174,000. During the last three years, the Company has updated a majority of its product line. 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. In addition, through flexible supply arrangements and construction methods, the Company has significantly improved its ability to quickly bring new home designs to market and modify existing products. 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. During 1996, the Company completed its first full year of operations in Minneapolis, Minnesota; Tampa, Florida; and San Jose, California. The Company also continued its start-up operations in Portland, Oregon and expects to begin delivering homes there in 1997. In December 1995, the Company announced its decision to exit homebuilding operations in the Columbus, Ohio market and this exit was substantially completed at December 31, 1996. The Company's decision was based upon its assessment that better opportunities were available to employ capital in other Midwest markets. During the past year, due to economic uncertainties and competitive pressures in the Mid-Atlantic region, the Company continued to reallocate capital out of the Mid-Atlantic and into other regions where the Company believes it can achieve higher returns. LAND ACQUISITION AND DEVELOPMENT As of December 31, 1996, the Company operated in approximately 275 communities in 24 metropolitan markets in 20 states. 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 formal 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, depending on which vehicle is deemed more advantageous given the Company's profit objectives and capital constraints as well as local market conditions. 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 various third parties. The Company generally does not purchase unentitled or unzoned land. Option contract agreements are generally limited to finished building lots. 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 preclude the Company from controlling quality building lots solely through the use of option contracts. In order to improve its land positions, the Company acquires finished lots on a bulk basis and undeveloped, entitled land. The Company utilizes selective development of entitled land in order 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, 1996, the Company had deposits and letters of credit outstanding of $32.9 million in connection with option and land purchase contracts having a total purchase price of $294.7 million. These options and commitments expire at various dates through 2001. 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 procure such products through national supply contracts. The Company operates a plant in Maryland that produces and ships rough lumber packages and trim materials to building sites in its Baltimore, Maryland and Washington, D.C./Northern Virginia markets. In other markets, the Company may purchase rough lumber packages from outside suppliers where this is determined to be the most cost effective procurement and construction approach. 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 completed the implementation of 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. MARKETING AND CUSTOMER SERVICE The Company generally markets it's homes to entry level, first and second-time move-up buyers 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. The Company's homes are sold by employees and independent real estate brokers, 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 upon closing. The Company normally commences 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 Company has repositioned its financial services segment through a strategy consisting of (1) a focus on retail mortgage loan origination and servicing activities, (2) the divestiture of non-core assets and lines of business, (3) leveraging its affiliation with the company's homebuilding segment to increase its capture rate for builder loans and (4) reaching mortgage customers directly at the point of sale through the use of technology. Operations of the financial services segment include retail loan production, loan servicing, related title, escrow and closing services and investment activities. RETAIL OPERATIONS LOAN PRODUCTION In 1996, the Company's mortgage origination operations consisted of both builder loans, which originate in connection with the sale of the Company's homes, and spot loans, which are unrelated to the financing of homes built by the Company. During 1996, RMC originated 11,161 loans totaling approximately $1.5 billion (including the wholesale operations which was sold in the first quarter of 1996) of which 47 percent were for purchases of homes built by the Company and 53 percent were for purchases of homes not built by the Company or for the refinancing of existing mortgage loans. The Company has increased its focus on builder loan production by deploying loan officers directly in the Company's homebuilding communities and by utilizing traffic and prospect information generated by the Company's homebuilding sales and marketing staff. RMC's capture rate of the Company's homebuilding segment customers increased from 63 percent in 1995 to 66 percent during 1996. During 1996, the Company sold its wholesale mortgage origination business based on expectations that the business would not contribute significantly to the Company's future earnings. The disposition of this business reduced mortgage originations and revenues of the financial services segment in 1996 but did not have a material effect on the Company's earnings for the year. 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. The Company's mortgage operations are approved by Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Association (FNMA) and Government National Mortgage Association (GNMA). The mortgage origination operation has loan production offices which are generally co-located with the Company's homebuilding operations. LOAN SERVICING The Company services loans that it originates, as well as loans originated by others. As of December 31, 1996, the Company's loan servicing portfolio was $6.3 billion and included loans subserviced for others totaling $1.2 billion. The Company services loans originated in all 50 states, with the highest concentrations in California, Florida, Maryland and Texas. The Company continually evaluates the economics of selling versus retaining the rights to service loans it originates. During 1996, the Company sold a substantial portion of the servicing rights related to loans it originated due to the economic conditions in the market place at the time. TITLE AND ESCROW SERVICES Cornerstone Title Company, a wholly owned subsidiary, provides title services primarily to the Company's customers. As of December 31, 1996, Cornerstone had offices in Delaware, Florida, Georgia, Illinois, Maryland, New Jersey, Texas and Virginia. The Company also operates an escrow Company in California that performs escrow and loan closing functions primarily on homes built by the Company. During 1996, Cornerstone Title Company captured 94% of the title and escrow business related to settlement of the Company's homes in those markets in which it operates. INVESTMENT OPERATIONS The 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. LIMITED-PURPOSE SUBSIDIARIES - ---------------------------- 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 of the limited-purpose subsidiaries consist of interest on mortgage collateral subject to bond indebtedness. Expenses consist primarily of interest on the outstanding bonds and amortization of deferred costs. Revenues, expenses and portfolio balances continue to decline as the mortgage collateral pledged to secure the bonds decreases due to scheduled principal payments, prepayments and exercises of early redemption provisions. Revenues have approximated expenses for the last three years. REAL ESTATE AND ECONOMIC CONDITIONS - ----------------------------------- The Company is significantly affected by the cyclical nature of the homebuilding industry, which is sensitive to fluctuations in economic activity, interest rates and levels of consumer confidence, the effects of which 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, the Company's home sales and mortgage originations generally will be negatively impacted by rising interest rates. Movements in interest rates may also affect the market value of the Company's investment portfolio. Prepayments, which are higher in a falling interest rate environment, reduce the value of loan servicing rights in the Company's loan servicing portfolio. 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. Inventory risk can be substantial for homebuilders. The market value of land, building lots and housing inventories can fluctuate significantly as a result of changing market and economic conditions. In addition, inventory carrying cost can be significant and can result in losses in poorly performing projects or markets. The Company must, in the ordinary course of its business, 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. Although the Company employs various measures designed to manage inventory risks, there can be no assurance that such measures will be successful. 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 general 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. In addition, the Company 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, availability and location of lots and availability of customer financing. The financial services segment competes with other mortgage bankers to arrange financing for home buyers and refinancing customers. Principal competitive factors include interest rates and other features of mortgage loan products available to the consumer. The loan servicing operation of the financial services segment competes with other loan servicers for loan servicing rights. REGULATORY AND ENVIRONMENTAL MATTERS - ------------------------------------ The homebuilding segment is subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulations which impose restrictive zoning and density requirements in order to limit the number of homes that can be built within the boundaries of a particular area. The Company may also be subject to periodic delays in homebuilding projects due to building moratoria in any of the areas in which it operates. Generally, such moratoria relate to insufficient water or sewage facilities or inadequate roads or local services. The Company and its competitors are subject to a variety of local, state and federal statutes, 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, the site's environmental condition and the present and former uses of the site, as well as 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. The Company's financial services segment is subject to the rules and regulations of FHA, VA, FNMA, FHLMC, and GNMA ("regulatory agencies") with respect to originating, processing, selling and servicing mortgage loans. In addition, there are other federal and state statutes and regulations affecting such 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. Moreover, the Company is required to submit to the regulatory agencies audited financial statements annually, and each regulatory entity has its own financial requirements. The Company's affairs are also subject to examination by the regulatory 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 regulations promulgated thereunder which prohibit discrimination and require the disclosure of certain information to mortgagors concerning credit and settlement costs. EMPLOYEES - --------- At December 31, 1996, the Company employed 2,358 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 Columbia, Maryland. In addition, the Company leases office space in the various markets in which it operates. The Company operates a building component plant in New Windsor, Maryland. 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. In 1995, one current and two former officers of Ryland Mortgage Company (RMC) were notified that they are targets of a federal grand jury investigation concerning alleged misappropriation of funds from the Resolution Trust Corporation (RTC). The Company has been advised that the investigation relates to alleged overpayments to RMC of approximately $3.4 million under three mortgage-servicing contracts with the RTC. In July 1996, the RTC (acting through its successor, the FDIC) requested reimbursement from RMC of the alleged overpayment, interest thereon and additional amounts relating to mortgage-servicing contracts. The Company is investigating these matters and, at this time, cannot predict how they will be resolved or whether the Company or RMC will be targets of the grand jury investigation, parties to any civil litigation or incur any liability. The Company is also party to various legal proceedings generally incidental to its businesses. Based on evaluation of the above 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. Item 4. Submission 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, 1996. SEPARATE ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT Position (date elected to position) Name Age Prior Business Experience - ---- --- ----------------------------------- R. Chad Dreier 49 Chairman of the Board of the Company (1994), President and Chief Executive Officer of the Company (1993). Executive Vice President and Chief Financial Officer of Kaufman and Broad Home Corporation and Chairman of Kaufman and Broad Mortgage Company (1986-1993). Michael C. Brown 39 Senior Vice President of the Company (1996), President of Ryland Mortgage Company (1996). Chief Operating Officer of Ryland Mortgage Company (1995). Senior Vice President of Ryland Mortgage Company (1987-1995). J. Sidney Davenport IV 55 Vice President of the Company(1984) and Executive Vice President of Ryland Mortgage Company (1993). Senior Vice President of Ryland Mortgage Company (1990-1993). James R. Fratangelo 38 Senior Vice President of Ryland Mortgage Company (1993). Marketing Representative of Ryland Mortgage Company (1983-1993). Thomas J. Gancsos 41 Senior Vice President of the Company and President of Mid-Atlantic Region (1996). Regional Vice President of Mid-Atlantic Region (1994). Vice-President of Washington Homes (1993-1994). Division President of Chicago (1993). John M. Garrity 50 Senior Vice President of the Company, President of Southeast Region (1994) and President of the Southwest Region (1996). Division General Manager of Arvida Homes (1992-1994). Timothy J. Geckle 44 Vice President, Corporate Counsel and Secretary of the Company (1996). Vice President, Deputy General Counsel (1995-1996). Corporate Counsel (1991-1995). Edward W. Gold 39 Senior Vice President Human Resources of the Company (1996). Vice President of Human Resources, United States Fidelity & Guaranty Company (1991-1996). Michael D. Mangan 40 Executive Vice President and Chief Financial Officer of the Company (1994).Executive Vice President and Group Chief Financial Officer of GMAC Mortgage Corporation (1991-1994). Frank J. Scardina 48 Senior Vice President of the Company (1994), President of West Region (1996) and President of California Region (1994). Division President of Columbus (1993). Kipling W. Scott 42 Senior Vice President of the Company and President of Midwest Region (1994). Midwest Region Director of Land Resources & Planning (1993). President of Development Management Services, Inc. (1989-1993). All officers are elected by the board of directors. 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 12 of the Proxy Statement for the 1997 Annual Meeting of Stockholders. 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 48 of the Annual Report to Shareholders for the year ended December 31, 1996. 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 23 of the Annual Report to Shareholders for the year ended December 31, 1996. 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 24 through 28 of the Annual Report to Shareholders for the year ended December 31, 1996. Item 8. Financial Statements and Supplementary Data. The information required by this item is incorporated by reference from the information appearing on pages 29 through 46 and from the section entitled "Quarterly Financial Data and Common Stock Prices and Dividends" appearing on page 48 of the Annual Report to Shareholders for the year ended December 31, 1996. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. During the fiscal years ended December 31, 1996 and 1995, there were no disagreements between the Company and its accountants on any matter of accounting principle or financial statement disclosure. PART III Item 10. Directors and Executive Officers of the Registrant. Information as to the Company's Directors is incorporated by reference from pages 3, 4 and 7 of the Company's Proxy Statement for its 1997 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 7-13 of the Company's Proxy Statement for its 1997 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 pages 5 and 6 of the Company's Proxy Statement for its 1997 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. 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, 1996, are incorporated by reference in Item 8: Consolidated Statements of Earnings - years ended December 31, 1996, 1995, and 1994. Consolidated Balance Sheets - December 31, 1996 and 1995. Consolidated Statements of Stockholders' Equity - years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows - years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. (a) 2. Financial Statement Schedules. (filed herewith) Page No. -------- Schedule II - Valuation and Qualifying Accounts..............18 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. (a) 3. Exhibits 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 Bylaws of The Ryland Group, Inc., as amended. (Filed herewith) 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 Indenture dated as of July 15, 1992, between The Ryland Group, Inc., and Security Trust Company, N.A., as Trustee. (Incorporated by reference from Form 8-K filed August 6, 1992) 4.4 Senior Subordinated Notes dated as of July 23, 1992. (Incorporated by reference from Form 8-K filed August 6, 1992) 4.5 Senior Subordinated Notes dated as of November 4, 1993. (Incorporated by reference from Registration Statement on Form S-3, Registration No. 33-48071) 4.6 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) 4.7 Senior Notes dated as of June 10, 1996. (Incorporated by reference from Registration Statement on Form S-3, Registration No. 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 (1) 1992 Equity Incentive Plan of The Ryland Group, Inc. (Incorporated by reference from Form 10-Q for the quarter ended June 30, 1992) 10.3 (1) 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) 10.4 Restated Credit Agreement dated as of July 21, 1995, between The Ryland Group, Inc., and certain banks. (Incorporated by reference from Form 10-K for the year ended December 31, 1995) 10.5 Restated Loan and Security Agreement dated as of June 16, 1995, between Ryland Mortgage Company; Associates Mortgage Funding Corporation; BankOne, Texas, N.A.; and certain lenders. (Incorporated by reference from Form 10-K for the year ended December 31, 1995) 10.6 First Amendment to Restated Loan and Security Agreement dated as of June 3, 1996, between Ryland Mortgage Company, Associate Mortgage Funding Corporation, BankOne, Texas, N.A., and certain lenders. (Filed herewith) 10.7 (1) Employment Agreement dated as of January 28, 1997, between R. Chad Dreier and The Ryland Group, Inc. (Filed herewith) 10.8 (1) Employment Agreement dated as of September 18, 1995, between Michael D. Mangan and The Ryland Group, Inc. as amended and restated as of January 28, 1997. (Filed herewith) 10.9 (1) Senior Executive Severance Agreement dated as of January 28, 1997, between the executive officers of the Company and The Ryland Group, Inc. (Filed herewith) 10.10 (1) Executive and Director Deferred Compensation Plan, effective as of January 1, 1997 between The Ryland Group, Inc. and certain of its executive employees and Directors. (Filed herewith) 11 Statement Re Computation of Per Share Earnings. (Filed herewith) 13 Annual Report to Shareholders for the year ended December 31, 1996. (Filed herewith) 21 Subsidiaries of the Registrant. (Filed herewith) 23 Consent of Ernst & Young LLP, Independent Auditors. (Filed herewith) 24 Power of Attorney. (Filed herewith) 27 Financial Data Schedule. (Filed herewith) (1) Executive Compensation Plan or Arrangement (b) Reports on Form 8-K filed in the fourth quarter of 1996: Form 8-K was filed with the Securities and Exchange Commission on October 24, 1996 regarding The Shareholders Rights Plan. 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 (1) Period (2) Valuation allowance: Homebuilding inventories 1996 $ 8,303 $ 0 $ 0 $ ( 5,251) $ 3,052 1995 31,853 7,000 0 (30,550) 8,303 1994 53,333 0 0 (21,480) 31,853 Valuation allowance: Investment in and advances to joint ventures 1996 $ 7,933 $ 0 $ 0 $ (1,433) $ 6,500 1995 1,573 7,000 0 (640) 7,933 1994 1,669 0 0 (96) 1,573 (1) In 1995, the Company adopted a new accounting standard, Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (FASB 121). As part of the implementation of FASB 121, the carrying basis of inventories to be held and used was written down by the remaining amount of valuation reserves provided under prior accounting rules. Deductions for homebuilding inventories, prior to the adoption of FASB 121, were generally related to normal inventory turnover resulting from home closings or land sales. (2) Balances as of December 31, 1996 and 1995, represent valuation allowances for assets to be disposed of. 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/ Michael D. Mangan March 20, 1997 ----------------------------- Michael D. Mangan Executive Vice President and Chief Financial 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 20, 1997 - ----------------------- R. Chad Dreier Chief Executive Officer Principal Financial Officer: /s/ Michael D. Mangan March 20, 1997 - ----------------------- Michael D. Mangan Chief Financial Officer Principal Accounting Officer: /s/ Stephen B. Cook March 20, 1997 - ----------------------- Stephen B. Cook Chief Accounting Officer The Board of Directors: James A. Flick, Jr.; R. Chad Dreier; Robert J. Gaw; Leonard M. Harlan; L. C. Heist; William L. Jews; William G. Kagler; John H. Mullin, III; Charlotte St. Martin; John O. Wilson. By: /s/ R. Chad Dreier March 20, 1997 ----------------------------- R. Chad Dreier For Himself and as Attorney-in-Fact Page Of INDEX OF Sequentially EXHIBITS Numbered Pages - -------- -------------- 3.2 Bylaws of The Ryland Group, Inc., as amended October 18, 1996. 22-32 10.6 First Amendment to Restated Loan and Security Agreement dated as of June 3, 1996, between Ryland Mortgage Company, Associate Mortgage Funding Corporation, BankOne, Texas, N.A., and certain lenders. 33-61 10.7(1) Employment Agreement dated as of January 28, 1997, between R. Chad Dreier and The Ryland Group, Inc. 62-75 10.8(1) Employment Agreement dated as of September 18, 1995 between Michael D. Mangan and The Ryland Group, Inc. as amended and restated as of January 28, 1997. 76-88 10.9(1) Senior Executive Severance Agreement dated as of January 28, 1997, between the executive officers of the Company and The Ryland Group, Inc. 89-133 10.10(1) Executive and Director Deferred Compensation Plan, effective as of January 1, 1997 between The Ryland Group, Inc. and certain of its executive employees and Directors. 134-154 11 Statement Re Computation of Per Share Earnings 155 13 Annual Report to Shareholders for the year ended December 31, 1996 156-188 21 Subsidiaries of the Registrant 189 23 Consent of Ernst & Young LLP, Independent Auditors 190 24 Power of Attorney 191 27 Financial Data Schedule 192 (1) Executive Compensation Plan or Arrangement. EX-3 2 THE RYLAND GROUP, INC. Bylaws ARTICLE I STOCKHOLDERS SECTION 1.01. Annual Meeting. The Corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers, either at 10:00 a.m. on the third Wednesday of April in each year, if not a legal holiday, or at such other time on such other day falling on or before the 30th day thereafter as shall be set by the Board of Directors. Except as the Charter or statute provides otherwise, any business may be considered at an annual meeting without the purpose of the meeting having been specified in the notice. Failure to hold an annual meeting does not invalidate the Corporation's existence or affect any otherwise valid corporate acts. SECTION 1.02. Special Meeting. At any time in the interval between annual meetings, a special meeting of the stockholders may be called by the Chairman of the Board or the President or by a majority of the Board of Directors by vote at a meeting or in writing (addressed to the Secretary of the Corporation) with or without a meeting. Special meetings of the stockholders shall be called by the Secretary at the request of the stockholders only on the written request of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting and then only as may be required by law. SECTION 1.03. Place of Meetings. Meetings of stockholders shall be held at such place in the United States as is set, from time to time, by the Board of Directors. SECTION 1.04. Notice of Meetings; Waiver of Notice. Not less than 10 nor more than 90 days before each stockholders' meeting, the Secretary shall give written notice of the meeting to each stockholder entitled to vote at the meeting and each other stockholder entitled to notice of the meeting. The notice shall state the time and place of the meeting and, if the meeting is a special meeting or notice of the purpose is required by statute, the purpose of the meeting. Notice is given to a stockholder when it is personally delivered to him, left at his residence or usual place of business, or mailed to him at his address as it appears on the records of the Corporation. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if he, before or after the meeting, signs a waiver of the notice, which is filed with the records of stockholders' meetings, or is present at the meeting in person or by proxy. A meeting of stockholders convened on the date for which it was called may be adjourned, from time to time, without further notice to a date not more than 120 days after the original record date. SECTION 1.05. Quorum; Voting. Unless statute or the Charter provides otherwise, at a meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum, and a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting. In the absence of a quorum, the stockholders present, in person or by proxy, by majority vote and without notice other than by announcement, may adjourn the meeting, from time to time, until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. In the event that at any meeting a quorum exists for the transaction of some business but does not exist for the transaction of other business, the business as to which a quorum is present may be transacted by the holders of stock present in person or by proxy who are entitled to vote thereon. SECTION 1.06. General Right to Vote; Proxies. Unless the Charter provides for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a vote at a meeting of stockholders. In all elections for directors, each share of stock may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A stockholder may vote the stock he owns of record either in person or by written proxy signed by the stockholder or by his duly authorized attorney in fact. Unless a proxy provides otherwise, it is not valid more than 11 months after its date. SECTION 1.07. List of Stockholders. At each meeting of stockholders, a full, true and complete list of all stockholders entitled to vote at such meeting, showing the number and class of shares held by each and certified by the transfer agent for such class or by the Secretary, shall be furnished by the Secretary. SECTION 1.08. Conduct of Voting. At all meetings of stockholders, unless the voting is conducted by judges, the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided, by the chairman of the meeting. If demanded by stockholders, present in person or by proxy, entitled to cast 10 percent of the number of total votes that are entitled to be cast, or if ordered by the chairman, the vote upon any election or question shall be taken by ballot and, upon like demand or order, the voting shall be conducted by two inspectors, in which event the proxies and ballots shall be received, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes, shall be decided by the inspectors. Unless so demanded or ordered, no vote need be by ballot, and voting need not be conducted by inspectors. The stockholders at any meeting may choose an inspector or inspectors to act at such meeting and, in default of such election, the chairman of the meeting may appoint an inspector or inspectors. No candidate for election as a director at a meeting shall serve as an inspector thereat. SECTION 1.09. Informal Action by Stockholders. Any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if there is filed with the records of stockholders' meetings a unanimous written consent which sets forth the action and is signed by each stockholder entitled to vote on the matter and a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at it. SECTION 1.10. Nominations of Directors. In addition to any other requirements, only persons who are nominated in accordance with the following procedures shall be eligible for election to the Board of Directors of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation shall be made at a meeting of stockholders at which directors are to be elected exclusively in accordance with this Section. Nominations of persons for such elections shall be deemed properly made if (i) set forth in proxy materials prepared for such a meeting by or at the direction of the Board of Directors, (ii) made by a stockholder at such a meeting at the direction of the Board of Directors, or (iii) made by a stockholder at such a meeting (other than at the direction of the Board of Directors) if timely notice has been given to the Secretary of the Corporation at the principal executive offices of the Corporation of such intent to make a nomination. To be timely, such stockholder's notice must be received by the Corporation not less than 75 days prior to the date of the stockholders' meeting; provided, however, that if less than 100 days' notice or prior disclosure of the date of the stockholders' meeting is given or made to the stockholders by the Corporation, then notice by the stockholder of intent to make a nomination must be received by the Corporation no later than the close of business on the 10th day following the day on which the Corporation mailed the notice of the date of the meeting or published or otherwise made public disclosure of such meeting date. For purposes of the preceding sentence, the "date of the stockholder meeting" is the date when the meeting is first convened, even if the meeting is adjourned one or more times to a later date or dates. Such stockholders' notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the Corporation which are beneficially owned by such person, if any, and (iv) any other information relating to such person which is required to be disclosed in solicitations for proxies for election of directors pursuant to Regulation 14A under the Securities and Exchange Act of 1934, as amended, or any successor act or Regulation; and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class and number of shares of the Corporation which are beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may be reasonably required by the Corporation to determine the qualifications of such proposed nominee to serve as a director of the Corporation. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 1.10. These procedures shall not apply to the nomination of any persons entitled to be separately elected by holders of Preferred Stock. The chairman of a stockholders' meeting may determine and declare to the meeting that a nomination has not been made in accordance with the foregoing procedure and that such defective nomination shall be disregarded. SECTION 1.11. Stockholder Proposals. In addition to any other requirements, any motions, resolutions, or proposals by stockholders (hereinafter "proposals") made at a meeting of stockholders shall be exclusively in accordance with this Section. Proposals shall be deemed properly made if (i) set forth in proxy materials prepared for such a meeting by or at the direction of the Board of Directors, (ii) made by a stockholder at such a meeting at the direction of the Board of Directors, or (iii) made by a stockholder at such a meeting (other than at the direction of the Board of Directors) if timely notice has been given to the Secretary of the Corporation at the principal executive offices of the Corporation of such intent to make the proposal. To be timely, such stockholder's notice must be received by the Corporation not less than 75 days prior to the date of the stockholders' meeting; provided, however, that if less than 100 days' notice or prior public disclosure of the date is given or made to the stockholders by the Corporation, then notice by the stockholder of intent to make the proposal must be received by the Corporation no later than the close of business on the 10th day following the day on which the Corporation mailed the notice of the date of the meeting or published or otherwise made public disclosure of such meeting date. For purposes of the preceding sentence, the "date of the stockholder meeting" is the date when the meeting is first convened, even if the meeting is adjourned one or more times to a later date or dates. Such shareholder's notice shall set forth a brief description of any proposal the stockholder intends to make, the reasons for bringing such proposal before the meeting, the name and address of the stockholder, and the class and number of shares of the Corporation which are beneficially owned by the stockholder, and any material interest of the stockholder in the subject of the proposal. No stockholder shall make a proposal at a stockholder meeting except in accordance with the procedures set forth in this Section 1.11. The chairman of a stockholder meeting may determine and declare to the meeting that a proposal has not been made in accordance with the foregoing procedure and that such defective proposal shall be disregarded. ARTICLE II BOARD OF DIRECTORS SECTION 2.01. Function of Directors. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors. All powers of the Corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to the stockholders by statute or by the Charter or Bylaws. SECTION 2.02. Number of Directors. The Corporation shall have at least three directors; provided that, if there is no stock outstanding, the number of directors may be less than three but not less than one; and, if there is stock outstanding and so long as there are less than three stockholders, the number of directors may be less than three but not less than the number of stockholders. The Corporation shall have the number of directors provided in the Charter until changed as herein provided. A majority of the entire Board of Directors may alter the number of directors set by the Charter to not exceeding 25 nor less than the minimum number then permitted herein, but the action may not affect the tenure of office of any director. SECTION 2.03. Election and Tenure of Directors. At each annual meeting, the stockholders shall elect directors to hold office until the next annual meeting and until their successors are elected and qualify. No director shall stand for election upon reaching the age of 70. SECTION 2.04. Removal of Director. The stockholders may remove any director, with or without cause, by the affirmative vote of a majority of all the votes entitled to be cast for the election of directors. SECTION 2.05. Vacancy on Board. The stockholders may elect a successor to fill a vacancy on the Board of Directors which results from the removal of a director. A majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the Board of Directors which results from any cause except an increase in the number of directors, and a majority of the entire Board of Directors may fill a vacancy which results from an increase in the number of directors. A director elected by the Board of Directors to fill a vacancy serves until the next annual meeting of stockholders and until his successor is elected and qualifies. A director elected by the stockholders to fill a vacancy which results form the removal of a director serves for the balance of the term of the removed director. SECTION 2.06. Regular Meetings. After each meeting of stockholders at which a Board of Directors shall have been elected, the Board of Directors so elected shall meet as soon as practicable for the purpose of organization and the transaction of other business; and in the event that no other time is designated by the stockholders, the Board of Directors shall meet one hour after the time for such stockholders' meeting or immediately following the close of such stockholders' meeting on the day of such meeting. Such first regular meeting shall be held at any place as may be designated by the stockholders, or in default of such designation, at the place designated by the Board of Directors for such first regular meeting, or in default of such designation, at the place of the holding of the immediately preceding meeting of stockholders. No notice of such first meeting shall be necessary if held as hereinabove provided. Any other regular meeting of the Board of Directors shall be held on such date and at any place as may be designated, from time to time, by the Board of Directors. SECTION 2.07. Special Meetings. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, the President or by a majority of the Board of Directors by vote at a meeting, or in writing with or without a meeting. A special meeting of the Board of Directors shall be held on such date and at any place in or out of the state of Maryland as may be designated, from time to time, by the Board of Directors. In the absence of designation, such meeting shall be held at such place as may be designated in the call. SECTION 2.08. Notice of Meeting. Except as provided in Section 2.06, the Secretary shall give notice to each director of each regular and special meeting of the Board of Directors. The notice shall state the time and place of the meeting. Notice is given to a director when it is delivered personally to him, left at his residence or usual place of business, or sent by telegraph or telephone at least 24 hours before the time of the meeting or, in the alternative, by mail to his address as it shall appear on the records of the Corporation at least 72 hours before the time of the meeting. Unless the Bylaws or a resolution of the Board of Directors provides otherwise, the notice need not state the business to be transacted at or the purposes of any regular or special meeting of the Board of Directors. No notice of any meeting of the Board of Directors need be given to any director who attends or to any director who, in writing executed and filed with the records of the meeting either before or after the holding thereof, waives such notice. Any meeting of the Board of Directors, regular or special, may adjourn, from time to time, to reconvene at the same or some other place, and no notice need be given of any such adjourned meeting other than by announcement. SECTION 2.09. Action by Directors. Unless statute or the Charter or Bylaws require a greater proportion, the action of a majority of the directors present at a meeting at which a quorum is present is action of the Board of Directors. A majority of the entire Board of Directors shall constitute a quorum for the transaction of business. In the absence of a quorum, the directors present, by majority vote and without notice other than by announcement, may adjourn the meeting, from time to time, until a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Any action required or permitted to be taken at a meeting of the Board of Directors may be taken without a meeting, if a unanimous written consent which sets forth the action is signed by each member of the Board and filed with the minutes of proceedings of the Board. SECTION 2.10. Meeting by Conference Telephone. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at a meeting. SECTION 2.11. Compensation. By resolution of the Board of Directors, a fixed sum and expenses, if any, for attendance at each regular or special meeting of the Board of Directors or of committees thereof, and other compensation for their services as such on committees of the Board of Directors, may be paid to directors. A director who serves the Corporation in any other capacity also may receive compensation for such other services, pursuant to a resolution of the directors. ARTICLE III COMMITTEES SECTION 3.01. Committees. The Board of Directors may appoint from among its members an Executive Committee and other committees composed of two or more directors and delegate to these committees any of the powers of the Board of Directors, except the power to declare dividends on stock; elect directors; issue stock, other than as provided in the next sentence; recommend to the stockholders any action which requires stockholder approval; amend the Bylaws; or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of stock, a committee of the Board, in accordance with that authorization or any stock option or other plan or program adopted by the Board of Directors, may fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. SECTION 3.02. Committee Procedure. Each committee may fix rules of procedure for its business. A majority of the members of a committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the committee. The members of a committee present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of an absent member. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if a unanimous written consent, which sets forth the action, is signed by each member of the committee and filed with the minutes of the committee. The members of a committee may conduct any meeting thereof by conference telephone in accordance with the provisions of Section 2.10. SECTION 3.03. Emergency. In the event of a state of disaster of sufficient severity to prevent the conduct and management of the affairs and business of the Corporation by its directors and officers, as contemplated by the Charter and the Bylaws, any two or more available members of the then incumbent Executive Committee shall constitute a quorum of that Committee for the full conduct and management of the affairs and business of the Corporation in accordance with the provisions of Section 3.01. In the event of the unavailability, at such time, of a minimum of two members of the then incumbent Executive Committee, the available directors shall elect an Executive Committee consisting of any two members of the Board of Directors, whether or not they be officers of the Corporation, which two members shall constitute the Executive Committee for the full conduct and management of the affairs of the Corporation in accordance with the foregoing provisions of this Section. This Section shall be subject to implementation by resolution of the Board of Directors passed, from time to time, for that purpose; and any provisions of the Bylaws (other than this Section) and any resolutions which are contrary to the provisions of this Section or to the provisions of any such implementary resolutions shall be suspended until it shall be determined by any interim Executive Committee acting under this Section that it shall be to the advantage of the Corporation to resume the conduct and management of its affairs and business under all the other provisions of the Bylaws. ARTICLE IV OFFICERS SECTION 4.01. Executive Officers. The Board of Directors may choose a Chairman of the Board from among the directors. The Board of Directors shall choose a President, a Secretary and a Treasurer who need not be directors. The Board of Directors may choose one or more Vice Presidents and a Controller, none of whom need be a director. Any two or more of the above- mentioned offices, except those of President and Vice Presidents, may be held by the same person; but no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument be required by statute, by charter, by the Bylaws or by resolution of the Board of Directors to be executed, acknowledged or verified by any two or more officers. Each such officer shall hold office until the first meeting of the Board of Directors after the annual meeting of stockholders next succeeding his election, and until his successor shall have been duly chosen and qualified, or until he shall have resigned or shall have been removed. Any vacancy in any of the above offices may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. The Board of Directors may designate such persons as appointed officers as they deem necessary or desirable, from time to time. SECTION 4.02. Chairman of the Board. The Chairman of the Board, if one be elected, shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present. He shall have and may exercise such powers as are, from time to time, assigned to him by the Board of Directors. SECTION 4.03. President. In the absence of the Chairman of the Board, the President shall preside at all meetings of the stockholders and the Board of Directors at which he shall be present; he shall have general charge and supervision of the business of the Corporation; and he may sign and execute, in the name of the Corporation, all authorized deeds, mortgages, bonds, contracts or other instruments, except in cases in which the signing and execution thereof shall have been expressly delegated to some other officer or agent of the Corporation; and, in general, he shall perform all duties as, from time to time, may be assigned to him by the Board of Directors. SECTION 4.04. Vice Presidents. The Corporation shall have four (4) classes of Vice President; namely, Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Operational Vice Presidents. Each class of Vice President shall have such powers and duties as, from time to time, may be assigned to them by the Board of Directors or the Chairman. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents shall be executive officers of the Corporation. They shall have the power and authority, in the ordinary course of business of the Corporation, to acquire and dispose of real and personal property of the Corporation and interests therein and to execute and deliver all such documents as may be necessary or desirable in connection with any such acquisition or disposition. Operational Vice Presidents shall be deemed appointed officers of the Corporation. They shall have the power and authority, in the ordinary course of business of the Corporation, to make conveyances of real property developed by the Corporation and related personal property and to execute and deliver all such documents as may be necessary or desirable in connection with any such conveyance, and to execute land purchase agreements and related documents in connection with land acquisition transactions approved by a Senior Vice President of the Corporation. SECTION 4.05. Secretary. The Secretary shall keep the minutes of the meetings of the stockholders, of the Board of Directors and of any committees in books provided for this purpose; he shall see that all notices are duly given in accordance with the provisions of the Bylaws or as required by law; he shall be custodian of the records of the Corporation; he shall see that the corporate seal is affixed to all documents, the execution of which, on behalf of the Corporation, under its seal, is duly authorized and when so affixed, may attest the same; and, in general, he shall perform all duties incident to the office of a secretary of a corporation, and such other duties as, from time to time, may be assigned to him by the Board of Directors or the President. SECTION 4.06. Treasurer. The Treasurer shall have charge of and be responsible for all funds, securities, and receipts and disbursements of the Corporation, and shall deposit, or cause to be deposited, in the name of the Corporation, all moneys or other valuable effects in such banks, trust companies or other depositories as shall, from time to time, be selected by the Board of Directors; he shall render to the President and to the Board of Directors, whenever requested, an account of the financial condition of the Corporation; and, in general, he shall perform all the duties incident to the office of treasurer of a corporation and such other duties as may be assigned to him by the Board of Directors or the President. SECTION 4.07. Appointed Officers. Operational Vice Presidents, Controllers, Assistant Vice Presidents, Assistant Secretaries or Assistant Treasurers, and such additional officers as may be deemed necessary or desirable to management of the Corporation, shall be deemed appointed officers and shall not be considered executive officers of the Corporation. Appointed officers may be appointed by the Board of Directors or the President. SECTION 4.08. Compensation. The Board of Directors shall have the power to fix the compensation of all executive and appointed officers of the Corporation. The President shall have the power to fix the compensation of appointed officers in the absence of action thereon by the Board of Directors. SECTION 4.09. Removal. Any officer, employee or agent of the Corporation may be removed by the Board of Directors whenever, in its judgment, the best interests of the Corporation will be served thereby; but such removal shall be without prejudice to the contractual rights, if any, of the person removed. Any appointed officer, employee or agent of the Corporation may be removed by the President whenever, in his judgment, the best interests of the Corporation will be served thereby; but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. ARTICLE V STOCK SECTION 5.01. Certificates for Stock. Each stockholder is entitled to certificates which represent and certify the shares of stock he holds in the Corporation. Each stock certificate shall include on its face the name of the corporation that issues it, the name of the stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. It shall be in such form, not inconsistent with law or with the Charter, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution of the Board of Directors. Each stock certificate shall be signed by the Chairman of the Board, the President, or a Vice President and countersigned by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer. Each certificate may be sealed with the actual corporate seal or a facsimile of it in any other form, and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. SECTION 5.02. Transfers. The Board of Directors shall have the power and authority to make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock; and may appoint transfer agents and registrars thereof. The duties of the transfer agent and registrar may be combined. SECTION 5.03. Record Date and Closing of Transfer Books. The Board of Directors may set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including which stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be more than 90 days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than 20 days; and, in the case of a meeting of stockholders, the record date or the closing of the transfer books shall be at least 10 days before the date of the meeting. SECTION 5.04. Stock Ledger. The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock, within or without the state of Maryland, or, if none, at the principal office or the principal executive offices of the Corporation in the state of Maryland. SECTION 5.05. Certification of Beneficial Owners. The Board of Directors may adopt by resolution a procedure by which a stockholder of the Corporation may certify in writing to the Corporation that any shares of stock registered in the name of the stock-holder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may certify; the purpose for which the certification may be made; the form of certification and the information to be contained in it; the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation, if the certification is with respect to a record date or closing of the stock transfer books; and any other provisions with respect to the procedure which the Board considers necessary or desirable. Upon receipt of a certification which complies with the procedure adopted by the Board in accordance with this Section, the person specified in the certification is, for the purpose set forth in the certification, the holder of record of the specified stock in place of the stockholder who makes the certification. SECTION 5.06. Lost Stock Certificates. The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have been lost, stolen, or destroyed, or the Board of Directors may delegate such power to any officer or officers of the Corporation. In their discretion, the Board of Directors, or such officer or officers, may refuse to issue such new certificate save upon the order of some court having jurisdiction in the premises. ARTICLE VI FINANCE SECTION 6.01. Checks, Drafts, Etc. All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the name of the Corporation, shall, unless otherwise provided by resolution of the Board of Directors, be signed by the President, a Vice President or an Assistant Vice President and countersigned by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary. SECTION 6.02. Annual Statement of Affairs. There shall be prepared annually a full and correct statement of the affairs of the Corporation, to include a balance sheet and a financial statement of operations for the preceding fiscal year. The statement of affairs shall be submitted at the annual meeting of the stockholders and, within 20 days after the meeting, placed on file at the Corporation's principal office. SECTION 6.03. Fiscal Year. The fiscal year of the Corporation shall be the 12-month period ending December 31 in each year, unless otherwise provided by the Board of Directors. ARTICLE VII SUNDRY PROVISIONS SECTION 7.01. Books and Records. The Corporation shall keep correct and complete books and records of its accounts and transactions and minutes of the proceedings of its stockholders, Board of Directors and of any executive or other committee when exercising any of the powers of the Board of Directors. The books and records of a Corporation may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form but may be maintained in the form of a reproduction. SECTION 7.02. Corporate Seal. The Board of Directors shall provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary. The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. SECTION 7.03. Bonds. The Board of Directors may require any officer, agent or employee of the Corporation to give a bond to the Corporation, conditioned upon the faithful discharge of his duties, with one or more sureties and in such amount as may be satisfactory to the Board of Directors. SECTIONS 7.04. Voting Upon Shares in Other Corporations. Stock of other corporations or associations, registered in the name of the Corporation, may be voted by the President, a Vice President or a proxy appointed by either of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a certified copy of such resolution. SECTION 7.05. Mail. Any notice or other document which is required by these Bylaws to be mailed shall be deposited in the United States mails, postage prepaid. SECTION 7.06. Execution of Documents. A person who holds more than one office in the Corporation may not act in more than one capacity to execute, acknowledge or verify an instrument required by law to be executed, acknowledged or verified by more than one officer. SECTION 7.07. Amendments. Subject to the special provisions of Section 2.02, the Board of Directors shall have the power at any regular or special meeting of Directors, to make and adopt new bylaws, or to amend, alter or repeal any of the bylaws of the Corporation, and the stockholders of the Corporation shall have no power to make and adopt new Bylaws, or to amend, alter or repeal any of the Bylaws of the Corporation. EX-10 3 EXHIBIT 10.6 FIRST AMENDMENT TO RESTATED LOAN AND SECURITY AGREEMENT ------------------------------------------------------- THIS AMENDMENT is entered into as of June 3, 1996, between ASSOCIATES MORTGAGE FUNDING CORPORATION, a Delaware corporation (`Associates'), RYLAND MORTGAGE COMPANY, an Ohio corporation (`Ryland'), BANK ONE, TEXAS, N.A., as Agent (`Agent'), and the Lenders executing this amendment. Associates and Ryland (the `Companies'), Agent, and certain lenders are party to the Restated Loan and Security Agreement (as renewed, extended, and amended, the `Loan Agreement') dated as of June 16, 1995. This amendment is for the purpose of, among other things, extending the maturity date, changing the interest rates, and revising and adding certain sublimits under the Loan Agreement. Accordingly, for adequate and sufficient consideration, the parties to this amendment agree as follows: 1. TERMS AND REFERENCES. Unless otherwise stated in this amendment (a) terms defined in the Loan Agreement have the same meanings when used in this amendment and (b) references to "Sections," "Schedules," and "Exhibits" are to the Loan Agreement's sections, schedules, and exhibits. 2. AMENDMENTS. The Loan Agreement is amended as follows: (a) Section 1.1 is amended to entirely add, delete, or amend the following terms, as the case may be: Applicable Margin means the following interest margin over a base rate (i.e., either the Fed-Funds Rate or LIBOR) as applicable under this agreement: Borrowing Base Rate Applicable Margin - --------- --------- ----------------- Warehouse Borrowings (except Gestation Borrowings) Fed-Funds Rate 0.750% LIBOR 0.625% Gestation Borrowings Fed-Funds Rate 0.550% LIBOR 0.450% Receivables Borrowings Fed-Funds Rate 0.900% LIBOR Not applicable Working-Capital Borrowings Fed-Funds Rate 1.125% LIBOR 1.000% Closing Date means June 3, 1996. Gestation Sublimit means not more than 50% of the Warehouse Sublimit. Investment-Mortgage Loan Sublimit means $10,000,000. Seasoned Loan means a Mortgage Loan that meets the requirements of being an Eligible-Mortgage Loan except that it is originated to investor specifications but delivered to Agent more than 180 days after the date of the original promissory note. Seasoned-Loan Sublimit means $10,000,000. Stated-Termination Date means May 31, 1998. (b) Section 3.18(b)(ii) is entirely amended as follows: (ii) The amount of those commitment fees are a percentage per annum - calculated on the basis of 12.5 basis points of the Commitment Percentage of the Warehouse Sublimit, and 20 basis points of the Commitment Percentage of the Receivables/Working-Capital Sublimit. (c) Section 4.2(b)(ii) is amended in its entirety as follows: (ii) In respect of the Servicing Portfolio, all present and future: Servicing Rights pertaining in any way to Ryland's Servicing Contracts with FHLMC, FNMA, or GNMA, together with all present and future sums paid or payable to Ryland on account of, or as a result of the performance of, those Servicing Rights, whether as compensation for the performance by Ryland, damages related to any of the foregoing, amounts payable upon cancellation or termination thereof, or otherwise; Servicing Receivables; provided, however, that any of Ryland's Servicing Portfolio sold within 180 days of origination shall be deemed automatically released as Collateral without any further action by the Companies, Agent, or any other Lender. (d) Section 4.10 is entirely amended as follows: 4.10 Release of Servicing Rights. In connection with any sale of Servicing Rights [to the extent included as Collateral pursuant to Section 4.2(b) or otherwise] permitted by the Loan Papers, the Companies shall execute and deliver to Agent a Request for Release and the appropriate Financing Statement Changes in substantially the form of Exhibit D-4 for execution and delivery by Agent, which Agent shall execute and return to the Companies within seven days. (e) Section 9.5 is entirely amended to read as follows: 9.5 Servicing Portfolio. (a) The sum of the Servicing Portfolio plus the total unpaid-principal balance of all mortgage loans for which the servicing rights are owned by any wholly-owned Subsidiary of Ryland (a "Servicing Subsidiary") may never be less than $4,000,000,000, and (b) the total Eligible-Servicing Portfolio may never be less than $1,000,000,000. (f) Item A(1)(e) on Schedule 1.1(c) is amended as follows: (e) The Collateral Documents for which (i) are delivered to Agent within 30 days after the date of the related promissory note (other than an ARM Loan that has been converted to a fixed-interest rate or an Investment- Mortgage Loan or -- subject to the Seasoned-Loan Sublimit -- a Seasoned Loan), (ii) in compliance with all Laws, and (iii) are otherwise in form and substance acceptable to Agent in its reasonable judgment. (g) The first seven lines of Part B on Schedule 1.1(d) are entirely amended as follows: B. Borrowing Base for Mortgage Collateral means, at any time, an amount equal to the sum of (a) the Borrowing Base for Eligible-Gestation Collateral plus (b) 99% of the Market Value of all Eligible-Mortgage Securities plus (c) an amount -- as reduced by any of the matters listed below -- equal to the lesser of either: - 98% of the greater of either the total outstanding principal balance or the total Market Value of all Eligible-Mortgage Loans that is not Eligible-Gestation Collateral, or - if -- the total Market Value of all Eligible-Mortgage Collateral that is not Eligible-Gestation Collateral is less than 98% of the total outstanding principal balance thereof -- then 100% of the total Market Value. (h) Item B.3 on Schedule 1.1(d) is entirely amended as follows: 3. No more than (a) $10,000,000 may be included for all Investment-Mortgage Loans and (b) 75% of the greater of either the total outstanding principal balance or the Market Value of any Investment-Mortgage Loan may be included. (i) Item B.7 is added to Schedule 1.1(d) as follows: 7. No more than the Seasoned-Loan Sublimit may be included for Seasoned Loans. (j) Schedules 1.1(a) and 1.1(b) and Exhibits C-3 and C-6 are respectively amended in the forms of - and each reference in the Loan Papers to those schedules and exhibits are now to - the attached Amended Schedules 1.1(a) and 1.1(b) and Amended Exhibits C-3 and C-6, respectively. 3. SETTLEMENT OF FUNDS. ------------------- (a) In accordance with Section 2.5(d), Borrower has terminated the Commitments of certain lenders party to the Loan Agreement before the effectiveness of this amendment, and on the effective date of this amendment Borrower shall pay to Agent for the account of those terminated lenders all amounts owing to those lenders in accordance with Sections 2.5(d)(ii). (b) In accordance with the amendments reflected in the attached Amended Schedule 1.1(a), certain Lenders are added as parties to the Loan Agreement by the effectiveness of this amendment, and on the effective date of this amendment those Lenders shall each jointly and severally pay to Agent their respective Commitment Percentages of the Principal Debt remaining after the payments by Borrower under Paragraph 3(a) above. (c) In accordance with the amendments reflected in the attached Amended Schedule 1.1(a), certain Lenders have increased their respective Commitments by the effectiveness of this amendment, and on the effective date of this amendment those Lenders shall each jointly and severally pay to Agent their respective increased Commitment Percentages of the Principal Debt remaining after the payments by Borrower under Paragraph 3(a) above. (d) In accordance with the amendments reflected in the attached Amended Schedule 1.1(a), certain Lenders have decreased their respective Commitments by the effectiveness of this amendment, and -- subject to the receipt of payments of funds under clauses (b) and (c) above, Agent shall pay to those Lenders their respective decreased Commitment Percentages of the Principal Debt remaining after the payments by Borrower under Paragraph 3(a) above. Upon receipt of replacement Notes pursuant to this amendment, each Lender severally agrees to return to Companies the Note or Notes being replaced. 4. CONDITIONS PRECEDENT. Paragraphs 2 and 3 above are not effective until Agent receives (a) counterparts of this amendment executed by the Companies and all Lenders, (b) replacement or new Notes, as the case may be, for each Lender whose Commitment is changing or is new according to the amendments reflected in the attached Amended Schedule 1.1(a), and (c) certifications acceptable to Agent and its counsel as to the Companies' continuing existence, power, and authority and the due authorization of this amendment and the Notes delivered under this amendment. 5. REPRESENTATIONS AND WARRANTIES. The Companies jointly and severally represent and warrant to Agent and Lenders that, as of the date of this amendment and on the date of its execution (a) the representations and warranties in the Loan Papers are true and correct in all material respects except to the extent that (i) a representation or warranty speaks to a specific date or (ii) the facts on which a representation or warranty is based have changed by transactions or conditions contemplated or permitted by the Loan Papers, and (b) no Default or Potential Default exists. 6. RATIFICATION. The Companies ratify and confirm (a) all provisions of the Loan Papers as amended by this amendment and (b) that all guaranties, assurances, and Liens granted, conveyed, or assigned to Agent or Lenders under the Loan Papers -- as they may have been revised, extended, and amended -- continue to guarantee, assure, and secure the full payment and performance of the Obligation (including, without limitation, all amounts evidenced now or in the future by any note delivered under this amendment). 7. MISCELLANEOUS. All references in the Loan Papers to the "Loan Agreement" are to the Loan Agreement, as amended by this amendment. This amendment is a "Loan Paper" referred to in the Loan Agreement, and the provisions relating to Loan Papers in the Loan Agreement are incorporated in this amendment by reference. Except as specifically amended and modified in this amendment, the Loan Agreement is unchanged and continues in full force and effect. This amendment may be executed in any number of counterparts with the same effect as if all signatories had signed the same document. All counterparts must be construed together to constitute one and the same instrument. THIS AMENDMENT AND THE OTHER LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. This amendment binds and inures to the Companies, Agent, Lenders, and their respective successors and permitted assigns. REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW. EXECUTED as of the day and year first stated above. ASSOCIATES MORTGAGE FUNDING CORPORATION By /s/ Alexander J. Stavrolakis ---------------------------- Alexander J. Stavrolakis, Treasurer RYLAND MORTGAGE COMPANY By /s/ Michael Brown ----------------- Michael Brown, President BANK ONE, TEXAS, N.A., a Lender and Agent By /s/ Mark Freeman ---------------- Mark L. Freeman, Vice President BANK OF AMERICA, a Lender By /s/ Donald Eppley ----------------- Donald Eppley, Vice President THE INDUSTRIAL BANK OF JAPAN, LIMITED, a Lender By /s/ J. Kenneth Biegen --------------------- J. Kenneth Biegen, Senior Vice President FIRST BANK NATIONAL ASSOCIATION, a Lender By /s/ Kathlyn K. Slater --------------------- Kathlyn K. Slater, Vice President THE FIRST NATIONAL BANK OF MARYLAND, a Lender By /s/ Kellie M. Matthews ---------------------- Kellie M. Matthews Vice President FIRST UNION NATIONAL BANK OF NORTH CAROLINA, a Lender By /s/ Sinclair Elliott -------------------- Sinclair Elliott Corporate Banking Officer GUARANTY FEDERAL BANK, F.S.B., a Lender By /s/ James B. Clapp ------------------ James B. Clapp Loan Officer NBD BANK, a Lender By /s/ Ann H. Chudacoff --------------------- Ann H. Chudacoff, Vice President NATIONSBANK OF TEXAS, N.A., a Lender By /s/ Elizabeth S. Kurilecz ------------------------- Elizabeth S. Kurilecz, Senior Vice President PNC BANK, KENTUCKY, INC., a Lender By /s/ Scott Goodwin ----------------- Scott Goodwin, Warehouse Lending Officer TEXAS COMMERCE BANK NATIONAL ASSOCIATION, a Lender By /s/ William J. Clark Jr. ------------------------ William J. Clark Jr. Vice President SUNTRUST BANK, ATLANTA, a Lender By /s/ Jerry White ---------------- Jerry White, Vice President By /s/ Jennifer Rose ----------------- Jennifer Rose, Banking Officer AMENDED SCHEDULE 1.1(a) ----------------------- LENDERS AND COMMITMENTS ----------------------- Receivables/ Working Warehouse Capital Name of Lender Commitment Commitment Total - -------------- --------- ----------- ------- Bank One, Texas, N.A. Mortgage Finance Group 1717 Main Street Dallas, TX 75201 Attn: Mark L Freeman, VP Fed Tax ID 75-2270994 Tele 214-290-2780 Fax 214-290-2054 $51,000,000 $6,400,000 $57,400,000 Texas Commerce Bank National Association 717 Travis 7th Floor 07TCB South 56 Houston, TX 77252-7056 Attn: Robert Salcetti, Managing Director Fed Tax ID 74-0800980 Tele 713-546-7702 Fax - 713-216-2082 45,000,000 5,500,000 50,500,000 Bank of America Commercial Real Estate Services Division Mortgage Warehousing 5134 24022 Calle de la Plata, Suite 405 Laguna Hills, CA 92653 Attn: Donald Eppley, VP Tele - 714-951-4171 Fax - 714-951-4055 30,000,000 3,700,000 33,700,000 NationsBank of Texas, N.A. Financial Institutions Department 901 Main Street, 66th Floor MC#TX1-492-66-01 Dallas, TX 75283-1000 Attn: Elizabeth S. Kurilecz, Senior VP Fed Tax ID 75-2238693 Tele - 214-508-0975 Fax - 214-508-0604 30,000,000 3,700,000 33,700,000 PNC Bank, Kentucky, Inc. Warehouse Lending 500 West Jefferson Suite 1200 Louisville, KY 40296 Attn: Scott Goodwin Fed Tax ID 610191580 Tele: 502-581-2667 Fax - 502-581-3919 30,000,000 3,700,000 33,700,000 NBD Bank One First National Plaza Mail Suite 0155 Chicago, IL 60670-0085 Attn: Jason McIntyre, Corporate Banking Officer Fed Tax ID Tele - 312-732-1188 Fax - 312-732-6222 25,000,000 3,000,000 28,000,000 Guaranty Federal Bank, F.S.B. 8333 Douglas Ave., 10th Floor Dallas, TX 75225 Attn: Abbie Y. Tidmore, VP Fed Tax ID 74-2511478 Tele - 214-360-2865 Fax 214-360-1660 25,000,000 3,000,000 28,000,000 SunTrust Bank, Atlanta 25 Park Place, N.E. Mail Code 118, 26th Floor Atlanta, GA 30303 Attn: Jennifer Rose, Banking Officer Fed Tax ID 580466330 Tele - 404-588-7170 Fax - 404-658-4905 20,000,000 2,500,000 22,500,000 First Union National Bank of North Carolina Capital Markets One First Union Center, DC-6 301 South College St. Charlotte, NC 28228-0600 Attn: Ms. Sinclair Ellet, VP Fed Tax ID: 56-0900030 Tele - 704-383-1418 Fax - 704-374-7102 20,000,000 2,500,000 22,500,000 The First National Bank of Maryland 25 South Charles Street Mail Code 101-744 Corporate Banking Division, 18th Floor Baltimore, MD 21201 Attn: Mr. Kellie M. Matthews, VP Fed Tax ID Tele - 410-244-4864 Fax - 410-244-4294 20,000,000 2,500,000 22,500,000 First Bank National Association Mortgage Banking Services First Bank Place/MPFP0801 601 Second Ave. South Minnepolis, MN. 55402-4302 Attn: Kathlyn K. Slater, VP Fed Tax ID 41-0256895 Tele: 612-973-0622 Fax: 612-973-0826 20,000,000 2,500,000 22,500,000 The Industrial Bank of Japan, Limited New York Branch 245 Park Avenue New York, NY 10167-0037 Attn: Craig Anderson Fed Tax ID Tele: 212-309-6698 Fax: 212-557-3581 9,000,000 1,000,000 10,000,000 ------------ ----------- ------------ Total $325,000,000 $40,000,000 $365,000,000 ============ =========== ============ AMENDED SCHEDULE 1.1(b) ----------------------- WIRING INSTRUCTIONS ------------------- Party Location of Account ABA# - -------------------------------------- -------------------- ----- Associates Mortgage Funding Corporation Chemical, Delaware 031100267 Ryland Mortgage Company Bank One, Texas, N.A. Bank One, Dallas 111000614 Bank of America Costa Mesa, California 121000358 First Bank National Association First Bank, Minn. 091000022 The First National Bank of Maryland First National,Baltimore 052000113 First Union National Bank of North Carolina First Union, Charlotte 053000219 Guaranty Federal Bank,F.S.B. Guaranty Federal,Dallas 314970664 The Industrial Bank of Japan, Limited New York 026008345 NationsBank of Texas, N.A. NationsBank,Dallas 111000025 NBD Bank NBD, Detroit 072000326 PNC Bank, Kentucky, Inc. PNC Kentucky, Louisville 083000108 Texas Commerce Bank National Association TCB, Houston 113000609 SunTrust Bank, Atlanta SunTrust,Atlanta 061000104 Account No. Attention/Phone No. Reference - -------------- ------------------------------- -------------- 6301215806500 --- Paydown 0100073055 Gloria Sadler (214)290-6069 Ryland Mtg. 56199-83980 Mr. Sandy Obnillas (213)345-9404 1702-2508-7585 Carolynn Kiewatt (612)973-0493 Asso/Ryland 0301789102 Marty Wolfe (410)244-6542 00005414 n/a Lisa Brown (704)383-5256 Ryland Mortgage n/a Katie Turner (214)360-4802 n/a n/a Atsushi Kawai (212)309-6521 Ryland 129-200-088-3 Mark Johnson (214)508-9349 Ryland Mtg. (214)508-0944(fax) 0093054 Commercial Loan (313)225-3312 Assoc./Ryland Mtg. 3000990597 Warehouse Lending Associates Mtg. 7001136825800 Billie Hankey (713)775-5471 8892170730 Audrey Davies (404)588-8341 Assoc. Mtg. AMENDED EXHIBIT C-3 ------------------- BORROWING-BASE REPORT FOR MORTGAGE COLLATERAL AGENT: Bank One, Texas, N.A. DATE: , 199 FOR: Associates Mortgage Funding Corporation and Ryland Mortgage Company This report is delivered to the Companies and Lenders under the Restated Loan and Security Agreement (as renewed, extended, and amended, the "Loan Agreement") dated as of June 16, 1995, between Associates Mortgage Funding Corporation, Ryland Mortgage Company, Agent, and certain lenders. Terms defined in the Loan Agreement have the same meanings when used -- unless otherwise defined - in this report. Agent has calculated the Borrowing Base for Mortgage Collateral and its various components as of the date of this report. 1. Borrowing Base (@ certain advance rates) (a) B-Paper Loans (@ 95%) $ (b) Investment-Mortgage Loans (@ 75%) $ (c) Seasoned Loans (@ 98%) $ (d) Other Dry Borrowings (@ 98%) $ (e) Wet Borrowings (@ 98%) $ (f) Gestation Borrowings (@ 99%) $ (g) Mortgage Securities (@ 99%) $ (h) Borrowing Base for Mortgage Collateral - Total of Lines 1(a) through 1(g) $ 2. Principal Debt of Warehouse Borrowings (a) Against B-Paper Loans $ (b) Against Investment-Mortgage Loans $ (c) Against Seasoned Loans $ (d) Other Dry Borrowings $ (e) Wet Borrowings $ (f) Gestation Borrowings $ (g) Mortgage Securities $ (h) Principal Debt of Warehouse Borrowings - Total of Lines 2(a) through 2(g) $ 3. B-Paper Loans Availability (a) B-Paper Sublimit $20,000,000 (b) Lesser of either Line 1(a) or Line 3(a) $ (c) Line 3(b) minus Line 2(a) - Maximum Borrowings against B-Paper Loans if positive or Borrowing Excess if negative $ 4. Investment-Mortgage Loan Availability (a) Investment-Mortgage Loan Sublimit $10,000,000 (b) Lesser of either Line 1(b) or Line 4(a) $ (c) Line 4(b) minus Line 2(b) - Maximum Borrowings against Investment-Mortgage Loans if positive or Borrowing Excess if negative $ 5. Other Dry Borrowing Availability (a) Warehouse Sublimit $325,000,000 (b) Line 5(a) minus Lines 2(a), 2(b), 2(c), 2(e), 2(f), and 2(g) $ (c) Lesser of either Line 1(d) or Line 5(b) $ (d) Line 5(c) minus Line 2(d) -- maximum other Dry Borrowings if positive or Borrowing Excess if negative $ 6. Wet Borrowings Availability (a) Wet Sublimit [30% of Line 5(a)] $ (b) Lesser of either Line 1(e) or Line 6(a) $ (c) Line 6(b) minus Line 2(e) - Maximum Wet Borrowings if positive or Borrowing Excess if negative $ 7. Gestation Borrowing Availability (a) Gestation Sublimit [50% of Line 5(a)] $ (b) Lesser of either Line 1(f) or Line 7(a) $ (c) Line 7(b) minus Line 2(f) - Maximum Gestation Borrowing if positive or Borrowing Excess if negative $ 8. Seasoned Loan Availability (a) Seasoned-Loan Sublimit $10,000,000 (b) Lesser of either Line 1(c) or Line 8(a) $ (c) Line 8(b) minus Line 2(c) - Maximum Borrowings against Seasoned Loans if positive or Borrowing Excess if negative $ The Principal Debt of Warehouse Borrowings to each Lender is as follows: Lender Commitment Share Percentage of Lender of Line 5(a) Line 2(h) Bank One, Texas, N.A. % $ Bank of America % $ First Bank National Association % $ The First National Bank of Maryland % $ First Union National Bank of North Carolina % $ Guaranty Federal Bank, F.S.B. % $ The Industrial Bank of Japan, Limited % $ NationsBank of Texas, N.A. % $ NBD Bank % $ PNC Bank, Kentucky, Inc. % $ Texas Commerce Bank National Association % $ Sun Trust Bank, Atlanta % $ In additional to the above, the total Commitment Usage does not exceed the lesser of either (i) the total Commitments or (ii) the total Borrowing Base. BANK ONE, TEXAS, N.A., Agent By ------------------------- (Name) -------------------------- (Title) -------------------------- AMENDED EXHIBIT C-6 ------------------- COMPLIANCE CERTIFICATE ---------------------- AGENT: Bank One, Texas, N.A. DATE: , 19 ASSOCIATES: Associates Mortgage Funding Corporation RYLAND: Ryland Mortgage Company SUBJECT PERIOD: ended , 199 This certificate is delivered under the Restated Loan and Security Agreement (as renewed, extended, and amended, the "Loan Agreement") dated as of June 16, 1995, between Associates, Ryland, Agent, and certain lenders. Terms defined in the Loan Agreement have the same meanings when used - unless otherwise defined - in this certificate. Solely on behalf of the Company for which each undersigned officer has executed this certificate, that undersigned officer certifies to Agent and Lenders, that on the date of this certificate: 1. That undersigned officer is the officer of that Company designated below. 2. That Company's consolidated Financial Statements that are attached to this certificate were prepared in accordance with GAAP and present fairly that Company's consolidated financial position and results of operations as of -- and for the one, two, or three quarters of fiscal year, as the case may be, ending on -- the last day of the Subject Period. 