<PAGE>

                                                                   EXHIBIT 10.10


TO:       M. Kathleen Smalley

FROM:     Nelson C. Rising

DATE:     February 7, 2001

SUBJECT:  Memorandum of Understanding regarding Employment

--------------------------------------------------------------------------------

     This Memorandum of Understanding ("Memorandum") sets forth the terms of
your employment with Catellus Development Corporation (the "Company") or its
subsidiary.  This Memorandum supersedes, in their entirety, all previous
agreements and understandings concerning your employment except the Indemnity
Agreement referenced in Section 8 below and any stock option agreements you have
with the Company; provided, however, that the provisions of this Memorandum
regarding vesting of stock options in the event of termination of your
employment shall supersede such provisions of your stock option agreements.  In
addition, nothing in this Memorandum shall affect the prior elimination of all
price vesting provisions previously in your stock option agreements.

     Effective upon your execution of this Memorandum, the following provisions
shall govern your employment with the Company or a subsidiary:

1.   Title; Responsibilities and Duties. You are a full-time, regular employee
     -----------------------------------
of the Company with the title of Senior Vice President-Corporate Operations and
General Counsel of the Company, and you shall be expected to handle such
responsibilities and perform such duties as I shall assign from time to time
consistent with those you were handling and performing as of September 30, 2000.
If you become an employee of a subsidiary of the Company, the Company will
nevertheless be bound by the terms of this Memorandum.

2.   At-Will Employment. You acknowledge and agree that your employment is at-
     ------------------
will and that either the Company or you, at any time, with or without cause, may
terminate the employment relationship, including all compensation and benefits.
However, should your employment terminate, Section 10 below shall apply.

3.   Salary. Effective January 1, 2000, you shall be paid at the annualized
     ------
salary rate of at least $292,500. Your salary shall be payable in accordance
with the Company's normal payroll practices and subject to all applicable tax
withholding requirements. Your salary will be reviewed in the first quarter of
each year starting in 2001 and, if appropriate, it will be increased retroactive
to January 1 of that year. Your salary, as it may be increased from time to time
in the sole discretion of the Company, shall be referred to as your "Base
Salary."
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 2 of 14

4.    Bonuses.  You are eligible to receive an annual maximum cash bonus for
      -------
each calendar year of employment of up to two hundred percent (200%) of your
Base Salary, subject to satisfaction of target performance criteria determined
each year by the Company. The performance criteria may relate to individual
goals, Company or division goals, or a combination thereof and shall be
established and communicated to you within the first 90 days after the start of
each calendar year. Such bonuses shall be paid no later than March 31 of the
following year and are subject to all applicable tax withholding requirements.
Except as provided in Section 10, no bonus shall be payable if your employment
terminates or you resign prior to the close of the calendar year to which such
bonus relates.

5.   Stock Options.  Beginning in 2003, you may be entitled to receive
     -------------
additional stock options under the Company's 2000 Performance Award Plan based
on your and the Company's performance as determined by the Company in its sole
discretion.

6.   Benefits; Housing Arrangement.
     -----------------------------

     6.1  Benefits. You shall be entitled to receive paid vacation, medical
          --------
coverage, disability income replacement coverage, and other employee benefits,
all to the same extent that the Company provides these benefits to the Company's
other senior management employees.

     6.2  Housing Arrangement.  You and the Company have entered into
          -------------------
arrangements for the purchase of a second residence for you in San Francisco,
California, in accordance with the terms and conditions set forth in Appendix C
                                                                     ----------
hereto.

7.   Expenses.  You shall be entitled to reimbursement for reasonable and
     --------
properly documented expenses you incur in the conduct of the Company's business,
including a monthly automobile allowance in accordance with the Company's
Automobile Allowance Policy as well as payment or reimbursement for cellular
phone expenses.

