-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RDZD0wJ3AzP54joL8agI3hkLUSA/5qS5/q92r8bx1j5QCq/SH8yoVlOS5ajQzAVO yF4+HJ3SWTfaSgkVn5rMzA== 0000950150-01-000117.txt : 20010402 0000950150-01-000117.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950150-01-000117 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HAWTHORNE FINANCIAL CORP CENTRAL INDEX KEY: 0000046267 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 952085671 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-01100 FILM NUMBER: 1587686 BUSINESS ADDRESS: STREET 1: 2381 ROSECRANS AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 BUSINESS PHONE: 3107255000 MAIL ADDRESS: STREET 1: 2381 ROSECRANS AVE CITY: EL SEGUNDO STATE: CA ZIP: 90245 10-K 1 a70896e10-k.txt FORM 10-K FOR YEAR ENDING 12-31-2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER: 0-1100 HAWTHORNE FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2085671 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2381 ROSECRANS AVENUE, 2ND FLOOR 90245 EL SEGUNDO, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 725-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 PER SHARE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [ ] As of March 23, 2001, the aggregate market value of voting stock held by nonaffiliates of the registrant was approximately $74,292,094 (based upon the last reported sales price of the Common Stock as reported by the Nasdaq National Market). Shares of Common Stock held by each executive officer, director, and shareholders with beneficial ownership of greater than 10% of the outstanding Common Stock of the registrant and persons or entities known to the registrant to be affiliates of the foregoing have been excluded in that such persons may be deemed to be affiliates. This assumption regarding affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of Common Stock, par value $0.01 per share, of the Registrant outstanding as of March 23, 2001 was 5,178,788 shares. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report incorporates by reference portions of the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the Registrant's 2001 Annual Meeting of Stockholders. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 HAWTHORNE FINANCIAL CORPORATION ANNUAL REPORT ON FORM 10-K
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 26 Item 3. Legal Proceedings........................................... 27 Item 4. Submission of Matters to a Vote of Security Holders......... 28 Item 4A. Executive Officers.......................................... 28 PART II Market for Registrant's Common Equity and Related Item 5. Stockholder Matters......................................... 30 Item 6. Selected Financial Data..................................... 31 Management's Discussion and Analysis of Financial Condition Item 7. and Results of Operations................................... 33 Quantitative and Qualitative Disclosure about Market Item 7A. Risks....................................................... 46 Item 8. Financial Statements and Supplementary Data................. 47 Changes in and Disagreements with Accountants on Accounting Item 9. and Financial Disclosure.................................... 47 PART III Item 10. Directors and Executive Officers of the Registrant.......... 48 Item 11. Executive Compensation...................................... 48 Security Ownership of Certain Beneficial Owners and Item 12. Management.................................................. 48 Item 13. Certain Relationships and Related Transactions.............. 48 PART IV Exhibits, Financial Statement Schedules and Reports on Form Item 14. 8-K......................................................... 48
i 3 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS When used in this Form 10-K or future filings by Hawthorne Financial Corporation ("Company") with the Securities and Exchange Commission ("SEC"), in the Company's press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", "believe" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers that all forward-looking statements are necessarily speculative and not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Also, the Company wishes to advise readers that various risks and uncertainties could affect the Company's financial performance and cause actual results for future periods to differ materially from those anticipated or projected. Specifically, the Company cautions readers that the following important factors could affect the Company's business and cause actual results to differ materially from those expressed in any forward-looking statement made by, or on behalf of, the Company: - Economic Conditions. The Company's results are strongly influenced by general economic conditions in its market area. Accordingly, deterioration in these conditions could have a material adverse impact on the quality of the Company's loan portfolio and the demand for its products and services. In particular, changes in economic conditions in the real estate industry may affect its performance. - Interest Rate Risk. The Company realizes income principally from the differential or spread between the interest earned on loans, investments, and other interest earning assets, and the interest paid on deposits and borrowings. The volumes and yields on loans, deposits, and borrowings are affected by market interest rates. As of December 31, 2000, 89.45% of the Company's net loan portfolio was tied to adjustable rate indices such as Prime Rate, 11th district cost of funds (COFI), MTA, CMT and LIBOR. The majority of the Company's deposits are time deposits with a stated maturity (generally one year or less) and a fixed rate of interest. The borrowings from the FHLB also carry a fixed interest rate for a term of up to 10 years, although the weighted average maturity of the borrowings as of December 31, 2000, was four years and two months. Changes in the market level of interest rates directly and immediately affect the Company's interest spread, and therefore profitability. Sharp and significant changes to market rates can cause the interest spread to shrink or expense significantly in the near term, principally because of the timing differences between the adjustable rate loans and the maturities (and therefore repricing) of the deposits and borrowings. Sharp decreases in interest rates have historically resulted in increased loan refinancings to fixed rate products. The Bank offers fixed rate products on a limited basis. - Government Regulation And Monetary Policy. All forward-looking statements presume a continuation of the existing regulatory environment and United States' government monetary policies. The banking industry is subject to extensive federal and state regulations, and significant new laws or changes in, or repeals of, existing laws may cause results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company, primarily through open market operations in United States government securities, the discount rate for member bank borrowings and bank reserve requirements, and a material change in these conditions has had and is likely to continue to have a material impact on the Company's results. - Competition. The Company competes with numerous other domestic and foreign financial institutions and non depository financial intermediaries. The Company's results may differ if circumstances affecting the nature or level of competition change, such as the merger of competing financial institutions or the acquisition of California institutions by out-of-state companies. - Credit Quality. A significant source of risk arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loans. The Company has adopted underwriting and credit monitoring procedures and credit ii 4 policies, including the establishment and review of the allowance for credit losses, that management believes are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying its credit portfolio, but such policies and procedures may not prevent unexpected losses that could materially adversely affect the Company's results. - Other Risks. From time to time, the Company details other risks with respect to its business and/or financial results in press releases and filings with the SEC. Stockholders are urged to review the risks described in such releases and filings. The risks highlighted herein should not be assumed the only things that could affect future performance of the Company. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. iii 5 PART I ITEM 1. BUSINESS GENERAL ORGANIZATION Hawthorne Financial Corporation ("Hawthorne Financial" or "Company"), a Delaware corporation organized in 1959, is a savings and loan holding company that owns 100% of the stock of Hawthorne Savings, F.S.B. ("Hawthorne Savings" or "Bank"). Hawthorne Savings was incorporated in 1950 and commenced operations on May 11, 1951. As of March 30, 2001, the Bank's eight full service retail offices located in Southern California included the Hermosa Beach branch, which opened in January 2001. The Company originates real estate secured loans throughout Southern California. These loans generally consist of (1) permanent loans collateralized by single family (one to four unit) residential property, (2) permanent and construction loans secured by multi-family residential and commercial real estate, (3) construction loans of single family residential homes and (4) the acquisition and development of land for the construction of such homes. The Company funds its loans predominately with retail deposits and, to a lesser extent, with advances from the Federal Home Loan Bank of San Francisco ("FHLB"). HAWTHORNE SAVINGS Hawthorne Savings is a federally chartered stock savings bank (referred to in applicable statutes and regulations as a "savings association") incorporated and licensed under the laws of the United States. The Bank is a member of the Federal Home Loan Bank of San Francisco ("FHLB"), which is a member bank of the Federal Home Loan Bank System. The Savings Association Insurance Fund ("SAIF"), which is a separate insurance fund administered by the Federal Deposit Insurance Corporation ("FDIC"), insures the Bank's deposit accounts up to the $100,000 maximum amount currently allowable under federal laws. The Bank is subject to examination and regulation by the Office of Thrift Supervision ("OTS") and the FDIC. Hawthorne Savings is further subject to regulations of the Board of Governors of the Federal Reserve System ("Federal Reserve Board" or "FRB") concerning reserves required to be maintained against deposits and certain other matters. GENERAL The Company's only operating segment is the Bank. The Bank offers a variety of consumer banking products through its network of eight retail branches, which includes the traditional range of checking and savings accounts, money market accounts and certificates of deposit. The Bank's primary target market is the South Bay region of Southern California, where it currently ranks seventh in terms of deposit market share based on branch information provided to the FDIC as of June 30, 2000. The Bank also has branches in the San Fernando Valley and Westlake Village areas of Los Angeles County. In connection with its principal business activities, the Company generates revenues from the interest and fees charged to customers and, to a much lesser extent, the interest earned on its portfolio of overnight liquid investments. The Company's costs include primarily interest paid to depositors and to other providers of borrowed funds, general and administrative expenses and other operating expenses. The Company's lending activities include single family residential, multi-family residential and commercial real estate loans for the construction of single family residential homes, and the acquisition and development of land for the construction of such homes. See "Item 1 -- Business -- Statistical Financial Data -- Loan Portfolio." The Company also offers consumer loans on a referral fee basis through an unaffiliated financial institution. The Company funds its loans predominately with its retail deposits and, to a lesser extent, with advances from the FHLB. See "Item 1 -- Business -- Statistical Financial Data -- Sources of Funds." The Company's current loan origination activities are governed by established policies and procedures appropriate to the risks inherent to the types of collateral and borrowers financed by the Company. The 1 6 Company's primary competitive advantages, which include (1) a willingness and competence to tailor the terms and conditions of individual transactions to accommodate both the borrower's and the Company's transaction-specific objectives, (2) a strategy of holding in portfolio virtually all new loan originations, and (3) highly effective, efficient and responsive transaction execution, are consistent with the Company's relatively flat organizational structure and its reliance upon relatively few, highly-skilled lending professionals (including loan officers, loan underwriters, processors and funders, in-house appraisers, and in-house legal staff). Management believes that this combination of competitive, organizational and strategic distinctions contribute to the Company's success in attracting new business and in its ability to receive a return believed by management to be commensurate with the inherent and transaction-specific risks assumed and value added to customers. MARKET AREA AND COMPETITION The Company concentrates on marketing its services throughout Southern California. The Company's operating results and its growth prospects are directly and materially influenced by (1) the health and vibrancy of the Southern California real estate markets and the underlying economic forces, which affect such markets, (2) the overall complexion of the interest rate environment, including the absolute level of market interest rates and the volatility of such interest rates, (3) the prominence of competitive forces, which provide customers of the Company with alternative sources of mortgage funds or investments, which compete with the Company's products and services, and (4) regulations promulgated by authorities, including those of the OTS, the FDIC and the FRB. The Company's success in identifying trends in each of these factors, and implementing strategies to exploit such trends, significantly influence the Company's long term results and growth prospects. The Bank faces significant competition in California for new loans from commercial banks, savings and loan associations, credit unions, credit companies, Wall Street lending conduits, mortgage bankers, life insurance companies and pension funds. Some of the largest savings and loans and banks in the United States operate in California, and have extensive branch systems and advertising programs, which the Bank does not have. Large banks and savings and loans frequently enjoy a lower cost of funds than the Bank and can therefore charge less than the Bank for loans. The Bank attempts to compensate for competitive disadvantages that may exist by providing a higher level of personal service to borrowers and "hands on" involvement by senior officers to meet borrower's needs. Due to intense competition within the lending area, the Company has experienced a decline in the yield within its commercial real estate lending portfolio over the last several years. Generally, the Company competes for deposit funds with other Southern California-based financial companies, including banks, savings associations and thrift and loans. These companies generally compete with one another based upon price, convenience and service. Many of the Bank's competitors offer a greater array of products to customers than the Bank. For example, the Bank does not currently offer internet banking, and thus has a competitive disadvantage to other commercial banks and savings associations in attracting depositors. As part of the Company's strategic plan, the Bank has targeted implementation of internet banking in 2001. The Bank attempts to compensate for the lack of a full array of services in its branches by providing superior personal service and enhancing our current product line. The Company will continue to focus on expansion of the products and services we offer our retail customers during 2001. Because the Company does not have a critical mass of retail banking facilities, and because its smaller size does not afford it the economies of scale to advertise its basic products to the extent of its principal competitors, the Company primarily competes on service and convenience. The average tenure of all households with the Bank is approximately five years. The Company solicits deposits from the public throughout its service area and attained a cross-sell ratio (products per household) of 1.51 at December 31, 2000, compared to 1.32 at December 31, 1999. 