Document:

Exhibit 10.1

 

EMPLOYMENT
AGREEMENT

 

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is entered
into as of August 8, 2005 by and between MICHAEL J. RAFFERTY (“Executive”)
and Hearthside Homes, Inc., a California corporation (“Employer”), which
is an indirect wholly-owned subsidiary of California Coastal Communities, Inc.,
a Delaware corporation (“Parent”).

 

WITNESSETH:

 

WHEREAS, Executive has
served Employer in various executive capacities and Employer desires to obtain
the benefit of continued service by Executive, and Executive desires to render
continued services to Employer;

 

 WHEREAS,
Employer has determined that because of Executive’s substantial experience and business
relationships in connection with the business of Employer, it is in the
Employer’s best interest and that of its stockholders to secure services of
Executive and to provide Executive certain additional benefits; and

 

WHEREAS, Employer and Executive desire to set forth in
this Agreement the terms and conditions of Executive’s employment with Employer.

 

NOW, THEREFORE, in consideration of the mutual
promises and covenants herein contained, the parties agree as follows:

 

SECTION 1.                                TERM. Employer
agrees to employ Executive and Executive agrees to serve Employer, in
accordance with the terms of this Agreement, for a term commencing as of January 1,
2005 and ending on December 31, 2006 (the “Term”).

 

SECTION 2.                                SERVICES. So
long as this Agreement shall continue in effect, Executive shall use his
commercially reasonably efforts and abilities to promote Employer’s business,
affairs and interests, and shall perform the services contemplated by this
Agreement in accordance with policies established by the Company.

 

SECTION 3.                                SPECIFIC POSITION;
DUTIES AND RESPONSIBILITIES. Employer and Executive agree that, subject to
the provisions of this Agreement, Employer will employ Executive and Executive
will serve Employer as a senior officer for the duration of this Agreement. The
specific job position in which Executive shall serve shall be President. Executive
agrees to observe and comply with the rules and regulations of Employer
respecting the performance of Executive’s duties and agrees to carry out and
perform directions and policies of Employer as they may be, from time to time,
stated either orally or in writing. Employer agrees that the duties which may
be assigned to Executive shall be usual and customary duties of the job
position set forth in this Section 3, and shall not be inconsistent with
the provisions of the charter documents of Employer or applicable law. Executive
shall have such corporate power and authority as shall reasonably be required
to enable the discharge of duties in any office that may be held.

 

 

SECTION 4.                                COMPENSATION.

 

(a)                                  Base
Salary and Bonus.

 

(i)                                     Base
Salary. During the Term of this Agreement, Employer agrees to pay Executive
a base salary of at least One Hundred Seventy Five Thousand Dollars ($175,000)
per year in semi-monthly installments on the same dates the other senior
officers of Employer are paid (“Base Salary”).

 

(ii)                                  Bonus.
Employer agrees to provide Executive with an opportunity to earn incentive
bonuses based upon the bonus formula set forth on Schedules A and B
attached hereto.

 

(b)                                 Additional
Benefits. Executive shall also be entitled to all rights and benefits under
any life, medical, dental, disability, or insurance plan or policy or other
plan or benefit that Employer or its subsidiaries may provide for Executive
(provided Executive is eligible to participate therein) or employees of
Employer generally as from time to time in effect during the Term of this
Agreement (the “Plans”). In any event, Employer shall provide Executive with
term life insurance, health insurance and long-term disability insurance
provided for Employer’s executive employees generally. Executive shall also be
entitled to fringe benefits in accordance with the plans, practices, programs
and policies as in effect generally with respect to other peer executives of
Employer.

 

(c)                                  Perquisites.

 

(i)                                     Vacation.
Executive shall be entitled to four (4) weeks of paid vacation each
twelve-month period, which shall accrue on a monthly basis. Such vacation shall
be taken at such time or times as shall not unduly disrupt the orderly conduct
of the business of Employer and the duties of Executive. At the time of any
termination of employment, Executive shall be paid for all accrued but unused
vacation up to 240 hours in accordance with Employer’s policy.

 

(ii)                                  Auto
Allowance. During the Term of this Agreement, Employer shall provide
Executive a monthly automobile allowance in the amount of $800 plus
reimbursement of operating costs as is currently covered under Employer’s Auto
Allowance Policy.

 

(d)                                 Overall
Qualification. Employer reserves the right to modify, suspend or
discontinue any and all practices, policies and programs generally applicable
to executives and other similarly situated executives at any time (whether
before or after termination of employment) without notice to or recourse by
Executive; however, Employer shall not amend the perquisites provisions set
forth in Section 4(c) to reduce Executive’s benefits thereunder
during the Term of this Agreement.