3. That undersigned officer supervised a review of that Company's activities during the Subject Period in respect of the following matters and has determined the following: (a) To that undersigned officer's best knowledge, except to the extent that (i) a representation or warranty speaks to a specific date or (ii) the facts on which a representation or warranty is based have changed by transactions or conditions contemplated or permitted by the Loan Papers, that Company's representations and warranties in Section 6 of the Loan Agreement are true and correct in all material respects, other than for the changes, if any, described on the attached Schedule 1; (b) that Company has complied with all of its obligations under the Loan Papers, other than for the deviations, if any, described on the attached Schedule 1; (c) no Default or Potential Default exists or is imminent, other than those, if any, described on the attached Schedule 1; and (d) that Company's compliance with the financial covenants in Section 9 of the Loan Agreement is accurately calculated on the attached Schedule 1. (Name) (Title) (Name) (Title) SCHEDULE 1 ---------- A. Describe deviations from compliance with obligations, if any - clause 3(b) of attached Compliance Certificate - if none, so state: B. Describe Potential Defaults or Defaults, if any - clause 3(c) of the attached Compliance Certificate - if none, so state: C. Calculate compliance with covenants in Section 9 at end of Subject Period (on a consolidated basis) - clause 3(d) of the attached Compliance Certificate: Covenant At End of Subject Period 1. Associates' Stockholders' Equity - Sec. 9.1(a) (quarterly) (a) Actual $ (b) Minimum $1,000,000 2. Ryland's Adjusted-Net Worth - Sec. 9.1(b) (quarterly) (a) Stockholder's equity $ (b) Loans and advances deducted under Item 13 on Schedule 8.3 $ (c) Actual - Line 2(a) minus Line 2(b) $ (d) Minimum $40,000,000 3. Ryland's Adjusted-Tangible-Net Worth - Sec. 9.1(c) (quarterly) (a) Subordinated long-term Debt maturing no earlier than June 30, 1998 $ (b) 1% of Eligible-Servicing Portfolio $ (c) Net-book-value of Servicing Rights $ (d) Goodwill, etc. $ (e) Patents, etc. $ (f) Other intangibles $ (g) Actual - Line 2(c) plus Lines 3(a) and 3(b) minus Lines 3(c) through 3(f) $ (h) Minimum $55,000,000 4. Ryland's Leverage Ratio - Sec. 9.2 (quarterly) (a) Total liabilities $ (b) Repurchase obligations permitted to be excluded $ (c) Line 4(a) minus Line 4(b) $ (d) Actual - Ratio of Line 4(c) to Line 3(g) - to - (e) Maximum 8.0 to 1.0 5. Associates' Net Income - Sec. 9.3 (annually) (a) Actual $ (b) Minimum $1.00 6. Ryland's Cash Flow - Sec. 9.4 (rolling 4 quarters) (a) Net income or loss $ (b) Amortization $ (c) Depreciation $ (d) Other noncash charges $ (e) Actual - Total of Lines 6(a) through 6(d) $ (f) Minimum $1.00 7. Servicing Portfolio - Sec. 9.5 (a) Actual - Servicing Portfolio (Ryland and any Subsidiary) $ billion (b) Minimum $4.0 billion (c) Actual Eligible-Servicing Portfolio (Ryland only) $ billion (d) Minimum $ 1 billion EX-10 4 EXHIBIT 10.7 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of the 28th day of January 1997, by and between The Ryland Group, Inc., a Maryland corporation (the "Company"), and R. Chad Dreier (the "Executive"). In consideration of the mutual covenants and agreements of the parties set forth in this Agreement, and other good and valuable consideration the receipt and sufficiency of which are acknowledged, the parties agree as follows: 1. Replacement of Prior Employment Agreement. This Employment Agreement replaces and supercedes the Employment Agreement dated as of December 31, 1994 between the Company and the Executive which upon the effective date of this Employment Agreement is terminated and no longer effective. 2. Term of Employment. The Company agrees to employ the Executive for a period of four (4) years commencing as of January 1, 1997. This Agreement shall be automatically renewed for a one (1) year period at the end of the initial four (4) year term or at the end of each renewal period until terminated in accordance with the terms of this Agreement. Either party may terminate this Agreement at the end of the initial four (4) year term or at the end of each one (1) year renewal period by giving the other party written notice of termination delivered at least one hundred eighty (180) days prior to the end of the initial term or any renewal period. If at any time during the initial term or any renewal period, a Change of Control of the Company occurs (as defined in Section 7.2 below), the term of this Agreement shall be the longer of (a) three (3) years beyond the effective date of the Change of Control or (b) the term as provided in this Section 2. 3. Position and Responsibilities. The Executive shall serve as the Chairman of the Board of Directors, President and Chief Executive Officer of the Company. In his capacity as Chairman of the Board, President and Chief Executive Officer, the Executive shall be the Company's highest ranking executive officer and shall have full authority and responsibility for formulating and administering the plans and policies of the Company subject to the control of the Board of Directors. 4. Performance of Duties. The Executive shall devote his full time attention and energies to the Company's business and will not engage in consulting work or any business for his own account or for any person, firm or corporation. The Executive may serve as a director of other companies so long as this service does not interfere with the performance of his duties with the Company. 5. Compensation. For all services to be rendered by the Executive during the term of this Agreement, the Company shall pay and provide to the Executive: 5.1 Base Salary. The Company shall pay the Executive a Base Salary in an amount which shall be established from time to time by the Board of Directors, provided the Base Salary shall not be less than six hundred fifty-five thousand dollars ($655,000) per year. This Base Salary is paid in installments consistent with the normal payroll practices of the Company and reviewed annually to determine whether, in the judgment of the Board of Directors, it should be increased based on the performance of the Executive and any other factors deemed appropriate. 5.2 Annual Bonus. The Executive is eligible to receive an annual cash bonus (the "Bonus") in respect of each fiscal year during the term of this Agreement equal to one percent (1.0%) of the Ordinary Course Pre-Tax Income. "Ordinary Course Pre-Tax Income" is the consolidated pre-tax income of the Company and its subsidiaries as reflected in the audited consolidated financial statements of the Company, as adjusted in good faith by the Compensation Committee to eliminate the effect of nonrecurring gains and losses and other items not reflective of the ongoing ordinary course of business and operating performance of the Company. The Bonus shall be payable to the Executive in cash within sixty (60) days after the end of each fiscal year during the term of this Agreement. 5.3 Incentive Plans. The Executive shall participate in any stock option and incentive award programs available to executive officers of the Company. This participation is on a basis which is commensurate with the Executive's position with the Company. 5.4 Other Benefits. The Executive is entitled to receive other employee benefits, such as disability, group life, sickness, accident and health insurance programs, split-dollar life insurance programs and other perquisites that are available to executive officers of the Company. This participation is on a basis which is commensurate with the Executive's position with the Company. 5.5 Stock Option (a) Grant of Option Pursuant to the terms and conditions of The Ryland Group, Inc. 1992 Equity Incentive Plan (the "Plan), the Company grants to the Executive during the period ending at the close of business on January 28, 2007 (the "Option Period"), the option to purchase (the "Option") from the Company at a price of $12.75 per share up to 150,000 shares of the Company's Common Stock. THE OPTION GRANTED SHALL NOT BE TREATED AS AN "INCENTIVE STOCK OPTION" WITHIN THE MEANING OF SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986. AS AMENDED. The option is governed and controlled by all terms of the Plan. (b) Exercise of Option. The Option may be exercised in whole or in part in accordance with the following vesting schedule: The aggregate number of shares of Common Stock optioned by this Agreement shall be dividend into 3 installments. The first installment for 50,000 shares may be exercised in whole or in part beginning 1/29/98 The second installment for 50,000 shares may be exercised in whole or in part beginning 1/29/99 The third installment for 50,000 shares may be exercised in whole or in part beginning 1/29/00 In case an installment is not immediately exercisable, the Board of Directors or the Compensation Committee of the Board may in its discretion accelerate the time at which the installment may be exercised. To the extent not exercised, installments shall accumulate and be exercisable by the Executive during the Option Period. Continued accrual and vesting of installments shall cease immediately upon termination of employment for any reason whatsoever, subject to acceleration by the Board of Directors or the Compensation Committee. (c) Payment of Exercise Price. The Executive shall pay the exercise price in the following ways: (I) cash payment (by certified check, bank draft or money order payable to the order of the Company). (ii) if approved by the Company, cash payment may be made from the proceeds of an immediate sale of Common Stock receivable upon the exercise of the Option; or (iii) if approved by the Company, delivery of Common Stock (including executed stock powers attached thereto); The payment of the exercise price shall be delivered with a notice of exercise, which notice will be in a form provided by the Company. The Company shall, subject to the receipt of withholding tax, issue to the Executive the stock certificate for the number of shares of Common Stock with respect to which the Option is exercised. The value of shares of Common Stock used as payment for the exercise of an Option shall be the closing price of such shares on the New York Stock Exchange on the date of exercise of an Option or as otherwise determined by the Company, the Board of Directors or the Compensation Committee of the Board of Directors. (d) Termination The Option shall terminate upon the happening of the earliest of the following events: (i) January 28, 2007 (ii) The expiration of 90 days after the date of termination of the Executive's employment, except in the case of death, Disability (defined below) or retirement. During this period, the Executive shall have the right to exercise the Option to the extent it is exercisable on the termination date. (iii) The expiration of three (3) years after the date of death of the Executive if death occurs during the term of this Agreement. During this period, the Executive's estate, personal representative or beneficiary shall have the right to exercise the Option to the extent it is exercisable on the date of death. (iv) The expiration of three (3) years after the date the Executive's employment is terminated due to Disability or retirement. During this period, the Executive shall have the right to exercise the Option to the extent it is exercisable on the date of termination. (e) Merger, Consolidation or Share Exchange. After any merger, consolidation or share exchange in which the Company is the surviving or resulting corporation, the Executive shall be entitled, upon the exercise of an Option, to receive the number and class of shares of stock or other consideration to which the Executive would have been entitled, if, immediately prior to such merger, consolidation or share exchange, the Executive had exercised the Option in accordance with and subject to the terms of this Agreement and the Plan. If the Company is not the surviving or resulting corporation in any merger, consolidation or share exchange, the surviving or resulting corporation shall tender stock options to purchase its shares on terms and conditions that substantially preserve the rights and benefits under this Option. 5.6 Stock Units (a) Grant of Stock Units. Pursuant to the terms and conditions of the Plan, the Company grants to the Executive an award of 45,000 Stock Units (the "Stock Units") pursuant to Section 10 of the Plan. (b) Vesting of Stock Units. The Stock Units become vested and payable in accordance with the following vesting schedule: DATE VESTING November 1, 1999 15,000 Stock Units November 1, 2000 30,000 Stock Units If the Executive terminates employment with the Company for any reason prior to any vesting date, all unvested Stock Units are immediately forfeited and cancelled. Notwithstanding the foregoing, all unvested Stock Units shall vest and be paid by the Company to the Executive upon the occurrence of a Change of Control (as defined in Section 7.2 below). (c) Payment of Stock Units. Upon each vesting date on which the Executive is employed by the Company, the number of Stock Units which become vested on such date shall be paid to the Executive in an equal number of shares of Common Stock of the Company and, upon payment, such Stock Units are automatically fully paid and cancelled. (d) Dividend Equivalents. As of each dividend payment date with respect to Common Stock, the Executive shall receive a cash dividend equivalent payment equal to the product of (i) the pre-share cash dividend payable with respect to each share of Common Stock on that date and (ii) the total number of Stock Units which have not been vested, paid or cancelled as of the record date corresponding to such dividend payment date. (e) Delivery of Stock Certificates. The stock certificate for shares of Common Stock issued to the Executive in payment of any vested Stock Unit shall be delivered to the Executive on the applicable vesting date. (f) Tax Matters. The Executive will pay to the Company, or make provision satisfactory to the Company for payment of, any taxes required by law to be withheld with respect to the payment of any Stock Unit no later than the date of vesting of each Stock Unit. Tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the payment of the Stock Units, valued at their Fair Market Value (as defined in the Plan) on the date of payment. (g) Rights of Executive With Respect to Stock Units. The Executive shall have no rights as a stockholder with respect to any Stock Unit or any share of Common Stock to be issued with respect to any Stock Unit until the date of vesting and payment. The Executive's rights with respect to Stock Units shall be the rights of a general unsecured creditor of the Company until the Stock Units vest and shares of Common Stock are actually issued to the Executive. (h) Adjustments. The number of Stock Units shall be appropriately adjusted, as determined by the Board of Directors or Compensation Committee of the Board of Directors pursuant to the Plan, in the event of any stock split, combination or similar transaction. (i) Stock Units Subject to Terms and Conditions of the Plan. The Stock Units and all shares of Common Stock issued with respect to Stock Units shall be subject to the terms and conditions of the Plan, which is incorporated herein by this reference. 6. Employment Termination. 6.1 Termination Due to Retirement or Death. In the event the Executive's employment is terminated by reason of retirement or death, the Executive's benefits shall be determined in accordance with the Company's retirement, survivor's benefits, insurance or other applicable program then in effect. Upon the effective date of termination, the Company's obligation to pay and provide the compensation described in Section 5 shall expire, except to the extent the benefits described in Section 5 continue after retirement or death. In addition, the Company shall pay to the Executive or the Executive's beneficiaries or estate a pro rata share of the Bonus for the year in which the termination occurs based on the results of the Company for that fiscal year. This pro rata Bonus shall be determined by multiplying the Bonus for the applicable fiscal year by a fraction, the numerator of which is the number of days in such fiscal year prior to the date of termination and the denominator of which is the total number of days in such fiscal year. The pro rata Bonus shall be paid within sixty (60) days of the end of the applicable fiscal year. 6.2 Termination Due to Disability. In the event the Executive becomes Disabled (as defined below) and is unable to perform his duties for more than one hundred twenty (120) days during any period of twelve (12) months or, in the reasonable determination of the Board of Directors, the Executive's Disability (as defined below) will exist for more than one hundred twenty (120) days, the Company has the right to terminate the Executive's employment and the Company's obligation to pay and provide the compensation described in Section 5 shall expire, except to the extent the benefits described in Section 5 continue after Disability. In addition, the Company shall pay to the Executive a pro rata share of the Bonus for the year in which the termination occurs based on the results of the Company for that fiscal year determined as provided in Section 6.1. The pro rata Bonus shall be paid within sixty (60) days of the end of the applicable fiscal year. The term "Disabled" or "Disability" means the incapacity of the Executive, due to injury, illness, disease or bodily or mental infirmity, to engage in the performance of his duties with the Company. A Disability is determined by the Board of Directors upon receipt of and in reliance on competent medical advice from one or more individuals selected by the Board who are qualified to give professional medical advice. 6.3 Voluntary Termination by the Executive. The Executive may terminate this Agreement at any time by giving the Board of Directors written notice of intent to terminate delivered at least ninety (90) days prior to the effective date of such termination. Upon the expiration of this ninety (90) day period, the termination by the Executive shall become effective. The Company shall pay the Executive his Base Salary through the effective date of termination plus all benefits to which the Executive has a vested right at that time. The Executive shall not receive a Bonus for the fiscal year in which voluntary termination occurs. Upon the date of termination, the Company and the Executive shall have no further obligations under this Agreement except as set forth in Sections 8 and 9. 6.4 Termination by the Company Without Cause. The Board of Directors may terminate the Executive's employment for reasons other than death, Disability, retirement or for Cause (as defined in Section 6.5) by notifying the Executive in writing at least thirty (30) days prior to the effective date of termination. Upon the expiration of this thirty (30) day period, the termination by the Company is effective. Within thirty (30) days after the date of termination, the Company shall pay to the Executive a lump sum cash payment equal to the greater of (a) the Base Salary in effect for the remaining term of this Agreement, or (b) eighteen (18) months of the Base Salary in effect as of the effective date of termination, and shall provide to the Executive a continuation of his health and welfare benefits for the greater of (a) such remaining term of this Agreement or (b) eighteen (18) months. If the Company is unable to provide health and welfare benefits as required by this Section 6.4, the Company shall provide equivalent benefits to the Executive or pay to the Executive a lump sum cash payment equal to the value of the benefits which the Company is unable to provide. The Company shall pay the Executive an annual Bonus for the year in which termination occurs based upon the performance of the Company through the end of the fiscal year in which the termination occurs. This annual Bonus shall be paid within sixty (60) days of the end of the applicable fiscal year. The Company shall also pay the Executive all benefits to which the Executive has a vested right at the time of termination. Upon the date of termination, the Company and the Executive shall have no further obligations under this Agreement except as set forth in Sections 8 and 9. 6.5 Termination for Cause. The Board of Directors may terminate the Executive's employment at any time for "Cause". "Cause" is determined by the Board of Directors and is defined as fraud, embezzlement, theft or other criminal act constituting a felony under U.S. laws, or the failure of the Executive to perform any material obligations under this Agreement for reasons other than the Executive's death, Disability or retirement. In the event this Agreement is terminated by the Board of Directors for Cause, the Company shall pay the Executive his Base Salary through the date of termination and the Executive shall forfeit all rights and benefits he is entitled to receive including any right to a Bonus for the fiscal year in which the termination occurs. The Company and the Executive thereafter shall have no further obligations under this Agreement except as set forth in Sections 8 and 9. 6.6 Termination for Good Reason. The Executive may terminate this Agreement for Good Reason (as defined below) by giving the Board of Directors thirty (30) days written notice of intent to terminate, which notice sets forth the facts and circumstances for the termination. Upon the expiration of this thirty (30) day period, the termination by the Executive is effective and the Company shall pay the Executive the benefits set forth in Section 6.4. "Good Reason" means, without the Executive's written consent, the occurrence of any of the following: (a) The assignment of the Executive to duties materially inconsistent with, or a reduction or alteration in the nature or status of, the Executive's authorities, duties, responsibilities or status as an executive officer of the Company from those in effect during the preceding year; (b) The Company requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence; (c) A reduction by the Company in the Executive's Base Salary; or (d) The failure of the Company to obtain an agreement from any successor to the Company to perform this Agreement. 7. Change in Control. 7.1 Termination After Change of Control. In lieu of the compensation and benefits provided in Sections 5 or 6, which will be superseded and replaced by the provisions of this Section 7, the following payments and benefits will be provided to the Executive by the Company in the event of a Termination of Employment (as defined below) within three (3) years after a Change of Control (as defined below) of the Company: (a) Lump Sum Cash Payment. On or before the Executive's last day of employment with the Company, the Company will pay the Executive an amount equal to the Executive's unpaid Base Salary for the year in which the Termination of Employment occurs and a pro rata Bonus through the date of Termination of Employment determined in accordance with Section 6.1. Also, on or before the Executive's last day of employment with the Company, the Company will pay the Executive a lump sum cash payment equal to three (3) times the highest Annual Compensation (as defined below) paid to the Executive in any of the three (3) calendar years immediately preceding the date of Termination of Employment. (b) Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan or other incentive plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any stock option or other benefit plans of the Company in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum as soon as practicable after the date of Termination of Employment. To the extent that any of the plans of the Company would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Company the amount of additional benefits payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Company. (c) Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Company at no cost to the Executive for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Company is unable to continue the Benefits as required by the preceding sentence, the Company shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Company is unable to provide. (d) Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Executive's Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Company under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. (e) Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the date of Termination of Employment. (f) Outplacement Assistant. The Executive shall be reimbursed by the Company for the cost of all outplacement services obtained by the Executive within the two (2) year period after the date of Termination of Employment provided the total reimbursement shall be limited to an amount equal to fifteen percent (15%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of Termination of Employment. 7.2 Definitions. (a) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (i) The acquisition by any person, other than the Company or any employee benefit plan of the Company, of beneficial ownership of 20% or more of the combined voting power of the Company's then outstanding voting securities; (ii) The first purchase under a tender offer or exchange offer, other than an offer by the Company or any employee benefit plans of the Company, pursuant to which shares of common stock have been purchased; (iii) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Company of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or (iv) Approval by stockholders of the Company of a merger, consolidation, liquidation or dissolution of the Company, or the sale of all or substantially all of the assets of the Company. (b) "Annual Compensation" shall mean the sum of the Base Salary and the Bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Company in which the Executive participates during the applicable calendar year. (c) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Company requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's Base Salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Company's or the successor company's executive officers. 7.3 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 7.3 is made. 8. Noncompetition and Proprietary Information. 8.1 Prohibition on Competition. During the term of this Agreement and for twenty-four (24) months following termination of this Agreement pursuant to Sections 2, 6.1, 6.2, 6.3 or 6.5 (the "Restrictive Period"), the Executive shall not, as a stockholder, partner, employee or officer, engage, directly or indirectly, in any business or enterprise which is "in competition" with the Company. For purposes of this Agreement, a business or enterprise will be "in competition" if it is engaged in any significant business activity of the Company or its subsidiaries within the United States. The Executive shall be allowed to purchase and hold for investment less than two percent (2%) of the shares of any corporation whose shares are regularly traded on a national securities exchange or in the over-the-counter market. 8.2 Disclosure of Information. The Executive recognizes that he has access to and knowledge of certain confidential and proprietary information of the Company which is essential to the performance of his duties under this Agreement. The Executive will not, during or after the term of his employment by the Company, in whole or in part, disclose such information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall he make use of any such information for his own purposes. 8.3 Covenants Regarding Other Employees. During the term of this Agreement and the Restrictive Period, the Executive agrees not to attempt to induce any employee of the Company to terminate his or her employment with the Company, accept employment with any competitor of the Company, or interfere in a similar manner with the business of the Company. 8.4 Specific Performance. The parties recognize that the Company will have no adequate remedy at law for breach of the requirements of this Section 8 and, in the event of such breach, the Company and the Executive agree that, in addition to the right to seek monetary damages, the Company will be entitled to a decree of specific performance, mandamus, or other appropriate remedy to enforce performance of these requirements. 9. Indemnification. The Company covenants and agrees to indemnify and hold harmless the Executive fully, completely and absolutely against any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including reasonable attorney's fees), losses and damages resulting from the Executive's good faith performance of his duties under this Agreement subject to the requirements and limitations imposed by the Company's Articles of Incorporation and By-Laws and applicable law. 10. Assignment. 10.1 Assignment by Company. This Agreement may be assigned or transferred to, and shall be binding upon and inure to the benefit of, any successor of the Company, and any successor shall be deemed substituted for all purposes of the "Company" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise acquires all or substantially all of the assets or the business of the Company. Notwithstanding such assignment, the Company shall remain jointly and severally liable for all obligations hereunder. 10.2 Assignment by Executive. The services to be provided by the Executive to the Company are personal to the Executive and the Executive's duties may not be assigned by the Executive. This Agreement shall, however, inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive dies while any amounts payable to the Executive remain outstanding, all such amounts shall be paid to the Executive's designee, estate or beneficiaries. 11. Dispute Resolution. Either the Executive or the Company may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration by providing written notice of such election to the other party specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Company and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. To the extent that the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Company of all expenses of such litigation or arbitration, including reasonable legal fees and expenses and necessary costs and disbursements. 12. Miscellaneous. 12.1 Entire Agreement. This Agreement supersedes any prior agreements or understandings, oral or written, between the Executive and the Company with respect to the subject matter hereof, and constitutes the entire agreement of the parties with respect thereto. 12.2 Modification. This Agreement shall not be varied, altered, modified, cancelled, changed or in any way amended except by mutual agreement of the parties in a written instrument executed by the parties or their legal representatives. 12.3 Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected and shall remain in full force and effect. 12.4 Tax Withholding. The Company may withhold all Federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. 12.5 Beneficiaries. The Executive may designate one or more persons or entities as the primary and/or contingent beneficiaries of any amounts to be received under this Agreement. Such designation must be in a signed writing acceptable to the Board of Directors, the Company or designees of the Board or Company. The Executive may change such designation at any time. 12.6 Board Committee. Any action taken or determination made by the Board of Directors under this Agreement may be taken or made by the Compensation Committee or any other Committee of the Board of Directors. 12.7 Governing Law. To the extent not preempted by Federal law, the provisions of this Agreement shall be construed and enforced in accordance with the laws of the State of Maryland. 12.8 Notice. Any notices, requests, demands or other communications required by or provided for in this Agreement shall be sufficient if in writing and sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal office. IN WITNESS WHEREOF, the Executive and the Company have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE: By: /s/ Edward W. Gold /s/ R. Chad Dreier ------------------------------------ ----------------------------- Edward W. Gold, Senior Vice President R. Chad Dreier Attest: /s/ Timothy J. Geckle ---------------------------- Timothy J. Geckle, Secretary EX-10 5 EXHIBIT 10.8 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is made, entered into, and is effective as of this 18th day of September 1995 (the "Effective Date"), by and between The Ryland Group, Inc., a Maryland corporation (the "Company"), and Michael D. Mangan (the "Executive"), as amended and restated as of January 28, 1997. WHEREAS, the Company desires to retain the employment of the Executive as the Company's Chief Financial Officer, and the Executive desires to serve the Company in such capacity; and WHEREAS, the parties hereto desire to set forth their agreement with respect to the terms and provisions of the Executive's employment with the Company as the Company's Chief Financial Officer. NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties set forth in this Agreement, and of other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: ARTICLE 1. TERM OF EMPLOYMENT The Company hereby agrees to employ the Executive and the Executive hereby agrees to continue to serve the Company, in accordance with the terms and conditions set forth herein, for an initial period of three (3) years, commencing as of the Effective Date of this Agreement, as indicated above; subject, however, to earlier termination as expressly provided herein. The initial three (3) year period of employment automatically shall be extended for one (1) additional year at the end of the initial three (3) year term, and then again after each successive year thereafter. However, either party may terminate this Agreement at the end of the initial three (3) year period, or at the end of any successive one (1) year term thereafter, by giving the other party written notice of intent not to renew, delivered at least three (3) months prior to the end of such initial period or successive term. In the event such notice of intent not to renew is properly delivered, this Agreement, along with all corresponding rights, duties, and covenants, automatically shall expire at the end of the initial period or successive term then in progress. However, regardless of the above, if at any time during the initial period of employment, or successive term, a Change of Control of the Company occurs (as defined in Article 7 herein), then the term of this Agreement shall be three (3) years beyond the month in which the effective date of such Change of Control occurs. ARTICLE 2. POSITION AND RESPONSIBILITIES During the term of this Agreement, the Executive agrees to serve as Chief Financial Officer of the Company and as a member of the Company's Board of Directors if so elected. In his capacity as Chief Financial Officer of the Company, the Executive shall report directly to the Company's Chief Executive Officer, and shall have primary responsibility for formulating financial policy and plans and providing overall direction for the accounting, tax, insurance, budget, credit, treasury and information systems functions of the Company. The Executive shall have the same status, privileges, and responsibilities normally inherent in such capacities in corporations of similar size and character. ARTICLE 3. STANDARD OF CARE During the term of this Agreement, the Executive agrees to devote substantially his full time, attention, and energies to the Company's business and shall not be engaged in any other business activity, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage. However, subject to Section 8.1 herein, the Executive may serve as a director of other companies so long as such service is not injurious to the Company. The Executive covenants, warrants, and represents that he shall: (a) Devote his full and best efforts to the fulfillment of his employment obligations; and (b) Exercise the highest degree of loyalty and the highest standards of conduct in the performance of his duties. This Article 3 shall not be construed as preventing the Executive from investing assets in such form or manner as will not require his services in the daily operations of the affairs of the companies in which such investments are made. ARTICLE 4. COMPENSATION As remuneration for all services to be rendered by the Executive during the term of this Agreement, and as consideration for complying with the covenants herein, the Company shall pay and provide to the Executive the following: 4.1 Base Salary. The Company shall pay the Executive a Base Salary in an amount which shall be established from time to time by the Board of Directors of the Company or the Board's designee provided; however, that such Base Salary shall not be less than $312,000 per year. This Base Salary shall be paid to the Executive in equal biweekly installments throughout the year, consistent with the normal payroll practices of the Company. The Executive's Base Salary shall be reviewed at least annually during the term of this Agreement to ascertain whether, in the judgment of the Board or the Board's designee, such Base Salary should be increased, based primarily on the performance of the Executive during the year and on the then current rate of inflation. If so increased, the Base Salary as stated above shall, likewise, be increased for all purposes of this Agreement. 4.2 Annual Bonus. The Executive's targeted cash bonus under the Company's annual bonus program (the "Bonus") shall not be less than 75 percent of the Executive's Base Salary. Except as otherwise provided in Article 6 and 7 hereof, any Bonus earned under the program shall be payable to the Executive in cash within sixty (60) days after the end of each fiscal year of the Company during the term of this Agreement, commencing with the fiscal year ending December 31, 1995. 4.3 Incentive Programs. The Executive shall participate in such stock option, incentive, and performance award programs as are made available generally to executives of the Company. With respect to any such program, the Company shall provide the Executive with the opportunity to earn an award at a level which is commensurate with the opportunity typically offered to executives having the same or similar duties and responsibilities as the Executive at companies similar in size and in character to the Company; provided, however, that the Executive's opportunity shall be at least equal to the highest level provided to any Senior Vice President of the Company. 4.4 Retirement Benefits. The Company shall provide to the Executive participation in all Company qualified defined benefit and defined contribution retirement plans (if any), subject to the eligibility and participation requirements of such plans. 4.5 Employee Benefits. The Company shall provide to the Executive all benefits to which other executives and employees of the Company are entitled to receive, as commensurate with the Executive's position, subject to the eligibility requirements and other provisions of such arrangements. Such benefits shall include, but not be limited to, split-dollar and group term life insurance, comprehensive health and major medical insurance, dental and short-term and long-term disability. 4.6 Perquisites. The Company shall provide to the Executive, at the Company's cost, all perquisites to which other similarly situated executives of the Company are entitled to receive and such other perquisites which are suitable to the character of Executive's position with the Company and adequate for the performance of his duties hereunder. Without limiting the generality of the foregoing, the Company shall provide to the Executive a Personal Health and Services Allowance having a total annual value at least equal to five percent (5%) of the Executive's Base Salary. 