2 7 SUPERVISION AND REGULATION GENERAL Savings and loan holding companies and savings associations are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and the SAIF and not for the benefit of stockholders of the Company. The following information describes certain aspects of that regulation applicable to the Company and the Bank, and does not purport to be complete. The discussion is qualified in its entirety by reference to all particular statutory or regulatory provisions. REGULATION OF THE COMPANY General. The Company is a unitary thrift holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its subsidiaries, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. Activities Restriction Test. As a unitary thrift holding company, the Company generally is not subject to activity restrictions, provided the Bank satisfies the Qualified Thrift Lender ("QTL") test or meets the definition of domestic building and loan association pursuant to the Internal Revenue Code of 1986, as amended (the "Code"). The Company presently intends to continue to operate as a unitary thrift holding company. Recent legislation terminated the "unitary thrift holding company exemption" for all companies that apply to acquire savings associations after May 4, 1999. Since the Company is grandfathered, its unitary thrift holding company powers and authorities were not affected. See "Financial Modernization Legislation." However, if the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other SAIF insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL or domestic building and loan association and were acquired in a supervisory acquisition. Furthermore, if the Company were in the future to sell control of the Bank to any other company, such company would not succeed to the Company grandfathered status and would be subject to the same business activity restrictions. See "-- Regulation of the Bank -- Qualified Thrift Lender Test." On October 27, 2000 the OTS issued a proposed rule that would require some savings and loan holding companies to notify the OTS 30 days before undertaking certain significant new business activities. As proposed, thrift companies would have to give the OTS advance notice if: - debt, combined with all other transactions by the company or any subsidiaries other than the thrift during the past 12 months, increases non-thrift liabilities by 5% or more; and non-thrift liabilities, after the debt transaction, equal 50% or more of the company's consolidated core capital; - an asset acquisition or series of such transactions by the company or non-thrift subsidiary during the past 12 months that involves assets other than cash, cash equivalents and securities or other obligations guaranteed by the U.S. Government and exceeds 15% of the company's consolidated assets; and - any transaction that, when combined with all other transactions during the past 12 months, reduces the company's capital by 10% or more. Any holding company with consolidated subsidiary thrift assets of less than 20% of total assets or consolidated holding company capital of at least 10% would be exempt from the notice requirement. The OTS could object to or conditionally approve an activity or transaction if it finds a material risk to the safety and soundness and stability of the thrift. The review period could be extended an additional 30 days if necessary. The OTS proposal also would codify current practices and the factors relevant to a holding company's need for capital. To determine the need for and level of an explicit holding company capital requirement, the OTS will look at overall risk at the thrift and the consolidated entity, their tangible and equity capital, whether the holding company's debt-to-capital ratio is rising, what investments or activities are funded by debt, its cash 3 8 flow, how much the holding company relies on dividends from subsidiary thrift to service debt or fulfill other obligations, earnings volatility and the thrift's standing in the corporate structure. Comments for the proposed rule were due by February 9, 2001. See "-- Regulation of the Bank -- Qualified Thrift Lender Test." The Company cannot determine whether the proposed rule will be adopted. Restrictions on Acquisitions. The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally insured savings association without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. In addition, no company may acquire control of such an institution without prior OTS approval. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of a savings and loan holding company, from acquiring control of any savings association not a subsidiary of the savings and loan holding company, unless the acquisition is approved by the OTS. For additional restrictions on the acquisition of a unitary thrift holding company, see "-- Financial Services Modernization Legislation." Financial Services Modernization Legislation General. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The Financial Services Modernization Act repeals the two affiliation provisions of the Glass-Steagall Act: - Section 20, which restricted the affiliation of Federal Reserve Member Banks with firms "engaged principally" in specified securities activities; and - Section 32, which restricts officer, director, or employee interlocks between a member bank and any company or person "primarily engaged" in specified securities activities. In addition, the Financial Services Modernization Act also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company system to engage in a full range of financial activities through a new entity known as a "Financial Holding Company." "Financial activities" is broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Financial Services Modernization Act provides that no company may acquire control of an insured savings association, unless that company engages, and continues to engage, only in the financial activities permissible for a Financial Holding Company, unless grandfathered as a unitary thrift holding company. The Financial Institution Modernization Act grandfathers any company that was a unitary thrift holding company on May 4, 1999 (or became a unitary thrift holding company pursuant to an application pending on that date). Such a company may continue to operate under present law as long as the company continues to meet the two tests: it can control only one savings institution, excluding supervisory acquisitions, and each such institution must meet the QTL test. A grandfathered unitary thrift holding company also must continue to control at least one savings association, or a successor institution, that it controlled on May 4, 1999. 4 9 The Financial Services Modernization Act also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a Financial Holding Company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act of 1956 ("BHCA") or permitted by regulation. The Company and the Bank do not believe that the Financial Services Modernization Act will have a material adverse affect on the operations of the Company and the Bank in the near-term. However, to the extent that the act permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis and which unitary thrift holding companies already possess. Nevertheless, this act may have the result of increasing the amount of competition that the Company and the Bank face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than the Company and the Bank. In addition, because the Company may only be acquired by other unitary thrift holding companies or Financial Holding Companies, the legislation may have an anti-takeover effect by limiting the number of potential acquirors or by increasing the costs of an acquisition transaction by a bank holding company that has not made the election to be a Financial Holding Company under the new legislation. Privacy. Under the Financial Services Modernization Act, federal banking regulators are required to adopt rules that will limit the ability of banks and other financial institutions to disclose non public information about consumers to nonaffiliated third parties. Federal banking regulators issued final rules on May 10, 2000. Pursuant to those rules, financial institutions must provide: - initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates; - annual notices of their privacy policies to current customers; and - a reasonable method for customers to "opt out" of disclosures to nonaffiliated third parties. The rules were effective November 13, 2000, but compliance is optional until July 1, 2001. These privacy provisions will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. It is not possible at this time to assess the impact of the privacy provisions on the Company's financial condition or results of operations. Safeguarding Confidential Customer Information. In January 2001, the banking agencies adopted guidelines requiring financial institutions to establish an information security program to: - identify and assess the risks that may threaten customer information; - develop a written plan containing policies and procedures to manage and control these risks; - implement and test the plan; and - adjust the plan on a continuing basis to account for changes in technology, the sensitivity of customer information, and internal or external threats to information security. Each institution may implement a security program appropriate to its size and complexity and the nature and scope of its operations. The guidelines outline specific security measures that institutions should consider in implementing a security program. A financial institution must adopt those security measures determined to be appropriate. The guidelines require the board of directors to oversee an institution's efforts to develop, implement, and maintain an effective information security program and approve written information security policies and programs. The guidelines are effective July 1, 2001. 5 10 REGULATION OF THE BANK As a federally chartered, SAIF insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments of the Bank must comply with various statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies found in the operations of the Bank. The relationship between the Bank and depositors and borrowers is also regulated by federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of mortgage documents utilized by the Bank. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC, or the Congress could have a material adverse impact on the Company, the Bank, and their operations. Insurance of Deposit Accounts. The SAIF, as administered by the FDIC, insures the Bank's deposit accounts up to the maximum amount permitted by law. The FDIC may terminate insurance of deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the institution's primary regulator. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. Under this system as of December 31, 2000, SAIF members pay within a range of 0 cents to 27 cents per $100 of domestic deposits, depending upon the institution's risk classification. This risk classification is based on an institution's capital group and supervisory subgroup assignment. In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately .0212% of insured deposits to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds mature in 2017. Regulatory Capital Requirements. OTS capital regulations require savings associations to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) leverage capital (core capital) equal to 4.0% of total adjusted assets for all but the most highly rated institutions, and (3) risk-based capital equal to 8.0% of total risk-based assets. The Bank must meet each of these standards in order to be deemed in compliance with OTS capital requirements. In addition, the OTS may require a savings association to maintain capital above the minimum capital levels. A savings association with a greater than "normal" level of interest rate exposure must deduct an interest rate risk ("IRR") component in calculating its total capital for purposes of determining whether it meets its risk-based capital requirement. Interest rate exposure is measured, generally, as the decline in an institution's net portfolio value that would result from a 200 basis point increase or decrease in market interest rates (whichever would result in a lower net portfolio value), divided by the estimated economic value of the savings association's assets. The interest rate risk component to be deducted from total capital is equal to one-half of the difference between an institution's measured exposure and "normal" IRR exposure (which is defined as 2%), multiplied by the estimated economic value of the institution's assets. In August 1995, the OTS indefinitely delayed implementation of its IRR regulation. Based on information voluntarily supplied to the OTS, at December 31, 2000, the Bank would not have been required to deduct an IRR component in calculating total risk-based capital had the IRR component of the capital regulations been in effect. 6 11 These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. In addition, the OTS regulations provide that minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings associations, upon a determination that the savings association's capital is or may become inadequate in view of its circumstances. The OTS regulations provide that higher individual minimum regulatory capital requirements may be appropriate in circumstances where, among others: (1) a savings association has a high degree of exposure to interest rate risk, prepayment risk, credit risk, concentration of credit risk, certain risks arising from nontraditional activities, or similar risks or a high proportion of off-balance sheet risk; (2) a savings association is growing, either internally or through acquisitions, at such a rate that certain supervisory concerns may be presented that OTS regulations do not address; and (3) a savings association may be adversely affected by activities or condition of its holding company, affiliates, subsidiaries, or other persons, or savings associations with which it has significant business relationships. The Bank has agreed to maintain minimum core capital and risk-based capital ratios of 6.5% and 11.0%, respectively. As shown below, the Bank's regulatory capital exceeded all minimum regulatory capital requirements applicable to it as of December 31, 2000.