8.   Indemnity.  Pursuant to that certain Indemnity Agreement, by and between
     ---------
the Company and you, dated as of January 1, 1999, the Company shall indemnify
you, and the Company shall maintain in full force and effect directors' and
officers' liability insurance for you in reasonable amounts from established and
reputable insurers. To the same extent, the Company shall pay and advance all
expenses, including, without limitation, attorneys' fees, disbursements and
retainers, accounting and witness fees, travel and deposition costs, expenses of
investigations, judicial or administrative proceedings and appeals, amounts paid
in settlement by you or on your behalf, actually incurred by you in connection
with any threatened, pending or completed claim, action, suit or proceeding,
formal or informal, whether brought before or after January 1, 1999, whether
brought in the right of the Company or otherwise and whether of a civil,
criminal, administrative or investigative nature, by reason of the fact that you
were a director, officer, employee or agent of the Company or were serving at
the Company's request as a director, officer, employee, or agent of another
corporation, limited liability company, partnership, joint venture, trust, or
other enterprise.
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 3 of 14

9.   Employee Handbook; Confidential Information.  As a condition of employment,
     -------------------------------------------
you acknowledge that you have reviewed the Company's current Employee Handbook,
executed the Handbook's Receipt and Acknowledgment (which is the last page of
the Handbook), and returned such Receipt and Acknowledgment and a completed W4
form to Jaime Gertmenian. You agree that during the term of your employment and
thereafter for a period of three years, you shall abide by the confidentiality
provisions of the current Employee Handbook.

10.  Termination of Employment. For definitions of capitalized terms used in
     -------------------------
this Section 10, see Appendix A attached to this Memorandum which is hereby
                     ----------
incorporated by reference.

     10.1 Right to Terminate.  The Company or you may terminate your employment
          ------------------
hereunder at any time by giving the other party prior written notice; provided,
that upon your death, your employment hereunder shall terminate automatically.
Immediately upon the termination of your employment hereunder for any reason,
you shall return promptly to the Company any property (including documents) in
your possession which is owned by the Company.

     10.2 Benefits upon Termination.
          -------------------------

          (a) Basic Payments upon Termination.  If your employment terminates
              -------------------------------
for any reason, the Company shall pay you your unpaid Base Salary for the period
through the Date of Termination and your unpaid salary with respect to any
vacation days accrued but not taken as of the Date of Termination (based upon
your Base Salary in effect at that time).  You shall also be entitled to other
payments or benefits to the extent provided in the Company's employee benefit
plans or arrangements.

          (b) Termination Other than for Cause, or for Death, Disability or Good
              ------------------------------------------------------------------
Reason.  If (i) you cease to be an employee of the Company on account of (A) the
------
Company's termination of your employment other than for Cause, (B) Disability or
(C) your death, or (ii) you resign your employment with the Company after giving
the Company notice of the occurrence of one or more events that constitute Good
Reason within a reasonable period (but not more than 90 days after such
occurrence) and the Company fails to correct such occurrence within a reasonable
time (but not more than 60 days) and your resignation occurs within 10 days
after the expiration of that cure period, then in addition to the amounts
payable under Section 10.2(a),

              (A) the stock options held by you shall become fully vested, and

              (B) the Company shall pay you, in monthly payments over a period
of 24 months from the Date of Termination, a monthly amount equal to one twenty-
fourth (1/24) of the amount that is two (2) times your Average Salary and Bonus.

     You shall not be required to mitigate the amount of any payment provided
for in this Section 10.2(b) by seeking other employment or otherwise.  The
Company shall not be entitled to set off against the amounts payable to you
under this Memorandum any amounts owed to the Company by you, any amounts earned
by you in other employment after termination of your
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 4 of 14

employment with the Company, or any amounts which might have been earned by you
in other employment had you sought such other employment.

          (c) Termination for Cause; Resignation.  If you cease to be an
              ----------------------------------
employee for any reason other than as set forth in Section 10.2(b), then the
Company shall have no obligation to make any payments to you for periods after
the Date of Termination, your unvested stock options shall terminate, and your
vested options must be exercised, if at all, within the time periods after the
Date of Termination specified in your stock option agreement(s).