 

SECTION 5.                                TERMINATION. The
compensation and other benefits provided to Executive pursuant to this
Agreement, and the employment of Executive by Employer, shall be terminated
prior to expiration of the Term of this Agreement only as provided in this Section 5:

 

(a)                                  Disability.
In the event that Executive shall fail, because of illness, incapacity or
injury which is determined to be total (“Disability”) by a physician selected
by Employer or its

 

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insurers and acceptable to Executive or Executive’s legal
representative (such agreement as to acceptability not to be withheld
unreasonably), to render, for three consecutive months or for shorter periods
aggregating ninety (90) or more business days in any twelve (12)-month period,
the services contemplated by this Agreement, Executive’s employment hereunder
may be terminated by sixty (60) days’ prior written notice of termination from
Employer to Executive. Thereafter, Employer shall continue to (i) pay the
Base Salary to Executive for a period of six (6) months after the date of
termination, subject to adjustments referenced in the following paragraph, and (ii) provide
medical insurance as in effect prior to such termination for a period of six (6) months
following the date of termination. Thereafter, no further salary shall be paid
or medical insurance be provided. Executive’s rights under the Plans subsequent
to termination of employment pursuant to this paragraph shall be determined
under the applicable provisions of the respective Plans, unless otherwise
expressly stated herein. This Agreement in all other respects will terminate
upon the termination of employment pursuant to this paragraph.

 

The amount of compensation to be paid to Executive pursuant to the
preceding paragraph shall be adjusted in the event Executive becomes entitled
to and receives disability benefits under any disability payment plan,
including disability insurance. The amount of Executive’s compensation
otherwise payable by Employer pursuant to the preceding paragraph shall be
reduced, on a dollar-for-dollar basis, but not to less than zero, by the amount
of any such disability benefits received by Executive, but only to the extent
such benefits are attributable to payments made by Employer or an Employer-paid
program.

 

(b)                                 Death.
In the event of Executive’s death during the Term of this Agreement, Executive’s
Base Salary shall immediately terminate and Employer shall pay to the estate of
Executive the Base Salary accrued to the date of Executive’s death to the
extent not theretofore paid. If Executive’s death occurs while receiving
payments under Section 5(a) above, such payments shall cease. Executive’s
rights under the Plans subsequent to his death shall be determined under the
applicable provisions of the respective Plans; provided that, notwithstanding
any provisions to the contrary therein, Employer shall continue to provide
medical insurance to the dependents of Executive for a period of six (6) months
following the death of Executive. This Agreement in all other respects will
terminate upon the death of Executive.

 

(c)                                  For
Cause. The employment of Executive hereunder shall be terminable by
Employer in the event that Executive (i) is or has been engaging in
willful or grossly negligent conduct which has resulted in a failure to perform
Executive’s duties hereunder or, (ii) has committed an act of dishonesty,
gross negligence or misconduct, which has a direct, substantial and adverse
effect on Employer, its business or reputation.

 

Notwithstanding the foregoing, Executive shall not be
terminated for cause pursuant to the first paragraph of this subsection 5(c) unless
and until Executive has received written notice of a proposed termination for
cause and Executive has had an opportunity to be heard by an officer of the
Company authorized to take such action. Executive shall be deemed to have had
such opportunity if given written or telephonic notice by any officer at least
72 hours in advance of a meeting.

 

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In the event of Executive’s termination pursuant to
this subsection 5(c), Executive’s rights to receive Base Salary shall
immediately terminate and Employer shall pay to Executive his Base Salary and
vacation accrued to the date of such termination to the extent not theretofore
paid. Executive’s rights under the Plans subsequent to termination shall be
determined under the applicable provisions of the respective plans. This
Agreement in all other respects will terminate upon such termination.

 

(d)                                 Without
Cause. Notwithstanding any other provision of this Section 5, the
Board shall have the right to terminate Executive’s employment with Employer
without cause at any time upon at least thirty (30) days’ prior written notice
to Executive. The following conditions shall thereupon become applicable:

 

(i)                                     Severance
Pay. Employer shall continue to pay Executive the Base Salary on a semi-monthly
basis for the remainder of the Term of this Agreement.

 

(ii)                                  Medical
Insurance Continuation. Employer shall continue to provide (under COBRA)
medical insurance as in effect prior to such termination for twelve (12) months
following such termination, and Employer shall bear all costs for such
insurance.

 

(iii)                               Severance
Bonus Payment. If Executive is terminated without cause in connection with
the sale or merger of the business and operations of Employer and/or Parent to
a third party (a “Transaction”) or if Executive is required to move outside of
Southern California following a Transaction, Executive shall also be paid for
any potential bonuses under this Agreement (the “Severance Bonus Payment”), which shall be determined as follows:

 

(A)            the bonus formula in Schedule A to
this Agreement will be applied to (i) the amount of the purchase price for
the Transaction that is agreed by the Parent and the third party purchaser for
allocation to the value of homebuilding operations, excluding the value
of the Oxnard Project which is governed by the bonus formula in Schedule B
to this Agreement; or (ii), in the absence of such a negotiated allocation, the
amount of such allocation that is determined in good faith by the Board of
Directors of the Parent. The bonus formula shall then be applied as follows:

 

Deduct book basis, including accrued interest and preferred return on the
Parent’s capital (as provided in Schedule A), to determine
after-tax gain before bonus and then apply bonus formula in Schedule A;
and

 

(B)              the bonus formula in
Schedule B will be applied to (i) the amount of the purchase
price that is agreed by the Parent and the third party purchaser for allocation
to the value of the Oxnard Project; or (ii), in the absence of such a
negotiated allocation, the amount of such allocation that is determined in good
faith by the Board of Directors of the Parent.