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL ------------------ ------------------ ------------------- BALANCE % BALANCE % BALANCE % (DOLLARS IN THOUSANDS) ---------- ---- ---------- ---- ---------- ----- Stockholders' equity........... $ 140,387 -- $ 140,387 -- $ 140,387 -- Adjustments: General reserves............. -- -- -- -- 15,632 -- Other(1)..................... -- -- -- -- (4,105) -- ---------- ---- ---------- ---- ---------- ----- Regulatory capital............. 140,387 8.01% 140,387 8.01% 151,914 12.23% Regulatory capital requirements................. 26,279 1.50 70,078 4.00 99,407 8.00 ---------- ---- ---------- ---- ---------- ----- Excess capital................. $ 114,108 6.51% $ 70,309 4.01% $ 52,507 4.23% ========== ==== ========== ==== ========== ===== Adjusted assets(2)............. $1,751,960 $1,751,960 $1,242,588 ========== ========== ==========
- --------------- (1) Includes the portion of non-residential construction and land development loans that exceed a loan to value ratio of 80%. (2) The term "adjusted assets" refers to (i) the term "adjusted total assets" as defined in 12 C.F.R. Section 567.1 (a) for purposes of tangible and core capital requirements, and (ii) the term "risk-weighted assets" as defined in 12 C.F.R. Section 567.5 (d) for purposes of the risk-based capital requirements. As a result of a number of federally insured financial institutions extending their risk selection standards to attract lower credit quality accounts due to such credits having higher interest rates and fees, in March 1999, the federal banking regulatory agencies jointly issued Interagency Guidelines on Subprime Lending. In addition, expanded guidelines were issued by the agencies on January 31, 2001. Subprime lending involves extending credit to individuals with less than perfect credit histories. These guidelines provide that if the risks associated with subprime lending are not properly controlled, the agencies consider subprime lending a high-risk activity that is unsafe and unsound. Specifically, the 2001 guidelines direct examiners to expect regulatory capital one and one-half to three times higher than that typically set aside for prime assets for institutions that: - have subprime asset concentration of 25% of Tier 1 capital or higher; or - have subprime portfolios experiencing rapid growth or adverse performance trends, administered by inexperienced management or having inadequate or weak controls. Based upon a review of the portfolio and credit and underwriting policies, the Bank has concluded that it does not currently engage in subprime lending and does not have a subprime lending program that would subject it to the higher capital requirements under the January 2001 guidelines. Although we believe we do not engage in subprime lending, we cannot determine whether our interpretation of the guidelines will be validated 7 12 by the OTS after examination and whether, or to what extent, additional capital requirements will be imposed on us. Any requirement for us to maintain additional regulatory capital as a result of our activities in subprime lending could have an adverse affect on our future prospects and operations, and may restrict our ability to grow. If we are unable to comply with any new capital requirements imposed upon regulatory examination, we may be subject to the prompt corrective action regulations of the OTS. The Home Owners' Loan Act ("HOLA") permits savings associations not in compliance with the OTS capital standards to seek an exemption from certain penalties or sanctions for noncompliance. Such an exemption will be granted only if certain strict requirements are met, and must be denied under certain circumstances. If the OTS grants an exemption, the savings association still may be subject to enforcement actions for other violations of law or unsafe or unsound practices or conditions. Proposed Capital Requirements for Community Institutions. In November 2000, the federal bank and thrift regulatory agencies requested public comment on an advance notice of proposed rulemaking that considers the establishment of a simplified regulatory capital framework for non-complex institutions. In the proposal, the agencies suggested criteria that could be used to determine eligibility for a simplified capital framework, such as the nature of a bank's activities, its asset size and its risk profile. In the advance notice, the agencies seek comment on possible minimum regulatory capital requirements for non-complex institutions, including a simplified risk-based ratio, a simple leverage ratio, or a leverage ratio modified to incorporate certain off-balance sheet exposures. The advance notice solicits public comment on the agencies' preliminary views. Comments were due on the proposal by February 1, 2001. Given the preliminary nature of the proposal, it is not possible to predict its impact on the Bank at this time. Prompt Corrective Action. The prompt corrective action regulation of the OTS requires certain mandatory actions and authorizes certain other discretionary actions to be taken by the OTS against a savings association that falls within certain undercapitalized capital categories specified in the regulation. The regulation establishes five categories of capital classification: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Under the regulation, the risk-based capital, leverage capital, and tangible capital ratios are used to determine an institution's capital classification. At December 31, 2000, the Bank met the capital requirements of a "well capitalized" institution under applicable OTS regulations. In general, the prompt corrective action regulation prohibits an insured depository institution from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may accept Brokered Deposits only with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll-over Brokered Deposits. If the OTS determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OTS may, if the institution is well capitalized, reclassify it as adequately capitalized; if the institution is adequately capitalized but not well capitalized, require it to comply with restrictions applicable to undercapitalized institutions; and, if the institution is undercapitalized, require it to comply with certain restrictions applicable to significantly undercapitalized institutions. 8 13 The Bank's actual capital amounts and ratios and the capital amounts and ratios for the Bank to meet the minimum capital requirements required by the OTS and to be categorized as "well capitalized" under the PCA Rules are presented in the table below.
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------- ------------------ ----------------- AMOUNT RATIOS AMOUNT RATIOS AMOUNT RATIOS (DOLLARS IN THOUSANDS) -------- ------ -------- ------- -------- ------ As of December 31, 2000: Total capital (to risk weighted assets)............. $151,914 12.23% $99,407 8.00% $124,259 10.00% Core capital (to adjusted tangible assets)......... 140,387 8.01% 70,078 4.00% 87,598 5.00% Tangible capital (to adjusted tangible assets)......... 140,387 8.01% 26,279 1.50% n/a n/a Tier 1 capital (to risk weighted assets)............. 140,387 11.30% n/a n/a 74,555 6.00% As of December 31, 1999: Total capital (to risk weighted assets)............. $139,815 12.50% $89,468 8.00% $111,835 10.00% Core capital (to adjusted tangible assets)......... 127,160 8.05% 63,174 4.00% 78,967 5.00% Tangible capital (to adjusted tangible assets)......... 127,160 8.05% 23,690 1.50% n/a n/a Tier 1 capital (to risk weighted assets)............. 127,160 11.37% n/a n/a 67,101 6.00%
Loans-to-One Borrower Limitations. Savings associations generally are subject to the lending limits applicable to national banks. With certain limited exceptions, the maximum amount that a savings association or a national bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. Savings associations are additionally authorized to make loans to one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of OTS, in an amount not to exceed the lesser of $30,000,000 or 30% of unimpaired capital and surplus to develop residential housing, provided: (i) the purchase price of each single family dwelling in the development does not exceed $500,000; (ii) the savings association is in compliance with its fully phased-in capital requirements; (iii) the loans comply with applicable loan-to-value requirements, and (iv) the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus. At December 31, 2000, the Bank's loans-to-one-borrower limit was $24.6 million based upon the 15% of unimpaired capital and surplus measurement. At December 31, 2000, the Bank's largest relationships consisted of one borrower with outstanding commitments of $19.9 million, which consisted of approximately 5 loans, with $9.6 million secured by commercial real estate in the Bank's lending area and $10.3 million secured by non-residential collateral. All were performing in accordance with their terms. Qualified Thrift Lender Test. Savings associations must meet a QTL test, which may be met either by maintaining a specified level of assets in qualified thrift investments as specified in HOLA or by meeting the definition of a "domestic building and loan association" in the Code. Qualified thrift investments are primarily residential mortgages and related investments, including certain mortgage-related securities. The required percentage of investments under HOLA is 65% of assets while the Code requires investments of 60% of assets. An association must be in compliance with the QTL test or the definition of domestic building and loan association on a monthly basis in nine out of every 12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings 9 14 association. The FHLB also relies on the QTL test. A savings association will only enjoy full borrowing privileges if the savings association is a QTL. As of December 31, 2000, the Bank was in compliance with its QTL requirement and met the definition of a domestic building and loan association. Affiliate Transactions. Transactions between a savings association and its "affiliates" are quantitatively and qualitatively restricted under the Federal Reserve Act. Affiliates of a savings association include, among other entities, the savings association's holding company and companies that are under common control with the savings association. In general, a savings association or its subsidiaries are limited in their ability to engage in certain "covered transactions" with affiliates to an amount equal to 10% of the association's capital and surplus, in the case of covered transactions with any one affiliate, and to an amount equal to 20% of such capital and surplus, in the case of covered transactions with all affiliates. In addition, a savings association and its subsidiaries may engage in covered transactions and certain other transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the savings association or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A "covered transaction" includes a loan or extension of credit to an affiliate; a purchase of investment securities issued by an affiliate; a purchase of assets from an affiliate, with certain exceptions; the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; or the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. In addition, under the OTS regulations, a savings association may not make a loan or extension of credit to an affiliate unless the affiliate is engaged only in activities permissible for bank holding companies; a savings association may not purchase or invest in securities of an affiliate other than shares of a subsidiary; a savings association and its subsidiaries may not purchase a low-quality asset from an affiliate; and covered transactions and certain other transactions between a savings association or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices. With certain exceptions, each loan or extension of credit by a savings association to an affiliate must be secured by collateral with a market value ranging from 100% to 130% (depending on the type of collateral) of the amount of the loan or extension of credit. The OTS regulation generally excludes all non-bank and non-savings association subsidiaries of savings associations from treatment as affiliates, except to the extent that the OTS or the Federal Reserve Board decides to treat such subsidiaries as affiliates. The regulation also requires savings associations to make and retain records that reflect affiliate transactions in reasonable detail, and provides that certain classes of savings associations may be