     10.3 Change of Control Payments. In the event that a Change of Control
          --------------------------
occurs while you are employed by the Company pursuant to the terms of this
Memorandum, and within 12 months after the occurrence of the Change of Control,
your employment by the Company or the Company's successor is terminated  by the
Company other than for Cause or you resign for one or more events that
constitute Good Reason, then you shall be entitled to receive from the Company
or such successor, in lieu of, and not in addition to, the amounts otherwise
payable to you pursuant to Section 10.2(b) hereof, the benefits provided below:

          (a) the Company shall pay to you (A) your Base Salary, when due,
through the Date of Termination at the rate in effect at the time the applicable
Notice of Termination is given, (B) the unpaid portion, if any, of any annual
bonus which has been earned by you but which has not been paid as of  the Date
of Termination, and (C) all other amounts to which you are entitled under any
compensation plan of the Company at the time such payments are due, and (D) any
unpaid salary with respect to any vacation days accrued but not taken as of the
Date of Termination (based upon your rate of Base Salary in effect at the time
the applicable Notice of Termination is given); and

          (b) all stock options or other equity awards held by you with respect
to the Company's Common Stock shall become fully vested; and

          (c) in lieu of any further salary payments to you for periods
subsequent to the Date of Termination, the Company shall pay to you a lump sum
payment in an amount which is equal to three (3) times your Average Salary and
Bonus; and

          (d) you shall receive the benefits of the Tax Protection Policy
attached hereto as Appendix B, which is hereby incorporated by reference.
                   ----------

11.  Severability.   In case any one or more provisions of this Memorandum
     ------------
shall be invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions shall not be in any way
be affected or impaired.

12.  Arbitration.  To the fullest extent allowed by law, any controversy or
     -----------
claim arising out of or relating to your employment with the Company (or
termination of your employment) shall be settled by binding and non-appealable
arbitration by an arbitrator in the City of Dallas.  Possible disputes covered
by the foregoing, include (but are not limited to) wage, contract,
discrimination, or other employment-related claims under laws known as Title VII
of the Civil Rights Act,
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 5 of 14

California Fair Employment and Housing Act and comparable statutes in other
states if applicable, Americans with Disabilities Act, Age Discrimination in
Employment Act, and any other statutes relating to an employee's relationship
with his/her employer. However, claims for workers' compensation benefits and
unemployment insurance are not covered by this arbitration agreement and such
claims may be presented by you to the appropriate court or state agency. You and
the Company shall initially confer and attempt to reach agreement on the
individual to be appointed as such arbitrator. If no agreement is reached, the
parties shall request from the Judicial Arbitration and Mediation Services
("JAMS") office in the city or region where your office is located, a list of
five retired judges affiliated with JAMS. (If there is no JAMS office in the
city or region where your office is located, then an organization which is
comparable to JAMS would be utilized.) You and the Company shall each
alternately strike names from such list until only one name remains and such
person shall thereby be selected as the arbitrator. Except as otherwise provided
for herein, such arbitration shall be conducted in conformity with the
procedures specified in the California Arbitration Act (Cal. C.C.P. (S)(S) 1280
et seq.) (or the statute applicable in the state in which your office is
-- ---
located). The arbitrator shall allow the discovery authorized by California Code
of Civil Procedure (S)1283.05 or any other discovery required by law in
arbitration proceedings. Also, to the extent that anything in this Memorandum
conflicts with any arbitration procedures required by applicable law, the
arbitration procedures required by applicable law shall govern. The arbitrator
shall issue a written award that sets forth the essential findings and
conclusions on which the award is based. The arbitrator shall have the authority
to award any relief authorized by law in connection with the asserted claims or
disputes. The arbitrator's award shall be subject to correction, confirmation,
or vacation, as provided by any applicable law setting forth the standard of
judicial review of arbitration awards. The parties shall bear equally the
arbitrator's fee and any other type of expense or cost that the employee would
not be required to bear if he or she were free to bring the dispute or claim in
court as well as any other expense or cost that is unique to arbitration but
exclusive of each party's attorneys' fees. The parties intend that this Section
12 shall be valid, binding, enforceable and irrevocable and shall survive the
termination of this Memorandum. Any final decision of the arbitrator so chosen
may be enforced by a court of competent jurisdiction. You are waiving your right
to a jury trial and agree that the decision of the arbitrator shall be final and
binding. If either party is determined by the arbitrator to be the prevailing
party in the arbitration, then that party will be entitled to reimbursement from
the other party of all the reasonable fees (including attorney fees) and
expenses incurred in connection with such arbitration.

13.  Attorneys' Fees.  The Company will pay your attorneys' fees in connection
     ---------------
with the preparation and negotiation of this Memorandum.