 

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(iv)                              Termination
Without Cause Bonus Payment. If Executive is terminated by Employer without
cause (and not in connection with a Transaction), Executive shall also be paid
for any potential bonuses under this Agreement (the “Termination Without Cause
Bonus Payment”). The amount of any such
Termination Without Cause Bonus
Payment shall be determined as follows:

 

(A)            the bonus formula in Schedule A
will be applied to the amount of the discounted cash flows (i.e. net present value)
of the homebuilding operations, excluding the value of the Oxnard
Project which is governed by the bonus formula in Schedule B, based
on the most recent cash flow forecast for Hearthside Homes, Inc. and its
subsidiaries after applying a 20% discount rate, on an annual basis, to
estimated future cash flows as of the date of Executive’s termination. The
bonus formula shall then be applied as follows:

 

Deduct book basis, including accrued interest and preferred return on the
Parent’s capital (as provided in Schedule A), to determine
after-tax gain before bonus and then apply bonus formula in Schedule A;
and

 

(B)              the
bonus formula in Schedule B will be applied to the amount of the discounted cash flows (i.e. net present value)
of the Oxnard Project based on the most recent forecast for Hearthside
Homes, Inc.’s share of the cash flows from Hearthside Homes Oxnard LLC after
applying a 30% discount rate, on an annual basis, to estimated future cash
flows as of the date of Executive’s termination.

 

(e)                                  Voluntary
Termination. At any time during the Term of this Agreement, Executive shall
have the right, upon thirty (30) days’ prior written notice to Employer, to
terminate his employment with Employer. Upon termination of Executive’s
employment pursuant to this subsection 5(e), (i) Executive’s right to
receive Base Salary shall immediately terminate and Employer shall pay to
Executive his Base Salary accrued to the date of such termination to the extent
not theretofore paid and (ii) Executive’s rights under the Plans
subsequent to such termination shall be determined under the applicable
provisions of the respective Plans. This Agreement in all other respects will
terminate upon such termination.

 

(f)                                    Termination
by Executive for “Good Reason”. Notwithstanding any other provisions of
this Agreement, Employer shall provide Executive with the payments and benefits
set forth in Section 5(d) (i) and (ii) in the event
Executive terminates employment for “Good Reason.”  For purposes of this Agreement, “Good Reason”
for Executive to terminate employment shall mean voluntary termination as a
result of (i) the assignment to Executive of duties inconsistent with the
position and status of Executive as set forth in this Agreement without
Executive’s prior written consent, (ii) a substantial alteration in the
nature, status or prestige of Executive’s responsibilities as set forth in this
Agreement or a change in Executive’s title or reporting level from that set
forth in this Agreement, (iii) the relocation of Employer’s executive
offices or principal business location to a point more than twenty-five (25)
miles from the location of such offices or business as of the date of this
Agreement, (iv) reduction by

 

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Employer of Executive’s Base Salary in effect on the date hereof or as
the same may be increased from time to time, (v) any action by Employer
(including the elimination of benefit plans without providing substitutes
therefor or the reduction of Executive’s benefits thereunder) that would
substantially diminish the aggregate value of Executive’s other fringe benefits.

 

SECTION 6.                                BUSINESS EXPENSES.
During the Term of this Agreement, Employer shall reimburse Executive promptly
for reasonable business expenditures, including travel, entertainment, parking,
business meetings and professional dues made and substantiated in accordance
with policies, practices and procedures established from time to time by the
Board and incurred in pursuit and furtherance of Employer’s business and
goodwill.

 

SECTION 7.                                MISCELLANEOUS.

 

(a)                                  Succession;
Survival. This Agreement shall inure to the benefit of and shall be binding
upon Employer, its successors and assigns. Absent the prior written consent of
Executive, this Agreement may not be assigned by Employer other than in
connection with a merger or sale of all or substantially all the assets of
Employer or a similar transaction in which the successor or assignee assumes
(whether by operation of law or express assumption) all obligations of Employer
hereunder. The obligations and duties of Executive hereunder are personal and
otherwise not assignable. Executive’s obligations and representations under
this Agreement will survive the termination of Executive’s employment,
regardless of the manner of such termination.

 

(b)                                 Notices.
Any notice or other communication provided for in this Agreement shall be in
writing and sent if to Employer to its office at:

 

Hearthside Homes, Inc.

6 Executive Circle, Suite 250

Irvine, California 92614

Attention: Chief Executive Officer

 

or at such other address as Employer may from time to
time in writing designate, and if to Executive at such address as Executive may
from time to time in writing designate (or Executive’s business address of
record in the absence of such designation). Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number so specified in (or pursuant to) this Section 7
and an appropriate answer back is received, (ii) if given by mail, three
days after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other
means, when actually delivered at such address.