required to give the OTS prior notice of affiliate transactions. Capital Distribution Limitations. OTS regulations impose limitations upon all capital distributions by savings associations, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The OTS recently adopted an amendment to these capital distribution limitations. Under the new rule, a savings association in some circumstances may be required to file an application and await approval from the OTS before it makes a capital distribution, may be required to file a notice 30 days prior to the capital distribution, or may be permitted to make the capital distribution without notice or application to the OTS. An application is required (1) if the savings association is not eligible for expedited treatment of its other applications under OTS regulations; (2) the total amount of all capital distributions (including the proposed capital distribution) for the applicable calendar year exceeds its net income for that year to date plus retained net income for the preceding two years; (3) the savings association would not be at least adequately capitalized, under the prompt corrective action regulations of the OTS following the distribution; or (4) the savings association's proposed capital distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the savings association and the OTS (or the FDIC), or violate a condition imposed on the savings association in an OTS-approved application or notice. A notice of a capital distribution is required if a savings association is not required to file an application, but: (1) would not be well capitalized under the prompt corrective action regulations of the OTS following the 10 15 distribution; (2) the proposed capital distribution would reduce the amount of or retire any part of your common or preferred stock or retire any part of debt instruments such as notes or debentures included in capital (other than regular payments required under a debt instrument approved by the OTS); or (3) the savings association is a subsidiary of a savings and loan holding company. If neither the savings association nor the proposed capital distribution meet any of the above listed criteria, no application or notice is required for the savings association to make a capital distribution. The OTS may prohibit the proposed capital distribution that would otherwise be permitted if the OTS determines that the distribution would constitute an unsafe or unsound practice. Further, a savings association like the Bank cannot distribute regulatory capital that is needed for its liquidity. Activities of Subsidiaries. A savings association seeking to establish a new subsidiary, acquire control of an existing company or conduct a new activity through a subsidiary must provide 30 days prior notice to the FDIC and the OTS and conduct any activities of the subsidiary in compliance with regulations and orders of the OTS. The OTS has the power to require a savings association to divest any subsidiary or terminate any activity conducted by a subsidiary that the OTS determines to pose a serious threat to the financial safety, soundness or stability of the savings association or to be otherwise inconsistent with sound banking practices. Community Reinvestment Act and the Fair Lending Laws. Savings associations have a responsibility under the Community Reinvestment Act ("CRA") and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws") prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution's failure to comply with the provisions of CRA could, at a minimum, result in regulatory restrictions on its activities and the denial of certain applications. In addition, an institution's failure to comply with the Fair Lending Laws could result in enforcement actions by the OTS, as well as other federal regulatory agencies and the Department of Justice. Federal Home Loan Bank System. The Bank is a member of the FHLB system. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available to members loans (i.e., advances) in accordance with the policies and procedures established by the Board of Directors of the individual FHLB. As a FHLB member, the Bank is required to own capital stock in a FHLB in an amount equal to the greater of: (i) 1% of its aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year, (ii) 0.3% of total assets, or (iii) 5% of its FHLB advances (borrowings). At December 31, 2000, the Bank had $20.7 million in FHLB stock, which was in compliance with this requirement. Liquidity Requirements. Under OTS regulations, a savings association is required to maintain an average daily balance of liquid assets (including cash, certain time deposits and savings accounts, bankers' acceptances, certain government obligations, and certain other investments) in each calendar quarter of not less than 4% of either (1) its liquidity base (consisting of certain net withdrawable accounts plus short term borrowings) as of the end of the preceding calendar quarter, or (2) the average daily balance of its liquidity base during the preceding quarter. This liquidity requirement may be changed from time to time by the OTS to any amount between 4.0% to 10.0%, depending upon certain factors, including economic conditions and savings flows of all savings associations. The Bank maintains liquid assets in compliance with these regulations. Monetary penalties may be imposed upon an institution for violations of liquidity requirements. On March 14, 2001, the OTS issued an interim final rule that eliminates the 4% liquidity requirement and replaced it with a general requirement that thrifts maintain sufficient liquidity to ensure safety and soundness. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the 11 16 reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At December 31, 2000, the Bank was in compliance with these requirements. OTHER REAL ESTATE LENDING STANDARDS The OTS and the other federal banking agencies have jointly adopted uniform rules on real estate lending and related Interagency Guidelines for Real Estate Lending Policies. The uniform rules require that associations adopt and maintain comprehensive written policies for real estate lending. The policies must reflect consideration of the Interagency Guidelines and must address relevant lending procedures, such as loan-to-value limitations, loan administration procedures, portfolio diversification standards and documentation, approval and reporting requirements. Although the final rule did not impose specific maximum loan-to-value ratios, the related Interagency Guidelines state that such ratio limits established by an individual association's board of directors should not exceed levels set forth in the Guidelines, which range from a maximum of 65% for loans secured by raw land to 85% for improved property. No limit is set for single family residential loans, but the guideline states that such loans exceeding a 95% loan-to-value ratio should have private mortgage insurance or some other form of credit enhancement. The Guidelines further permit a limited amount of loans that do not conform to these criteria. EMPLOYEES The Company employed 270 full time equivalent persons at December 31, 2000. A union or collective bargaining group does not represent employees and the Company considers its employee relations to be satisfactory. STATISTICAL FINANCIAL DATA LOAN PORTFOLIO Loans Receivable The Company's loan portfolio is almost exclusively secured by real estate, concentrated in Southern California. The Bank's principal lending activities consist of single family residential, single family construction and income property lending. The composition of the net growth in loans, from $1.4 billion at December 31, 1999 to $1.6 billion at December 31, 2000, includes increases in net single family residential loans of $208.9 million and net income property loans of $36.4 million. 12 17 The table below sets forth the composition of the Company's loan portfolio as of the dates indicated.
DECEMBER 31, -------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------- ------------------- ------------------- ------------------ ----------------- BALANCE % BALANCE % BALANCE % BALANCE % BALANCE % (DOLLARS IN THOUSANDS) ---------- ------ ---------- ------ ---------- ------ --------- ------ -------- ------ Single family residential............ $ 888,416 49.17% $ 683,250 40.99% $ 576,032 35.88% $ 396,629 41.00% $337,784 45.70% Income property: Multi-family(1)........ 253,039 14.00 222,616 13.36 250,876 15.62 225,738 23.33 220,707 29.86 Commercial(1).......... 200,372 11.09 232,938 13.98 222,558 13.86 111,893 11.57 60,388 8.17 Development (2)........ 203,894 11.28 148,092 8.88 78,425 4.88 7,310 0.76 -- -- Single family construction: Single family residential(3)....... 195,983 10.85 274,697 16.48 275,888 17.18 107,989 11.16 56,306 7.62 Tract.................. 3,495 0.19 24,056 1.44 85,942 5.35 68,653 7.10 33,791 4.57 Land(4).................. 46,520 2.57 59,095 3.55 69,581 4.33 39,475 4.08 14,513 1.96 Other.................... 15,390 0.85 22,053 1.32 46,615 2.90 9,698 1.00 15,684 2.12 ---------- ------ ---------- ------ ---------- ------ --------- ------ -------- ------ Gross loans receivable(5).......... 1,807,109 100.00% 1,666,797 100.00% 1,605,917 100.00% 967,385 100.00% 739,173 100.00% ====== ====== ====== ====== ====== Less: Undisbursed funds...... (171,789) (196,249) (256,096) (108,683) (46,646) Deferred (fees) and costs, net(6)........ 2,197 (1,295) (5,919) (7,177) (6,611) Allowance for estimated credit losses........ (29,450) (24,285) (17,111) (13,274) (13,515) ---------- ---------- ---------- --------- -------- Net loans receivable..... $1,608,067 $1,444,968 $1,326,791 $ 838,251 $672,401 ========== ========== ========== ========= ========
- --------------- (1) Predominantly term loans secured by improved properties, with respect to which the properties' cash flows are sufficient to service the Company's loan. (2) Predominantly loans to finance the construction of income producing improvements. Also includes loans to finance the renovation of existing improvements. (3) Predominantly loans for the construction of individual and custom homes. (4) The Company expects that a majority of these loans will be converted into construction loans, and the land secured loans repaid with the proceeds of these construction loans, within 12 months. (5) Gross loans receivable includes the principal balance of loans outstanding, plus outstanding but unfunded loan commitments, predominantly in connection with construction loans. (6) The balance in deferred fees moved from a deferred fee position to a deferred cost position due to higher broker fees resulting from increased single family residential loan volume. 13 18 The table below sets forth the Company's loan portfolio diversification by size.
YEAR ENDED DECEMBER 31, -------------------------------------------- 2000 1999 -------------------- -------------------- NO. OF GROSS NO. OF GROSS LOANS COMMITMENT LOANS COMMITMENT (DOLLARS IN THOUSANDS) ------ ---------- ------ ---------- Loans in excess of $10.0 million: Single family residential........................ -- $ -- 1 $ 13,000 Income property: Multi-family.................................. -- -- -- -- Commercial.................................... 2 22,027 3 32,622 Development................................... 5 59,707 3 33,900 Other............................................ -- -- 1 16,000 -- ---------- -- ---------- 7 $ 81,734 8 $ 95,522 == ========== == ========== Percentage of total gross loans............... 4.52% 5.73% Loans between $5.0 and $10.0 million: Single family residential........................ 5 $ 33,073 7 $ 39,364 Income property: Multi-family.................................. -- -- 1 6,655 Commercial.................................... 8 55,568 9 65,998 Development................................... 13 90,672 11 71,049 Single family construction: Single family residential..................... 2 14,300 4 24,812 Tract......................................... -- -- 2 11,040 Land............................................. 1 6,501 1 6,501 Other............................................ 1 7,500 3 27,466 -- ---------- -- ---------- 30 $ 207,614 38 $ 252,885 == ========== == ========== Percentage of total gross loans............... 11.49% 15.17% Loans less than $5.0 million....................... $1,517,761 $1,318,390 ---------- ---------- Gross loans receivable........................ $1,807,109 $1,666,797 ========== ==========
The table below sets forth the Company's net loan portfolio composition, excluding net deferred fees and costs, as of the dates indicated.