14.  Amendments.  No amendments to this Memorandum may be made except by writing
     ----------
signed by you and the Company.
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 6 of 14

15.  Governing Law.  This Memorandum shall be governed by the internal laws of
     -------------
the State of California.


CATELLUS DEVELOPMENT CORPORATION



By /s/ Nelson C. Rising
  -------------------------------
     Nelson C. Rising
     Chairman of the Board and
     Chief Executive Officer


                                        ACCEPTED AND AGREED:


                                        /s/ M. Kathleen Smalley
                                        -----------------------------
                                        M. Kathleen Smalley

                                        Date signed:  February __, 2001
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 6 of 14

                                  Appendix A
                                  ----------

                                  Definitions
                                  -----------

     For purposes of this Memorandum, the following definitions are set forth
below:

          (i)  "Average Salary and Bonus" means the greater of (a) your annual
Base Salary and annual bonus, including any amounts deferred by you under the
Company's Profit Sharing and Savings Plan, Cafeteria Plan, and Executive
Deferred Compensation Plan and any other deferred compensation program now or
hereafter established by the Company, earned by you for the three full calendar
years prior to termination of your employment (regardless of whether all of such
years occurred while this Memorandum was in effect and regardless of whether
those earned amounts were paid out on a current basis or deferred) or such
smaller number of full calendar years as you have been employed by the Company,
divided by the number of such full calendar years, or (b) your annual Base
Salary and annual bonus, including any amounts deferred by you under the
Company's Profit Sharing and Savings Plan, Cafeteria Plan, and Executive
Deferred Compensation Plan and any other deferred compensation program now or
hereafter established by the Company, earned by you for the three full calendar
years with respect to which annual bonuses have been determined prior to the
occurrence of the Change of Control (regardless of whether all of such years
occurred while this Memorandum was in effect and regardless of whether those
earned amounts were paid out on a current basis or deferred) or such smaller
number of full calendar years as you have been employed by the Company, divided
by the number of such full calendar years.

          (ii)  "Cause" means that the Company provides you with a Notice of
Termination for either of the following reasons: (a) the willful and continued
failure by you substantially to perform your material duties (other than any
such failure resulting from your incapacity due to physical or mental illness)
after written demand for substantial performance of such duties is delivered to
you by the Board of Directors, which demand identifies the manner in which the
Board of Directors believes that you have not substantially performed your
duties and you have been given a reasonable period of time (but in no event more
than 60 days) to correct your deficient performance; or (b) your engaging in
egregious misconduct involving serious moral turpitude to such an extent that,
in the reasonable judgment of the Board of Directors, such misconduct
substantially impairs your ability to perform your duties with the Company. For
purposes of clause (a) of this definition, no act, or failure to act, on your
part shall be deemed "willful" unless done, or omitted to be done, by you
without reasonable belief that your action or omission was in the best interest
of the Company.

          (iii) A "Change of Control" shall be deemed to have occurred upon the
happening of any of the following events:

                 (a) the acquisition or holding of the Company, by any
individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (an
"Acquiror") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 25% or more of the combined
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 8 of 14

voting power of the then outstanding shares of Common Stock and other stock of
the Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"), but excluding for this purpose any
such acquisition (or holding) by (i) the Company or any corporation controlled
by the Company; (ii) any employee benefit plan (or related trust) of the Company
or any corporation controlled by the Company; (iii) any acquisition or ownership
by an Acquiror of 25% of the Outstanding Company Voting Securities as a result
of an acquisition of common stock or voting securities by the Company which, by
reducing the number of shares of the Company's common stock or voting securities
outstanding, increases the proportionate number of shares beneficially owned by
such Acquiror to 25% or more of the Outstanding Company Voting Securities;
provided, however, that if an Acquiror shall become the beneficial owner of 25%
or more of the Outstanding Company Voting Securities by reason of a share
acquisition by the Company as described above and shall, after such share
acquisition by the Company, become the beneficial owner of any additional shares
of common stock or voting securities of the Company, then such acquisition shall
constitute a Change of Control; or (iv) any corporation with respect to which,
following such acquisition, more than 50% of, respectively, the then outstanding
shares of Common Stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Voting
Securities immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition, of the
then Outstanding Company Voting Securities;