4.7 Right to Change Plans. By reason of Sections 4.3, 4.4, 4.5, and 4.6 herein, the Company shall not be obligated to institute, maintain, or refrain from changing, amending, or discontinuing any benefit plan, program, or perquisite, so long as such changes are similarly applicable to executive employees generally. ARTICLE 5. EXPENSES The Company shall pay, or reimburse the Executive, for all ordinary and necessary expenses, in a reasonable amount, which the Executive incurs in performing his duties under this Agreement including, but not limited to, travel, entertainment, professional dues and subscriptions, and all dues, fees, and expenses associated with membership in various professional, business, and civic associations and societies of which the Executive's participation is in the best interest of the Company. ARTICLE 6. EMPLOYMENT TERMINATIONS 6.1 Termination Due to Retirement or Death. In the event the Executive's employment is terminated while this Agreement is in force by reason of Retirement (as defined under the then established rules of the Company's tax- qualified retirement plan) or death, the Executive's benefits shall be determined in accordance with the Company's retirement, survivor's benefits, insurance, and other applicable programs of the Company then in effect. Upon the effective date of such termination, the Company's obligation under this Agreement to pay and provide to the Executive the elements of pay described in Article 4 herein shall immediately expire, except to the extent that the benefits described in Sections 4.4 and 4.5 continue after Retirement under the terms of the benefit plans and programs which apply generally to the Company's executives, and except that the Executive shall receive all other rights and benefits that he is vested in pursuant to other plans and programs of the Company. In addition, the Company shall pay to the Executive (or the Executive's beneficiaries, or estate, as applicable), a pro rata share of his Bonus for the fiscal year in which employment termination occurs, based on the results of the Company for such fiscal year. This pro rata Bonus amount shall be determined by multiplying the Bonus which otherwise would apply for such full fiscal year by a fraction, the numerator of which is the number of days in such fiscal year prior to the date of employment termination and the denominator of which is the total number of days in such fiscal year. The pro rata Bonus shall be paid within sixty (60) days of the end of such fiscal year. 6.2 Termination Due to Disability. In the event that the Executive becomes Disabled (as defined below) during the term of this Agreement and is, therefore, unable to perform his duties herein for more than one hundred twenty (120) total calendar days during any period of twelve (12) consecutive months, or in the event of the Board's reasonable expectation that the Executive's Disability will exist for more than a period of one hundred twenty (120) calendar days, the Company shall have the right to terminate the Executive's active employment as provided in this Agreement. However, the Board shall deliver written notice to the Executive of the Company's intent to terminate for Disability at least thirty (30) calendar days prior to the effective date of such termination. A termination for Disability shall become effective upon the end of the thirty (30) day notice period. Upon such effective date, the Company's obligation to pay and provide to the Executive the elements of pay described in Article 4 herein shall immediately expire, except to the extent that the benefits described in Sections 4.4 and 4.5 continue after Disability under the terms of the benefit plans and programs which apply generally to the Company's executives, and except that the Executive shall receive all rights and benefits that he is vested in pursuant to other plans and programs of the Company. In addition, the Company shall pay to the Executive a pro rata share of his Bonus for the fiscal year in which employment termination occurs, based on the results for such fiscal year, determined as provided in Section 6.1 herein. The pro rata Bonus shall be paid within sixty (60) days of the end of such fiscal year. The term "Disability" shall mean, for all purposes of this Agreement, the incapacity of the Executive, due to injury, illness, disease, or bodily or mental infirmity, to engage in the performance of substantially all of the usual duties of employment with the Company as contemplated by Article 2 herein, such Disability to be determined by the Board of Directors of the Company upon receipt and in reliance on competent medical advice from one (1) or more individuals, selected by the Board, who are qualified to give such professional medical advice. It is expressly understood that the Disability of the Executive for a period of one hundred twenty (120) calendar days or less in the aggregate during any period of twelve (12) consecutive months, in the absence of any reasonable expectation that his Disability will exist for more than such a period of time, shall not constitute a failure by him to perform his duties hereunder and shall not be deemed a breach or default and the Executive shall receive full compensation for any such period of Disability or for any other temporary illness or incapacity during the term of this Agreement. 6.3 Voluntary Termination by the Executive. The Executive may terminate this Agreement at any time by giving the Board of Directors of the Company written notice of intent to terminate, delivered at least ninety (90) calendar days prior to the effective date of such termination. Upon the effective date of such termination, following the expiration of the ninety (90) day notice period, the Company shall pay the Executive his full Base Salary, at the rate then in effect as provided in Section 4.1 herein, through the effective date of termination, plus all other benefits to which the Executive has a vested right to at that time (for this purpose, the Executive shall not be paid any Bonus with respect to the fiscal year in which voluntary termination under this Section 6.3 occurs). In the event that the terms and provisions of Section 6.6 or Article 7 herein do not apply to such termination, the Company and the Executive thereafter shall have no further obligations under this Agreement. However, in the event the terms and provisions of Section 6.6 or Article 7 herein apply, the payments and benefits set forth therein shall apply. 6.4 Involuntary Termination by the Company Without Cause. Other than during a Change of Control Period (as defined in Section 7.2), the Board may terminate the Executive's employment, as provided under this Agreement, at any time, for reasons other than death, Disability, Retirement, or for Cause, by notifying the Executive in writing of the Company's intent to terminate, at least thirty (30) calendar days prior the effective date of such termination. Unless the provisions of Section 7 apply, upon the effective date of such termination, following the expiration of the thirty (30) day notice period, the Company shall pay to the Executive a lump-sum cash payment equal to the greater of: (a) the Base Salary then in effect for the remaining term of this Agreement; or (b) eighteen (18) full months of the Base Salary in effect as of the effective date of termination. In addition, the Company shall provide the Executive a continuation of his health and welfare benefits for the longer of: (x) the remaining term of the Agreement; or (y) eighteen (18) full months at the employee rates then in effect. If for any reason the Company is unable to continue health and welfare benefits as required by the preceding sentence, the Company shall either provide equivalent benefits to the Executive or pay to the Executive a lump-sum cash payment equal to the value of the benefits which the Company is unable to provide. Continuation of health benefits under this Section 6.4 will count against, and will not extend, the period during which benefits are required to be continued under COBRA. In addition, the Company shall make a prorated payment of the Executive's targeted Bonus for the fiscal year in which termination occurs, calculated based upon the performance of the Company through the end of the month immediately preceding the effective date of the termination. Payment of the Bonus shall be made in cash, in one lump sum, at the same time payment of Base Salary is made pursuant to this Section 6.4. Further, the Company shall pay the Executive all other benefits to which the Executive has a vested right at the time, according to the provisions of each governing plan or program. The Company and the Executive thereafter shall have no further obligations under this Agreement. For purposes of this Section 6.4: (i) with respect to the fiscal year in which termination occurs, the Executive shall be fully vested in any prior year awards that remain unvested or awards made for the fiscal year in which termination occurs under the TRG Incentive Plan or any successor plan, and (ii) all vested awards under any incentive programs shall be paid notwithstanding any provision of the governing plan or program calling for forfeiture of benefits upon termination. If for any reason the Company is unable to comply with the preceding sentence, the Company shall pay the Executive a lump-sum cash payment equal to the value of the benefits or awards it is unable to vest, pay or give credit for. If the Executive's employment is terminated for any of the reasons set forth in Article 7 herein, the Executive shall be entitled to receive the benefits provided in Article 7 herein. 6.5 Termination For Cause. Nothing in this Agreement shall be construed to prevent the Board from terminating the Executive's employment under this Agreement for "Cause." "Cause" shall be determined by the Board in the exercise of good faith and reasonable judgment; and shall be defined as the conviction of the Executive for the commission of an act of fraud, embezzlement, theft, or other criminal act constituting a felony under U.S. laws involving moral turpitude; or the gross neglect of the Executive in the performance of any and all material covenants under this Agreement, for reasons other than the Executive's death, Disability, or Retirement. The Company's Board of Directors, by majority vote, shall make the determination of whether Cause exists, after providing the Executive with notice of the reasons the Board believes Cause may exist, and after giving the Executive the opportunity to respond to the allegation that Cause exists. In the event this Agreement is terminated by the Board for Cause, the Company shall pay the Executive his Base Salary through the effective date of the employment termination and the Executive shall immediately thereafter forfeit all rights and benefits (other than vested benefits) he would otherwise have been entitled to receive under this Agreement. The Company and the Executive thereafter shall have no further obligations under this Agreement. 6.6 Termination by Executive for Good Reason. At any time during the term of this Agreement, the Executive may terminate this Agreement for Good Reason (as defined below) by giving the Board of Directors of the Company thirty (30) calendar days written notice of intent to terminate, which notice sets forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination. Upon the expiration of the thirty (30) day notice period, the Good Reason termination shall become effective, and the Company shall pay and provide to the Executive the benefits set forth in this Section 6.6 unless the provisions of Section 7 apply. Good Reason shall mean, without the Executive's express written consent, the occurrence of any one or more of the following: (a) The assignment of the Executive to duties materially inconsistent with the Executive's authorities, duties, responsibilities, and status (including offices, titles, and reporting requirements) as an officer of the Company, or a reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect during the immediately preceding fiscal year, other than an insubstantial and inadvertent act that is remedied by the Company promptly after receipt of notice thereof given by the Executive; (b) Without the Executive's consent, the Company's requiring the Executive to be based at a location which is at least fifty (50) miles further from the Executive's primary residence as of the Effective Date than is such residence from the Company's current headquarters, except for required travel on the Company's business to an extent substantially consistent with the Executive's business obligations as of the Effective Date; (c) A failure by the Company to meet any obligation under Article 4 herein, except as provided in Section 4.7 herein. (d) The failure of the Company to obtain a satisfactory agreement from any successor to the Company to assume and agree to perform this Agreement, as contemplated in Section 10.1 herein. Upon a termination of the Executive's employment for Good Reason at any time, the Executive shall be entitled to receive the same payments and benefits as he is entitled to receive following an involuntary termination of his employment by the Company without Cause, as specified in Section 6.4 herein unless the provisions of Section 7 apply. The payment of Base Salary and pro rata Bonus shall be made to the Executive within thirty (30) calendar days following the effective date of employment termination. The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason herein. 6.7 Nonrenewal by Company. Upon any termination of this Agreement as a result of a notice of nonrenewal by the Company pursuant to Article 1 hereof, upon the effective date of such termination, the Company shall pay to the Executive a lump-sum cash payment equal to twelve (12) full months' Base Salary then in effect and shall continue the Executive's health and welfare benefits for twelve (12) full months at the employee rates then in effect. If for any reason the Company is unable to continue health and welfare benefits as required by the preceding sentence, the Company shall either provide equivalent benefits to the Executive or pay to the Executive a lump-sum cash payment equal to the value of the benefits which the Company is unable to provide. Continuation of health benefits under this Section 6.7 will count against, and will not extend, the period during which benefits are required to be continued under COBRA. In addition, the Company shall pay the Executive's Bonus for the final year within sixty (60) days after the effective date of the termination of this Agreement. ARTICLE 7. CHANGE OF CONTROL 7.1 Termination in Connection With a Change of Control. In lieu of the compensation and benefits provided in Sections 4 or 6, which will be superseded and replaced by the provisions of this Section 7, the following payments and benefits will be provided to the Executive by the Company in the event of a Termination of Employment (as defined below) during a Change of Control Period (as defined below) of the Company: (a) Lump Sum Cash Payment. On or before the Executive's last day of employment with the Company, the Company will pay the Executive an amount equal to the Executive's unpaid Base Salary for the year in which the Termination of Employment occurs and a pro rata Bonus through the date of Termination of Employment determined in accordance with Section 6.1. Also, on or before the Executive's last day of employment with the Company, the Company will pay the Executive a lump sum cash payment equal to three (3) times the highest Annual Compensation (as defined below) paid to the Executive in any of the three (3) calendar years immediately preceding the date of Termination of Employment. (b) Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan or other incentive plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any stock option or other benefit plans of the Company in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum as soon as practicable after the date of Termination of Employment. To the extent that any of the plans of the Company would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Company the amount of additional benefits payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Company. (c) Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Company at no cost to the Executive for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Company is unable to continue the Benefits as required by the preceding sentence, the Company shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Company is unable to provide. (d) Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Executive's Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Company under its relocation plan as in effect immediately prior to the Change of Control Period or the Termination of Employment. (e) Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the date of Termination of Employment. (f) Outplacement Assistance. The Executive shall be reimbursed by the Company for the cost of all outplacement services obtained by the Executive within the two (2) year period after the date of Termination of Employment provided the total reimbursement shall be limited to an amount equal to fifteen percent (15%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of Termination of Employment. 7.2 Definitions. (a) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (i) The acquisition by any person, other than the Company or any employee benefit plan of the Company, of beneficial ownership of 20% or more of the combined voting power of the Company's then outstanding voting securities; (ii) The first purchase under a tender offer or exchange offer, other than an offer by the Company or any employee benefit plans of the Company, pursuant to which shares of common stock have been purchased; (iii) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Company of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period; or (iv) Approval by stockholders of the Company of a merger, consolidation, liquidation or dissolution of the Company, or the sale of all or substantially all of the assets of the Company. (b) "Annual Compensation" shall mean the sum of the Base Salary and the Bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Company in which the Executive participates during the applicable calendar year. (c) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to a Change of Control Period, (c) the Company requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's Base Salary is reduced, (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Company's or the successor company's executive officers, or (f) the Company gives the Executive notice of an intent not to renew or does not renew the term of this Agreement at any time during a Change of Control Period. (d) A "Change of Control Period" shall mean the period of time commencing with the date of a Change of Control or on which the Company becomes aware of or enters into any discussions or negotiations that could involve a Change of Control or a proposed transaction which could result in a Change of Control, and ending on the first to occur of: (a) three (3) years after the effective date of the Change of Control, or (b) the date on which the proposed Change of Control is no longer discussed or expected to occur. 7.3 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment", subject to the excise tax under Section 4999 of the Code, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 7.3 is made. ARTICLE 8. NONCOMPETITION 8.1 Prohibition on Competition. Without the prior written consent of the Company: (a) during the term of this Agreement; (b) for twenty-four (24) months following the expiration or termination of this Agreement as a result of Notice of Nonrenewal by the Executive pursuant to Article 1; and (c) for twenty-four (24) months following the effective date of a termination of this Agreement by the Executive pursuant to Section 6.3, the Executive shall not serve as an employee or officer of any business or enterprise which is both: (1) engaged in the domestic home-building business; and (2) is ranked in the top ten, based on annual revenues, of all domestic homebuilders. However, the Executive shall be allowed to purchase and hold for investment less than three percent (3%) of the shares of any corporation whose shares are regularly traded on a national securities exchange or in the over- the-counter market. 8.2 Disclosure of Information. The Executive recognizes that he has access to and knowledge of certain confidential and proprietary information of the Company which is essential to the performance of his duties under this Agreement. The Executive will not, during or after the term of his employment by the Company, in whole or in part, disclose such information to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, nor shall he make use of any such information for his own purposes. 8.3 Covenants Regarding Other Employees. During the term of this Agreement, and for a period of twenty-four (24) months following the expiration of this Agreement, the Executive agrees not to attempt to induce any employee of the Company to terminate his or her employment with the Company, accept employment with any competitor of the Company, or to interfere in a similar manner with the business of the Company. 8.4 Specific Performance. The parties recognize that the Company will have no adequate remedy at law for breach by the Executive of the requirements of this Article 8 and, in the event of such breach, the Company and the Executive hereby agree that, in addition to the right to seek monetary damages, the Company will be entitled to a decree of specific performance, mandamus, or other appropriate remedy to enforce performance of such requirements. ARTICLE 9. INDEMNIFICATION The Company hereby covenants and agrees to indemnify and hold harmless the Executive fully, completely, and absolutely against and in respect to any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including attorney's fees), losses, and damages resulting from the Executive's good faith performance of his duties and obligations under the terms of this Agreement. Nothing herein shall limit or reduce any rights of indemnification to which the Executive might be entitled under the charter or by-laws of the Company or otherwise. ARTICLE 10. ASSIGNMENT 10.1 Assignment by Company. This Agreement may and shall be assigned or transferred to, and shall be binding upon and shall inure to the benefit of, any successor of the Company, and any such successor shall be deemed substituted for all purposes of the "Company" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation, or business entity which at any time, whether by merger, purchase, or otherwise, acquires all or substantially all of the assets or the business of the Company. Notwithstanding such assignment, the Company shall remain, with such successor, jointly and severally liable for all its obligations hereunder. Failure of the Company to obtain the agreement of any successor to be bound by the terms of this Agreement prior to the effectiveness of any such succession shall be a breach of this Agreement, and shall immediately entitle the Executive to compensation from the Company in the same amount and on the same terms as provided in Article 7 hereof. Except as herein provided, this Agreement may not otherwise be assigned by the Company. 10.2 Assignment by Executive. The services to be provided by the Executive to the Company hereunder are personal to the Executive, and the Executive's duties may not be assigned by the Executive; provided, however that this Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, and administrators, successors, heirs, distributees, devisees, and legatees. If the Executive dies while any amounts payable to the Executive hereunder remain outstanding, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, in the absence of such designee, to the Executive's estate. ARTICLE 11. DISPUTE RESOLUTION AND NOTICE 11.1 Dispute Resolution. The Executive shall have the right and option to elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by litigation or by arbitration. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location selected by the Executive within fifty (50) miles from the location of his principal place of employment, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. All expenses of such litigation or arbitration, including the reasonable fees and expenses of the legal representative for the Executive, and necessary costs and disbursements incurred as a result of such dispute or legal proceeding, and any prejudgment interest, shall be borne by the Company. 11.2 Notice. Any notices, requests, demands, or other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal offices. ARTICLE 12. MISCELLANEOUS 12.1 Entire Agreement. This Agreement supersedes any prior agreements or understandings, oral or written, between the parties hereto, or between the Executive and the Company, with respect to the subject matter hereof, and constitutes the entire agreement of the parties with respect thereto. 12.2 Modification. This Agreement shall not be varied, altered, modified, canceled, changed, or in any way amended except by mutual agreement of the parties in a written instrument executed by the parties hereto or their legal representatives. 12.3 Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 12.4 Counterparts. This Agreement may be executed in one (1) or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 12.5 Tax Withholding. The Company may withhold from any benefits payable under this Agreement all Federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. 12.6 Beneficiaries. The Executive may designate one or more persons or entities as the primary and/or contingent beneficiaries of any amounts to be received under this Agreement. Such designation must be in the form of a signed writing acceptable to the Board or the Board's designee. The Executive may make or change such designation at any time. ARTICLE 13. GOVERNING LAW To the extent not preempted by Federal law, the provisions of this Agreement shall be construed and enforced in accordance with the laws of the state of Maryland. IN WITNESS WHEREOF, the Executive and the Company have executed this Agreement as of September 18, 1995 and as amended and restated as of January 28, 1997. THE RYLAND GROUP, INC. EXECUTIVE: By: /s/ R. Chad Dreier /s/ Michael D. Mangan ------------------ --------------------- R. Chad Dreier, Chairman Michael D. Mangan of the Board of Directors, President and Chief Executive Officer Attest: /s/ Timothy J. Geckle --------------------- Timothy J. Geckle, Secretary EX-10 6 EXHIBIT 10.9 SENIOR EXECUTIVE SEVERANCE AGREEMENT AGREEMENT dated as of the 28th day of January 1997 between The Ryland Group, Inc., a Maryland corporation (the "Corporation"), and Thomas J. Gancsos (the "Executive"). In consideration of the services provided by the Executive and the covenants and agreements contained herein, and for other good and valuable consideration the sufficiency of which is acknowledged, the Corporation and the Executive agree as follows: 1. Termination After Change of Control. The following payments and benefits will be provided to the Executive by the Corporation in the event of a Termination of Employment (as hereinafter defined) of the Executive within three (3) years after a Change of Control (as hereinafter defined) of the Corporation: 1.1 Lump Sum Cash Payment. On or before the Executive's last day of employment with the Corporation, the Corporation will pay to the Executive a lump sum cash amount equal to two (2) times the highest Annual Compensation (as hereinafter defined) paid to the Executive by the Corporation for any of the three (3) calendar years immediately preceding the date of Termination of Employment. 1.2 Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any incentive, bonus or benefit plans of the Corporation in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum within thirty (30) days of the date of Termination of Employment. To the extent that any of the plans of the Corporation would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Corporation the amount of additional benefits that would be payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. 1.3 Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Corporation, at no cost to the Executive, for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Corporation is unable to continue the Benefits, as required by the preceding sentence, the Corporation shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Corporation is unable to provide. 1.4 Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Corporation under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. 1.5 Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the Executive's last day of employment with the Corporation. 1.6 Outplacement Assistant. The Executive shall be reimbursed by the Corporation for the costs of all outplacement services obtained by the Executive within the two (2) year period after the date of the Executive's Termination of Employment provided the total reimbursement shall be limited to an amount equal to twenty-five percent (25%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of the Executive's Termination of Employment. 1.7 Definitions. (i) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (a) The acquisition by any person, other than the Corporation or any employee benefit plan of the Corporation, of beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities; (b) The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any employee benefit plans of the Corporation, pursuant to which shares of common stock have been purchased; (c) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Corporation of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period; or (d) Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. (ii) "Annual Compensation" shall mean the sum of the base salary and annual bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Corporation in which the Executive participates during the applicable calendar year. In the event the Executive has not been employed by the Corporation or received a base salary and annual bonus for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of base salary, annual bonus and vested amounts credited under incentive compensation or other benefit plans for a complete calendar year based upon the amounts that were paid or credited during the partial year of employment or partial year of receipt of compensation and any other information deemed appropriate. (iii) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Corporation requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's base salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Corporation's or the successor corporation's executive officers. 1.8 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 1.8 is made. 2. General. 2.1 Indemnification. If litigation shall be brought to enforce or interpret any provision contained herein, the Corporation, to the extent permitted by applicable law and the Corporation's Charter and By-laws, indemnifies the Executive for his reasonable attorneys' fees and disbursements incurred in such litigation. 2.2 Dispute Resolution. Either the Executive or the Corporation may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration, by providing written notice of such election to the other party, specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Corporation and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. If the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Corporation of all expenses, including reasonable legal fees and expenses, and costs and disbursements incurred as a result of such dispute or legal proceeding. 2.3 Payment of Obligations Absolute. The Corporation's obligation to pay the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including any offset, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or anyone else. All amounts payable by the Corporation shall be paid without notice or demand. Each and every payment made by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under this Agreement, and the obtaining of any other employment shall not result in a reduction of the Corporation's obligations to make the payments, benefits and arrangements required to be made under this Agreement. 2.4 Continuing Obligations. The Executive shall retain in confidence any confidential information known to him concerning the Corporation, its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 2.5 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his estate, and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Executive. All references in this Agreement to the Corporation shall include its subsidiaries and affiliates and any successors and assigns of the Corporation. Any successor of the Corporation shall be deemed substituted for all purposes of the "Corporation" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or the business of the Corporation. In all cases, the Corporation shall remain jointly and severally liable for all obligations hereunder. 2.6 Severability. Any provisions in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 2.7 Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. 2.8 Modification. This Agreement shall not be varied, altered, modified, canceled, changed or in any way amended except by mutual agreement of the Executive and the Corporation in a written instrument executed by the Executive and the Corporation. 2.9 Tax Withholding. The Corporation may withhold all federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE /s/ R. Chad Dreier /s/ Thomas J. Gancsos - ---------------------------------- ----------------------------- R. Chad Dreier, President and Chief Thomas J. Gancsos Executive Officer ATTEST: /s/ Timothy J. Geckle - --------------------------------- Timothy J. Geckle, Secretary SENIOR EXECUTIVE SEVERANCE AGREEMENT AGREEMENT dated as of the 28th day of January 1997 between The Ryland Group, Inc., a Maryland corporation (the "Corporation"), and Timothy J. Geckle (the "Executive"). In consideration of the services provided by the Executive and the covenants and agreements contained herein, and for other good and valuable consideration the sufficiency of which is acknowledged, the Corporation and the Executive agree as follows: 1. Termination After Change of Control. The following payments and benefits will be provided to the Executive by the Corporation in the event of a Termination of Employment (as hereinafter defined) of the Executive within three (3) years after a Change of Control (as hereinafter defined) of the Corporation: 1.1 Lump Sum Cash Payment. On or before the Executive's last day of employment with the Corporation, the Corporation will pay to the Executive a lump sum cash amount equal to two (2) times the highest Annual Compensation (as hereinafter defined) paid to the Executive by the Corporation for any of the three (3) calendar years immediately preceding the date of Termination of Employment. 1.2 Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any incentive, bonus or benefit plans of the Corporation in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum within thirty (30) days of the date of Termination of Employment. To the extent that any of the plans of the Corporation would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Corporation the amount of additional benefits that would be payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. 1.3 Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Corporation, at no cost to the Executive, for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Corporation is unable to continue the Benefits, as required by the preceding sentence, the Corporation shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Corporation is unable to provide. 1.4 Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Corporation under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. 1.5 Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the Executive's last day of employment with the Corporation. 1.6 Outplacement Assistant. The Executive shall be reimbursed by the Corporation for the costs of all outplacement services obtained by the Executive within the two (2) year period after the date of the Executive's Termination of Employment provided the total reimbursement shall be limited to an amount equal to twenty-five percent (25%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of the Executive's Termination of Employment. 1.7 Definitions. (i) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (a) The acquisition by any person, other than the Corporation or any employee benefit plan of the Corporation, of beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities; (b) The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any employee benefit plans of the Corporation, pursuant to which shares of common stock have been purchased; (c) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Corporation of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period; or (d) Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. (ii) "Annual Compensation" shall mean the sum of the base salary and annual bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Corporation in which the Executive participates during the applicable calendar year. In the event the Executive has not been employed by the Corporation or received a base salary and annual bonus for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of base salary, annual bonus and vested amounts credited under incentive compensation or other benefit plans for a complete calendar year based upon the amounts that were paid or credited during the partial year of employment or partial year of receipt of compensation and any other information deemed appropriate. (iii) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Corporation requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's base salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Corporation's or the successor corporation's executive officers. 1.8 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 1.8 is made. 2. General. 2.1 Indemnification. If litigation shall be brought to enforce or interpret any provision contained herein, the Corporation, to the extent permitted by applicable law and the Corporation's Charter and By-laws, indemnifies the Executive for his reasonable attorneys' fees and disbursements incurred in such litigation. 2.2 Dispute Resolution. Either the Executive or the Corporation may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration, by providing written notice of such election to the other party, specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Corporation and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. If the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Corporation of all expenses, including reasonable legal fees and expenses, and costs and disbursements incurred as a result of such dispute or legal proceeding. 2.3 Payment of Obligations Absolute. The Corporation's obligation to pay the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including any offset, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or anyone else. All amounts payable by the Corporation shall be paid without notice or demand. Each and every payment made by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under this Agreement, and the obtaining of any other employment shall not result in a reduction of the Corporation's obligations to make the payments, benefits and arrangements required to be made under this Agreement. 2.4 Continuing Obligations. The Executive shall retain in confidence any confidential information known to him concerning the Corporation, its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 2.5 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his estate, and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Executive. All references in this Agreement to the Corporation shall include its subsidiaries and affiliates and any successors and assigns of the Corporation. Any successor of the Corporation shall be deemed substituted for all purposes of the "Corporation" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or the business of the Corporation. In all cases, the Corporation shall remain jointly and severally liable for all obligations hereunder. 2.6 Severability. Any provisions in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 2.7 Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. 2.8 Modification. This Agreement shall not be varied, altered, modified, canceled, changed or in any way amended except by mutual agreement of the Executive and the Corporation in a written instrument executed by the Executive and the Corporation. 