DECEMBER 31, 2000 DECEMBER 31, 1999 --------------------- --------------------- BALANCE PERCENT BALANCE PERCENT (DOLLARS IN THOUSANDS) ---------- ------- ---------- ------- Single family residential................ $ 883,814 54.04% $ 674,917 45.90% Income property: Multi-family........................... 251,995 15.41% 222,142 15.11% Commercial............................. 187,680 11.48% 212,100 14.42% Development............................ 130,263 7.97% 99,296 6.75% Single family construction: Single family residential.............. 127,630 7.80% 198,066 13.47% Land..................................... 45,450 2.78% 50,161 3.41% Other.................................... 8,488 0.52% 13,866 0.94% ---------- ------ ---------- ------ Total.......................... $1,635,320 100.00% $1,470,548 100.00% ========== ====== ========== ======
14 19 Single Family Residential Loans The Bank offers first mortgage loans secured by single family (one-to-four unit) residential properties located in the Bank's primary lending area of Southern California. At December 31, 2000, $888.4 million, or 49.17% of the total gross loan portfolio was secured by single family residential properties with an average loan size of $0.5 million, compared to $683.3 million, or 40.99% of the total gross loan portfolio at December 31, 1999. The Company originates single family residential loans principally through contact with, and submissions by, independent mortgage brokers. The Company pays a fee, generally ranging from 0.5% to 2.0% of the loan amount, to mortgage brokers in connection with its funding of certain loans. The practice and pricing are common for single family-secured loans originated throughout the Company's market area. Income Property Multi-family and Commercial Loans The Company originates loans secured by multi-family properties and commercial properties, such as office buildings, retail properties, industrial properties and various special purpose properties. The Company generates a majority of its new income property loan opportunities through contact with, and submissions by, independent mortgage loan brokers. However, a growing proportion of the Company's new business is derived from existing customer relationships or through referrals from existing customers. The Company competes for such loans by providing highly responsive transaction execution, specialized market knowledge and expertise and a high customer service orientation. Multi-family and commercial loans accounted for $253.0 million or 14.00% and $200.4 million or 11.09%, respectively, of the Bank's total gross loan portfolio at December 31, 2000. The average loan size of the income producing properties portfolio was $3.0 million at December 31, 2000. At December 31, 1999, multi-family and commercial real estate loans consisted of $222.6 million or 13.36% and $232.9 million or 13.98%, respectively, of the Bank's total gross loan portfolio. Income Property -- Development Loans Commencing in 1998, the Company has pursued financing opportunities involving (1) the acquisition of land and the construction of income-producing improvements thereon or (2) the acquisition and substantial renovation of existing, income-producing properties. To date, the Company has focused on loans for apartment building construction (primarily located in the West Los Angeles area) and the renovation of existing commercial real estate improvements located throughout Los Angeles County. At December 31, 2000, income property development loans accounted for $203.9 million, or 11.28% of the Bank's total gross loan portfolio compared to $148.1 million, or 8.88% of the Bank's total gross loan portfolio at December 31, 1999. Single Family Construction The Company provides individual home construction financing, primarily to local builders and, to a much lesser extent, homeowners. Generally, the Company finances the construction of luxury custom homes throughout the coastal region of Southern California and elsewhere within the Company's market area. A majority of the Company's single family construction -- residential loans are sourced through standing relationships between the Company's loan officers and local builders and, therefore, do not typically involve mortgage brokers. The Company's loan commitment generally includes provision for a portion of the cost of the acquired land and all of the costs of construction (including financing costs). Generally, the Company's loan commitment covers between 70.0% and 75.0% of the total costs of construction (including the cost of land acquisition, the cost to construct the planned improvements and financing costs), with the borrower providing the remainder of the funds required at the date the Company records its financing commitment. The Company's single family construction residential loans have initial terms of 12 to 24 months, with an option for the borrower to extend the loan for up to six months, subject to the Company's then current evaluation of the status of construction, costs to and at completion, the as-completed valuation of the property, and other factors. Single family construction residential homes accounted for $196.0 million, or 10.85% of the 15 20 total gross loan portfolio at December 31, 2000, with an average loan size of $1.4 million, compared to $274.7 million, or 16.48% of the total gross loan portfolio at December 31, 1999. In 2001, the Company plans to introduce a construction to permanent loan program targeted at owner-occupied properties. Single Family Construction -- Tract Loans In the past, the Company provided financing to small-to-medium-sized developers of residential subdivisions located throughout Southern California. Generally, the Company's tract loans finance land acquisition, site development and home construction. Except for very small subdivisions (i.e., generally developments involving 10 or fewer homes), the Company generally structured its tract loans such that it will separately finance land acquisition and site development, and the individual phased construction of homes. In connection with these multi-phase developments, the Company does not commit to finance more than one phase of the development at a time, and fully underwrites future phases at such time as the borrower makes their financing request. Generally, the Company's tract loans carried a loan term of 12 months, with built-in options to extend the loan for up to an additional six months. As finished homes are sold, the Company generally receives substantially all of the proceeds from sales until its loan is fully repaid. At December 31, 2000, tract loans accounted for $3.5 million, or 0.19% of the Bank's total gross loan portfolio compared to $24.1 million, or 1.44% of the Bank's total gross loan portfolio at December 31, 1999. The decrease in tract loans reflects the Bank's decision to cease the origination of such loans for its portfolio, which was announced during the fourth quarter of 1998. Consumer Lending In December 2000, the Bank launched a new consumer lending product. This new product offers automobile, recreational vehicle and boat loans, personal unsecured loans and personal unsecured lines of credit to its retail customers through a correspondent lending relationship and receives fee income based upon originations. This product was introduced to offer a greater range of services to our customers, which will assist the Bank in achieving greater franchise value through an expansion of the products and services we offer our retail customers. NEW BUSINESS GENERATION The Company extends credit pursuant to its lending policies covering loan applications, borrower financial information and legal and corollary agreements which support the vesting of title to the Company's collateral, title policies, fire and extended liability coverage casualty insurance, credit reports, and other documents necessary to support each extension of credit. The real property collateral that secures the Company's loans is appraised either by an independent fee appraiser or by one of the Company's staff appraisers. The Company's staff appraisers and the Company's Chief Appraiser generally review independent fee appraisals. With few exceptions, all of the principal legal documents that support each extension of credit are prepared or reviewed by the Company's in house legal staff or outside attorneys. 16 21 The following table sets forth the approximate composition of the Company's gross new loan commitments, net of internal refinances, for the periods indicated, in dollars and as a percentage of total loans originated.
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 2000 1999 1998 ----------------- ----------------- ----------------- (DOLLARS IN THOUSANDS) AMOUNT % AMOUNT % AMOUNT % ---------------------- -------- ------ -------- ------ -------- ------ Single family residential(1)............ $361,034 47.36% $293,600 42.03% $302,600 31.37% Income property: Multi-family(2)....................... 63,366 8.32 21,800 3.12 64,800 6.72 Commercial(3)......................... 66,118 8.68 61,400 8.79 125,900 13.05 Development(4)........................ 116,123 15.24 86,400 12.37 81,200 8.42 Single family construction: Single family residential(5).......... 121,279 15.92 164,100 23.49 220,400 22.85 Tract(6).............................. -- -- 12,100 1.73 57,100 5.92 Land(7)................................. 34,063 4.47 51,500 7.37 98,500 10.21 Other(8)................................ 49 0.01 7,700 1.10 14,100 1.46 -------- ------ -------- ------ -------- ------ Total......................... $762,032 100.00% $698,600 100.00% $964,600 100.00% ======== ====== ======== ====== ======== ======
- --------------- (1) Includes unfunded commitments of $0.3 million, $0.4 million and $5.3 million at December 31, 2000, 1999 and 1998, respectively. (2) Includes unfunded commitments of $0.5 million at December 31, 2000. There were no unfunded commitments at December 31, 1999. Includes $1.7 million of financings provided in connection with sales of previously foreclosed properties for 1998. (3) Includes unfunded commitments of $0.9 million, $13.1 million and $16.4 million at December 31, 2000, 1999 and 1998, respectively. (4) Includes unfunded commitments of $64.9 million, $40.2 million and $17.5 million at December 31, 2000, 1999 and 1998, respectively. (5) Includes unfunded commitments of $64.8 million, $72.3 million and $109.8 million at December 31, 2000, 1999 and 1998, respectively. (6) There were no unfunded commitments at December 31, 2000. Includes unfunded commitments of $2.5 million and $34.7 million at December 31, 1999 and 1998, respectively. (7) Includes unfunded commitments of $0.4 million, $4.0 million and $12.9 million at December 31, 2000, 1999 and 1998, respectively. (8) There were no unfunded commitments at December 31, 2000. Includes unfunded commitments of $7.5 million and $1.2 million at December 31, 1999 and 1998, respectively. 17 22 The table below sets forth, by contractual maturity, the Company's loan portfolio at December 31, 2000. The table below is based on contractual loan maturities and does not consider amortization and prepayments of loan principal.
MATURING IN: ------------------------------------------------------------ OVER OVER ONE YEAR FIVE YEARS TOTAL LESS THAN THROUGH THROUGH OVER LOANS ONE YEAR FIVE YEARS TEN YEARS TEN YEARS RECEIVABLE (DOLLARS IN THOUSANDS) --------- ---------- ---------- --------- ---------- Single family residential................... $ 18,164 $ 39,713 $256,223 $574,316 $ 888,416 Income property: Multi-family.............................. 1,261 52,186 112,801 86,791 253,039 Commercial................................ 18,958 67,370 111,811 2,233 200,372 Development............................... 203,894 -- -- -- 203,894 Single family construction: Single family residential................. 195,983 -- -- -- 195,983 Tract..................................... 3,495 -- -- -- 3,495 Land........................................ 34,487 8,459 3,353 221 46,520 Other....................................... 9,910 3,261 -- 2,219 15,390 -------- -------- -------- -------- ---------- Gross loans receivable(1)................... $486,152 $170,989 $484,188 $665,780 1,807,109 ======== ======== ======== ======== ========== Less: Undisbursed funds......................... (171,789) Deferred (fees) and costs, net............ 2,197 Allowance for estimated credit losses..... (29,450) ---------- Net loans receivable........................ $1,608,067 ==========
- --------------- (1) Gross loans receivable includes the principal balance of loans outstanding plus outstanding but unfunded loan commitments, predominantly in connection with construction loans. ASSET QUALITY The Company has an asset review and classification system to establish specific and general allowances for estimated credit losses and to classify assets and groups of assets. The Company's problem asset classifications are discussed below. NONACCRUAL LOANS As a matter of policy, the Company generally ceases to accrue interest on any loan with respect to which the loan's contractual payments are more than 90 days past due, as well as loans classified substandard for which interest payment reserves were established from loan funds rather than borrower funds. In addition, interest is not recognized on any loan for which management has determined that collection of the Company's investment in the loan is not reasonably assured. CLASSIFIED ASSETS OTS regulations require insured institutions to classify their assets in accordance with established policies and procedures. A classified asset is an asset classified substandard, doubtful or loss. Loans that are not classified are categorized as pass or special mention. The severity of an asset's classification is dependent upon, among other things, the institution's risk of loss, the borrower's performance, the characteristics of the institution's security, and the local market conditions, among other factors. The Company automatically classifies as substandard (1) real estate owned ("REO"), (2) loans delinquent 90 or more days, and (3) other loans that have been adversely classified pursuant to OTS regulations and guidelines ("performing/classified"). Performing loans are classified consistent with the Company's classification policies. 18 23 The table below sets forth information concerning the Company's risk elements as of the dates indicated. Classified assets include REO, nonaccrual loans and performing loans which have been adversely classified pursuant to the Company's classification policies and OTS regulations and guidelines ("performing/ classified" loans).