          (b) individuals who, as of the date hereof, constitute the Board of
Directors (the "Continuing Directors") cease for any reason to constitute at
least a majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
stockholders of Company, was approved by a vote of at least a majority of the
persons then comprising the Continuing Directors shall be considered a
Continuing Director, but excluding, for this purpose, any such individual whose
initial election as a member of the Board is in connection with an actual or
threatened "election contest" relating to the election of the directors of the
Company (as such term is used in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act); or

          (c) consummation by the Company of (1) a reorganization, merger or
consolidation of the Company, with respect to which in each case all or
substantially all of the individuals and entities who were the respective
beneficial owners of the Outstanding Company Voting Securities immediately prior
to such reorganization, merger or consolidation do not, following such
reorganization, merger or consolidation, beneficially own, directly and
indirectly, more than 50% of, respectively, the then outstanding shares of
Common Stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors of the
corporation or other entity resulting from such reorganization, merger or
consolidation, or (2) a complete liquidation or dissolution of the Company, or
(3) the sale or other disposition of all or substantially all of the assets of
the Company.
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 9 of 14

          (iv) "Date of Termination" means the effective date specified in the
Notice of Termination as of which your employment terminates  or, in the event
of termination of employment other than for Cause, the date as of which your
employment is to terminate pursuant to the provisions of Section 10.1 of this
Memorandum.

          (v) "Disability" means that (i) you have a physical or mental
condition that renders you incapable, after reasonable accommodation, of
performing your duties; (ii) such condition is reasonably determined by the
Chief Executive Officer to be of a long-term nature; and (iii) you are eligible
for income replacement benefits under the Company's long-term disability plan
during such period of disability.

          (vi) "Notice of Termination" means a notice of a proposed termination
by the Company with a written explanation to you of the grounds for such
proposed termination.

          (vii)  "Good Reason" exists if, without your express written consent,
any of the following occurs:

                 (A) the Company reduces your Base Salary as in effect from time
to time; or

                 (B) an assigning of duties to you that are a reduction in any
substantial respect from your position, authority, or responsibilities as of
September 30, 2000; or

                 (C) the Company's failure to fulfill the Company's obligations
under this Memorandum; or

                 (D) the Company's intentional failure, without your consent, to
pay to you any portion of your Base Salary, earned bonus, or other current
compensation (if any), or to pay to you any portion of any installment of
deferred compensation under any deferred compensation program within ten
business days of the date such compensation is due or to issue shares of the
Company's Common Stock in accordance with the terms of stock options granted to
you upon valid exercise thereof; or

                 (E) (i) any requirement that you relocate your principal
residence or establish a new secondary residence in a new location because of a
Company requirement that you be based in that new location, or (ii) any
requirement that you spend substantially more time traveling on Company business
than you did in the year ending September 30, 2000, because of a Company
requirement that you have a new place of business; or

                 (F) the Company does not allow you to devote reasonable time to
activities other than those required under this Memorandum, including
supervision of personal investments and activities involving professional,
charitable, educational, political, religious and similar types of
organizations, speaking engagements, memberships of boards of directors of other
organizations and similar activities, provided that you shall not serve on the
board of directors of any other business or hold any other position with any
business without the consent of the Chief Executive Officer; or
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 10 of 14

                 (G) the Company does not allow you to serve from time to time
at your discretion as a Lecturer at Harvard Law School or an officer or director
of Yorkshire Restaurants or Yorkshire Securities; or

                 (H) the failure of any successor entity in a Change of Control
to continue this Memorandum in effect and assume the Company's obligations and
responsibilities hereunder.
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 11 of 14