 

(c)                                  Entire
Agreement; Amendments. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof and it supersedes any prior
agreements, undertakings, commitments and practices relating to Executive’s
employment by Employer. No amendment or modification of the terms of this
Agreement shall be valid unless made in writing and signed by Executive and, on
behalf of Employer, by an officer expressly so authorized by its Board of
Directors.

 

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(d)                                 Waiver.
No failure on the part of any party to exercise or delay in exercising any
right hereunder shall be deemed a waiver thereof or of any other right, nor
shall any single or partial exercise preclude any further or other exercise of
such right or any other right.

 

(e)                                  Choice
of Law. This Agreement, the legal relations between the parties and any
action, whether contractual or non-contractual, instituted by any party with
respect to matters arising under or growing out of or in connection with or in
respect of this Agreement, the relationship of the parties or the subject
matter hereof shall be governed by and construed in accordance with the laws of
the State of California, applicable to contracts made and performed in such
State and without regard to conflicts of law doctrines, to the extent permitted
by law.

 

(f)                                    Attorney’s
Fees. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled
to recover reasonable attorney’s fees, costs and necessary disbursements from
the non-prevailing party in addition to any other relief to which such party
may be entitled.

 

(g)                                 Confidentiality;
Proprietary Information. Executive agrees to not make use of, divulge or
otherwise disclose, directly or indirectly, any trade secret or other
confidential or proprietary information concerning the business (including but
not limited to its products, employees, services, practices or policies) of
Employer or any of its affiliates of which Executive may learn or be aware as a
result of Executive’s employment during the Term of the Agreement or prior
thereto as stockholder, employee, officer or director of, or consultant to,
Employer, except to the extent such use or disclosure is (i) necessary to
the performance of this Agreement and in furtherance of Employer’s best
interests, (ii) required by applicable law, (iii) lawfully obtainable
from other public sources, or (iv) authorized in writing by or pursuant to
a written agreement with Employer. The provisions of this subsection (g) shall
survive the expiration, suspension or termination, for any reason, of this
Agreement.

 

(h)                                 Severability.
If any provision of this Agreement is held invalid or unenforceable, the
remainder of this Agreement shall nevertheless remain in full force and effect,
and if any provision is held invalid or unenforceable with respect to
particular circumstances, it shall nevertheless remain in full force and effect
in all other circumstances, to the fullest extent permitted by law.

 

(i)                                     Withholding;
Deductions. All compensation payable hereunder, including salary and other
benefits, shall be subject to applicable taxes, withholding and other required,
normal or elected employee deductions.

 

(j)                                     Section Headings.
Section and other headings contained in this Agreement are for convenience
of reference only and shall not affect in any way the meaning or interpretation
of this Agreement.

 

(k)                                  Counterparts.
This Agreement and any amendment hereto may be executed in one or more
counterparts. All of such counterparts shall constitute one and the same
agreement and shall become effective when a copy signed by each party has been
delivered to the other party.

 

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IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.

 

	
   

  	
  “EMPLOYER”

  
	
   

  	
   

  
	
   

  	
  HEARTHSIDE HOMES, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ RAYMOND J. PACINI

  	
   

  
	
   

  	
   

  	
  Raymond J. Pacini

  
	
   

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  “EXECUTIVE”

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ MICHAEL J. RAFFERTY

  	
   

  
	
   

  	
   

  	
  Michael J. Rafferty

  
					

 

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Schedule A

 

Homebuilding Bonus Formula *

 

Executive shall receive
10% of the after-tax income of Hearthside Homes, Inc. after adjustments
for (a) preferred return to Parent at 16% per annum for “finished,
blue-top lots” during 2005 (subject to annual adjustment based on changes in
the prime rate as of January 1st of each year thereafter) and at 20% per
annum for “paper lots” during 2005 (subject to annual adjustment based on
changes in the prime rate as of January 1st of each year thereafter) based
on actual equity outstanding, or a 70/30 debt to equity ratio if there is no
third party debt outstanding; (b) interest payable to Parent at prevailing
bank rates based on a 70/30 debt to equity ratio if there is no third party
debt outstanding or such third party debt is not fully utilized;  (c) state and federal income taxes
(currently at an effective rate of 40.75%); and (d) any prior period book
losses based on generally accepted accounting principles.

 

* This formula shall not
apply to any income resulting from any homebuilding at Bolsa Chica or any
acquisition of another homebuilder, or homebuilding assets, which is initiated
and financed by Parent.

 

 

Schedule B

 

Oxnard Project Bonus Formula

 

The Oxnard Project Bonus shall only be payable to the
extent that certain profit levels on the Oxnard Project are realized in cash (“Cash
Flow”) as calculated below:

 

Executive shall receive 6% of the first $5.5 million
of Cash Flow received by Hearthside Homes, Inc. from Hearthside Homes Oxnard
LLC after adjustments for preferred return to Parent at 15% per annum based on
actual equity outstanding. Thereafter, Executive shall receive 8% of the Cash
Flow received by Hearthside Homes, Inc. from Hearthside Homes Oxnard LLC
in excess of $5.5 million and Parent’s preferred return.