DECEMBER 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 (DOLLARS IN THOUSANDS) ---------- ---------- ---------- -------- -------- Risk elements: Nonaccrual loans...................... $ 31,601 $ 44,031 $ 47,688 $ 15,396 $ 28,624 Real estate owned, net................ 2,859 5,587 4,070 9,859 20,140 ---------- ---------- ---------- -------- -------- 34,460 49,618 51,758 25,255 48,764 Performing loans classified substandard or lower(1)............ 40,642 25,646 45,397 35,845 45,088 ---------- ---------- ---------- -------- -------- Total classified assets............ $ 75,102 $ 75,264 $ 97,155 $ 61,100 $ 93,852 ========== ========== ========== ======== ======== Total classified loans............. $ 72,243 $ 69,677 $ 93,085 $ 51,241 $ 73,712 ========== ========== ========== ======== ======== Loans restructured and paying in accordance with modified terms(2)..... $ 14,933 $ 15,394 $ 27,334 $ 25,631 $ 22,446 ========== ========== ========== ======== ======== Gross loans before allowance for estimated credit losses............... $1,637,517 $1,469,253 $1,343,902 $851,525 $685,916 ========== ========== ========== ======== ======== Loans receivable, net of specific reserves and deferred fees............ $1,631,721 $1,468,445 $1,338,718 $847,647 $683,731 ========== ========== ========== ======== ======== Delinquent Loans 30 - 89 days.......................... $ 12,407 $ 9,063 $ 37,308 $ 4,435 $ 10,082 90 + days............................. 14,509 14,916 13,832 10,793 16,643 ---------- ---------- ---------- -------- -------- Total delinquent loans............. $ 26,916 $ 23,979 $ 51,140 $ 15,228 $ 26,725 ========== ========== ========== ======== ======== Allowance for estimated credit losses: General............................... $ 23,654 $ 23,477 $ 11,927 $ 9,396 $ 11,330 Specific.............................. 5,796 808 5,184 3,878 2,185 ---------- ---------- ---------- -------- -------- Total allowance for estimated credit losses.................... $ 29,450 $ 24,285 $ 17,111 $ 13,274 $ 13,515 ========== ========== ========== ======== ======== Total allowance for estimated credit losses to loans receivable, net of specific reserves and deferred fees....... 1.80% 1.65% 1.28% 1.57% 1.98% ========== ========== ========== ======== ======== Total general allowance for estimated credit losses to loans receivable, net of specific reserves and deferred fees....... 1.45% 1.60% 0.89% 1.11% 1.66% ========== ========== ========== ======== ======== Core capital............................ $ 140,387 $ 127,160 $ 108,673 $ 69,906 $ 52,803 ========== ========== ========== ======== ======== Risk-based capital...................... $ 151,914 $ 139,815 $ 119,400 $ 78,454 $ 59,560 ========== ========== ========== ======== ======== Ratio of classified assets to: Loans receivable, net of specific reserves and deferred fees......... 4.60% 5.13% 7.26% 7.21% 13.73% ========== ========== ========== ======== ======== Bank core capital and general allowance for estimated credit losses............................. 45.78% 49.96% 80.56% 77.05% 146.34% ========== ========== ========== ======== ======== Core capital.......................... 53.50% 59.19% 89.40% 87.40% 177.74% ========== ========== ========== ======== ======== Risk-based capital.................... 49.44% 53.83% 81.37% 77.88% 157.58% ========== ========== ========== ======== ========
- --------------- (1) Excludes nonaccrual (2) Troubled debt restructured loans ("TDRs") not classified and not on nonaccrual Nonaccrual loans totaled $31.6 million at December 31, 2000 (or 1.80% of total assets), compared with nonaccrual loans of $44.0 million (or 2.78% of total assets) at December 31, 1999. Included in nonaccrual 19 24 loans at December 31, 2000, were five single family residential loans with balances of $1.0 million or more representing $11.0 million, or 34.91% of total nonaccrual loans. The average loan to value ("LTV") for these five loans was 67.76%. Nonaccrual loans also consisted of one income property construction loan with a balance of $11.0 million, or 34.77% of total nonaccrual loans. In December 2000, the Bank reclassified $5.2 million of the general valuation allowance to the specific allowance as a result of an internal valuation analysis performed on this income property development loan secured by a retail center in Riverside County, California, whose major tenant filed for Chapter 11 bankruptcy protection. As a result, the Bank placed this loan on nonaccrual status. Subsequent to December 31, 2000, $4.5 million, or 14.26% of total nonaccrual loans, consisting of one land loan with a balance of $3.4 million and one single family construction loan with a balance of $1.1 million, paid off. Other classified loans were $40.6 million at December 31, 2000, compared with $25.6 million at December 31, 1999. Subsequent to December 31, 2000, there was one new nonaccrual single family residential loan with a balance of $2.3 million. Delinquent loans totaled $26.9 million at December 31, 2000, compared with $24.0 million at December 31, 1999. The table below sets forth information concerning the Company's gross classified loans, by category, as of December 31, 2000.
DELINQUENT LOANS OTHER ---------------------------- NONACCRUAL PERFORMING 90 + DAYS 30 - 89 DAYS(1) LOANS(2) LOANS TOTAL (DOLLARS IN THOUSANDS) ---------- --------------- ---------- ---------- ------- Single family residential................ $ 9,682 $4,222 $ 3,665 $ 8,740 $26,309 Income property: Multi-family........................... -- -- -- -- -- Commercial............................. -- 3,061 -- 10,696 13,757 Development............................ -- -- 10,987 -- 10,987 Single family construction: Single family residential.............. 879 -- 1,833 7,567 10,279 Tract.................................. -- -- -- 3,464 3,464 Land..................................... 3,930 -- -- 3,499 7,429 Other.................................... 18 -- -- -- 18 ------- ------ ------- ------- ------- Gross classified loans................. $14,509 $7,283 $16,485 $33,966 $72,243 ======= ====== ======= ======= =======
- --------------- (1) Includes $0.5 million in loans on nonaccrual status. (2) Includes loans that have been restructured and are paying as agreed. ALLOWANCE FOR ESTIMATED CREDIT LOSSES Management establishes specific allowances for estimated credit losses on individual loans when it has determined that recovery of the Company's gross investment is not probable and when the amount of loss can be reasonably determined. In making this determination, management considers (1) the status of the asset, (2) the probable future status of the asset, (3) the value of the asset or underlying collateral and (4) management's intent with respect to the asset. In quantifying the loss, if any, associated with individual loans, management utilizes external sources of information (i.e., appraisals, price opinions from real estate professionals, comparable sales data and internal estimates). In establishing specific allowances, management estimates the revenues expected to be generated from disposal of the Company's collateral or owned property, less construction and renovation costs (if any), holding costs and transaction costs. For tract construction and land development, the resulting projected cash flows are discounted utilizing a market rate of return to determine their value. The Company maintains an allowance for estimated credit losses which is not tied to individual loans or properties ("general allowances"). General allowances are maintained for each of the Company's principal loan segments, and supplemented by periodic additions through provisions for credit losses. In measuring the adequacy of the Company's general allowances, management considers (1) the Company's historical loss experience for each loan portfolio segment and in total, (2) the historical migration of loans within each portfolio segment and in total (i.e., from performing to nonperforming, from nonperforming to REO), 20 25 (3) observable trends in the performance of each loan portfolio segment, (4) observable trends in the region's economy and in its real property markets and (5) guidelines published by the OTS for maintaining general allowances. In addition to the amount of allowance determined by applying individual loss factors to the portfolio, the general allowance may also include an unallocated amount. The unallocated allowance recognizes the model and estimation risk associated with the allowance formula and specific allowances. In addition, the unallocated allowance is based upon management's evaluation of various conditions, the effects of which are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include (1) general economic and business conditions affecting our key lending areas, (2) credit quality trends (including trends in nonperforming loans expected to result from existing conditions), (3) collateral values, (4) loan volumes and concentrations, (5) seasoning of the loan portfolio, (6) specific industry conditions within portfolio segments (7) recent loss experience in particular segments of the portfolio, (8) duration of the current business cycle, (9) bank regulatory examination results and (10) findings of our internal credit examiners. The unallocated reserves are reviewed periodically to determine whether they are at a level that management believes are adequate. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss has occurred. Executive management reviews these conditions quarterly in discussion with senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management's estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. 21 26 The table below summarizes the Company's allowance for estimated credit losses by category for the periods indicated.