                                  Appendix B
                                  ----------

                             Tax Protection Policy
                             ---------------------

          This Appendix shall apply if it is determined that any payment,
distribution or benefit provided (including, without limitation, the
acceleration of any payment, distribution or benefit, the provision of any
severance pay or benefits and the acceleration of exercisability of any stock
option) to you or for your benefit (whether paid or payable or distributed or
distributable) pursuant to the terms of this Memorandum or otherwise pursuant to
or by reason of any other agreement, policy, plan, program or arrangement,
including without limitation any stock option, stock appreciation right or
similar right, or the lapse or termination of any restriction on or the vesting
or exercisability of any of the foregoing (the "Payments") would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"),  by reason of being "contingent on a change in the
ownership or control" of the Company, within the meaning of Section 280G of the
Code or to any similar tax imposed by state or local law, or any interest or
penalties with respect to such excise tax (such tax or taxes, together with any
such interest or penalties, are collectively referred to as the "Excise Tax").
If the Payments are subject to the Excise Tax and it is determined that the
Parachute Value of the Payments  (as defined below) exceeds 110% of the Safe
Harbor Amount (as defined below), you shall be entitled to receive from the
Company an additional payment (the "Gross-Up Payment") in an amount such that
the net amount of the Payments and the Gross-Up Payment retained by you after
the calculation and deduction of all Excise Taxes (including any interest or
penalties imposed with respect to such taxes) on those Payments and all federal,
state and local income tax, employment tax and Excise Tax (including any
interest or penalties imposed with respect to such taxes) on the Gross-Up
Payment provided for in this Appendix B, and taking into account any lost or
                             ----------
reduced tax deductions you may incur on account of the Gross-Up Payment, shall
be equal to the Payments.  If it shall be determined that the Parachute Value of
the Payments does not exceed 110% of the Safe Harbor Amount, then no Gross-Up
Payment shall be made to you, and the amount of the Payments otherwise due you
shall be reduced to the extent necessary to assure that the Parachute Value of
the Payments as calculated for the Payments remaining after such reduction does
not exceed the greater of (i) the Safe Harbor Amount or (ii) the amount which
yields you the greatest after-tax amount of Payments after taking into account
any Excise Tax you must pay with respect to those Payments.  To the extent any
such reduction to your Payments becomes necessary by reason of the preceding
sentence, the reduction shall be applied against the portion of your Payments
based upon your Average Salary and Bonus. For the purposes of this Appendix B,
                                                                   ----------
(a) "Parachute Value of the Payments" shall mean the present value as of the
date of the Change of Control for purposes of Section 280G of the Code of the
portion of such Payments that constitutes a "parachute payment" under Section
280G(b)(2), as determined by the Accountants (as defined below) for purposes of
determining whether and to what extent the Excise Tax will apply to such
Payments, and (b) "Safe Harbor Amount" shall mean the maximum Parachute Value of
the Payments that you can receive without any Payments being subject to the
Excise Tax.
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 12 of 14

              (i) All determinations required to be made under this Appendix B,
                                                                    ----------
including whether and when the Gross-Up Payment is required and the amount of
such Gross-Up Payment, and the assumptions to be utilized in arriving at such
determinations shall be made by the Accountants (as defined below) which shall
provide you and the Company with detailed supporting calculations with respect
to such Gross-Up Payment within fifteen (15) business days of the receipt of
notice from you or the Company that you have received or shall receive a
Payment.  For purposes of making the determinations and calculations required
herein, the Accountants may make reasonable assumptions and approximations
concerning applicable taxes and may rely on reasonable, good faith
interpretations concerning the application of Section 280G and 4999 of the Code,
including (without limitation) the Proposed Treasury Regulations under Section
280G of the Code, provided that the Accountants' determinations must be made on
the basis of  "substantial authority" (within the meaning of Section 6662 of the
Code).  For the purposes of this Appendix B, the "Accountants" shall mean the
                                 ----------
Company's independent certified public accountants serving immediately prior to
the Change of Control.  In the event that the Accountants are also serving as
accountant or auditor for the individual, entity or group effecting the Change
of Control, you may appoint another nationally recognized public accounting firm
to make the determinations required hereunder (which accounting firm shall then
be referred to as the Accountants hereunder).  All fees and expenses of the
Accountants shall be borne solely by the Company.