 

2Exhibit 10.2

 

EMPLOYMENT
AGREEMENT

 

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is entered
into as of August 8, 2005 by and between JOHN W. MARSHALL (“Executive”)
and Hearthside Homes, Inc., a California corporation (“Employer”), which
is an indirect wholly-owned subsidiary of California Coastal Communities, Inc.,
a Delaware corporation (“Parent”).

 

WITNESSETH:

 

WHEREAS, Executive has
served Employer in various executive capacities and Employer desires to obtain
the benefit of continued service by Executive, and Executive desires to render
continued services to Employer;

 

 WHEREAS,
Employer has determined that because of Executive’s substantial experience and business
relationships in connection with the business of Employer, it is in the
Employer’s best interest and that of its stockholders to secure services of
Executive and to provide Executive certain additional benefits; and

 

WHEREAS, Employer and Executive desire to set forth in
this Agreement the terms and conditions of Executive’s employment with Employer.

 

NOW, THEREFORE, in consideration of the mutual
promises and covenants herein contained, the parties agree as follows:

 

SECTION 1.                                TERM. Employer
agrees to employ Executive and Executive agrees to serve Employer, in
accordance with the terms of this Agreement, for a term commencing as of January 1,
2005 and ending on December 31, 2006 (the “Term”).

 

SECTION 2.                                SERVICES. So
long as this Agreement shall continue in effect, Executive shall use his
commercially reasonably efforts and abilities to promote Employer’s business,
affairs and interests, and shall perform the services contemplated by this
Agreement in accordance with policies established by the Company.

 

SECTION 3.                                SPECIFIC POSITION;
DUTIES AND RESPONSIBILITIES. Employer and Executive agree that, subject to
the provisions of this Agreement, Employer will employ Executive and Executive
will serve Employer as a senior officer for the duration of this Agreement. The
specific job position in which Executive shall serve shall be Senior Vice President.
Executive agrees to observe and comply with the rules and regulations of
Employer respecting the performance of Executive’s duties and agrees to carry
out and perform directions and policies of Employer as they may be, from time
to time, stated either orally or in writing. Employer agrees that the duties
which may be assigned to Executive shall be usual and customary duties of the
job position set forth in this Section 3, and shall not be inconsistent
with the provisions of the charter documents of Employer or applicable law. Executive
shall have such corporate power and authority as shall reasonably be required
to enable the discharge of duties in any office that may be held.

 

 

SECTION 4.                                COMPENSATION.

 

(a)                                  Base
Salary and Bonus.

 

(i)                                     Base
Salary. During the Term of this Agreement, Employer agrees to pay Executive
a base salary of at least One Hundred Thirty-Seven Thousand and Five Hundred Dollars
($137,500) per year in semi-monthly installments on the same dates the other
senior officers of Employer are paid (“Base Salary”).

 

(ii)                                  Bonus.
Employer agrees to provide Executive with an opportunity to earn incentive
bonuses based upon the bonus formula set forth on Schedules A and B
attached hereto.

 

(b)                                 Additional
Benefits. Executive shall also be entitled to all rights and benefits under
any life, medical, dental, disability, or insurance plan or policy or other
plan or benefit that Employer or its subsidiaries may provide for Executive
(provided Executive is eligible to participate therein) or employees of Employer
generally as from time to time in effect during the Term of this Agreement (the
“Plans”). In any event, Employer shall provide Executive with term life
insurance, health insurance and long-term disability insurance provided for
Employer’s executive employees generally. Executive shall also be entitled to
fringe benefits in accordance with the plans, practices, programs and policies
as in effect generally with respect to other peer executives of Employer.

 

(c)                                  Perquisites.

 

(i)                                     Vacation.
Executive shall be entitled to four (4) weeks of paid vacation each
twelve-month period, which shall accrue on a monthly basis. Such vacation shall
be taken at such time or times as shall not unduly disrupt the orderly conduct
of the business of Employer and the duties of Executive. At the time of any
termination of employment, Executive shall be paid for all accrued but unused
vacation up to 240 hours in accordance with Employer’s policy.

 

(ii)                                  Auto
Allowance. During the Term of this Agreement, Employer shall provide Executive
a monthly automobile allowance in the amount of $550 plus reimbursement of
operating costs as is currently covered under Employer’s Auto Allowance Policy.

 

(d)                                 Overall
Qualification. Employer reserves the right to modify, suspend or
discontinue any and all practices, policies and programs generally applicable
to executives and other similarly situated executives at any time (whether
before or after termination of employment) without notice to or recourse by
Executive; however, Employer shall not amend the perquisites provisions set
forth in Section 4(c) to reduce Executive’s benefits thereunder
during the Term of this Agreement.