2.9 Tax Withholding. The Corporation may withhold all federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE /s/ R. Chad Dreier /s/ Timothy J. Geckle - ---------------------------------- ----------------------------- R. Chad Dreier, President and Chief Timothy J. Geckle Executive Officer ATTEST: /s/ Julie Charping - --------------------------------- Julie Charping, Assistant Secretary SENIOR EXECUTIVE SEVERANCE AGREEMENT AGREEMENT dated as of the 28th day of January 1997 between The Ryland Group, Inc., a Maryland corporation (the "Corporation"), and Edward W. Gold (the "Executive"). In consideration of the services provided by the Executive and the covenants and agreements contained herein, and for other good and valuable consideration the sufficiency of which is acknowledged, the Corporation and the Executive agree as follows: 1. Termination After Change of Control. The following payments and benefits will be provided to the Executive by the Corporation in the event of a Termination of Employment (as hereinafter defined) of the Executive within three (3) years after a Change of Control (as hereinafter defined) of the Corporation: 1.1 Lump Sum Cash Payment. On or before the Executive's last day of employment with the Corporation, the Corporation will pay to the Executive a lump sum cash amount equal to two (2) times the highest Annual Compensation (as hereinafter defined) paid to the Executive by the Corporation for any of the three (3) calendar years immediately preceding the date of Termination of Employment. 1.2 Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any incentive, bonus or benefit plans of the Corporation in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum within thirty (30) days of the date of Termination of Employment. To the extent that any of the plans of the Corporation would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Corporation the amount of additional benefits that would be payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. 1.3 Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Corporation, at no cost to the Executive, for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Corporation is unable to continue the Benefits, as required by the preceding sentence, the Corporation shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Corporation is unable to provide. 1.4 Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Corporation under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. 1.5 Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the Executive's last day of employment with the Corporation. 1.6 Outplacement Assistant. The Executive shall be reimbursed by the Corporation for the costs of all outplacement services obtained by the Executive within the two (2) year period after the date of the Executive's Termination of Employment provided the total reimbursement shall be limited to an amount equal to twenty-five percent (25%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of the Executive's Termination of Employment. 1.7 Definitions. (i) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (a) The acquisition by any person, other than the Corporation or any employee benefit plan of the Corporation, of beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities; (b) The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any employee benefit plans of the Corporation, pursuant to which shares of common stock have been purchased; (c) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Corporation of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period; or (d) Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. (ii) "Annual Compensation" shall mean the sum of the base salary and annual bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Corporation in which the Executive participates during the applicable calendar year. In the event the Executive has not been employed by the Corporation or received a base salary and annual bonus for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of base salary, annual bonus and vested amounts credited under incentive compensation or other benefit plans for a complete calendar year based upon the amounts that were paid or credited during the partial year of employment or partial year of receipt of compensation and any other information deemed appropriate. (iii) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Corporation requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's base salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Corporation's or the successor corporation's executive officers. 1.8 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 1.8 is made. 2. General. 2.1 Indemnification. If litigation shall be brought to enforce or interpret any provision contained herein, the Corporation, to the extent permitted by applicable law and the Corporation's Charter and By-laws, indemnifies the Executive for his reasonable attorneys' fees and disbursements incurred in such litigation. 2.2 Dispute Resolution. Either the Executive or the Corporation may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration, by providing written notice of such election to the other party, specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Corporation and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. If the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Corporation of all expenses, including reasonable legal fees and expenses, and costs and disbursements incurred as a result of such dispute or legal proceeding. 2.3 Payment of Obligations Absolute. The Corporation's obligation to pay the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including any offset, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or anyone else. All amounts payable by the Corporation shall be paid without notice or demand. Each and every payment made by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under this Agreement, and the obtaining of any other employment shall not result in a reduction of the Corporation's obligations to make the payments, benefits and arrangements required to be made under this Agreement. 2.4 Continuing Obligations. The Executive shall retain in confidence any confidential information known to him concerning the Corporation, its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 2.5 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his estate, and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Executive. All references in this Agreement to the Corporation shall include its subsidiaries and affiliates and any successors and assigns of the Corporation. Any successor of the Corporation shall be deemed substituted for all purposes of the "Corporation" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or the business of the Corporation. In all cases, the Corporation shall remain jointly and severally liable for all obligations hereunder. 2.6 Severability. Any provisions in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 2.7 Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. 2.8 Modification. This Agreement shall not be varied, altered, modified, canceled, changed or in any way amended except by mutual agreement of the Executive and the Corporation in a written instrument executed by the Executive and the Corporation. 2.9 Tax Withholding. The Corporation may withhold all federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE /s/ R. Chad Dreier /s/ Edward W. Gold - ---------------------------------- ----------------------------- R. Chad Dreier, President and Chief Edward W. Gold Executive Officer ATTEST: /s/ Timothy J. Geckle, Secretary - --------------------------------- Timothy J. Geckle, Secretary SENIOR EXECUTIVE SEVERANCE AGREEMENT AGREEMENT dated as of the 28th day of January 1997 between The Ryland Group, Inc., a Maryland corporation (the "Corporation"), and John M. Garrity (the "Executive"). In consideration of the services provided by the Executive and the covenants and agreements contained herein, and for other good and valuable consideration the sufficiency of which is acknowledged, the Corporation and the Executive agree as follows: 1. Termination After Change of Control. The following payments and benefits will be provided to the Executive by the Corporation in the event of a Termination of Employment (as hereinafter defined) of the Executive within three (3) years after a Change of Control (as hereinafter defined) of the Corporation: 1.1 Lump Sum Cash Payment. On or before the Executive's last day of employment with the Corporation, the Corporation will pay to the Executive a lump sum cash amount equal to two (2) times the highest Annual Compensation (as hereinafter defined) paid to the Executive by the Corporation for any of the three (3) calendar years immediately preceding the date of Termination of Employment. 1.2 Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any incentive, bonus or benefit plans of the Corporation in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum within thirty (30) days of the date of Termination of Employment. To the extent that any of the plans of the Corporation would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Corporation the amount of additional benefits that would be payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. 1.3 Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Corporation, at no cost to the Executive, for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Corporation is unable to continue the Benefits, as required by the preceding sentence, the Corporation shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Corporation is unable to provide. 1.4 Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Corporation under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. 1.5 Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the Executive's last day of employment with the Corporation. 1.6 Outplacement Assistant. The Executive shall be reimbursed by the Corporation for the costs of all outplacement services obtained by the Executive within the two (2) year period after the date of the Executive's Termination of Employment provided the total reimbursement shall be limited to an amount equal to twenty-five percent (25%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of the Executive's Termination of Employment. 1.7 Definitions. (i) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (a) The acquisition by any person, other than the Corporation or any employee benefit plan of the Corporation, of beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities; (b) The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any employee benefit plans of the Corporation, pursuant to which shares of common stock have been purchased; (c) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Corporation of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period; or (d) Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. (ii) "Annual Compensation" shall mean the sum of the base salary and annual bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Corporation in which the Executive participates during the applicable calendar year. In the event the Executive has not been employed by the Corporation or received a base salary and annual bonus for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of base salary, annual bonus and vested amounts credited under incentive compensation or other benefit plans for a complete calendar year based upon the amounts that were paid or credited during the partial year of employment or partial year of receipt of compensation and any other information deemed appropriate. (iii) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Corporation requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's base salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Corporation's or the successor corporation's executive officers. 1.8 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 1.8 is made. 2. General. 2.1 Indemnification. If litigation shall be brought to enforce or interpret any provision contained herein, the Corporation, to the extent permitted by applicable law and the Corporation's Charter and By-laws, indemnifies the Executive for his reasonable attorneys' fees and disbursements incurred in such litigation. 2.2 Dispute Resolution. Either the Executive or the Corporation may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration, by providing written notice of such election to the other party, specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Corporation and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. If the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Corporation of all expenses, including reasonable legal fees and expenses, and costs and disbursements incurred as a result of such dispute or legal proceeding. 2.3 Payment of Obligations Absolute. The Corporation's obligation to pay the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including any offset, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or anyone else. All amounts payable by the Corporation shall be paid without notice or demand. Each and every payment made by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under this Agreement, and the obtaining of any other employment shall not result in a reduction of the Corporation's obligations to make the payments, benefits and arrangements required to be made under this Agreement. 2.4 Continuing Obligations. The Executive shall retain in confidence any confidential information known to him concerning the Corporation, its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 2.5 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his estate, and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Executive. All references in this Agreement to the Corporation shall include its subsidiaries and affiliates and any successors and assigns of the Corporation. Any successor of the Corporation shall be deemed substituted for all purposes of the "Corporation" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or the business of the Corporation. In all cases, the Corporation shall remain jointly and severally liable for all obligations hereunder. 2.6 Severability. Any provisions in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 2.7 Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. 2.8 Modification. This Agreement shall not be varied, altered, modified, canceled, changed or in any way amended except by mutual agreement of the Executive and the Corporation in a written instrument executed by the Executive and the Corporation. 2.9 Tax Withholding. The Corporation may withhold all federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE /s/ R. Chad Dreier /s/ John M. Garrity - ----------------------------------- ----------------------------- R. Chad Dreier, President and Chief John M. Garrity Executive Officer ATTEST: /s/ Timothy J. Geckle - --------------------------------- Timothy J. Geckle, Secretary SENIOR EXECUTIVE SEVERANCE AGREEMENT AGREEMENT dated as of the 28th day of January 1997 between The Ryland Group, Inc., a Maryland corporation (the "Corporation"), and Frank J. Scardina (the "Executive"). In consideration of the services provided by the Executive and the covenants and agreements contained herein, and for other good and valuable consideration the sufficiency of which is acknowledged, the Corporation and the Executive agree as follows: 1. Termination After Change of Control. The following payments and benefits will be provided to the Executive by the Corporation in the event of a Termination of Employment (as hereinafter defined) of the Executive within three (3) years after a Change of Control (as hereinafter defined) of the Corporation: 1.1 Lump Sum Cash Payment. On or before the Executive's last day of employment with the Corporation, the Corporation will pay to the Executive a lump sum cash amount equal to two (2) times the highest Annual Compensation (as hereinafter defined) paid to the Executive by the Corporation for any of the three (3) calendar years immediately preceding the date of Termination of Employment. 1.2 Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any incentive, bonus or benefit plans of the Corporation in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum within thirty (30) days of the date of Termination of Employment. To the extent that any of the plans of the Corporation would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Corporation the amount of additional benefits that would be payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. 1.3 Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Corporation, at no cost to the Executive, for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Corporation is unable to continue the Benefits, as required by the preceding sentence, the Corporation shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Corporation is unable to provide. 1.4 Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Corporation under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. 1.5 Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the Executive's last day of employment with the Corporation. 1.6 Outplacement Assistant. The Executive shall be reimbursed by the Corporation for the costs of all outplacement services obtained by the Executive within the two (2) year period after the date of the Executive's Termination of Employment provided the total reimbursement shall be limited to an amount equal to twenty-five percent (25%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of the Executive's Termination of Employment. 1.7 Definitions. (i) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (a) The acquisition by any person, other than the Corporation or any employee benefit plan of the Corporation, of beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities; (b) The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any employee benefit plans of the Corporation, pursuant to which shares of common stock have been purchased; (c) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Corporation of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period; or (d) Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. (ii) "Annual Compensation" shall mean the sum of the base salary and annual bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Corporation in which the Executive participates during the applicable calendar year. In the event the Executive has not been employed by the Corporation or received a base salary and annual bonus for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of base salary, annual bonus and vested amounts credited under incentive compensation or other benefit plans for a complete calendar year based upon the amounts that were paid or credited during the partial year of employment or partial year of receipt of compensation and any other information deemed appropriate. (iii) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Corporation requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's base salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Corporation's or the successor corporation's executive officers. 1.8 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 1.8 is made. 2. General. 2.1 Indemnification. If litigation shall be brought to enforce or interpret any provision contained herein, the Corporation, to the extent permitted by applicable law and the Corporation's Charter and By-laws, indemnifies the Executive for his reasonable attorneys' fees and disbursements incurred in such litigation. 2.2 Dispute Resolution. Either the Executive or the Corporation may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration, by providing written notice of such election to the other party, specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Corporation and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. If the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Corporation of all expenses, including reasonable legal fees and expenses, and costs and disbursements incurred as a result of such dispute or legal proceeding. 2.3 Payment of Obligations Absolute. The Corporation's obligation to pay the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including any offset, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or anyone else. All amounts payable by the Corporation shall be paid without notice or demand. Each and every payment made by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under this Agreement, and the obtaining of any other employment shall not result in a reduction of the Corporation's obligations to make the payments, benefits and arrangements required to be made under this Agreement. 2.4 Continuing Obligations. The Executive shall retain in confidence any confidential information known to him concerning the Corporation, its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 2.5 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his estate, and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Executive. All references in this Agreement to the Corporation shall include its subsidiaries and affiliates and any successors and assigns of the Corporation. Any successor of the Corporation shall be deemed substituted for all purposes of the "Corporation" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or the business of the Corporation. In all cases, the Corporation shall remain jointly and severally liable for all obligations hereunder. 2.6 Severability. Any provisions in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 2.7 Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. 2.8 Modification. This Agreement shall not be varied, altered, modified, canceled, changed or in any way amended except by mutual agreement of the Executive and the Corporation in a written instrument executed by the Executive and the Corporation. 2.9 Tax Withholding. The Corporation may withhold all federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE /s/ R. Chad Dreier /s/ Frank J. Scardina - ----------------------------------- ----------------------------- R. Chad Dreier, President and Chief Frank J. Scardina Executive Officer ATTEST: /s/ Timothy J. Geckle - --------------------------------- Timothy J. Geckle, Secretary SENIOR EXECUTIVE SEVERANCE AGREEMENT AGREEMENT dated as of the 28th day of January 1997 between The Ryland Group, Inc., a Maryland corporation (the "Corporation"), and Kipling W. Scott (the "Executive"). In consideration of the services provided by the Executive and the covenants and agreements contained herein, and for other good and valuable consideration the sufficiency of which is acknowledged, the Corporation and the Executive agree as follows: 1. Termination After Change of Control. The following payments and benefits will be provided to the Executive by the Corporation in the event of a Termination of Employment (as hereinafter defined) of the Executive within three (3) years after a Change of Control (as hereinafter defined) of the Corporation: 1.1 Lump Sum Cash Payment. On or before the Executive's last day of employment with the Corporation, the Corporation will pay to the Executive a lump sum cash amount equal to two (2) times the highest Annual Compensation (as hereinafter defined) paid to the Executive by the Corporation for any of the three (3) calendar years immediately preceding the date of Termination of Employment. 1.2 Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any incentive, bonus or benefit plans of the Corporation in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum within thirty (30) days of the date of Termination of Employment. To the extent that any of the plans of the Corporation would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Corporation the amount of additional benefits that would be payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. 1.3 Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Corporation, at no cost to the Executive, for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Corporation is unable to continue the Benefits, as required by the preceding sentence, the Corporation shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Corporation is unable to provide. 1.4 Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Corporation under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. 1.5 Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the Executive's last day of employment with the Corporation. 1.6 Outplacement Assistant. The Executive shall be reimbursed by the Corporation for the costs of all outplacement services obtained by the Executive within the two (2) year period after the date of the Executive's Termination of Employment provided the total reimbursement shall be limited to an amount equal to twenty-five percent (25%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of the Executive's Termination of Employment. 1.7 Definitions. (i) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (a) The acquisition by any person, other than the Corporation or any employee benefit plan of the Corporation, of beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities; (b) The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any employee benefit plans of the Corporation, pursuant to which shares of common stock have been purchased; (c) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Corporation of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period; or (d) Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. (ii) "Annual Compensation" shall mean the sum of the base salary and annual bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Corporation in which the Executive participates during the applicable calendar year. In the event the Executive has not been employed by the Corporation or received a base salary and annual bonus for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of base salary, annual bonus and vested amounts credited under incentive compensation or other benefit plans for a complete calendar year based upon the amounts that were paid or credited during the partial year of employment or partial year of receipt of compensation and any other information deemed appropriate. (iii) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Corporation requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's base salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Corporation's or the successor corporation's executive officers. 1.8 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 1.8 is made. 2. General. 2.1 Indemnification. If litigation shall be brought to enforce or interpret any provision contained herein, the Corporation, to the extent permitted by applicable law and the Corporation's Charter and By-laws, indemnifies the Executive for his reasonable attorneys' fees and disbursements incurred in such litigation. 2.2 Dispute Resolution. Either the Executive or the Corporation may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration, by providing written notice of such election to the other party, specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Corporation and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. If the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Corporation of all expenses, including reasonable legal fees and expenses, and costs and disbursements incurred as a result of such dispute or legal proceeding. 2.3 Payment of Obligations Absolute. The Corporation's obligation to pay the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including any offset, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or anyone else. All amounts payable by the Corporation shall be paid without notice or demand. Each and every payment made by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under this Agreement, and the obtaining of any other employment shall not result in a reduction of the Corporation's obligations to make the payments, benefits and arrangements required to be made under this Agreement. 2.4 Continuing Obligations. The Executive shall retain in confidence any confidential information known to him concerning the Corporation, its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 2.5 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his estate, and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Executive. All references in this Agreement to the Corporation shall include its subsidiaries and affiliates and any successors and assigns of the Corporation. Any successor of the Corporation shall be deemed substituted for all purposes of the "Corporation" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or the business of the Corporation. In all cases, the Corporation shall remain jointly and severally liable for all obligations hereunder. 2.6 Severability. Any provisions in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 2.7 Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. 2.8 Modification. This Agreement shall not be varied, altered, modified, canceled, changed or in any way amended except by mutual agreement of the Executive and the Corporation in a written instrument executed by the Executive and the Corporation. 2.9 Tax Withholding. The Corporation may withhold all federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE /s/ R. Chad Dreier /s/ Kipling W. Scott - ----------------------------------- ----------------------------- R. Chad Dreier, President and Chief Kipling W. Scott Executive Officer ATTEST: /s/ Timothy J. Geckle - --------------------------------- Timothy J. Geckle, Secretary SENIOR EXECUTIVE SEVERANCE AGREEMENT AGREEMENT dated as of the 28th day of January 1997 between The Ryland Group, Inc., a Maryland corporation (the "Corporation"), and Michael C. Brown (the "Executive"). In consideration of the services provided by the Executive and the covenants and agreements contained herein, and for other good and valuable consideration the sufficiency of which is acknowledged, the Corporation and the Executive agree as follows: 1. Termination After Change of Control. The following payments and benefits will be provided to the Executive by the Corporation in the event of a Termination of Employment (as hereinafter defined) of the Executive within three (3) years after a Change of Control (as hereinafter defined) of the Corporation: 1.1 Lump Sum Cash Payment. On or before the Executive's last day of employment with the Corporation, the Corporation will pay to the Executive a lump sum cash amount equal to two (2) times the highest Annual Compensation (as hereinafter defined) paid to the Executive by the Corporation for any of the three (3) calendar years immediately preceding the date of Termination of Employment. 1.2 Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any incentive, bonus or benefit plans of the Corporation in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum within thirty (30) days of the date of Termination of Employment. To the extent that any of the plans of the Corporation would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Corporation the amount of additional benefits that would be payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. 1.3 Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Corporation, at no cost to the Executive, for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Corporation is unable to continue the Benefits, as required by the preceding sentence, the Corporation shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Corporation is unable to provide. 1.4 Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Corporation under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. 1.5 Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the Executive's last day of employment with the Corporation. 1.6 Outplacement Assistant. The Executive shall be reimbursed by the Corporation for the costs of all outplacement services obtained by the Executive within the two (2) year period after the date of the Executive's Termination of Employment provided the total reimbursement shall be limited to an amount equal to twenty-five percent (25%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of the Executive's Termination of Employment. 1.7 Definitions. (i) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (a) The acquisition by any person, other than the Corporation or any employee benefit plan of the Corporation, of beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities; (b) The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any employee benefit plans of the Corporation, pursuant to which shares of common stock have been purchased; (c) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Corporation of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period; or (d) Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. (ii) "Annual Compensation" shall mean the sum of the base salary and annual bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Corporation in which the Executive participates during the applicable calendar year. In the event the Executive has not been employed by the Corporation or received a base salary and annual bonus for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of base salary, annual bonus and vested amounts credited under incentive compensation or other benefit plans for a complete calendar year based upon the amounts that were paid or credited during the partial year of employment or partial year of receipt of compensation and any other information deemed appropriate. (iii) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Corporation requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's base salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Corporation's or the successor corporation's executive officers. 1.8 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 1.8 is made. 2. General. 2.1 Indemnification. If litigation shall be brought to enforce or interpret any provision contained herein, the Corporation, to the extent permitted by applicable law and the Corporation's Charter and By-laws, indemnifies the Executive for his reasonable attorneys' fees and disbursements incurred in such litigation. 2.2 Dispute Resolution. Either the Executive or the Corporation may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration, by providing written notice of such election to the other party, specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Corporation and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. If the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Corporation of all expenses, including reasonable legal fees and expenses, and costs and disbursements incurred as a result of such dispute or legal proceeding. 2.3 Payment of Obligations Absolute. The Corporation's obligation to pay the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including any offset, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or anyone else. All amounts payable by the Corporation shall be paid without notice or demand. Each and every payment made by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under this Agreement, and the obtaining of any other employment shall not result in a reduction of the Corporation's obligations to make the payments, benefits and arrangements required to be made under this Agreement. 2.4 Continuing Obligations. The Executive shall retain in confidence any confidential information known to him concerning the Corporation, its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 2.5 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his estate, and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Executive. All references in this Agreement to the Corporation shall include its subsidiaries and affiliates and any successors and assigns of the Corporation. Any successor of the Corporation shall be deemed substituted for all purposes of the "Corporation" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or the business of the Corporation. In all cases, the Corporation shall remain jointly and severally liable for all obligations hereunder. 2.6 Severability. Any provisions in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 2.7 Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. 2.8 Modification. This Agreement shall not be varied, altered, modified, canceled, changed or in any way amended except by mutual agreement of the Executive and the Corporation in a written instrument executed by the Executive and the Corporation. 2.9 Tax Withholding. The Corporation may withhold all federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE /s/ R. Chad Dreier /s/ Michael C. Brown - ----------------------------------- ---------------------------- R. Chad Dreier, President and Chief Michael C. Brown Executive Officer ATTEST: /s/ Timothy J. Geckle - -------------------------------- Timothy J. Geckle, Secretary SENIOR EXECUTIVE SEVERANCE AGREEMENT AGREEMENT dated as of the 28th day of January 1997 between The Ryland Group, Inc., a Maryland corporation (the "Corporation"), and J. Sidney Davenport, IV (the "Executive"). In consideration of the services provided by the Executive and the covenants and agreements contained herein, and for other good and valuable consideration the sufficiency of which is acknowledged, the Corporation and the Executive agree as follows: 1. Termination After Change of Control. The following payments and benefits will be provided to the Executive by the Corporation in the event of a Termination of Employment (as hereinafter defined) of the Executive within three (3) years after a Change of Control (as hereinafter defined) of the Corporation: 1.1 Lump Sum Cash Payment. On or before the Executive's last day of employment with the Corporation, the Corporation will pay to the Executive a lump sum cash amount equal to two (2) times the highest Annual Compensation (as hereinafter defined) paid to the Executive by the Corporation for any of the three (3) calendar years immediately preceding the date of Termination of Employment. 1.2 Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any incentive, bonus or benefit plans of the Corporation in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum within thirty (30) days of the date of Termination of Employment. To the extent that any of the plans of the Corporation would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Corporation the amount of additional benefits that would be payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. 1.3 Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Corporation, at no cost to the Executive, for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Corporation is unable to continue the Benefits, as required by the preceding sentence, the Corporation shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Corporation is unable to provide. 1.4 Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Corporation under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. 1.5 Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the Executive's last day of employment with the Corporation. 1.6 Outplacement Assistant. The Executive shall be reimbursed by the Corporation for the costs of all outplacement services obtained by the Executive within the two (2) year period after the date of the Executive's Termination of Employment provided the total reimbursement shall be limited to an amount equal to twenty-five percent (25%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of the Executive's Termination of Employment. 1.7 Definitions. (i) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (a) The acquisition by any person, other than the Corporation or any employee benefit plan of the Corporation, of beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities; (b) The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any employee benefit plans of the Corporation, pursuant to which shares of common stock have been purchased; (c) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Corporation of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period; or (d) Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. (ii) "Annual Compensation" shall mean the sum of the base salary and annual bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Corporation in which the Executive participates during the applicable calendar year. In the event the Executive has not been employed by the Corporation or received a base salary and annual bonus for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of base salary, annual bonus and vested amounts credited under incentive compensation or other benefit plans for a complete calendar year based upon the amounts that were paid or credited during the partial year of employment or partial year of receipt of compensation and any other information deemed appropriate. (iii) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Corporation requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's base salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Corporation's or the successor corporation's executive officers. 