              (ii)  For the purposes of determining whether any of the Payments
shall be subject to the Excise Tax and the amount of such Excise Tax, such
Payments shall be treated as "parachute payments" within the meaning of Section
280G of the Code, and all "parachute payments" in excess of the "base amount"
(as defined under Section 280G(b)(3) of the Code) shall be treated as subject to
the Excise Tax, unless and except to the extent that in the opinion of the
Accountants such Payments (in whole or in part) either do not constitute
"parachute payments" or represent reasonable compensation for services actually
rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the
"base amount," or such "parachute payments" are otherwise not subject to such
Excise Tax.  For purposes of determining the amount of the Gross-Up Payment, you
shall be deemed to pay federal income taxes at the highest applicable marginal
rate of federal income taxation for the calendar year in which the Gross-Up
Payment is to be made and to pay any applicable state and local income taxes at
the highest applicable marginal rate of taxation for the calendar year in which
the Gross-Up Payment is to be made, net of the actual reduction in federal
income taxes which is reasonably expected to result from the deduction of such
state and local taxes if paid in such year (determined, however, with regard to
limitations on deductions based upon the amount of your adjusted gross income).
To the extent practicable, any Gross-Up Payment with respect to any Payment
shall be paid by the Company at the time you are entitled to receive the Payment
and in no event shall any Gross-Up Payment be paid later than five days after
your receipt of the Accountant's determination.  Any determination by the
Accountants shall be binding upon the Company and you.

              (iii)  As a result of uncertainty in the application of Section
4999 of the Code at the time of the initial determination by the Accountants
hereunder, it is possible that the Gross-Up Payment made shall have been an
amount less than the Company should have paid
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 13 of 14

pursuant to this Appendix B (the"Underpayment"). Unless the Company elects to
                 ----------
exhaust its remedies under clause (v) below with respect to the additional
Excise Tax on your Payments, the Underpayment shall be promptly paid by the
Company to or for your benefit at the time you are required to pay
the additional Excise Tax resulting in such Underpayment.

              (iv) You and the Company shall each provide the Accountants
access to and copies of any books, records and documents in the Company's or
your possession, as the case may be, reasonably requested by the Accountants,
and otherwise cooperate with the Accountants in connection with the preparation
and issuance of the determination contemplated by this Appendix B.
                                                       ----------

              (v)  You shall notify the Company in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by the
Company of the Gross-Up Payment.  Such notification shall be given as soon as
practicable after you are informed in writing of such claim and shall apprise
the Company of the nature of such claim and the date on which such claim is
requested to be paid. You shall not pay such claim prior to the expiration of
the 30-day period following the date on which you give such notice to the
Company (or such shorter period ending on the date that any payment of taxes,
interest and/or penalties with respect to such claim is due). If the Company
were to notify you in writing prior to the expiration of such period that it
desires to contest such claim, you shall:

                   (A) give the Company any information reasonably requested by
the Company relating to such claim;

                   (B) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney reasonably selected by the Company and reasonably satisfactory to
you;

                   (C) cooperate with the Company in good faith in order to
effectively contest such claim; and

                   (D) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company shall bear and pay
directly all additional Excise Taxes imposed upon you and all costs, legal fees
and other expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify you for and hold you harmless
from, on an after-tax basis, any additional Excise Tax (including interest and
penalties with respect thereto) imposed upon you and any Excise Tax or income or
employment tax (including interest and penalties with respect thereto)
attributable to the Company's payment of that additional Excise Tax on your
behalf or imposed as a result of such representation and payment of all related
costs, legal fees and expenses. The amounts owed to you by reason of the
foregoing shall be paid to you or for your benefit as they become due and
payable. Without limiting the foregoing provisions of this paragraph, the
Company shall control all proceedings taken in connection with such contest and,
at its sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the
<PAGE>

M. Kathleen Smalley
Memorandum of Understanding regarding Employment
February 7, 2001
Page 14 of 14

taxing authority in respect of such claim and may, at the Company's sole option,
either direct you to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and you agree to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, the Company shall determine;
provided, however, that if the Company were to direct you to pay such claim and
sue for a refund, the Company shall advance the amount of such payment to you,
on an interest-free basis, and shall indemnify you for and hold you harmless
from, on an after-tax basis, any Excise Tax or income tax (including interest or
penalties with respect thereto) imposed with respect to such advance or with
respect to any imputed income with respect to such advance (including as a
result of any forgiveness by the Company of such advance); provided, further,
that any extension of the statute of limitations relating to the payment of
taxes for your taxable year with respect to which such contested amount is
claimed to be due is attributable in whole or in part to such contested amount.
Furthermore, the Company's control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and you
shall be entitled to settle or contest, as the case may be, any other issue
raised by the Internal Revenue Service or any other taxing authority.