DECEMBER 31, --------------------------------------------------- 2000 1999 1998 1997 1996 (DOLLARS IN THOUSANDS) ------- ------- ------- ------- ------- Dollars: Single family residential.............. $ 8,075 $ 7,095 $ 7,836 $ 6,671 $ 6,476 Income property: Multi-family........................ 906 646 1,063 2,000 4,786 Commercial.......................... 4,236 6,907 4,334 2,252 1,150 Development......................... 7,877 2,067 354 -- -- Single family construction: Single family residential........... 4,382 3,946 789 503 168 Tract............................... 693 855 1,092 817 338 Land................................... 1,914 1,470 293 162 167 Other.................................. 260 311 1,082 226 -- Unallocated............................ 1,107 988 268 643 430 ------- ------- ------- ------- ------- Total.......................... $29,450 $24,285 $17,111 $13,274 $13,515 ======= ======= ======= ======= ======= Percentage of year end allowance: Single family residential.............. 27.42% 29.22% 45.80% 50.26% 47.92% Income property: Multi-family........................ 3.08 2.66 6.21 15.07 35.41 Commercial.......................... 14.38 28.44 25.33 16.97 8.51 Development......................... 26.75 8.51 2.07 -- -- Single family construction: Single family residential........... 14.88 16.25 4.61 3.79 1.24 Tract............................... 2.35 3.52 6.38 6.15 2.50 Land................................... 6.50 6.05 1.71 1.22 1.24 Other.................................. 0.88 1.28 6.32 1.70 -- Unallocated............................ 3.76 4.07 1.57 4.84 3.18 ------- ------- ------- ------- ------- Total.......................... 100.00% 100.00% 100.00% 100.00% 100.00% ======= ======= ======= ======= ======= Percentage of reserves to total gross loans (1) by category: Single family residential.............. 0.91% 1.04% 1.36% 1.68% 1.92% Income property: Multi-family........................ 0.36 0.29 0.42 0.89 2.17 Commercial.......................... 2.11 2.97 1.95 2.01 1.90 Development......................... 3.86 1.40 0.45 -- -- Single family construction: Single family residential........... 2.24 1.44 0.29 0.47 0.30 Tract............................... 19.83 3.55 1.27 1.19 1.00 Land................................... 4.11 2.49 0.42 0.41 1.15 Other.................................. 1.69 1.41 2.32 2.33 -- Unallocated............................ n/a n/a n/a n/a n/a Total.......................... 1.63% 1.46% 1.07% 1.37% 1.83%
- --------------- (1) Percent of allowance for estimated credit losses to gross loan commitments, which include the outstanding but undisbursed portion of such commitments. The change in the percentage of reserves to total loans by category is a result of different levels of classified assets within each category. 22 27 Unallocated reserves are established based on management's judgment in order to appropriately reflect the presence of indicators of inherent losses that are not fully reflected in the historical loss information and analysis used in the development of allocated reserves. The table below summarizes the activity of the Company's allowance for estimated credit losses for the periods indicated.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 (DOLLARS IN THOUSANDS) ---------- ---------- ---------- -------- -------- Average loans outstanding....... $1,547,206 $1,411,697 $1,081,382 $745,197 $671,365 ========== ========== ========== ======== ======== Total allowance for estimated credit losses at beginning of period........................ $ 24,285 $ 17,111 $ 13,274 $ 13,515 $ 15,192 Provision for credit losses..... 6,000 12,000 7,135 5,137 6,067 Charge-offs: Single family residential..... (354) (1,910) (1,178) (3,472) (3,103) Income property: Multi-family............... -- (186) (1,038) (1,745) (4,641) Commercial................. (573) (512) (815) -- -- Single family construction: Single family residential.............. -- -- (267) -- -- Tract...................... (147) -- -- -- -- Land.......................... -- (1,140) -- (150) -- Other......................... (10) (1,124) -- (11) -- Recoveries: Single family residential..... -- -- -- -- -- Income property: Multi-family............... -- -- -- -- -- Commercial................. -- -- -- -- -- Single family construction: Single family residential.............. -- -- -- -- -- Tract...................... -- -- -- -- -- Land.......................... -- -- -- -- -- Other......................... 249 46 -- -- -- ---------- ---------- ---------- -------- -------- Net charge-offs................. (835) (4,826) (3,298) (5,378) (7,744) ---------- ---------- ---------- -------- -------- Total allowance for estimated credit losses at end of period........................ $ 29,450 $ 24,285 $ 17,111 $ 13,274 $ 13,515 ========== ========== ========== ======== ======== Ratio of net charge-offs to average loans outstanding during the period............. 0.05% 0.34% 0.30% 0.72% 1.15% Ratio of allowance to average loans outstanding............. 1.90% 1.72% 1.58% 1.78% 2.01%
REAL ESTATE OWNED Real estate acquired in satisfaction of loans is transferred to REO at estimated fair values, less any estimated disposal costs. The difference between the fair value of the real estate collateral and the loan balance at the time of transfer is recorded as a loan charge off if fair value is lower. Any subsequent declines in the fair value of the REO after the date of transfer are recorded through a write-down of the asset or through the establishment of, or additions to specific reserves. The Company's investment in REO decreased from $5.6 million to $2.9 million, or 48.83%, from December 31, 1999 to 2000, respectively. 23 28 The table below summarizes the composition of the Company's portfolio of real estate owned properties as of the dates indicated.
DECEMBER 31, -------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) ------ ------ ------ Single family residential................................ $2,859 $1,218 $2,509 Income property: Multi-family........................................... -- -- 213 Commercial............................................. -- -- 1,393 Land..................................................... -- 4,398(1) -- ------ ------ ------ Gross investment......................................... 2,859 5,616 4,115 Allowance for estimated losses......................... -- (29) (45) ------ ------ ------ Real estate owned, net................................... $2,859 $5,587 $4,070 ====== ====== ======
- --------------- (1) In December 1999, the Bank acquired 18 lots of a tract development in La Quinta, California with a carrying value of $4.4 million. In the preceding table, the Company's gross investment in REO equals loan principal at foreclosure, plus post-foreclosure capitalized costs, less cumulative charge-offs. The table below summarizes the changes in valuation of the REO portfolio for the periods indicated.
YEAR ENDED DECEMBER 31, ---------------------------------------------- 2000 1999 1998 1997 1996 (DOLLARS IN THOUSANDS) ---- ---- ------- -------- ------- Total allowance for estimated losses at beginning of period........................ $ 29 $ 45 $ 2,563 $ 11,871 $15,725 Provision for estimated losses............. -- 80 60 913 4,933 Charge-offs................................ (29) (96) (2,578) (10,221) (8,787) ---- ---- ------- -------- ------- Total allowance for estimated losses at end of period.................................. $ -- $ 29 $ 45 $ 2,563 $11,871 ==== ==== ======= ======== =======
INVESTMENT SECURITIES The Company has authority to invest in a variety of investment securities, including U.S. Government and agency securities, mortgage-backed securities and corporate securities. However, in recent years the Company's strategy has been to deploy its assets through loan originations, rather than purchases of investment securities. As a result, the investment activity has been steadily decreasing over the last six years, and during 2000 and 1999 there was no investment activity. Subsequent to the Company's stock offering in the third quarter of 1998, the Company utilized the $27.6 million of proceeds to purchase $27.9 million in FNMA discount notes, $5.0 million of which matured in September 1998 and $22.9 million of which matured in December 1998. During 1998, the Company sold $596,000 in mutual funds. The Company classifies all securities acquired as available-for-sale under generally accepted accounting principles, and thus the securities were carried at fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders' equity, net of taxes. SOURCES OF FUNDS The Company's principal sources of funds in recent years have been deposits obtained on a retail basis through its branch offices and, to a lesser extent, advances from the FHLB. In addition, funds have been obtained from maturities and repayments of loans and securities, and sales of loans, securities and other assets, including real estate owned. 24 29 DEPOSITS At December 31, 2000, the Company operated seven retail-banking locations with three primary product lines; (1) checking and savings accounts, (2) money market accounts, and (3) certificates of deposit. Five of these branches are located in the South Bay area of Los Angeles County, one is located in the San Fernando Valley area of Los Angeles County and the other is located near the border of Los Angeles and Ventura Counties. At December 31, 2000, the Company's retail branches carried average deposit balances of $277.6 million and $131.9 million in the Valley and South Bay regions, respectively, which is substantially higher than most local banking companies. The Company does not operate a money desk or otherwise solicit Brokered Deposits. The Company has several types of deposit accounts principally designed to attract short term deposits. The table below summarizes the twelve month average on deposits and the weighted average interest costs incurred thereon during the periods indicated. See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Net Interest Income."
2000 1999 1998 -------------------------------- -------------------------------- ------------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE PERCENT AVERAGE PERCENT AVERAGE PERCENT AMOUNT COST OF TOTAL AMOUNT COST OF TOTAL AMOUNT COST OF TOTAL (DOLLARS IN THOUSANDS) ---------- -------- -------- ---------- -------- -------- -------- -------- -------- Noninterest checking....... $ 31,174 -- 2.67% $ 24,469 -- 2.32% $ 13,378 -- 1.47% Checking/NOW............... 39,609 2.46% 3.39 35,105 2.16% 3.33 25,912 2.62% 2.85 Passbook................... 26,658 2.18% 2.28 27,666 3.31% 2.62 73,190 4.04% 8.06 Money market............... 180,815 4.99% 15.46 156,538 4.37% 14.85 22,487 3.19% 2.48 Certificates of deposit(1)............... 891,037 5.94% 76.20 810,392 5.22% 76.88 772,748 5.60% 85.14 ---------- ------- ---------- ------- -------- ------- Total.............. $1,169,293 5.58% 100.00% $1,054,170 4.94% 100.00% $907,715 5.33% 100.00% ========== ======= ========== ======= ======== =======
- --------------- (1) See "Note 7 -- Deposits" for certificates of deposit with balances >$100,000. FHLB ADVANCES The FHLB system functions as a source of credit to savings institutions which are members. Advances are secured by the Company's mortgage loans and the capital stock of the FHLB owned by the Company. Subject to the FHLB's advance policies and requirements, these advances can be requested for any business purpose in which the Company is authorized to engage. In granting advances, the FHLB considers a member's creditworthiness and other relevant factors. At December 31, 2000, the Company had an approved line of credit with the FHLB for a maximum advance of up to 35% of total assets ($613.2 million as of December 31, 2000) based on qualifying collateral. At December 31, 2000, the Company had ten FHLB advances outstanding totaling $384.0 million which had a weighted averaged interest rate of 5.98% and a weighted average remaining maturity of 4 years and 2 months. SENIOR NOTES On December 31, 1997, the Company issued $40.0 million of Senior Notes due 2004 ("1997 Senior Notes") in a private placement (the "1997 Offering"), which included registration rights. Concurrent with the completion of the 1997 Offering, the Company prepaid all of its 1995 Senior Notes and redeemed all of its Series A Preferred Stock. The 1997 Senior Notes bear interest payable semiannually at the stated interest rate of 12.50%. On or after December 31, 2002, the 1997 Senior Notes will be redeemable at any time at the option of the Company, in whole or in part, at the redemption price of 106.25% for the twelve month period beginning December 31, 2002, and 103.125% beginning December 31, 2003 and thereafter until maturity. In November 2000, the Company repurchased $642,000 of its 1997 Senior Notes at an average price of 96.2% of par value. As of March 23, 2001, the Company repurchased $2.1 million of its 1997 Senior Notes at an average price of 99.6% of par value. 25 30 OTHER On March 28, 2001, HFC Capital Trust I (the "Trust"), a statutory business trust and wholly owned subsidiary of the Company, issued in a private placement transaction $9.0 million of 10.18% capital securities (the "Capital Securities"), which represent undivided preferred beneficial interests in the assets of the Trust. The Company is the owner of all the beneficial interests represented by the common securities of the Trust (the "Common Securities") together with the Capital Securities (the "Trust Securities"). The Trust exists for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 10.18% junior subordinated deferrable interest debentures (the "Junior Subordinated Debentures") issued by the Company and engaging in certain other limited activities. The Junior Subordinated Debentures held by the Trust will mature on June 8, 2031, at which time the Company is obligated to redeem the Capital Securities. The Company intends to use the proceeds to repurchase some of its outstanding 12.50% 1997 Senior Notes due 2004 in order to reduce its overall interest costs. To the extent that the Company is unable to use the full amount of the proceeds to repurchase 1997 Senior Notes, the capital will be used to repurchase Common Stock or to fund acquisitions of complementary lines of business. Some portion of the proceeds may be invested in the Bank to support future growth. Pending use of the proceeds as described above, the proceeds will be invested in short term investments. ITEM 2. PROPERTIES As of December 31, 2000, the Company had seven leased and two wholly owned properties. The leased properties included its corporate headquarters, five branch offices (two of which were ground leases for sites on which the Company has built branch offices), and one warehouse. All of the properties owned or leased by the Company are in Southern California. The following table summarizes the Company's owned and leased properties at December 31, 2000 and, with respect to leased properties, highlights the principal terms and net book values of the owned properties and leasehold improvements. None of the leases contain any unusual terms and are all "net" or "triple net" leases.