 

SECTION 5.                                TERMINATION. The
compensation and other benefits provided to Executive pursuant to this
Agreement, and the employment of Executive by Employer, shall be terminated
prior to expiration of the Term of this Agreement only as provided in this Section 5:

 

(a)                                  Disability.
In the event that Executive shall fail, because of illness, incapacity or
injury which is determined to be total (“Disability”) by a physician selected
by Employer or its

 

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insurers and acceptable to Executive or Executive’s legal
representative (such agreement as to acceptability not to be withheld unreasonably),
to render, for three consecutive months or for shorter periods aggregating
ninety (90) or more business days in any twelve (12)-month period, the services
contemplated by this Agreement, Executive’s employment hereunder may be
terminated by sixty (60) days’ prior written notice of termination from
Employer to Executive. Thereafter, Employer shall continue to (i) pay the
Base Salary to Executive for a period of six (6) months after the date of
termination, subject to adjustments referenced in the following paragraph, and (ii) provide
medical insurance as in effect prior to such termination for a period of six (6) months
following the date of termination. Thereafter, no further salary shall be paid
or medical insurance be provided. Executive’s rights under the Plans subsequent
to termination of employment pursuant to this paragraph shall be determined
under the applicable provisions of the respective Plans, unless otherwise
expressly stated herein. This Agreement in all other respects will terminate
upon the termination of employment pursuant to this paragraph.

 

The amount of compensation to be paid to Executive pursuant to the
preceding paragraph shall be adjusted in the event Executive becomes entitled
to and receives disability benefits under any disability payment plan,
including disability insurance. The amount of Executive’s compensation
otherwise payable by Employer pursuant to the preceding paragraph shall be
reduced, on a dollar-for-dollar basis, but not to less than zero, by the amount
of any such disability benefits received by Executive, but only to the extent
such benefits are attributable to payments made by Employer or an Employer-paid
program.

 

(b)                                 Death.
In the event of Executive’s death during the Term of this Agreement, Executive’s
Base Salary shall immediately terminate and Employer shall pay to the estate of
Executive the Base Salary accrued to the date of Executive’s death to the
extent not theretofore paid. If Executive’s death occurs while receiving
payments under Section 5(a) above, such payments shall cease. Executive’s
rights under the Plans subsequent to his death shall be determined under the
applicable provisions of the respective Plans; provided that, notwithstanding
any provisions to the contrary therein, Employer shall continue to provide
medical insurance to the dependents of Executive for a period of six (6) months
following the death of Executive. This Agreement in all other respects will
terminate upon the death of Executive.

 

(c)                                  For
Cause. The employment of Executive hereunder shall be terminable by
Employer in the event that Executive (i) is or has been engaging in
willful or grossly negligent conduct which has resulted in a failure to perform
Executive’s duties hereunder or, (ii) has committed an act of dishonesty,
gross negligence or misconduct, which has a direct, substantial and adverse
effect on Employer, its business or reputation.

 

Notwithstanding the foregoing, Executive shall not be
terminated for cause pursuant to the first paragraph of this subsection 5(c) unless
and until Executive has received written notice of a proposed termination for
cause and Executive has had an opportunity to be heard by an officer of the
Company authorized to take such action. Executive shall be deemed to have had
such opportunity if given written or telephonic notice by any officer at least
72 hours in advance of a meeting.

 

3

 

In the event of Executive’s termination pursuant to
this subsection 5(c), Executive’s rights to receive Base Salary shall
immediately terminate and Employer shall pay to Executive his Base Salary and
vacation accrued to the date of such termination to the extent not theretofore
paid. Executive’s rights under the Plans subsequent to termination shall be
determined under the applicable provisions of the respective plans. This
Agreement in all other respects will terminate upon such termination.

 

(d)                                 Without
Cause. Notwithstanding any other provision of this Section 5, the
Board shall have the right to terminate Executive’s employment with Employer
without cause at any time upon at least thirty (30) days’ prior written notice
to Executive. The following conditions shall thereupon become applicable:

 

(i)                                     Severance
Pay. Employer shall continue to pay Executive the Base Salary on a semi-monthly
basis for the remainder of the Term of this Agreement.

 

(ii)                                  Medical
Insurance Continuation. Employer shall continue to provide (under COBRA)
medical insurance as in effect prior to such termination for twelve (12) months
following such termination, and Employer shall bear all costs for such
insurance.

 

(iii)                               Severance
Bonus Payment. If Executive is terminated without cause in connection with
the sale or merger of the business and operations of Employer and/or Parent to
a third party (a “Transaction”) or if Executive is required to move outside of
Southern California following a Transaction, Executive shall also be paid for
any potential bonuses under this Agreement (the “Severance Bonus Payment”), which shall be determined as follows:

 

(A)            the bonus formula in Schedule A to
this Agreement will be applied to (i) the amount of the purchase price for
the Transaction that is agreed by the Parent and the third party purchaser for
allocation to the value of homebuilding operations, excluding the value
of the Oxnard Project which is governed by the bonus formula in Schedule B
to this Agreement; or (ii), in the absence of such a negotiated allocation, the
amount of such allocation that is determined in good faith by the Board of
Directors of the Parent. The bonus formula shall then be applied as follows:

 

Deduct book basis, including accrued interest and preferred return on the
Parent’s capital (as provided in Schedule A), to determine
after-tax gain before bonus and then apply bonus formula in Schedule A;
and

 

(B)              the bonus formula in
Schedule B will be applied to (i) the amount of the purchase
price that is agreed by the Parent and the third party purchaser for allocation
to the value of the Oxnard Project; or (ii), in the absence of such a
negotiated allocation, the amount of such allocation that is determined in good
faith by the Board of Directors of the Parent.