1.8 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 1.8 is made. 2. General. 2.1 Indemnification. If litigation shall be brought to enforce or interpret any provision contained herein, the Corporation, to the extent permitted by applicable law and the Corporation's Charter and By-laws, indemnifies the Executive for his reasonable attorneys' fees and disbursements incurred in such litigation. 2.2 Dispute Resolution. Either the Executive or the Corporation may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration, by providing written notice of such election to the other party, specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Corporation and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. If the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Corporation of all expenses, including reasonable legal fees and expenses, and costs and disbursements incurred as a result of such dispute or legal proceeding. 2.3 Payment of Obligations Absolute. The Corporation's obligation to pay the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including any offset, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or anyone else. All amounts payable by the Corporation shall be paid without notice or demand. Each and every payment made by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under this Agreement, and the obtaining of any other employment shall not result in a reduction of the Corporation's obligations to make the payments, benefits and arrangements required to be made under this Agreement. 2.4 Continuing Obligations. The Executive shall retain in confidence any confidential information known to him concerning the Corporation, its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 2.5 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his estate, and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Executive. All references in this Agreement to the Corporation shall include its subsidiaries and affiliates and any successors and assigns of the Corporation. Any successor of the Corporation shall be deemed substituted for all purposes of the "Corporation" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or the business of the Corporation. In all cases, the Corporation shall remain jointly and severally liable for all obligations hereunder. 2.6 Severability. Any provisions in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 2.7 Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. 2.8 Modification. This Agreement shall not be varied, altered, modified, canceled, changed or in any way amended except by mutual agreement of the Executive and the Corporation in a written instrument executed by the Executive and the Corporation. 2.9 Tax Withholding. The Corporation may withhold all federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE /s/ R. Chad Dreier /s/ J. Sidney Davenport, IV - ---------------------------------- ----------------------------- R. Chad Dreier, President and Chief J. Sidney Davenport, IV Executive Officer ATTEST: /s/ Timothy J. Geckle - --------------------------------- Timothy J. Geckle, Secretary SENIOR EXECUTIVE SEVERANCE AGREEMENT AGREEMENT dated as of the 28th day of January 1997 between The Ryland Group, Inc., a Maryland corporation (the "Corporation"), and James R. Fratangelo (the "Executive"). In consideration of the services provided by the Executive and the covenants and agreements contained herein, and for other good and valuable consideration the sufficiency of which is acknowledged, the Corporation and the Executive agree as follows: 1. Termination After Change of Control. The following payments and benefits will be provided to the Executive by the Corporation in the event of a Termination of Employment (as hereinafter defined) of the Executive within three (3) years after a Change of Control (as hereinafter defined) of the Corporation: 1.1 Lump Sum Cash Payment. On or before the Executive's last day of employment with the Corporation, the Corporation will pay to the Executive a lump sum cash amount equal to two (2) times the highest Annual Compensation (as hereinafter defined) paid to the Executive by the Corporation for any of the three (3) calendar years immediately preceding the date of Termination of Employment. 1.2 Accelerated Vesting and Supplemental Payments. All rights, awards and benefits of the Executive in the TRG Incentive Plan, the deferred compensation plans (including the Retirement and Stock Ownership Plan, Executive and Director Deferred Compensation Plan and any successor or replacements plans) and any incentive, bonus or benefit plans of the Corporation in which the Executive participates shall immediately vest in full and the Executive shall be paid in a lump sum within thirty (30) days of the date of Termination of Employment. To the extent that any of the plans of the Corporation would not under applicable law permit accelerated vesting, the Executive will be paid supplementally by the Corporation the amount of additional benefits that would be payable if full vesting had taken place as of the date of Termination of Employment. All supplemental payments are provided on an unfunded basis, are not intended to meet the qualification requirements of Section 401 of the Internal Revenue Code, and shall be payable solely from the general assets of the Corporation. 1.3 Insurance and Other Special Benefits. The Executive's participation in the life, accident and health insurance, employee welfare benefit plans (as defined in the Employee Retirement Income Security Act of 1974) and other fringe benefits (the "Benefits") provided to the Executive prior to the Change of Control or the Termination of Employment shall be continued or equivalent benefits provided by the Corporation, at no cost to the Executive, for a period of two (2) years from the date of the Executive's Termination of Employment. If for any reason the Corporation is unable to continue the Benefits, as required by the preceding sentence, the Corporation shall pay to the Executive a lump sum cash payment equal to the value of the Benefits which the Corporation is unable to provide. 1.4 Relocation Assistance. Should the Executive move his residence in order to pursue other business opportunities within two (2) years after the date of the Termination of Employment, he will be reimbursed for any expenses incurred in that relocation, including taxes payable on the reimbursement, which are not reimbursed by another employer. Benefits under this paragraph will include assistance in selling the Executive's home and all other assistance and benefits which are provided by the Corporation under its relocation plan as in effect immediately prior to the Change of Control or the Termination of Employment. 1.5 Stock Rights. All stock options, stock appreciation rights, stock purchase rights, restricted stock rights and any similar rights which the Executive holds shall become fully vested and be exercisable on the Executive's last day of employment with the Corporation. 1.6 Outplacement Assistant. The Executive shall be reimbursed by the Corporation for the costs of all outplacement services obtained by the Executive within the two (2) year period after the date of the Executive's Termination of Employment provided the total reimbursement shall be limited to an amount equal to twenty-five percent (25%) of the Executive's Annual Compensation for the calendar year immediately preceding the date of the Executive's Termination of Employment. 1.7 Definitions. (i) A "Change of Control" shall take place on the date of the earlier to occur of any of the following events: (a) The acquisition by any person, other than the Corporation or any employee benefit plan of the Corporation, of beneficial ownership of 20% or more of the combined voting power of the Corporation's then outstanding voting securities; (b) The first purchase under a tender offer or exchange offer, other than an offer by the Corporation or any employee benefit plans of the Corporation, pursuant to which shares of common stock have been purchased; (c) During any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election or the nomination for the election by stockholders of the Corporation of each new director was approved by a vote of at least two- thirds of the directors then still in office who were directors at the beginning of the period; or (d) Approval by stockholders of the Corporation of a merger, consolidation, liquidation or dissolution of the Corporation, or the sale of all or substantially all of the assets of the Corporation. (ii) "Annual Compensation" shall mean the sum of the base salary and annual bonus paid to the Executive and all vested amounts credited to the Executive under any incentive compensation or other benefit plans of the Corporation in which the Executive participates during the applicable calendar year. In the event the Executive has not been employed by the Corporation or received a base salary and annual bonus for a complete calendar year, the determination of Annual Compensation shall involve a pro forma projection of base salary, annual bonus and vested amounts credited under incentive compensation or other benefit plans for a complete calendar year based upon the amounts that were paid or credited during the partial year of employment or partial year of receipt of compensation and any other information deemed appropriate. (iii) A "Termination of Employment" shall take place in the event that (a) the Executive's employment is terminated for any reason other than as a consequence of death, disability or normal retirement, (b) the Executive is assigned any duties or responsibilities that are inconsistent in any respect with his position, duties, responsibilities or status prior to the Change of Control, (c) the Corporation requires the Executive to be based at a location which is more than fifty (50) miles from the Executive's then current primary residence, (d) the Executive's base salary is reduced, or (e) the Executive experiences in any year a reduction in the ratio of his incentive compensation, bonus or other such payments to his base compensation which is greater than the average reduction in the ratio of incentive compensation, bonus or other such payments to base compensation experienced by all of the Corporation's or the successor corporation's executive officers. 1.8 Subsequent Imposition of Excise Tax. If it is ultimately determined by a court or pursuant to a final determination by the Internal Revenue Service that any portion of the payments to the Executive is considered to be an "excess parachute payment," subject to the excise tax under Section 4999 of the Code, which was not contemplated to be an "excess parachute payment" at the time of payment, the Executive shall be entitled to receive a lump sum cash payment sufficient to place the Executive in the same net after-tax position, computed by using the "Special Tax Rate" as such term is defined below, that the Executive would have been in had such payment not been subject to such excise tax, and had the Executive not incurred any interest charges or penalties with respect to the imposition of such excise tax. For purposes of this Agreement, the "Special Tax Rate" shall be the highest effective Federal and state marginal tax rates applicable to the Executive in the year in which the payment contemplated under this Section 1.8 is made. 2. General. 2.1 Indemnification. If litigation shall be brought to enforce or interpret any provision contained herein, the Corporation, to the extent permitted by applicable law and the Corporation's Charter and By-laws, indemnifies the Executive for his reasonable attorneys' fees and disbursements incurred in such litigation. 2.2 Dispute Resolution. Either the Executive or the Corporation may elect to have any good faith dispute or controversy arising under or in connection with this Agreement settled by arbitration, by providing written notice of such election to the other party, specifying the nature of the dispute to be arbitrated. If arbitration is selected, such proceeding shall be conducted before a panel of three (3) arbitrators sitting in a location agreed to by the Corporation and the Executive within fifty (50) miles from the location of the Executive's principal place of employment in accordance with the rules of the American Arbitration Association. Judgment may be entered on the award of the arbitrators in any court having competent jurisdiction. If the Executive prevails in any litigation or arbitration seeking to enforce the provisions of this Agreement, the Executive shall be entitled to reimbursement by the Corporation of all expenses, including reasonable legal fees and expenses, and costs and disbursements incurred as a result of such dispute or legal proceeding. 2.3 Payment of Obligations Absolute. The Corporation's obligation to pay the compensation and to make the arrangements provided in this Agreement shall be absolute and unconditional and shall not be affected by any circumstances, including any offset, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or anyone else. All amounts payable by the Corporation shall be paid without notice or demand. Each and every payment made by the Corporation shall be final and the Corporation will not seek to recover all or any part of such payment. The Executive shall not be obligated to seek other employment in mitigation of the amounts payable or arrangements made under this Agreement, and the obtaining of any other employment shall not result in a reduction of the Corporation's obligations to make the payments, benefits and arrangements required to be made under this Agreement. 2.4 Continuing Obligations. The Executive shall retain in confidence any confidential information known to him concerning the Corporation, its subsidiaries and their respective businesses so long as such information is not publicly disclosed. 2.5 Successors. This Agreement shall be binding upon and inure to the benefit of the Executive and his estate, and the Corporation and any successor of the Corporation, but neither this Agreement nor any rights arising hereunder may be assigned or pledged by the Executive. All references in this Agreement to the Corporation shall include its subsidiaries and affiliates and any successors and assigns of the Corporation. Any successor of the Corporation shall be deemed substituted for all purposes of the "Corporation" under the terms of this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation or business entity which at any time, whether by merger, purchase or otherwise, acquires all or substantially all of the assets or the business of the Corporation. In all cases, the Corporation shall remain jointly and severally liable for all obligations hereunder. 2.6 Severability. Any provisions in this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability, without invalidating or affecting the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 2.7 Controlling Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. 2.8 Modification. This Agreement shall not be varied, altered, modified, canceled, changed or in any way amended except by mutual agreement of the Executive and the Corporation in a written instrument executed by the Executive and the Corporation. 2.9 Tax Withholding. The Corporation may withhold all federal, state, city or other taxes required pursuant to any law or governmental regulation or ruling. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE RYLAND GROUP, INC. EXECUTIVE /s/ R. Chad Dreier /s/ James R. Fratangelo - ---------------------------------- ----------------------------- R. Chad Dreier, President and Chief James R. Fratangelo Executive Officer ATTEST: /s/ Timothy J. Geckle - --------------------------------- Timothy J. Geckle, Secretary EX-10 7 EXHIBIT 10.10 THE RYLAND GROUP, INC. EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION PLAN Effective as of March 1, 1997, and constituting an Amendment and Restatement of the following Plans: 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 RYLAND GROUP, INC. EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION PLAN Effective as of March 1, 1997 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 1 1.6 COMPENSATION DEFERRALS 1 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 2 1.16 PLAN 2 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 ARTICLE 3 --------- CONTRIBUTIONS AND CREDITS ------------------------- 3.1 EMPLOYER CONTRIBUTION CREDITS 3 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 6 4.2 ACCOUNTING FOR DISTRIBUTIONS 6 4.3 SEPARATE ACCOUNTS 7 4.4 INTERIM VALUATIONS 7 4.5 DEEMED INVESTMENT DIRECTIONS OF PARTICIPANTS 7 4.6 EXPENSES 8 4.7 TAXES 8 ARTICLE 5 --------- ENTITLEMENT TO BENEFITS ----------------------- 5.1 FIXED PAYMENT DATES; TERMINATION OF EMPLOYMENT 8 5.2 HARDSHIP DISTRIBUTIONS. 8 5.3 APPLICATION TO TRUSTEE. 9 5.4 RE-EMPLOYMENT OF RECIPIENT, ETC. 9 ARTICLE 6 --------- DISTRIBUTION OF BENEFITS ------------------------ 6.1 AMOUNT 9 6.2 METHOD OF PAYMENT 10 6.3 DEATH BENEFITS 10 ARTICLE 7 --------- BENEFICIARIES; PARTICIPANT DATA ------------------------------- 7.1 DESIGNATION OF BENEFICIARIES 10 7.2 INFORMATION TO BE FURNISHED BY PARTICIPANTS AND BENEFICIARIES; INABILITY TO LOCATE PARTICIPANTS OR BENEFICIARIES 11 ARTICLE 8 --------- ADMINISTRATION -------------- 8.1 ADMINISTRATIVE AUTHORITY 11 8.2 UNIFORMITY OF DISCRETIONARY ACTS 12 8.3 LITIGATION 12 8.4 CLAIMS PROCEDURE 12 ARTICLE 9 --------- AMENDMENT --------- 9.1 RIGHT TO AMEND 14 9.2 AMENDMENTS TO ENSURE PROPER CHARACTERIZATION OF PLAN 14 ARTICLE 10 ---------- TERMINATION ----------- 10.1 EMPLOYER'S RIGHT TO TERMINATE OR SUSPEND PLAN 14 10.2 AUTOMATIC TERMINATION OF PLAN 14 10.3 SUSPENSION OF DEFERRALS 14 10.4 ALLOCATION AND DISTRIBUTION 14 10.5 SUCCESSOR TO EMPLOYER 15 ARTICLE 11 ---------- THE TRUST --------- 11.1 ESTABLISHMENT OF TRUST. 15 ARTICLE 12 ---------- MISCELLANEOUS ------------- 12.1 LIMITATIONS ON LIABILITY OF EMPLOYER 15 12.2 CONSTRUCTION 15 12.3 SPENDTHRIFT PROVISION 16 THE RYLAND GROUP, INC. EXECUTIVE AND DIRECTOR DEFERRED COMPENSATION PLAN Effective as of March 1, 1997 RECITALS -------- This, 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, 1997, for certain of its executive employees and Directors. The Plan constitutes an amendment and restatement of each of the following plans, all of which are merged into this Plan as a single plan in connection herewith: 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"). Accordingly, the following Plan is adopted. 1 - - DEFINITIONS ----------- .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. .2 BENEFICIARY means any person or person so designated in accordance with the provisions of Article 7. .3 CODE means the Internal Revenue Code of 1986 and the regulations thereunder, as amended from time to time. .4 COMPENSATION means the total current cash remuneration (exclusive of the Eligible Individual's personal health and service allowance) paid by the Employer to an Eligible Individual with respect to his or her service for the Employer. .5 COMPENSATION DEFERRAL ACCOUNT is defined in Section 3.2. .6 COMPENSATION DEFERRALS is defined in Section 3.2. .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. .8 EFFECTIVE DATE means the effective date of the Plan, which shall be March 1, 1997. .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. .10 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. .11 EMPLOYER CONTRIBUTION CREDIT ACCOUNT is defined Section 3.1. .12 EMPLOYER CONTRIBUTION CREDITS is defined in Section 3.1. .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. .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. .15 PARTICIPANT ENTROLLMENT 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. .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. .17 PLAN YEAR means the twelve (12) month period ending on the December 31 of each year during which the Plan is in effect. .18 TRUST means the Trust established pursuant to Article 11. .19 TRUSTEE means the trustee of the Trust established pursuant to Article .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. 2 - - ELIGIBILITY AND PARTICIPATION ----------------------------- .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 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. .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 - - CONTRIBUTIONS AND CREDITS ------------------------- .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 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 calendar year shall not exceed six percent (6%) of the Participant's Compensation from the Employer for that year; 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. 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% 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. .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 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. 4 - - ALLOCATION OF FUNDS ------------------- .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. .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. .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. .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. .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. 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. .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. .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. 5 - - ENITLEMENT TO BENEFITS ---------------------- .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 second 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 of Director status with the Employer. .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. "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. 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. 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. 6 - - DISTRIBUTION OF BENEFITS ------------------------ .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. .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. (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. .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. 7 - - BENEFICIARIES; PARTICIPANTS DATA -------------------------------- .1 DESIGNATION OF BENEFICIAREIS. 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. 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 stripes, 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. .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. 8 - - ADMINISTRATION -------------- .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: (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. .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. .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. .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: (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. 9 - - AMENDMENT --------- .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. .2 AMENDMENTS TO ENSURE PROPER CHARATERIZATION 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. 10 - -- TERMINATION ----------- .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. .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. .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. .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. .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. 11 - -- THE TRUST --------- .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. 12 - -- MISCELLANEOUS ------------- .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. .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. .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 the Plan to be executed and its seal to be affixed hereto, effective as of the 1st day of March, 1997. ATTEST/WITNESS THE RYLAND GROUP, INC. /s/ Kelly Elinsky By: /s/ Edward W. Gold - --------------------------- ----------------------- Print: Kelly Elinsky Print Name: Edward W. Gold Date: 3/19/97 EX-11 8 Exhibit 11 Statement RE Computation of Per Share Earnings December 31, December 31, December 31, 1996 1995 1994 ----------- ------------ ------------ Primary: Net earnings (loss) from continuing operations $15,839 $(25,474) $16,417 Discontinued operations 0 22,856 5,974 ------- --------- ------- Net earnings (loss) before cumulative effect of a change in accounting principle 15,839 (2,618) 22,391 Cumulative effect of a change in accounting principle 0 0 2,076 ------- --------- ------- Net earnings (loss) 15,839 (2,618) 24,467 Adjustment for dividends on convertible preferred shares (1,974) (2,193) (2,441) ------- --------- ------- Adjusteed net earnings (loss) $13,865 $(4,811) $22,026 ======== ======== ======== Weighted average common shares outstanding 15,789,184 15,585,254 15,404,994 ========== =========== ========== Common stock equivalents (1): Stock Options 5,387 0 39,313 Employee incentive plans 134,240 0 116,739 ------- --------- ------- Total 15,928,811 15,585,254 15,561,046 ========== -=========== ========== Net earnings (loss) per share from continuing operations $0.87 $(1.78) $0.90 Discontinued operations 0.00 1.47 0.39 ------- --------- ------- Net earnings (loss) per share before cumulative effect of a change in accounting principle 0.87 (0.31) 1.29 Cumulative effect of a change in accounting principle 0.00 0.00 0.13 ------- --------- ------- Net earnings (loss) per share $0.87 $ (0.31) $1.42 ======= ========= ======== Fully-Diluted: Net earnings (loss) from continuing operations $15,839 $ (25,474) $16,417 Discontinued operations 0 22,856 5,974 ------- --------- ------- Net earnings (loss) before cumulative effect of a change in accounting principle 15,839 (2,618) 22,391 Cumulative effect of a change in accounting principle 0 0 2,076 ------- --------- ------- Net earnings (loss) 15,839 (2,618) 24,467 Adjustment for dividends on convertible preferred shares (2) (1,974) (2,193) 0 Adjustment for incremental dividends on convertible preferred shares 0 0 (1,076) ------- --------- ------- Adjusted net earnings (loss) $13,865 $(4,811) $23,391 ======== ======== ======== Weighted average common shares outstanding 15,789,184 15,585,254 15,404,994 Common stock equivalents (1): Stock options 5,387 0 39,313 Compensation unit plan 134,240 0 116,739 Convertible preferred stock 0 0 1,114,757 ------- --------- --------- Total 15,928,811 15,585,254 16,675,803 ========== -=========== ========== Net earnings (loss) per share from continuing operations $0.87 $(1.78) $ 0.92 Discontinued operations 0.00 1.47 0.36 ------- --------- ------- Net earnings (loss) per share before cumulative effect of a change in accounting principle 0.87 (0.31) 1.28 Cumulative effect of a change in accounting principle 0.00 0.00 0.12 ------- --------- ------- Net earnings (loss) per share $0.87 $ (0.31) $ 1.40 ========== ========== ========== (1) For 1995 average shares outstanding have not been increased by the common stock equivalents relating to the employee stock option and employee incentive plans as the effect would be anti-dilutive. (2) For 1996 and 1995 the net earnings (loss) was adjusted for dividends on convertible preferred shares as the adjustment for incremental dividends on convertible preferred shares would be anti-dilutive. EX-13 9 The Ryland Group, Inc. and Subsidiaries SELECTED FINANCIAL DATA (dollar amounts in millions, except unit and per share data) unaudited - ------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------ Annual Results: Revenues Homebuilding $1,473 $1,458 $1,443 $1,204 $1,077 Financial services and limited-purpose subsidiaries 107 127 176 247 347 ----------------------------------------- Total 1,580 1,585 1,619 1,451 1,424 Cost of sales - homebuilding 1,277 1,280 1,262 1,059 940 Selling, general and administrative expenses 203 211 225 201 200 Interest expense 74 91 105 162 249 Impairment of inventories and joint venture investments (1) 0 45 0 45 0 ----------------------------------------- Earnings (loss) from continuing operations before taxes 26 (42) 27 (16) 35 Tax expense (benefit) 10 (17) 11 (6) 12 ----------------------------------------- Net earnings (loss) from continuing operations 16 (25) 16 (10) 23 Discontinued operations, net of taxes (2) Earnings from discontinued operations 0 3 6 7 5 Gain on sale of discontinued operations 0 19 0 0 0 ----------------------------------------- Net earnings (loss) before cumulative effect of accounting change 16 (3) 22 (3) 28 Cumulative effect of accounting change, net of taxes (3) 0 0 2 0 0 ----------------------------------------- Net earnings (loss) $ 16 $ (3) $ 24 $ (3) $ 28 ----------------------------------------- Year-End Position: Assets Housing inventories $ 575 $ 538 $ 600 $ 492 $ 485 Mortgage loans held for sale 180 285 215 536 393 Mortgage-backed securities and notes receivable 144 113 171 192 241 Collateral for bonds payable of limited-purpose subsidiaries 214 375 459 798 1,560 Other assets 226 270 259 298 218 ----------------------------------------- Total assets $1,339 $1,581 $1,704 $2,316 $2,897 ----------------------------------------- Liabilities Long-term debt $ 354 $ 397 $ 409 $ 381 $ 318 Short-term notes payable 326 367 378 717 588 Bonds payable of limited -purpose subsidiaries 207 365 447 778 1,533 Other liabilities 142 151 158 147 152 ----------------------------------------- Total liabilities $1,029 $1,280 $1,392 $2,023 $2,591 ----------------------------------------- Stockholders' equity $ 310 $ 301 $ 312 $ 293 $ 306 ----------------------------------------- Per Common Share Data: Primary net earnings (loss) from continuing operations $ 0.87 $(1.78) $ 0.90 $(0.79) $ 1.36 Primary net earnings (loss) before cumulative effect of accounting change $ 0.87 $(0.31) $ 1.29 $(0.34) $ 1.66 Primary net earnings (loss) $ 0.87 $(0.31) $ 1.42 $(0.34) $ 1.66 Dividends declared $ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.60 Stockholders' equity $19.00 $18.69 $19.56 $18.61 $19.43 ----------------------------------------- (1) 1995 and 1993 reflect $45 million pretax charges 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. (3) The Company adopted Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt and Equity Securities," in 1994. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THE COMPANY Operations of The Ryland Group, Inc. and 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 24 divisions in 20 states throughout the United States. The financial services segment provides various mortgage-related products and services for retail customers and conducts investment activities. RESULTS OF OPERATIONS CONSOLIDATED The Company reported consolidated net earnings of $15.8 million, or $.87 per share, for 1996, compared with a consolidated net loss of $2.6 million, or $.31 per share, for 1995, and consolidated net earnings of $24.5 million, or $1.42 per share, for 1994. From continuing operations, the Company's 1996 net earnings of $15.8 million, or $.87 per share, compare with a 1995 net loss of $25.5 million, or $1.78 per share, and 1994 net earnings of $16.4 million, or $.90 per share. The Company's results for 1995 include an after-tax impairment charge of $27 million (pretax $45 million), primarily related to the Company's adoption of Statement of Financial Accounting Standards No. 121 (FASB 121) "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", that resulted in a reduction in the carrying value of certain inventories and joint venture investments to fair value. The 1994 results include $2.1 million, or $.13 per share, for the cumulative impact of an accounting change to adopt Statement of Financial Accounting Standards No. 115 (FASB 115), "Accounting for Certain Investments in Debt and Equity Securities." The Company's 1995 results also include a net after-tax gain of $19.5 million related to the second-quarter sale of the Company's institutional mortgage securities administration business. The sale of this business was consistent with the Company's long-term strategy to focus on its core homebuilding and retail mortgage-finance operations and to invest additional capital into its homebuilding operations. The homebuilding segment recorded pretax earnings of $22.6 million for 1996, compared with a pretax loss of $47.5 million for 1995 and pretax earnings of $10.9 million for 1994. Homebuilding results in 1996 increased from 1995, excluding the $45 million pretax impairment charge, primarily due to improved gross profit margins combined with lower selling, general and administrative expenses. Homebuilding results in 1995, excluding the impairment charge, declined from 1994 primarily due to lower closing volume and gross profit margins. The financial services segment reported pretax earnings of $15.8 million for 1996, compared with $17.9 million for 1995 and $33.5 million for 1994. The decline from 1995 was primarily attributable to a decrease in investment earnings due to lower gains from sales of mortgage-backed securities. Retail earnings for 1996 were comparable to 1995. The decline in 1995 from 1994 was primarily attributable to lower gains from sales of mortgages and mortgage servicing rights and a lower level of investment earnings. Corporate expenses represent the costs of corporate functions, which support the business segments. Corporate expenses totaling $12.0 million for 1996 were down $.9 million from 1995 primarily due to the Company's efforts to reduce operating expenses. Corporate expenses in 1995 were down $4.3 million from 1994 primarily as a result of staff reductions which occurred in the latter part of 1994 and lower payouts under the Company's performance-based incentive plans. 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 of the limited-purpose subsidiaries consist of interest on mortgage collateral subject to bond indebtedness. Expenses consist primarily of interest on the outstanding bonds and amortization of deferred costs. Revenues, expenses and portfolio balances continue to decline as the 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): 1996 1995 1994 ---- ---- ---- Revenues $ 1,473,275 $1,458,174 $ 1,443,212 Gross profit 196,398 178,428 181,391 Selling, general and administrative expenses 146,285 151,087 142,254 Interest expense 27,517 29,807 28,209 Impairment of inventories and joint venture investments 0 45,000 0 ---- ---- ---- Homebuilding pretax earnings (loss) $ 22,596 $ (47,466) $ 10,928 ======== ======== ======== Average closing price $ 174,000 $ 164,000 $ 160,000 ======== ======== ======== The Company's homebuilding segment reported pretax earnings of $22.6 million in 1996, compared with a pretax loss of $47.5 million in 1995 and pretax earnings of $10.9 million in 1994. The improvement in 1996, compared with 1995, excluding the $45 million pretax impairment charge, was primarily attributable to improved gross profit margins as well as lower selling, general and administrative expenses. The 1995 pretax impairment charge of $45 million was primarily related to the Company's adoption of FASB 121 and its effect on the valuation of homebuilding inventories and investments in joint ventures. Of the total impairment charge, $31 million related to California inventories and $14 million related to assets to be disposed of. In the fourth quarter of 1995, in response to competitive market pressures in California, the Company determined that some product repositioning, increased homebuyer incentives and reduced selling prices were necessary in certain of its California subdivisions. The land inventory in most of these subdivisions was acquired in 1988 and 1989 and had a cost basis substantially in excess of current market values. Accordingly, the Company determined that certain subdivision inventories were impaired. Under FASB 121, a writedown of $31 million was required to state the impaired inventories at their fair value. In addition, the Company decided to dispose of certain joint venture investments in the Mid-Atlantic and certain subdivision inventories in other geographic areas because the Company believed that it could achieve higher returns on alternative uses of its capital. As a result, the Company recorded a reserve of $14 million in the fourth quarter of 1995 to reduce the carrying value of these assets to their fair value less cost to sell. Excluding the pretax impairment charge of $45 million, the Company's homebuilding segment reported a pretax loss of $2.5 million for 1995, compared with pretax earnings of $10.9 million for 1994. The decline in 1995 earnings was due to lower closing volume and lower gross profit margins. Homebuilding revenues increased 1.0 percent in 1996, compared with 1995, primarily due to a $10,000 increase in average closing price and increased revenues from land sales. The increase in average closing price was partially offset by a 6.3 percent decline in closings reflecting a reduction in new orders resulting from increased competitive pressures in certain markets and the Company's reduced inventory investment in the Mid-Atlantic region. Homebuilding revenues increased 1.0 percent in 1995, compared with 1994, due to a $4,000 increase in average closing price, which was partially offset by a .9 percent decline in closings. Closing volume was down in 1995, primarily due to slower sales early in the year, particularly in the Mid-Atlantic region. Gross profit margins increased to 13.3 percent for 1996, an increase of 1.1 percentage points from 1995, excluding the impairment charge. Increased closings from higher-margin new communities and $4.0 million in gains from land sales contributed to the 1996 margin improvement. Gross profit margins of 12.2 percent for 1995, excluding the impairment charge, were down from 12.6 percent for 1994. The Company's focus on reducing unsold homes under construction and actions taken in the Mid-Atlantic region to close out older communities with high-cost land positions, negatively impacted gross profit margins during 1995. The Company's gross profit margins during 1995 and 1994 were negatively impacted by the build out of older inventories in California that were affected by a decline in economic and market conditions. The impairment charge taken in 1995 adjusted the basis of the affected California inventories to fair value. Selling, general and administrative expenses as a percent of revenues were 9.9 percent for 1996, 10.4 percent for 1995 and 9.9 percent for 1994. The 1996 decline is primarily reflective of the Company's ongoing efforts to control costs as both general and administrative costs and selling costs declined from 1995. Included in selling, general and administrative expenses for 1995 were $2.2 million of reorganization costs associated with the Company's initiatives to restructure certain divisions within its Mid-Atlantic and Southwest operations. In addition to the impact of the reorganization costs, selling, general and administrative expenses increased in 1995 due to expenses associated with expansion into new markets and higher costs associated with the Company's new marketing and merchandising programs initiated in 1994. Interest expense decreased in 1996 due to a lower average cost of funds. Interest expense increased in 1995 due to an increase in the average homebuilding debt outstanding required to fund higher average inventories and an increase in the average cost of funds. The increase in interest expense in 1995 was mitigated by an increase in the amount of interest capitalized due to an increase in land under development. HOMEBUILDING OPERATIONAL DATA 1996 1995 ---- ---- New Orders % Closings % New Orders Closings (Units) Change (Units) Change (Units) (Units) ---------- ------ -------- ------ ---------- -------- Mid-Atlantic 1,194 (41) 1,470 (38) 2,011 2,385 Midwest 1,345 3 1,370 23 1,307 1,112 Southeast 1,450 4 1,401 11 1,399 1,260 Southwest 1,578 (18) 1,806 1 1,923 1,794 West 2,272 ( 9) 2,341 (2) 2,501 2,399 ---- ---- ---- ---- ---- ------- Total 7,839 (14) 8,388 (6) 9,141 8,950 Outstanding Contracts Outstanding Contracts December 31, 1996 December 31, 1995 --------------------- --------------------- Dollars Dollars % in Average in Average Units Change Millions Price Units Millions Price ----- ----- ------ -------- ------ ---------- -------- Mid-Atlantic 370 (43) $74 $ 200,232 646 $125 $193,912 Midwest 469 (5) 77 165,439 494 79 159,917 Southeast 498 11 87 174,904 449 74 164,209 Southwest 334 (41) 52 154,605 562 92 163,308 West 524 (12) 115 219,237 593 107 181,425 ----- ----- ----- --------- --- ----- -------- Total 2,195 (20) $405 $ 184,646 2,744 $477 $173,965 New orders in 1996 declined 14 percent compared with 1995 due to decreases in the Mid-Atlantic, Southwest and West regions, which resulted from increased competitive pressures combined with the Company's emphasis on margin improvement rather than volume growth. The significant decline in the Mid- Atlantic region was also due in large part to the Company's reduced investment in favor of other markets showing stronger growth characteristics. The growth for the year in the Midwest region was primarily attributable to the Company's new markets in Chicago and Minneapolis, while growth in the new Tampa market increased new orders for the Southeast region. As of December 31, 1996, the Company had outstanding contracts for 2,195 units, down 20 percent from year-end 1995 due to a decline in new orders. Outstanding contracts represent the Company's backlog of sold but not closed homes, which generally are built and closed, subject to cancellation, over the next two quarters. The $405 million value of outstanding contracts decreased 15 percent from year-end 1995. The decrease in outstanding contracts as of the end of the year could result in a decline in homebuilding revenues and closings for the first half of 1997. FINANCIAL SERVICES SEGMENT The Company's financial services segment reported pretax earnings of $15.8 million in 1996, compared with $17.9 million in 1995 and $33.5 million in 1994. Pretax earnings by line of business were as follows (amounts in thousands): 1996 1995 1994 ---- ---- ---- Retail $ 9,539 $ 9,672 $ 21,484 Investments 6,308 8,198 12,042 -------- -------- -------- Total $ 15,847 $ 17,870 $ 33,526 ======== ======== ======== The decline in pretax earnings in 1996 was primarily due to a decrease in investment earnings as the result of lower gains from the sale of mortgage- backed securities. Lower retail originations and revenues in 1996 were substantially offset by reduced general and administrative expenses and a higher net interest spread. During 1996, the Company sold its wholesale mortgage origination business based on expectations that the business would not contribute significantly to the Company's future earnings. The disposition of this business reduced mortgage originations and revenues of the financial services segment in 1996 but did not have a material effect on the Company's earnings for the year. The decline in pretax earnings in 1995 compared with 1994 was primarily related to lower gains from sales of mortgages and mortgage servicing rights and a lower level of investment earnings. Revenues and expenses for the financial services segment were as follows (amounts in thousands): 1996 1995 1994 ----- ----- ----- Retail revenues: Interest and net origination fees $ 13,210 $ 16,727 $19,468 Gains on sales of mortgages and servicing rights 15,543 17,362 37,191 Loan servicing 29,684 32,650 37,578 Title/escrow 5,733 5,246 4,597 Total retail revenues 64,170 71,985 98,834 ------ ------ ------ Revenues from investment operations 15,354 17,626 24,797 ------ ------ ------ Total revenues 79,524 89,611 123,631 Expenses: General and administrative 44,723 47,991 63,411 Interest 18,954 23,750 26,694 ------ ------ ------ Total expenses 63,677 71,741 90,105 ------ ------ ------ Pretax earnings $ 15,847 $ 17,870 $33,526 ======== ======== ======== Revenues for the financial services segment decreased in 1996 primarily due to reduced mortgage originations, which declined by 27.2 percent due principally to the sale of the wholesale mortgage origination business in May 1996. Revenues decreased 27.5 percent in 1995 compared with 1994 primarily as a result of lower gains from sales of mortgages and mortgage servicing rights and lower revenues from investment operations due to a decline in the investment portfolio. The decrease in loan servicing revenue in 1996 is a result of lower revenue per loan primarily due to changes in the portfolio product mix. Loan servicing revenue declined in 1995 due to reductions in the Company's loan servicing portfolio. Declines in interest expense for 1996, 1995 and 1994 were directly related to the level of borrowings required to fund mortgage loan originations and investment portfolio balances in those periods. General and administrative expenses for the financial services segment declined 6.8 percent in 1996 due to the disposition of the Company's wholesale mortgage origination business combined with the Company's cost reduction efforts. General and administrative expenses for the financial services segment declined 24.3 percent in 1995 as a result of cost reduction measures in retail operations initiated in the latter part of 1994. Retail Operations Retail operations include mortgage origination, loan servicing and title/escrow services for retail customers. A summary of mortgage origination activities is as follows: 1996 1995 1994 ---- ---- ---- Dollar volume of mortgages originated (in millions) $ 1,466 $ 1,952 $ 2,055 Number of mortgages originated 11,161 15,330 16,740 Percentage Ryland home settlements 47% 35% 28% Other settlements 53% 65% 72% ---- ---- ----- Total settlements 100% 100% 100% ---- ---- ---- Mortgage originations decreased by 27.2 percent from 1995 due to the sale of the wholesale mortgage origination business. Excluding wholesale originations, originations for 1996 decreased by 2.0 percent compared with 1995, primarily due to the lower volume of closings from the Company's homebuilding segment. Mortgage origination volume in 1995 was down 8.4 percent compared with 1994 as declines early in 1995 were offset by increases later in the year when the interest rate environment was more favorable. The Company earns interest on mortgages held for sale and pays interest on borrowings secured by the mortgages. Significant data related to these activities are as follows: 1996 1995 1994 ---- ---- ---- Net interest earned (in thousands) $ 6,458 $ 5,766 $ 9,598 Average balance of mortgages held for sale (in millions) $ 168 $ 211 $ 293 Net interest spread 3.8% 2.7% 3.3% Net interest earned increased in 1996 due to a higher net interest spread resulting from lower average borrowing costs. Net interest earned decreased in 1995 due to a lower average balance of mortgages held for sale combined with a lower net interest spread. The Company services loans that it originates, as well as loans originated by others. Loan servicing portfolio balances were as follows at December 31 (amounts in billions): 1996 1995 1994 ---- ---- ---- Originated $ 2.1 $ 2.4 $ 2.8 Acquired 3.0 3.5 4.0 Subserviced 1.2 .3 .1 ----- ----- ----- Total serviced $ 6.3 $ 6.2 $ 6.9 ===== ===== ===== The increase in the portfolio balance is attributable to an increase in loans subserviced for others. The decreases in the originated and acquired portfolio balances in 1996 and 1995 are primarily attributable to normal mortgage prepayment activity. Investment Operations The assets of the Company's investment operations primarily consist of 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. Revenues and expenses were as follows (amounts in thousands): 1996 1995 1994 ---- ---- ---- Sale of mortgage-backed securities $ 1,138 $ 4,839 $ 2,349 Interest and other income 14,216 12,787 22,448 ------ ------ ------ Total revenues 15,354 17,626 24,797 Interest and other expenses 9,046 9,428 12,755 ------ ------ ------ Pretax earnings $ 6,308 $ 8,198 $ 12,042 ------ ------ ------ Interest and other income includes $1.3 million for 1996 related to the redemption of certain securities. Pretax earnings for 1996 were lower than 1995 due to a decrease in the gains from the sale of mortgage-backed securities. Pretax earnings for 1995 decreased compared with 1994 due to decreases in the net interest earned on mortgage-backed securities and notes receivable. Partially offsetting the lower net interest earned in 1995 were higher gains from sales of mortgage-backed securities. Significant data from investment operations are as follows: 1996 1995 1994 ---- ---- ---- Net interest earned (in thousands) $ 4,744 $ 4,433 $12,989 Average balance outstanding (in millions) $ 123 $ 122 $ 205 Net interest spread 3.8% 3.6% 6.3% The Company earns a net interest spread on the investment portfolio, which represents the difference between the interest rates on the mortgage-backed securities and notes receivable and the related borrowing rates. A small increase in the average investment portfolio balance outstanding combined with a higher net interest spread resulted in an increase in net interest earned for 1996. The 1995 decrease in net interest earned was primarily due to a decline in the average balance outstanding combined with a lower net interest spread resulting from an increase in borrowing rates. DISCONTINUED INSTITUTIONAL OPERATIONS In the second quarter of 1995, the Company sold its institutional mortgage securities administration business which included master servicing, securities administration, investor information services, and tax calculation and reporting. The prior period results for this business (formerly reported as institutional financial services), as well as the $19.5 million net after-tax gain on the sale of the business, have been reported as discontinued operations in the accompanying consolidated statements of earnings. Revenues from operations of the discontinued business were $11.4 million and $23.6 million for 1995 and 1994, respectively. Net after-tax earnings from operations of the discontinued business were $3.3 million for 1995 and $6.0 million for 1994. FINANCIAL CONDITION AND LIQUIDITY The Company generally provides for the cash requirements of the homebuilding and financial services businesses from outside borrowings and internally generated funds. The Company believes that its current sources of cash are sufficient to finance its requirements. The homebuilding segment has provided for a significant portion of its external financing requirements through the issuance of senior and senior subordinated notes, which totaled $318 million as of December 31, 1996. Of this amount, only $18 million matures in the next five years. During 1996, the Company completed the issuance of $100 million of 10.5% senior notes due 2006. The Company used the net proceeds of the offering to repay amounts outstanding under its revolving credit facility and certain senior notes. Senior notes amounting to $35 million matured and were paid off in 1996, and $10 million in senior notes matured and were paid off in January 1997. The homebuilding segment also meets its borrowing needs through utilization of an unsecured revolving credit facility which is primarily used to finance increases in its homebuilding inventory. As of January 1997, this facility provides for total borrowings of up to $300 million. As of December 31, 1996, the outstanding borrowings under this facility totaled $34.0 million, compared with $137.0 million as of December 31, 1995. In addition, the Company had letters of credit outstanding under this facility totaling $18.3 million and $22.2 million at December 31, 1996 and 1995, respectively. To finance land purchases, the Company also has additional letter of credit facilities totaling $25 million and may also use seller-financed, non-recourse secured notes. At December 31, 1996 and 1995, amounts outstanding under these letter of credit facilities totaled $17.6 million and $9.3 million, respectively, and non-recourse secured notes outstanding amounted to $1.5 million and $4.5 million, respectively. Total homebuilding debt outstanding was reduced by $42.3 million during 1996 to $354.3 million as of December 31, 1996. Housing inventories increased to $574.6 million as of December 31, 1996, from $537.9 million as of the end of 1995. The increase is primarily due to a higher investment in land under development and improved lots which reflects in part the Company's entry into new markets. The financial services segment uses cash generated from operations and borrowing arrangements to finance its operations. In June 1996, the Company extended the maturity of its bank facility to May 1998. The bank facility provides up to $325 million for mortgage warehouse funding and $40 million for working capital advances. Other borrowing arrangements as of year-end 1996 included repurchase agreement facilities aggregating $625 million, a $100 million revolving credit facility used to finance investment portfolio securities and a $35 million credit facility to be used for the short-term financing of optional bond redemptions. At December 31, 1996 and 1995, the combined borrowings under these agreements were $325.7 million and $367.5 million, respectively. Mortgage loans, notes receivable and mortgage-backed securities held by the limited-purpose subsidiaries are pledged as collateral for the issued bonds, the terms of which provide for the retirement of all bonds from the proceeds of the collateral. The source of cash for the bond payments is cash received from the mortgage loans, notes receivable and mortgage-backed securities. The Ryland Group, Inc. has not guaranteed the debt of the financial services segment or the limited-purpose subsidiaries. Note: Certain statements in this Annual Report may be "forward-looking statements" within the meaning of the Private Securities Litigation Act of 1995. Such statements involve known and unknown risks, uncertainties and other factors, including, changes in economic conditions and interest rates, increases in raw material and labor costs, and general competitive factors that may cause actual results to differ materially. The Ryland Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS (amounts in thousands, except share data) - ------------------------------------------------------------------------------ Year ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------ Revenues: Homebuilding: Residential revenue $ 1,456,634 $ 1,456,767 $ 1,439,292 Other revenue 16,641 1,407 3,920 ---------------------------------------- Total homebuilding revenue 1,473,275 1,458,174 1,443,212 Financial services 79,524 89,611 123,631 Limited-purpose subsidiaries 27,387 37,267 52,293 ---------------------------------------- Total revenues 1,580,186 1,585,052 1,619,136 ---------------------------------------- Expenses: Homebuilding: Cost of sales 1,276,877 1,279,746 1,261,821 Selling, general and administrative 146,285 151,087 142,254 Interest 27,517 29,807 28,209 Impairment of inventories and joint venture investments 0 45,000 0 ---------------------------------------- Total homebuilding expenses 1,450,679 1,505,640 1,432,284 Financial services: General and administrative 44,723 47,991 63,411 Interest 18,954 23,750 26,694 ---------------------------------------- Total financial services expenses 63,677 71,741 90,105 Limited-purpose subsidiaries expenses 27,387 37,215 52,197 Corporate expenses 12,046 12,913 17,187 ---------------------------------------- Total expenses 1,553,789 1,627,509 1,591,773 ---------------------------------------- Earnings (loss) from continuing operations before taxes 26,397 (42,457) 27,363 Tax expense (benefit) 10,558 (16,983) 10,946 ---------------------------------------- Net earnings (loss) from continuing operations 15,839 (25,474) 16,417 Discontinued operations: Earnings from discontinued operations (net of taxes in 1995 - $2,212, 1994 - $3,982) 0 3,318 5,974 Gain on sale of discontinued operations (net of taxes - $13,025) 0 19,538 0 ---------------------------------------- Net earnings (loss) before cumulative effect of a change in accounting principle 15,839 (2,618) 22,391 Cumulative effect of a change in accounting principle (net of taxes - $1,384) 0 0 2,076 ---------------------------------------- Net earnings (loss) $ 15,839 $ (2,618) $ 24,467 ---------------------------------------- Preferred dividends $ 1,974 $ 2,193 $ 2,441 Net earnings (loss) applicable to common stockholders $ 13,865 $ (4,811) $ 22,026 Net earnings (loss) per common share: Primary: Net earnings (loss) from continuing operations $ 0.87 $ (1.78) $ 0.90 Discontinued operations 0.00 1.47 0.39 ---------------------------------------- Net earnings (loss) before cumulative effect of a change in accounting principle 0.87 (0.31) 1.29 Cumulative effect of a change in accounting principle 0.00 0.00 0.13 ---------------------------------------- Net earnings (loss) per common share $ 0.87 $ (0.31) $ 1.42 Fully Diluted: Net earnings (loss) from continuing operations $ 0.87 $ (1.78) $ 0.92 Discontinued operations 0.00 1.47 0.36 ---------------------------------------- Net earnings (loss) before cumulative effect of a change in accounting principle 0.87 (0.31) 1.28 Cumulative effect of a change in accounting principle 0.00 0.00 0.12 ---------------------------------------- Net earnings (loss) per common share $ 0.87 $ (0.31) $ 1.40 Average common shares outstanding: Primary 15,929,000 15,585,000 15,561,000 Fully diluted 15,929,000 15,585,000 16,676,000 - ------------------------------------------------------------------------------ See notes to consolidated financial statements. The Ryland Group, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (amounts in thousands) - ---------------------------------------------------------------------- DECEMBER 31, 1996 1995 - ---------------------------------------------------------------------- ASSETS HOMEBUILDING: Cash and cash equivalents $ 27,852 $ 54,518 Housing inventories: Homes under construction 336,782 332,272 Land under development and improved lots 237,808 205,646 --------------------------------- Total inventories 574,590 537,918 Property, plant and equipment 31,560 34,662 Purchase price in excess of net assets acquired 20,543 21,575 Other assets 40,739 47,903 --------------------------------- 695,284 696,576 --------------------------------- FINANCIAL SERVICES: Cash and cash equivalents 856 1,474 Mortgage loans held for sale 180,149 285,001 Mortgage-backed securities and notes receivable 143,508 112,544 Mortgage servicing rights 9,903 7,814 Other assets 48,015 42,586 --------------------------------- 382,431 449,419 --------------------------------- OTHER ASSETS: Collateral for bonds payable of limited-purpose subsidiaries 214,443 375,146 Net deferred taxes 31,806 41,259 Other 14,560 18,389 ----------------------------------- TOTAL ASSETS $ 1,338,524 $ 1,580,789 =================================== See notes to consolidated financial statements. The Ryland Group, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (amounts in thousands, except share data) - ----------------------------------------------------------------------- DECEMBER 31, 1996 1995 - ----------------------------------------------------------------------- LIABILITIES HOMEBUILDING: Accounts payable and other liabilities $ 84,651 $ 78,853 Long-term debt 354,267 396,607 --------------------------------- 438,918 475,460 --------------------------------- FINANCIAL SERVICES: Accounts payable and other liabilities 18,754 27,219 Short-term notes payable 325,650 367,469 --------------------------------- 344,404 394,688 --------------------------------- OTHER LIABILITIES: Bonds payable of limited- purpose subsidiaries 206,891 364,672 Other 37,862 44,845 -------------------------------- TOTAL LIABILITIES 1,028,075 1,279,665 ================================= STOCKHOLDERS' EQUITY Convertible preferred stock, $1 par value: Authorized-1,400,000 shares Issued-861,741 shares (943,097 for 1995) 862 943 Common stock, $1 par value Authorized-78,600,000 shares Issued-15,852,729 shares (15,681,891 for 1995) 15,853 15,682 Paid-in capital 116,652 115,611 Retained earnings 184,678 179,937 Net unrealized gain on mortgage-backed securities 2,758 2,550 Due from RSOP Trust (10,354) (13,599) ------------------------------- TOTAL STOCKHOLDERS' EQUITY 310,449 301,124 ================================ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,338,524 $ 1,580,789 ================================ See notes to consolidated financial statements. The Ryland Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (amounts in thousands, except share data) - --------------------------------------------------------------------------- Preferred Common Paid-In Retained Stock Stock Capital Earnings - --------------------------------------------------------------------------- Balance at January 1, 1994 $ 1,154 $15,343 $116,386 $180,351 Adjustment to beginning balance for change in accounting principle, net of taxes of $5,063 Net earnings 24,467 Preferred stock dividends (per share $2.21) (2,441) Common stock dividends (per share $0.60) (9,262) Conversion of preferred stock (81) 81 (814) Reclassification of preferred paid-in capital and proportionate amount of RSOP receivable (470) RSOP debt repayments Change in net unrealized gain on mortgage-backed securities, net of taxes of $3,888 Employee stock plans (51,869 shares) 51 761 520 --------------------------------------------------- Balance at December 31, 1994 1,073 15,475 115,863 193,635 --------------------------------------------------- Net loss (2,618) Preferred stock dividends (per share $2.21) (2,193) Common stock dividends (per share $0.60) (9,358) Conversion of preferred stock (130) 130 (1,387) Reclassification of preferred paid-in capital and proportionate amount of RSOP receivable 151 RSOP debt repayments Change in net unrealized gain on mortgage -backed securities, net of taxes of $525 Employee stock plans (77,181 shares) 77 984 471 ---------------------------------------------- Balance at December 31, 1995 943 15,682 115,611 179,937 --------------------------------------------- Net earnings 15,839 Preferred stock dividends (per share $2.21) (1,974) Common stock dividends (per share $0.60) (9,475) Conversion of preferred stock (81) 81 (961) Reclassification of preferred paid-in capital and proportionate amount of RSOP receivable 828 RSOP debt repayments Change in net unrealized gain on mortgage -backed securities, net of taxes of $139 Employee stock plans (89,482 shares) 90 1,174 351 -------------------------------------------- Balance at December 31, 1996 $ 862 $15,853 $116,652 $184,678 ============================================== See notes to consolidated financial statements. The Ryland Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (amounts in thousands, except share data) - ------------------------------------------------------------------------------ Net Unrealized Total Gain on Mortgag- Due from Stockholders' Backed Securities RSOP Trust Equity - ---------------------------------------------------------------------------- Balance at January 1, 1994 $ 0 $(19,987) $293,247 Adjustment to beginning balance for change in accounting principle, net of taxes of $5,063 7,594 7,594 Net earnings 24,467 Preferred stock dividends (per share $2.21) (2,441) Common stock dividends (per share $0.60) (9,262) Conversion of preferred stock (814) Reclassification of preferred paid-in capital and proportionate amount of RSOP receivable (584) (1,054) RSOP debt repayments 4,884 4,884 Change in net unrealized gain on mortgage-backed securities, net of taxes of $3,888 (5,831) (5,831) Employee stock plans (51,869 shares) 1,332 --------------------------------------------------- Balance at December 31, 1994 1,763 (15,687) 312,122 --------------------------------------------------- Net loss (2,618) Preferred stock dividends (per share $2.21) (2,193) Common stock dividends (per share $0.60) (9,358) Conversion of preferred stock (1,387) Reclassification of preferred paid-in capital and proportionate amount of RSOP receivable 251 402 RSOP debt repayments 1,837 1,837 Change in net unrealized gain on mortgage -backed securities, net of taxes of $525 787 787 Employee stock plans (77,181 shares) 1,532 ---------------------------------------------- Balance at December 31, 1995 2,550 (13,599) 301,124 --------------------------------------------- Net earnings 15,839 Preferred stock dividends (per share $2.21) (1,974) Common stock dividends (per share $0.60) (9,475) Conversion of preferred stock (961) Reclassification of preferred paid-in capital and proportionate amount of RSOP receivable (1,759) (931) RSOP debt repayments 5,004 5,004 Change in net unrealized gain on mortgage -backed securities, net of taxes of $139 208 208 Employee stock plans (89,482 shares) 1,615 -------------------------------------------- Balance at December 31, 1996 $ 2,758 $(10,354) $310,449 ============================================== See notes to consolidated financial statements. The Ryland Group, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) - ----------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 1994 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 15,839 $ (2,618) $ 24,467 Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 31,373 34,512 25,640 Cumulative effect of a change in accounting principle 0 0 (3,460) Gain on sale of mortgage- backed securities-available- for-sale (1,138) (4,772) (2,349) Gain on sale of discontinued operations 0 (32,563) 0 Increase (decrease) in inventories (36,672) 62,195 (105,267) Net change in other assets, payables and other liabilities (3,311) (16,953) 6,387 Equity in (earnings) loss of/distributions from unconsolidated joint ventures 1,080 8,973 11,319 Decrease (increase) in mortgage loans held for sale 104,852 (70,229) 320,907 ------------------------------------- Net cash provided by (used for) operating activities 112,023 (21,455) 277,644 -------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net additions to property, plant and equipment (19,500) (30,152) (19,019) Proceeds from sale of discontinued operations 0 47,000 0 Principal reduction of mortgage collateral 64,230 56,257 152,805 Principal reduction of mortgage-backed securities----available- for-sale 20,362 5,264 52,161 Purchases of mortgage-backed securities----available- for-sale (8,572) 0 0 Sales of mortgage-backed securities----available- for-sale 21,937 68,539 33,066 Principal reduction of mortgage-backed securities----held-to- maturity 19,818 13,612 68,247 Decrease in funds held by trustee 17,133 5,718 79,530 Other investing activities, net (2,884) (470) 1,200 -------------------------------------- Net cash provided by investing activities 112,524 165,768 367,990 -------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash proceeds of long-term debt 103,145 14,747 55,074 Reduction of long-term debt (145,485) (26,884) (27,370) Decrease in short-term notes payable (41,819) (10,160) (339,304) Bond principal payments (159,665) (83,279) (348,047) Common and preferred stock dividends (11,449) (11,551) (11,703) Other financing activities, net 3,442 1,980 6,052 --------------------------------------- Net cash used for financing activities (251,831) (115,147) (665,298) -------------------------------------- Net (decrease) increase in cash and cash equivalents (27,284) 29,166 (19,664) Cash and cash equivalents at beginning of year 55,992 26,826 46,490 ------------------------------------- CASH AND CASH EQUIVALENTS AT AT END OF YEAR $ 28,708 $ 55,992 $ 26,826 ------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest (net of capitalized interest) $ 77,612 $ 86,650 $ 105,639 Cash (received) paid for income taxes (net of refunds for 1996 and 1995) $ ( 3,230) $ 17,026 $ 26,555 See notes to consolidated financial statements. The Ryland Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share data, in all notes unless otherwise noted) NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - --------------------------------------------------- Organization The Ryland Group, Inc. is a leading national homebuilder and mortgage-related financial services firm. The Company builds homes in 24 divisions in 20 states and is one of the largest single-family on-site homebuilders in the United States. 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, loan servicing and title and escrow services, and also conducts investment activities. Basis of Presentation The consolidated financial statements include the accounts of The Ryland Group, Inc. 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 1996 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 reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Per Share Data Primary net earnings (loss) per common share is computed by dividing net earnings (loss), after considering preferred stock dividend requirements, by the weighted average number of common shares outstanding considering dilutive common equivalent shares. Common equivalent shares relating to stock options are computed using the treasury stock method. Common equivalent shares were not dilutive for the year ended December 31, 1995. Fully diluted net earnings (loss) per common share additionally gives effect to the assumed conversion of the preferred shares held by The Ryland Group, Inc. Retirement and Stock Ownership Plan Trust (RSOP Trust) into common stock, as well as the amount of the additional RSOP Trust contribution required to fund the difference between the RSOP Trust's earnings from preferred share dividends and the RSOP Trust's potential earnings from common share dividends after an assumed conversion. The effect of the RSOP Trust was not dilutive for the years ended December 31, 1996 and 1995. 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 the enacted tax rates and are subsequently adjusted for changes in these rates. A change in the deferred tax assets or liabilities results in a charge or credit to deferred tax expense. 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. Homebuilding Revenues Homebuilding revenues are recognized when home sales are completed and title passes to the customer at closing. Service Liabilities Service and warranty costs are estimated and accrued for at the time a home closes. Housing Inventories Housing inventories consist principally of homes under construction and land under development and improved lots. In 1995, the Company adopted Statement of Financial Accounting Standards No. 121 (FASB 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under FASB 121, inventories to be held and used are stated at cost, unless a subdivision is determined to be impaired, in which case the impaired inventories are written down to fair value. Writedowns 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 $3.1 million at December 31, 1996, and $8.3 million at December 31, 1995. The carrying value of the related inventories amounted to $8.0 million and $13.0 million at December 31, 1996 and 1995, respectively. Costs of inventory include direct costs of land, material acquisition, home construction and related direct overhead expenses. Real estate taxes, insurance and interest 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: 1996 1995 ---- ---- Capitalized interest as of January 1, $ 27,649 $ 22,243 Interest capitalized 16,975 17,543 Interest amortized (17,035) (12,137) ------- ------- Capitalized interest as of December 31, $ 27,589 $ 27,649 ------- ------- Purchase Price in Excess of Net Assets Acquired Cost in excess of net assets of acquired businesses (goodwill) is being amortized on a straight-line basis over 30 years. On a periodic basis, the Company evaluates the businesses to which goodwill relates in order to insure that the carrying value of goodwill has not been impaired. 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 the sale. Mortgage-Backed Securities The Company classifies its mortgage-backed securities into three categories: held-to-maturity, available-for-sale and trading. Management determines the appropriate classification of investment securities at the time of purchase and reevaluates such designations as of each balance sheet date. Investment 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-aturity are stated at amortized cost. Those securities which are held-to-maturity are currently held in a limited-purpose subsidiary and are collateral for bonds payable whose indentures prohibit liquidation of the collateral unless the corresponding bonds are redeemed. Securities classified as available-for-sale are measured at fair value with the unrealized gains and losses, net of tax, reflected as a component of stockholders' equity. Securities classified as trading are measured at fair value with gains and losses, both realized and unrealized, recognized in the statement of earnings. Loan Origination Fees, Costs and Mortgage Discounts Loan origination fees, net of the related direct origination costs, and loan discount points, are deferred as an adjustment to the carrying value of the related mortgage loans held for sale and are recognized into income upon the sale of the mortgage loans. Discounts on mortgage collateral for the bonds of the limited-purpose subsidiaries primarily represent loan origination discount points and purchase price discounts. These discounts are deferred as an adjustment to the recorded book value of the related mortgage loans. They are amortized into interest income over their respective lives using the interest method, which is adjusted for the effect of prepayments. Hedging Contracts The Company enters into forward delivery contracts, options on forward delivery contracts, options on futures contracts and futures contracts, (collectively referred to as hedging 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 hedging 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 hedging 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 loans and securities are sold. Deferred Financing Costs Financing costs incurred in connection with the issuance of bonds by the limited-purpose subsidiaries are capitalized and amortized over the respective lives of the bonds using the interest method. Mortgage Servicing Rights Retained mortgage servicing rights on originated loans are capitalized by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights, which include purchased servicing rights, are amortized in proportion to and over the period of estimated servicing revenues. New Accounting Pronouncements FASB 123 Statement of Financial Accounting Standards No. 123 (FASB 123), "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has adopted the disclosure-only provisions of FASB 123 and has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. Refer to Note N for additional information. FASB 121 In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, (FASB 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Company adopted this new standard for its inventories, joint venture investments and other long-lived assets in the fourth quarter of 1995. In accordance with FASB 121, prior period financial statements were not restated to reflect the change in accounting principle. FASB 121 provides that when events or changes in circumstances indicate that the carrying amount of assets might not be recoverable, companies should evaluate the need for an impairment writedown. In the fourth quarter of 1995, in response to competitive market pressures in California, the Company determined that some product repositioning, increased homebuyer incentives and reduced selling prices would be necessary in certain of its California subdivisions. The land inventory in most of these subdivisions was acquired in 1988 and 1989 and had a cost basis substantially in excess of current market values. Accordingly, the Company evaluated the affected California subdivisions and determined that certain subdivision inventories were impaired. Under FASB 121, a writedown of $31 million was required to state the impaired inventories at their fair value. Fair value was based upon an evaluation of comparable market prices, discounted cash flow analysis and expected returns for comparable properties. In addition, the Company decided in the fourth quarter of 1995 to dispose of certain joint venture investments and certain other subdivision inventories because the Company believed that it could achieve higher returns on alternative uses of its capital. As a result, the Company recorded a reserve of $14 million in the fourth quarter of 1995 to reduce the carrying value of these assets to their fair value less cost to sell. Of the total reserve, $7 million pertained to the planned disposal of joint venture investments and the remaining $7 million primarily pertained to the planned disposal of certain subdivision lots. FASB 122 and 125 In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122 (FASB 122), "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement No. 65." This statement requires a mortgage-banking enterprise to capitalize retained mortgage servicing rights on originated or purchased loans by allocating the total cost of the mortgage loans between the mortgage servicing rights and the loans (without the servicing rights) based on their relative fair values. Previously, only the cost of mortgage servicing rights acquired through a purchase transaction could be capitalized. The new statement also specifies new procedures for assessing impairment of capitalized mortgage-servicing rights, whenever capitalized, and requires that impairment shall be recognized through a valuation allowance for individual portfolio stratifications based on the fair value of those rights. The adoption of FASB 122 resulted in a favorable after-tax impact of $.7 million for the year ended December 31, 1995. In accordance with FASB 122, prior period financial statements were not restated. The book value of the capitalized mortgage-servicing rights at December 31, 1996 and 1995, was $9.9 million and $7.8 million, respectively, and the aggregate fair value totaled $10.9 million and $9.5 million, respectively. Comparable market values and the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type and interest rates were used to stratify the post-implementation originated mortgage-servicing rights. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125 (FASB 125), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The Company is required to adopt FASB 125 on January 1, 1997; however, the Company does not anticipate the adoption will have a significant impact on its 1997 financial statements. FASB 115 In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 (FASB 115), "Accounting for Certain Investments in Debt and Equity Securities." The Company adopted the provisions of the new standard for investments held as of or acquired after January 1, 1994. The cumulative effect of adopting FASB 115 as of January 1, 1994, increased net income by $2.1 million (net of $1.4 million in deferred income taxes). This cumulative effect adjustment related to unearned income of discount points on mortgage-backed securities, which can now be amortized into income during the period that the mortgage-backed securities are held. The January 1, 1994, balance of stockholders' equity was increased by $7.6 million (net of $5.1 million in deferred income taxes) to reflect the net unrealized holding gains on securities classified as available-for-sale, which were previously carried at the lower of amortized cost or market. In November 1995, the Financial Accounting Standards Board issued Special Report No. 155-B, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," as an aid in understanding and implementing FASB 115. The effect of adopting this implementation guidance as of December 31, 1995, resulted in the reclassification of $74,184 of mortgage-backed securities from the held-to- maturity classification to the available-for-sale classification. The related increase in net unrealized gains recorded in stockholders' equity at December 31, 1995, totaled $2,185, net of deferred taxes of $1,456. Restatement of prior periods to reflect the effects of initially adopting this implementation guidance was not permitted. NOTE B: SEGMENT INFORMATION - --------------------------- Segment information in the following table is presented on the basis of continuing operations and excludes amounts related to the institutional mortgage securities administration business, which was sold in 1995 and is reported as discontinued operations. For additional information, refer to Note C: Discontinued Operations. In addition, amounts related to the limited- purpose subsidiaries are combined with corporate expenses and corporate assets in the following table as "Other." Segment Information 1996 1995 1994 ---- ---- ---- Revenues: Homebuilding $ 1,473,275 $ 1,458,174 $1,443,212 Financial services 79,524 89,611 123,631 Other (limited-purpose subsidiaries) 27,387 37,267 52,293 ----------- ----------- ---------- Total $ 1,580,186 $ 1,585,052 $1,619,136 ----------- ----------- ---------- Pretax Earnings (Loss): Homebuilding $ 22,596 $ (47,466) $ 10,928 Financial services 15,847 17,870 33,526 Corporate and other (12,046) (12,861) (17,091) ----------- ----------- ---------- Total $ 26,397 $ (42,457) $ 27,363 ----------- ----------- ---------- Depreciation and Amortization: Homebuilding $ 25,762 $ 28,410 $ 17,911 Financial services 3,296 4,846 4,250 Corporate and other 2,315 1,256 3,479 ----------- ----------- ---------- Total $ 31,373 $ 34,512 $ 25,640 ----------- ----------- ---------- Identifiable Assets: Homebuilding $ 695,284 $ 696,576 $ 740,246 Financial services 382,431 449,419 455,020 Corporate and other 260,809 434,794 509,222 ----------- ----------- ---------- Total $ 1,338,524 $ 1,580,789 $ 1,704,488 ----------- ----------- ---------- NOTE C: DISCONTINUED OPERATIONS - -------------------------------- On June 30, 1995, pursuant to an Asset Purchase Agreement dated April 10, 1995, the Company completed the sale of its institutional mortgage securities administration business for a purchase price of $47 million in cash. The Company's institutional mortgage securities administration business included master servicing, securities administration, investor information services, and tax calculation and reporting. The results for this business (formerly reported as institutional financial services), as well as the net gain on the sale of the business of $19.5 million (net of taxes of $13.0 million), have been reported as discontinued operations in the accompanying consolidated statements of earnings. There were no operating results from the discontinued business for the second half of 1995 as the sale occurred in the second quarter. Revenues from operations of the discontinued business were $11.4 million and $23.6 million for 1995 and 1994, respectively. Net earnings from operations of the discontinued business were $3.3 million (net of taxes of $2.2 million) for 1995 and $6.0 million (net of taxes of $4.0 million) for 1994. NOTE D: INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES ----------------------------------------------------------- The Company participates in homebuilding joint ventures primarily in its Mid- Atlantic and West regions. Summarized financial information for all joint venture entities accounted for under the equity method is as follows: STATEMENT OF EARNINGS Year ended December 31, 1996 1995 1994 ---- ---- ---- Revenues $ 1,122 $ 23,045 $ 38,900 Cost of sales 4,322 21,287 36,718 Expenses 545 894 2,544 --------------------------------------- Pretax earnings (loss) $ (3,745) $ 864 $ (362) --------------------------------------- The Company's share of pretax earnings (loss), net of reserve $ 120 $ (6,594) $ (37) ------------------------------------------------------------------ BALANCE SHEETS December 31, 1996 1995 - --------------------------------------------------------------- Assets: Housing inventories $ 14,149 $ 15,521 Other assets 3,905 8,449 -------------------- Total assets $ 18,054 $ 23,970 -------------------- Liabilities and Partners' Equity: Debt $ 11,055 $ 11,892 Other liabilities 4,891 7,261 Due to the Company 5,867 7,905 -------------------- Total liabilities 21,813 27,058 -------------------- The Company's equity (4,420) (5,378) Other partners' equity 661 2,290 -------------------- Total equity (3,759) (3,088) -------------------- Total liabilities and equity $ 18,054 $ 23,970 - ----------------------------------------------------------------- The Company generally has a 50 percent interest in these joint ventures and records its interest in their operating results using the equity method. The Company's share of operating results is not always in proportion to its ownership interest. The Company's equity and pretax earnings (loss) reflected in the above table included a charge to earnings of $7,000 in 1995 related to joint venture investments in the Mid-Atlantic region. The joint ventures primarily use non-recourse financing arrangements collateralized by joint venture land and improvements. The Company had guaranteed $1,200 and $1,400 of joint venture debt at December 31, 1996 and 1995, respectively. NOTE E: ASSETS OF FINANCIAL SERVICES AND THE 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 houses. 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 and whole loans. Mortgage loans held for sale were reported net of mortgage discounts/ (premiums) of $871 and ($547) at December 31, 1996 and 1995, respectively. Mortgage loans held for sale, mortgage-backed securities and notes receivable are pledged as collateral for certain short-term notes payable (see Note F). The financial services segment serviced 83,000 and 81,000 loans with principal balances totaling $6.3 billion and $6.2 billion at December 31, 1996 and 1995, respectively, including loans subserviced for others of $1.2 billion in 1996 and $.2 billion in 1995. As a mortgage servicer, the Company may incur risk with respect to mortgages that are delinquent or in foreclosure to the extent that losses are not covered by a mortgage insurer or guarantor. The Company has no risk in the event of foreclosure for loans subserviced for others. The reserve for potential losses on the servicing portfolio was $1,685 and $2,409, at December 31, 1996 and 1995, respectively. These reserves are established based on the current economic environment and historical experience for foreclosures and delinquencies. LIMITED-PURPOSE SUBSIDIARIES Collateral for bonds payable consists of notes receivable secured by mortgage- backed securities, fixed-rate mortgage loans and mortgage-backed securities secured by first liens on single-family residential housing. Mortgage-backed securities consist of GNMA certificates, FNMA mortgage pass-through certificates and FHLMC participation certificates. All principal and interest on the 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: 1996 1995 - ------------------------------------------------------------------ Notes receivable $ 71,145 $ 158,352 Mortgage-backed securities 113,567 147,532 Mortgage loans 17,932 51,917 Funds held by trustee 15,669 26,231 Mortgage discounts (3,870) (8,886) - ------------------------------------------------------------------- Total $214,443 $ 375,146 - ------------------------------------------------------------------ Cash reserves totaling $180 and $189 as of December 31, 1996 and 1995, respectively, provide additional security for the bonds and will be available for payment on the bonds in the event of certain circumstances as described in the trust indentures. Neither The Ryland Group, Inc. 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," and 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, 1996 Available-for-sale $ 64,018 $ 4,640 $ 43 $ 68,615 Held-to-maturity 90,886 5,925 17 96,794 - ---------------------------------------------------------------------------- Total $ 154,904 $ 10,565 $ 60 $ 165,409 - ----------------------------------------------------------------------------- December 31, 1995 Available-for-sale $ 79,133 $ 4,659 $ 409 $ 83,383 Held-to-maturity 110,007 8,754 0 118,761 - ---------------------------------------------------------------------------- Total $ 189,140 $ 13,413 $ 409 $ 202,144 - ---------------------------------------------------------------------------- NOTE F: FINANCIAL SERVICES SHORT-TERM NOTES PAYABLE - ----------------------------------------------------- Financial services had outstanding borrowings at December 31 as follows: 1996 1995 - --------------------------------------------------------------------- Mortgage warehouse and working capital facility $ 188,046 $ 244,254 Repurchase agreements 82,157 82,653 Revolving credit agreement 55,447 34,260 Bond redemption financing agreement 0 6,302 - ---------------------------------------------------------------------- Total outstanding borrowings $ 325,650 $ 367,469 - ---------------------------------------------------------------------- During 1996, the Company renewed and extended until May 1998 its bank facility which provides up to $325 million for mortgage warehouse funding and $40 million for working capital advances. Warehouse advances are secured by mortgage loans held for sale, and working capital advances are secured by certain loan servicing rights and loan servicing advances. Borrowings outstanding under this bank facility totaling $188,046 at December 31, 1996, were collateralized by mortgage loans held for sale with outstanding principal balances of $161,735 and certain loan servicing advances of $28,112. Borrowings outstanding under this bank facility totaling $244,254 at December 31, 1995, were collateralized by mortgage loans held for sale with outstanding principal balances of $263,544. The effective interest rates on these borrowings were 3.1 percent, 4.1 percent and 2.1 percent for 1996, 1995 and 1994, respectively. The agreement contains certain financial covenants, which the Company met at December 31, 1996. The repurchase agreements represent short-term borrowings. The collateral for these borrowings consists of mortgage loans and mortgage-backed securities issued by one of the Company's limited-purpose subsidiaries with outstanding balances on December 31, 1996 and 1995, of $82,208 and $84,113, respectively. The effective interest rates were 5.8 percent, 6.4 percent and 4.6 percent for 1996, 1995 and 1994, respectively. The following table provides additional information relating to the mortgage loans and mortgage-backed securities collateralizing the repurchase agreements at December 31, 1996: ASSETS Carrying Accrued Fair Repurchase Interest Maturity Value Interest Value Liability Rate - ------------------------------------------------------------------ 31 to 90 days $49,169 $410 $50,368 $48,052 6.0 % Demand 33,039 271 35,292 34,105 5.6 % ------------------------------------------------- Total $82,208 $681 $85,660 $82,157 ------------------------------------------------- In October 1996, the Company renewed and extended its $100 million credit facility used to finance investment securities in the financial services segment. The agreement was extended to May 1998, bears interest at market rates and is collateralized by investment portfolio securities. Borrowings outstanding under this facility totaling $55,447 and $34,260 were collateralized by investment portfolio securities with principal balances of $54,624 and $34,426 at December 31, 1996 and 1995, respectively. The Company also has a secured $35 million credit agreement to be used for the short-term financing of optional bond redemptions. The agreement has a one- year term, is collateralized by the security being redeemed and bears interest at market rates. No borrowings were outstanding under this agreement at December 31, 1996. At December 31, 1995, outstanding borrowings were $6,302. The effective interest rates for this credit agreement during 1996, 1995 and 1994 were 6.0 percent, 6.5 percent and 1.3 percent, respectively. The weighted-average interest rates at the end of the period on all short-term borrowings were 4.2 percent, 4.6 percent and 4.6 percent for 1996, 1995 and 1994, respectively. The weighted-average interest rates during the period on all short-term borrowings were 4.3 percent, 4.8 percent and 3.5 percent for 1996, 1995 and 1994, respectively. NOTE G: 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 are as follows: 1996 1995 ---- ---- Commitments to originate mortgage loans $ 28,821 $ 64,393 Hedging contracts: Forward delivery contracts $ 138,560 $ 157,850 Options on forward delivery contracts $ 0 $ 45,000 Options on futures contracts $ 5,000 $ 0 In addition, to protect against exposure to interest rate fluctuations on adjustable-rate mortgage-loan commitments, at December 31, 1996 and 1995, the Company contracted with various parties to deliver $30,004 and $115,015, respectively, in adjustable and fixed-rate mortgage loans for a specified price on a primarily 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 is mitigated by fees collected from the customer and by the Company's hedging activities. Loan commitments had interest rates ranging from 6.8 percent to 9.3 percent as of December 31, 1996, and 6.3 percent to 11.0 percent as of December 31, 1995. Hedging contracts are regularly entered into by the Company for the purpose of mitigating its exposure to movements in interest rates on mortgage commitments and mortgage loans held for sale. The selection of these hedging contracts is based upon the Company's hedging policy, 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. Exposure to credit risk in the event of nonperformance by the other parties to the hedging contracts would be limited to the difference between the contract price and current market value of the hedged item, which would be a small percentage of the outstanding commitments and would be limited to those instances where the Company was in a net unrealized gain position. The Company manages this credit risk by entering into agreements with counterparties meeting the credit standards of the Company and monitoring position limits. Net deferred hedging losses included with mortgage loans held for sale on the Company's balance sheet at December 31, 1996 and 1995, amounted to $457 and $2,463, respectively. NOTE H: 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 flow. In that regard, the derived fair- value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. 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. 1996 1995 - ----------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - ----------------------------------------------------------------------------- Homebuilding: Liabilities Secured notes payable $ 1,517 $ 1,517 $ 4,498 $ 4,498 Senior notes 118,000 123,110 53,000 55,490 Senior subordinated notes 200,000 202,500 200,000 201,500 Financial Services: Assets Mortgage loans held for sale $ 180,149 $ 182,205 $ 285,001 $286,176 Mortgage-backed securities, available-for-sale 47,290 47,290 47,911 47,911 Mortgage-backed securities, trading 3,287 3,287 0 0 Notes receivable and whole loans 92,931 100,206 64,633 68,332 Off-balance sheet financial instruments Forward delivery contracts 0 381 0 (1,447) Options on forward delivery contracts 0 0 0 0 Options on futures contracts 0 (29) 0 0 Commitments to originate mortgage loans 0 (92) 0 296 Call right options 0 2,691 0 3,601 Other Assets: Collateral for bonds payable of the limited-purpose subsidiaries $ 214,443 $ 227,067 $ 375,146 $395,760 Other Liabilities: Bonds payable of the limited- purpose subsidiaries $ 206,891 $ 226,727 $ 364,672 $394,175 The Company used the following methods and assumptions in estimating fair values: - - Cash and cash equivalents, bank credit agreement, loan servicing receivables and short-term notes payable: The carrying amounts reported in the balance sheet approximate fair values. - - Secured notes payable: The fair values of the Company's secured notes payable are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. - - Senior notes, senior subordinated notes, mortgage loans held for sale, mortgage-backed securities, the various hedging contracts if settled on December 31, 1996 and 1995, and mortgage loan commitments: The fair values of these financial instruments are estimated based on quoted market prices for similar financial instruments. - - Call right options: In estimating the fair value, independent mortgage prepayment forecasts were used to estimate mortgage collateral balances at the dates when the call rights would be exercisable. Based on December 31, 1996 and 1995 collateral prices the implied net gains that could be realized upon exercise of the options and sale of the mortgage collateral were estimated. These net gains were then discounted using a current long- term market interest rate. NOTE I: LIMITED-PURPOSE SUBSIDIARIES' BONDS PAYABLE - ----------------------------------------------------- The Company's limited-purpose subsidiaries are no longer issuing mortgage- backed securities and mortgage-participation securities. Previously, they issued mortgage-backed bonds, and the Company retained residual interests in some of these bonds. Payments are made on the bonds on a periodic basis as a result of, and 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: 1996 1995 - -------------------------------------------------------------------- Bonds payable, net of discounts: 1996-$ 4,779; 1995-$6,662 $ 206,891 $364,672 Range of interest rates 7.25%-12.625% 7.25%-12.625% Stated maturities 2006-2019 2006-2019 - ------------------------------------------------------------------------ NOTE J: LONG-TERM DEBT - ------------------------ Long-term debt consists of the following: December 31, 1996 1995 - ---------------------------------------------------------- Bank credit agreement $ 34,000 $ 137,000 Senior subordinated notes 200,000 200,000 Senior notes 118,000 53,000 Other 2,267 6,607 ----------------------- 354,267 396,607 Less current portion (10,255) (35,073) ----------------------- $ 344,012 $ 361,534 - ------------------------------------------------------------ The Company has an unsecured credit agreement with a group of banks, which matures in July 1998, with a total borrowing capacity of $300 million as of January 1997. Borrowings under the agreement bear interest at variable short- term rates. The effective interest rates for 1996, 1995 and 1994 were 7.1 percent, 8.0 percent and 6.6 percent, respectively. The Company has $100,000 of 10.5% senior subordinated notes outstanding, due July 15, 2002, with interest payable semi-annually, which may be redeemed at the option of the Company, in whole or in part, at any time on or after July 15, 1997. The Company also has $100,000 of 9.625% senior subordinated notes, due 2004, with interest payable semi-annually, which may be redeemed at the option of the Company, in whole or in part, at any time on or after December 1, 2000. Senior subordinated notes are subordinated to all existing and future senior debt of the Company. On July 6, 1996, the Company completed the issuance of $100 million of 10.5% senior notes due 2006, with interest payable semi-annually, 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, 1996, the Company also has $18,000 of senior notes bearing a fixed rate of 10.5% which mature in the years 1997 through 2000. Senior notes amounting to $35 million matured and were paid off in 1996, and $10 million in senior notes matured and were paid off in January 1997. Maturities of long-term debt for each of the next five years are as follows: - --------------------------------------------------------------- 1997 $ 10,255 1998 35,762 1999 250 2000 8,000 2001 -- - --------------------------------------------------------------- The bank credit agreement, senior subordinated indenture agreements and senior note agreements contain certain financial covenants. Under the loan covenants, the Company has $15,068 of retained earnings available for dividends at December 31, 1996. At December 31, 1996, the Company is in compliance with its covenants. NOTE K: INCOME TAXES - ---------------------- The Company's expense (benefit) for income taxes relating to earnings (loss) from continuing operations for the years ended December 31 is summarized as follows: 1996 1995 1994 - --------------------------------------------------------------------- Current: Federal $ 954 $ (1,257) $ 5,671 State 203 (266) 1,203 ------------------------------- Total current 1,157 (1,523) 6,874 ------------------------------- Deferred: Federal 7,756 (12,754) 3,359 State 1,645 (2,706) 713 ------------------------------- Total deferred 9,401 (15,460) 4,072 ------------------------------- Total expense (benefit) $ 10,558 $(16,983) $ 10,946 - --------------------------------------------------------------------- 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. A reconciliation between the total income tax expense (benefit) and the income tax expense (benefit) computed by applying the statutory federal income tax rate to earnings (loss) from continuing operations before income taxes is as follows: 1996 1995 1994 - --------------------------------------------------------------------- Computed income taxes at statutory rate (35%) $ 9,239 $ (14,860) $ 9,577 Applicable state taxes 1,201 (1,932) 1,245 Goodwill amortization 408 408 408 RSOP dividend (431) (401) (401) Other, net 141 (198) 117 ------------------------------------- Total actual income tax expense (benefit) $ 10,558 $ (16,983) $ 10,946 - ---------------------------------------------------------------------- Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows: 1996 1995 - ---------------------------------------------------------------------------- Deferred tax assets: Inventory valuation provisions and operational reserves $ 26,301 $ 37,278 Employee benefit plans 4,743 5,472 Capitalization of costs to inventory 7,763 5,809 Other 3,192 3,378 ---------------------- Total deferred tax assets 41,999 51,937 ----------------------- Deferred tax liabilities: Gross profit from sales reported on the installment method (4,339) (5,091) Preconstruction interest (1,853) (2,307) Unrealized market gain (1,135) (1,354) Other (2,866) (1,926) ------------------------ Total deferred tax liabilities (10,193) (10,678) -------------------------- Net deferred tax asset $ 31,806 $ 41,259 - ------------------------------------------------------------------------------ The Company has determined that no valuation allowance for the deferred tax asset is required primarily due to tax carrybacks currently available. The Company had a current tax asset of $3,761 and $7,750 as of December 31, 1996 and 1995, respectively. NOTE L: 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 (see Note N). Each share of preferred stock pays an annual cumulative dividend of $2.21. During 1996, 1995 and 1994, the Company paid $1,974, $2,193 and $2,441, respectively, in dividends on the preferred stock. Each share of preferred stock is entitled to a number of votes equal to the shares into which it is convertible, and the holders of the preferred stock generally vote together with the common stockholders on all matters. Under the RSOP Trust, at the option of the trustee, the Company may be obligated to redeem the preferred stock to satisfy distribution obligations to or investment elections of 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, 1996 and 1995, the maximum cash obligation for such redemptions was shown outside of stockholders' equity as part of other liabilities. This obligation is calculated assuming that all preferred shares outstanding were submitted for redemption. Based upon the appraised value of each share of preferred stock ($25.50 and $25.50) and the market value of each share of common stock ($13.625 and $14.00) at December 31, 1996 and 1995, respectively, and the application of a proportionate amount of the note due from the RSOP Trust, the net amounts of this obligation at December 31, 1996 and 1995 were $3,981 and $3,051, respectively. During 1996 and 1995, 81,356 and 129,806 shares of preferred stock, respectively, were converted into shares of common stock. Common Share Purchase Rights On October 18, 1996, the Company adopted a new shareholder rights plan. The new plan replaced the original plan dated December 17, 1986, which was set to expire on January 13, 1997. Under the new plan, 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 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 rights provide that 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 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, 1996, the Company had deposits and letters of credit outstanding of $32,978 for options and land purchase contracts having a total purchase price of $294,664. Rent expense primarily relates to office facilities, model home furniture and equipment. Total rent expense amounted to $10,191, $11,681 and $13,973 for the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum rental commitments under non-cancelable leases with remaining terms in excess of one year are as follows: - ------------------------------------------------------------------------------ 1997 $ 7,689 1998 6,400 1999 4,782 2000 3,967 2001 3,073 After 2001 2 ------- Total lease commitments $ 25,913 - ----------------------------------------------------------------------------- Contingencies 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. 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, 1996, were $117,420, and total letters of credit at December 31, 1996, were $9,215. In 1995, one current and two former officers of Ryland Mortgage Company (RMC) were notified that they are targets of a federal grand jury investigation concerning alleged misappropriation of funds from the Resolution Trust Corporation (RTC). The Company has been advised that the investigation relates to alleged overpayments to RMC of approximately $3.4 million under three mortgage-servicing contracts with the RTC. In July 1996, the RTC (acting through its successor, the FDIC) requested reimbursement from RMC of the alleged overpayment, interest thereon and additional amounts relating to mortgage-servicing contracts. The Company is investigating these matters and at this time cannot predict how they will be resolved or whether the Company or RMC will be targets of the grand jury investigation, parties to any civil litigation or incur any liability. The Company is also party to various legal proceedings incidental to its businesses. Based on evaluation of these proceedings and discussions with counsel, management believes that liabilities to the Company arising from these proceedings will not have a material adverse effect on the financial condition of the Company. NOTE N: EMPLOYEE INCENTIVE AND STOCK PLANS - -------------------------------------------- The Company's employee incentive and stock plans are as follows: Retirement and Stock Ownership Plan On August 16, 1989, the Company established an employee stock ownership plan, known as the RSOP Trust. The RSOP Trust's purchase of shares of preferred stock was financed by a loan to the RSOP Trust by the Company in an amount of $40,000. The loan bears interest at the rate of 9.99% and is expected to be repaid by the RSOP Trust through dividends received on the preferred stock and Company contributions. The RSOP Trust incurred interest on this loan in 1996, 1995 and 1994 of $1,794, $2,229 and $2,637, respectively. Preferred shares are collateral for the loan and are released to the RSOP Trust as debt payments are made. As of December 31, 1996, 486,867 shares under the RSOP Trust have been allocated to participants and 374,874 shares remain unallocated. There are two components within the RSOP: a 401(k) plan and a profit sharing plan. All full-time employees with one year of service are eligible to participate in the RSOP. 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 of the employee 401(k) contributions and any discretionary profit sharing contribution. Total compensation expense amounted to $5,870, $5,072 and $4,986 in 1996, 1995 and 1994, respectively. Equity Incentive Plan and Other Related Plans The Company's 1992 Equity Incentive Plan permits the Company 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 the Company's 1992 Equity Incentive 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 1996 generally have a maximum term of 10 years and vest over 3 years. At the beginning of each year, 2 1/2 percent of the number of common shares outstanding at the beginning of the year are authorized for grants of options and other equity instruments. The Company uses the intrinsic value method to measure compensation expense related to the award of stock options. 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. The Company has adopted the disclosure-only provisions of FASB 123. Accordingly, no compensation expense has been recognized for the stock option plans. Had compensation expense for the Company's stock option plan been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of FASB 123, the Company's net earnings (loss) and earnings (loss) per share would have been reduced to the pro-forma amounts indicated below: 1996 1995 ---- ---- Net earnings (loss)- as reported $15,839 $(2,618) Net earnings (loss)- pro forma $15,154 $(3,058) Primary net earnings (loss) per share - as reported $ 0.87 $ (0.31) Primary net earnings (loss) per share - pro forma $ 0.83 $ (0.34) Fully diluted net earnings (loss) per share - as reported $ 0.87 $ (0.31) Fully diluted net earnings (loss) per share - pro forma $ 0.83 $ (0.34) The pro-forma effect on net income (loss) and net earnings (loss) per share for 1996 and 1995 is not representative of the pro-forma effect on net income and earnings per share in future years because it does not take into consideration pro-forma compensation expense related to grants made prior to 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: a risk-free interest rate of 5.6% and 7.6%; an expected volatility factor for the market price of the Company's common stock of 34%; a dividend yield of 4.0%; and an expected life of 6 years. The weighted-average fair value as of the grant date for options granted in 1996 and 1995 was $4.07 and $4.55, respectively. Pursuant to the Equity Incentive Plan, the Company has a long-term incentive plan for officers and key employees. After each fiscal year, restricted shares of the Company's common stock and cash are credited to the accounts of the participants according to a prescribed formula. There was no compensation expense relating to this plan for 1996. Compensation expense for this plan for 1995 and 1994 amounted to $1,404 and $2,504, respectively. In November 1993, the Company entered into a stock unit agreement with an officer, pursuant to the Equity Incentive Plan. The Company granted the officer 75,000 stock units. Each stock unit is payable in one share of the Company's common stock. The units vest in increments of 15,000 units for five years beginning November 1, 1994. In January 1997, the Company granted the officer 45,000 additional stock units that vest and are payable in the amount of 15,000 and 30,000 shares of common stock on November 1, 1999 and 2000, respectively. The Company recognizes compensation expense related to these agreements over the vesting period, valued at the market price of the Company's common stock on the vesting date. For 1996, 1995 and 1994, the Company recognized compensation expense of $198, $267 and $315, respectively, related to these agreements. 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 the transactions relating to all stock option plans for each year ended December 31: 1996 1995 1994 - ------------------------------------------------------------------------------ Weighted- Average Exercise Shares Price Shares Shares ------- --------- -------- ------- Options outstanding beginning of year 1,545,700 $17.44 1,262,599 1,040,530 Granted 539,500 14.85 620,270 507,600 Exercised (4,950) 15.00 (47,600) (45,030) Forfeited (211,362) 16.27 (289,569) (240,501) Expired (85,150) 19.48 0 0 --------------------------------------------------------------------------- Options outstanding end of year 1,783,738 16.70 1,545,700 1,262,599 Available for future grant 561,715 530,729 708,157 - ----------------------------------------------------------------------------- Total shares reserved 2,345,453 2,076,429 1,970,756 - ----------------------------------------------------------------------------- Options exercisable at December 31 923,119 18.16 701,262 656,827 - ----------------------------------------------------------------------------- Prices related to options exercised $10.94- $10.13- during the year $15.00 $15.25 $20.75 - ------------------------------------------------------------------------------ Exercise prices related to options outstanding on December 31, 1996, ranged from $13.50 to $26.00. The weighted-average remaining contractual life for options outstanding on December 31, 1996, is approximately seven years. The Ryland Group, Inc. and Subsidiaries REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND STOCKHOLDERS OF THE RYLAND GROUP, INC. We have audited the accompanying consolidated balance sheets of The Ryland Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing standards. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note A to the financial statements, in the fourth quarter of 1995, the Company changed its method of accounting for impairment of long- lived assets in accordance with the adoption of FASB No. 121 and, effective January 1, 1994, the Company also changed its method of accounting for investments in debt securities in accordance with the adoption of FASB No. 115. /s/ Ernst & Young LLP Baltimore, Maryland January 31, 1997 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 are 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/ Michael D. Mangan - ------------------------ Michael D. Mangan Executive Vice President Chief Financial Officer /s/ Stephen B. Cook - ------------------------ Stephen B. Cook Vice President Corporate Controller and Chief Accounting Officer The Ryland Group, Inc. and Subsidiaries QUARTERLY FINANCIAL DATA ------------------------ (amounts in thousands, except per share data) unaudited - ------------------------------------------------------------------------------ 1996 Quarter Ended Dec. 31 Sept. 30 June 30 March 31 - ------------------------------------------------------------------------------ Consolidated Results: Revenues $ 436,041 $ 402,458 $ 414,254 $ 327,433 Earnings (loss) from continuing operations before taxes 8,325 7,462 9,045 1,565 Income tax expense (benefit) 3,329 2,985 3,618 626 ----------------------------------------------- Net earnings (loss) from continuing operations 4,996 4,477 5,427 939 Discontinued operations, net of taxes (2) 0 0 0 0 ----------------------------------------------- Net earnings (loss) $ 4,996 $ 4,477 $ 5,427 $ 939 Net earnings (loss) per common share (primary) $ 0.28 $ 0.25 $ 0.31 $ 0.03 Weighted average common shares outstanding 15,950 15,935 15,955 15,924 - ------------------------------------------------------------------------------ (amounts in thousands, except per share data) unaudited - ------------------------------------------------------------------------------ 1995 Quarter Ended Dec. 31(1) Sept. 30 June 30 March 31 - ------------------------------------------------------------------------------ Consolidated Results: Revenues $ 448,040 $ 402,587 $ 389,228 $ 345,197 Earnings (loss) from continuing operations before taxes (39,588) 1,130 (1,536) (2,463) Income tax expense (benefit) (15,835) 452 (614) (986) ----------------------------------------------- Net earnings (loss) from continuing operations (23,753) 678 (922) (1,477) Discontinued operations, net of taxes (2) 0 0 20,706 2,150 ----------------------------------------------- Net earnings (loss) $ (23,753) $ 678 $ 19,784 $ 673 Net earnings (loss) per common share (primary) $ (1.55) $ 0.01 $ 1.22 $ 0.01 Weighted average common shares outstanding 15,667 15,812 15,764 15,676 - ------------------------------------------------------------------------------ (1) Reflects a $27 million after-tax 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. The 1995 results include the second- quarter gain on the sale and the results of operations for the first half of 1995. COMMON STOCK PRICES AND DIVIDENDS The Ryland Group, Inc. lists its common shares on the New York Stock Exchange, trading under the symbol RYL. The table below presents the high and low market prices and dividend information for the Company. The number of common stockholders of record as of February 19, 1997, was 3,260 (See Note J for dividend restrictions) Dividends Declared 1996 High Low Per Share - ---------------------------------------------------------------------------- First quarter $ 16 3/8 $ 14 1/8 $ 0.15 Second quarter 16 7/8 13 5/8 0.15 Third quarter 15 3/8 13 1/2 0.15 Fourth quarter 15 1/4 11 1/4 0.15 Dividends Declared 1995 High Low Per Share - ---------------------------------------------------------------------------- First quarter $ 15 $ 13 3/8 $ 0.15 Second quarter 17 1/4 14 3/8 0.15 Third quarter 17 1/4 14 5/8 0.15 Fourth quarter 15 5/8 12 3/8 0.15 EX-21 10 Exhibit 21 List of Subsidiaries of Registrant Ryland Mortgage Company (an Ohio Corporation) M.J. Brock & Sons, Inc. (a Delaware Corporation) LPS Holdings Corporation (a Maryland Corporation) EX-23 11 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of The Ryland Group, Inc., of our report dated January 31, 1997, included in the 1996 Annual Report to the Shareholders of The Ryland Group, Inc. Our audits also included the financial statement schedule of The Ryland Group, Inc., listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-3 No. 33-28692, Form S-8 No. 33-32431, Form S-3 No. 33- 48071, Form S-3 No. 33-50933, Form S-8 No. 33-56905, Form S-8 No. 33-56917, Form S-3 No. 333-03791) of The Ryland Group, Inc., and in the related Prospectuses of our report dated January 31, 1997, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of The Ryland Group, Inc. /s/Ernst & Young LLP Baltimore, Maryland March 17, 1997 EX-24 12 Exhibit 24 - Power of Attorney KNOW ALL MEN BY THESE PRESENTS that the undersigned directors and officers of The Ryland Group, Inc., a Maryland corporation, constitute and appoint R. Chad Dreier and Michael D. Mangan and either of them, the true and lawful agents and attorneys-in-fact of the undersigned with full power and authority in said agents and attorneys-in-fact, and in either of them, to sign for the undersigned in their respective names as directors and officers of The Ryland Group, Inc., the Annual Report on Form 10-K of The Ryland Group, Inc., for the fiscal year ended December 31, 1996, to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We hereby confirm all acts taken by such agents and attorneys-in-fact, or either of them, as herein authorized. DATED: January 31, 1997 /s/ R. Chad Dreier ------------------------------- R. Chad Dreier, Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer) /s/ James A. Flick, Jr. -------------------------------- James A. Flick, Jr., Director /s/ Robert J. Gaw --------------------------------- Robert J. Gaw, Director /s/ Leonard M. Harlan --------------------------------- Leonard M. Harlan, Director /s/ L.C. Heist --------------------------------- L.C. Heist, Director /s/ William L. Jews --------------------------------- William L. Jews, Director /s/ William G. Kagler -------------------------------- William G. Kagler, Director /s/ John H. Mullin, III --------------------------------- John H. Mullin, III, Director /s/ Charlotte St. Martin --------------------------------- Charlotte St. Martin, Director /s/ John O. Wilson --------------------------------- John O. Wilson, Director EX-27 13
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RYLAND GROUP, INC. FORM 10-K FOR THE PERIOD ENDED 12/31/96 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 DEC-31-1996 28,708 143,508 180,149 0 574,590 0 31,560 0 1,338,524 0 532,541 0 862 15,853 293,734 1,338,524 1,473,275 1,580,186 1,276,877 1,468,189 12,046 0 73,554 26,397 10,558 15,839 0 0 0 15,839 0.87 0.87
-----END PRIVACY-ENHANCED MESSAGE-----