 

4

 

(iv)                              Termination
Without Cause Bonus Payment. If Executive is terminated by Employer without
cause (and not in connection with a Transaction), Executive shall also be paid
for any potential bonuses under this Agreement (the “Termination Without Cause
Bonus Payment”). The amount of any such
Termination Without Cause Bonus
Payment shall be determined as follows:

 

(A)            the bonus formula in Schedule A
will be applied to the amount of the discounted cash flows (i.e. net present value)
of the homebuilding operations, excluding the value of the Oxnard
Project which is governed by the bonus formula in Schedule B, based
on the most recent cash flow forecast for Hearthside Homes, Inc. and its
subsidiaries after applying a 20% discount rate, on an annual basis, to
estimated future cash flows as of the date of Executive’s termination. The
bonus formula shall then be applied as follows:

 

Deduct book basis, including accrued interest and preferred return on the
Parent’s capital (as provided in Schedule A), to determine
after-tax gain before bonus and then apply bonus formula in Schedule A;
and

 

(B)              the
bonus formula in Schedule B will be applied to the amount of the discounted cash flows (i.e. net present value)
of the Oxnard Project based on the most recent forecast for Hearthside
Homes, Inc.’s share of the cash flows from Hearthside Homes Oxnard LLC after
applying a 30% discount rate, on an annual basis, to estimated future cash
flows as of the date of Executive’s termination.

 

(e)                                  Voluntary
Termination. At any time during the Term of this Agreement, Executive shall
have the right, upon thirty (30) days’ prior written notice to Employer, to
terminate his employment with Employer. Upon termination of Executive’s
employment pursuant to this subsection 5(e), (i) Executive’s right to
receive Base Salary shall immediately terminate and Employer shall pay to
Executive his Base Salary accrued to the date of such termination to the extent
not theretofore paid and (ii) Executive’s rights under the Plans
subsequent to such termination shall be determined under the applicable
provisions of the respective Plans. This Agreement in all other respects will
terminate upon such termination.

 

(f)                                    Termination
by Executive for “Good Reason”. Notwithstanding any other provisions of
this Agreement, Employer shall provide Executive with the payments and benefits
set forth in Section 5(d) (i) and (ii) in the event
Executive terminates employment for “Good Reason.”  For purposes of this Agreement, “Good Reason”
for Executive to terminate employment shall mean voluntary termination as a
result of (i) the assignment to Executive of duties inconsistent with the
position and status of Executive as set forth in this Agreement without
Executive’s prior written consent, (ii) a substantial alteration in the
nature, status or prestige of Executive’s responsibilities as set forth in this
Agreement or a change in Executive’s title or reporting level from that set
forth in this Agreement, (iii) the relocation of Employer’s executive
offices or principal business location to a point more than twenty-five (25)
miles from the location of such offices or business as of the date of this
Agreement, (iv) reduction by

 

5

 

Employer of Executive’s Base Salary in effect on the date hereof or as
the same may be increased from time to time, (v) any action by Employer
(including the elimination of benefit plans without providing substitutes
therefor or the reduction of Executive’s benefits thereunder) that would
substantially diminish the aggregate value of Executive’s other fringe benefits.

 

SECTION 6.                                BUSINESS EXPENSES.
During the Term of this Agreement, Employer shall reimburse Executive promptly
for reasonable business expenditures, including travel, entertainment, parking,
business meetings and professional dues made and substantiated in accordance
with policies, practices and procedures established from time to time by the
Board and incurred in pursuit and furtherance of Employer’s business and
goodwill.

 

SECTION 7.                                MISCELLANEOUS.

 

(a)                                  Succession;
Survival. This Agreement shall inure to the benefit of and shall be binding
upon Employer, its successors and assigns. Absent the prior written consent of
Executive, this Agreement may not be assigned by Employer other than in
connection with a merger or sale of all or substantially all the assets of
Employer or a similar transaction in which the successor or assignee assumes
(whether by operation of law or express assumption) all obligations of Employer
hereunder. The obligations and duties of Executive hereunder are personal and
otherwise not assignable. Executive’s obligations and representations under
this Agreement will survive the termination of Executive’s employment,
regardless of the manner of such termination.

 

(b)                                 Notices.
Any notice or other communication provided for in this Agreement shall be in
writing and sent if to Employer to its office at:

 

Hearthside Homes, Inc.

6 Executive Circle, Suite 250

Irvine, California 92614

Attention: Chief Executive Officer

 

or at such other address as Employer may from time to
time in writing designate, and if to Executive at such address as Executive may
from time to time in writing designate (or Executive’s business address of
record in the absence of such designation). Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number so specified in (or pursuant to) this Section 7
and an appropriate answer back is received, (ii) if given by mail, three
days after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other
means, when actually delivered at such address.

 

(c)                                  Entire
Agreement; Amendments. This Agreement contains the entire agreement of the
parties relating to the subject matter hereof and it supersedes any prior agreements,
undertakings, commitments and practices relating to Executive’s employment by
Employer. No amendment or modification of the terms of this Agreement shall be
valid unless made in writing and signed by Executive and, on behalf of
Employer, by an officer expressly so authorized by its Board of Directors.

 

6

 

(d)                                 Waiver.
No failure on the part of any party to exercise or delay in exercising any
right hereunder shall be deemed a waiver thereof or of any other right, nor
shall any single or partial exercise preclude any further or other exercise of
such right or any other right.

 

(e)                                  Choice
of Law. This Agreement, the legal relations between the parties and any
action, whether contractual or non-contractual, instituted by any party with
respect to matters arising under or growing out of or in connection with or in
respect of this Agreement, the relationship of the parties or the subject
matter hereof shall be governed by and construed in accordance with the laws of
the State of California, applicable to contracts made and performed in such
State and without regard to conflicts of law doctrines, to the extent permitted
by law.

 

(f)                                    Attorney’s
Fees. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled
to recover reasonable attorney’s fees, costs and necessary disbursements from
the non-prevailing party in addition to any other relief to which such party
may be entitled.

 

(g)                                 Confidentiality;
Proprietary Information. Executive agrees to not make use of, divulge or
otherwise disclose, directly or indirectly, any trade secret or other
confidential or proprietary information concerning the business (including but
not limited to its products, employees, services, practices or policies) of
Employer or any of its affiliates of which Executive may learn or be aware as a
result of Executive’s employment during the Term of the Agreement or prior
thereto as stockholder, employee, officer or director of, or consultant to,
Employer, except to the extent such use or disclosure is (i) necessary to
the performance of this Agreement and in furtherance of Employer’s best
interests, (ii) required by applicable law, (iii) lawfully obtainable
from other public sources, or (iv) authorized in writing by or pursuant to
a written agreement with Employer. The provisions of this subsection (g) shall
survive the expiration, suspension or termination, for any reason, of this
Agreement.

 

(h)                                 Severability.
If any provision of this Agreement is held invalid or unenforceable, the
remainder of this Agreement shall nevertheless remain in full force and effect,
and if any provision is held invalid or unenforceable with respect to
particular circumstances, it shall nevertheless remain in full force and effect
in all other circumstances, to the fullest extent permitted by law.

 

(i)                                     Withholding;
Deductions. All compensation payable hereunder, including salary and other
benefits, shall be subject to applicable taxes, withholding and other required,
normal or elected employee deductions.

 

(j)                                     Section Headings.
Section and other headings contained in this Agreement are for convenience
of reference only and shall not affect in any way the meaning or interpretation
of this Agreement.

 

(k)                                  Counterparts.
This Agreement and any amendment hereto may be executed in one or more
counterparts. All of such counterparts shall constitute one and the same
agreement and shall become effective when a copy signed by each party has been
delivered to the other party.

 

7

 

IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.

 

	
   

  	
  “EMPLOYER”

  
	
   

  	
   

  	
   

  
	
   

  	
  HEARTHSIDE HOMES, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ RAYMOND J. PACINI

  	
   

  
	
   

  	
   

  	
  Raymond J. Pacini

  
	
   

  	
   

  	
  Chief Executive Officer

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  “EXECUTIVE”

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ JOHN M. MARSHALL

  	
   

  
	
   

  	
   

  	
  John W. Marshall

  
					

 

8

 

Schedule A

 

Homebuilding Bonus Formula *

 

Executive shall receive 6%
of the after-tax income of Hearthside Homes, Inc. after adjustments for (a) preferred
return to Parent at 16% per annum for “finished, blue-top lots” during 2005
(subject to annual adjustment based on changes in the prime rate as of January 1st
of each year thereafter) and at 20% per annum for “paper lots” during 2005 (subject
to annual adjustment based on changes in the prime rate as of January 1st
of each year thereafter) based on actual equity outstanding, or a 70/30 debt to
equity ratio if there is no third party debt outstanding; (b) interest
payable to Parent at prevailing bank rates based on a 70/30 debt to equity
ratio if there is no third party debt outstanding or such third party debt is
not fully utilized;  (c) state and
federal income taxes (currently at an effective rate of 40.75%); and (d) any
prior period book losses based on generally accepted accounting principles.

 

* This formula shall not
apply to any income resulting from any homebuilding at Bolsa Chica or any
acquisition of another homebuilder, or homebuilding assets, which is initiated
and financed by Parent.

 

 

Schedule B

 

Oxnard Project Bonus Formula

 

The Oxnard Project Bonus shall only be payable to the
extent that certain profit levels on the Oxnard Project are realized in cash (“Cash
Flow”) as calculated below:

 

Executive shall receive 3% of the first $5.5 million
of Cash Flow received by Hearthside Homes, Inc. from Hearthside Homes Oxnard
LLC after adjustments for preferred return to Parent at 15% per annum based on
actual equity outstanding. Thereafter, Executive shall receive 4% of the Cash
Flow received by Hearthside Homes, Inc. from Hearthside Homes Oxnard LLC
in excess of $5.5 million and Parent’s preferred return.

 

2

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