EXPIRATION RENEWAL MONTHLY SQUARE NET OF TERM OPTIONS RENTAL FEET BOOK VALUE ---------- ----------- -------- ------ ---------- Leased: El Segundo Corporate............. 11/30/05 One 5-year $104,149 61,190 $579,114 Torrance Branch.................. 12/31/01 One 5-year 18,578 7,343 66,925 Westlake Branch.................. 06/30/10 Two 5-year 14,245 7,700 129,106 Manhattan Beach Branch........... 10/30/10 Four 5-year 4,590 4,590 -- Warehouse........................ 06/30/01 Two 3-year 4,000 10,000 57,834 Tarzana Branch................... 01/31/05 Five 5-year 3,589 3,352 -- Redondo Beach Branch............. 04/30/04 Two 5-year 3,857 1,403 82,853 -------- ------ -------- Total.................... $153,008 95,578 $915,832 ======== ====== ======== Owned: Hawthorne Branch................. 10,000 $170,896 Westchester Branch............... 8,800 367,833 Manhattan Beach Branch (building only)(1)...................... 4,590 35,804 Tarzana Branch (building only)(1)...................... 3,352 3,787 ------ -------- Total.................... 26,742 $578,320 ====== ========
- --------------- (1) Ground lease only; building and improvements are owned by the Company but revert to the landlord upon termination of the lease. The Bank utilizes a client-server computer system with use of various third-party vendors' software for retail deposit operations, loan servicing, accounting and loan origination functions. The net book value of the 26 31 Bank's electronic data processing equipment, including personal computers and software, was $1.1 million at December 31, 2000. At December 31, 2000, the net book values of the Company's office property, and furniture, fixtures and equipment, excluding data processing equipment, were $3.7 million. See Note 6 of the Notes to Consolidated Financial Statements. The Company believes that all of the above facilities are in good condition and are adequate for the Company's present operations. ITEM 3. LEGAL PROCEEDINGS LITIGATION The Bank is a defendant in a construction defect case entitled Marine Village Townhomes Homeowners' Association v. Hawthorne Savings and Loan Association that was filed in the Superior Court of the State of California, County of Los Angeles. In this action, Plaintiffs allege, under several theories of recovery, that the Bank was responsible for construction defects in a multi-unit condominium complex, and further alleges fraud by the Bank in connection with the sales of the condominiums. The Bank initially provided a construction loan to the developer, but took over the completion of a portion of the projects after the developer defaulted. Plaintiffs are seeking damages of approximately $3.3 million, plus punitive damages. The Bank has denied that it is responsible for all of the defects Plaintiffs are alleging, and has made claims for indemnification against the contractor and subcontractors. The Bank is also seeking reimbursement from various insurance carriers for defense costs and indemnification for any amounts the Bank is obligated to pay. No assurances can be given that the responsible parties will ultimately indemnify the Bank. Further, there can be no insurance coverage for intentional acts or punitive damages, if awarded. Although the Bank intends to vigorously defend its position and to pursue indemnification, there can be no assurances that the Bank will prevail. In addition, the Bank has incurred substantial legal fees defending the case. In addition, the inherent uncertainty of jury or judicial verdicts makes it impossible to determine with certainty the Company's maximum exposure in this case. In December 2000, the Bank settled the action entitled Mells v. Hawthorne, a construction defect case in which the Bank was appealing a $767,000 judgment against the Bank. The terms of the Settlement Agreement are confidential, and did not result in a material additional accrual during the fourth quarter. In conjunction with the settlement, the parties have stipulated to the reversal of the judgment and dismissal of the action with prejudice. The Bank was a defendant in a construction defect case entitled Stone Water Terrace HOA v. Hawthorne Savings and Loan Association, which was filed in the Superior Court of the State of California, County of Los Angeles. In this action, Plaintiff alleged, under several theories of recovery, that the Bank was responsible for construction defects in a multi-unit condominium complex. The Bank initially provided construction loans to the developer, but took over the completion of a portion of the projects after the developer defaulted. The plaintiff sought damages in an unspecified amount, plus punitive damages. The Bank denied the allegations in the complaint and sought indemnification against the responsible parties. On September 18, 2000, the Court entered an order dismissing the Stonewater Terrace HOA case because Plaintiffs failed to take certain actions. In March 2001, the Plaintiffs filed a motion seeking to have the case reinstated. The Bank intends to oppose the motion, but there can be no assurances that the case will not be reinstated. If the case is reinstated, it is probable that the Bank will incur substantial legal fees defending this matter. At the time the case was dismissed, discovery had not yet begun, so the Bank is not in a position to estimate the extent of any liability. In addition, the inherent uncertainty of jury or judicial verdicts makes it impossible to determine with certainty the Company's maximum exposure in this action. The Bank is involved in a variety of other litigation matters in the ordinary course of its business, and anticipates that it will become involved in new litigation matters from time to time in the future. Based on the current assessment of these other matters, management does not presently believe that any one of these existing other matters is likely to have material adverse impact on the Company's financial condition or result of operations. However, the Company will incur legal and related costs concerning the litigation and may from time to time determine to settle some or all of the cases, regardless of management's assessment of the 27 32 Company's legal position. The amount of legal defense costs and settlements in any period will depend on many factors, including the status of cases (and the number of cases that are in trial or about to be brought to trial) and the opposing parties' aggressiveness in pursuing their cases and their perception of their legal position. Further, the inherent uncertainty of jury or judicial verdicts makes it impossible to determine with certainty the Company's maximum cost in any pending litigation. Accordingly, the Company's litigation costs and expenses may vary materially from period to period, and no assurance can be given that these costs will not be material in any particular period. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the fourth quarter of 2000. ITEM 4A. EXECUTIVE OFFICERS The following table sets forth, as of February 26, 2001 the names and ages of all executive officers of the Company, indicating their positions and principal occupation.
NAME AGE POSITION WITH THE COMPANY AND PRIOR EXPERIENCE ---- --- ---------------------------------------------- Simone Lagomarsino............. 39 President and Chief Executive Officer of Hawthorne Financial Corporation and Hawthorne Savings, F.S.B. since December 1999. Executive Vice President and Chief Financial Officer of the Company and the Bank from February 1999 through December 1999. Executive Vice President and Chief Financial Officer of First Plus Bank from March 1998 to February 1999. Senior Vice President, Finance of Imperial Financial Group from March 1997 to March 1998. Senior Vice President and Chief Financial Officer of Ventura County National Bank from March 1995 to March 1997. (Ventura County National Bank was sold to City National Bank in January 1997). Financial advisor Prudential Securities September 1993 to March 1995. Karen C. Abajian............... 38 Executive Vice President and Chief Financial Officer of Hawthorne Financial Corporation and Hawthorne Savings, F.S.B. since April 2000. Senior Vice President and Controller of Imperial Bank from May 1993 to March 2000. David L. Adams................. 47 Senior Vice President and Income Property Group Manager of Hawthorne Savings, F.S.B. since June 2000. Vice President and Wholesale Lending Division Manager of Pacific Shore Funding, Inc. from November 1998 to June 2000. Vice President and Correspondent Loan Production Division Manager of Century National Financial Group, Inc. from January 1998 to November 1998. Senior Vice President and Director of Residential Loan Production of Downey Savings and Loan Association from 1995 to 1997. William R. Brown............... 44 Senior Vice President of Hawthorne Savings, F.S.B. since August 1993. Group manager of single family residential construction lending since January 2000. Manager of the Bank's construction servicing group from January 1998 through December 1999. Manager of the Bank's single family and tract construction lending operations from 1995 through 1998. Manager of Bank's Special Assets division from 1993 through 1995. Vice President, City National Bank, Real Estate Special Assets group, from January 1993 to August 1993. Senior Vice President, Valley Federal Savings, from 1983 to 1992. David L. Hardin................ 47 Executive Vice President of Hawthorne Savings, F.S.B. since September 1993. Executive Vice President and Director, Retail Banking of Downey Savings from February 1992 to September 1993. Executive Vice President and Chief Retail Officer of Valley Federal Savings from November 1990 to February 1992. Eileen Lyon.................... 43 Senior Vice President, General Counsel, and Corporate Secretary of Hawthorne Financial Corporation and Hawthorne Savings, F.S.B. since February 2000. Partner with Manatt, Phelps & Phillips, LLP from 1993 to February 2000.
28 33
NAME AGE POSITION WITH THE COMPANY AND PRIOR EXPERIENCE ---- --- ---------------------------------------------- Daniel A. Ruvalcaba............ 49 Executive Vice President and Chief Lending Officer of Hawthorne Savings, F.S.B. since February 2000. Executive Vice President and Chief Credit Officer of California National Bank from 1997 to January 2000. Senior Vice President of California Federal Bank from 1994 to 1997. Executive Vice President and Senior Credit Officer of Travelers Insurance Corporation from 1987 to 1994. Charles B. Stoneburg........... 58 Executive Vice President of Hawthorne Savings, F.S.B. since August 1993. President of Semper Enterprises Inc. from August 1981 to July 1993. Executive Vice President of FiServ Corporation from September 1972 to August 1981.
29 34 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS MARKET PRICES OF COMMON STOCK The common stock of the Company ("Common Stock") is traded on the Nasdaq National Market under the symbol "HTHR". Mellon Investor Services is the Company's transfer agent and registrar, and is able to respond to inquiries from shareholders on their website: www.mellon-investor.com. The following table sets forth the high and low sales prices of the Common Stock as reported by Nasdaq for the periods indicated below.
YEAR ENDED DECEMBER 31, 2000 HIGH LOW ---------------------------- ---- --- First quarter............................................... 11 1/2 7 41/64 Second quarter.............................................. 8 3/4 7 3/8 Third quarter............................................... 12 7 3/4 Fourth quarter.............................................. 15 11
YEAR ENDED DECEMBER 31, 1999 HIGH LOW ---------------------------- ---- --- First quarter............................................... 17 14 3/4 Second quarter.............................................. 16 1/2 13 5/16 Third quarter............................................... 16 3/4 13 1/4 Fourth quarter.............................................. 14 3/4 11 1/16
STOCKHOLDERS As of March 23, 2001, there were approximately 411 holders of record. DIVIDENDS It is the present policy of the Company to retain earnings to provide funds for use in its business. The Company has not paid cash dividends on the Common Stock during the past several years and does not anticipate doing so in the foreseeable future. As a holding company whose only significant asset is the common stock of the Bank, the Company's ability to pay dividends on its Common Stock and to conduct business activities directly or in non-banking subsidiaries depends significantly on the receipt of dividends or other distributions from the Bank. Federal banking laws and regulations, including the regulations of the OTS, limit the Bank's ability to pay dividends to the Company. The Bank generally may not declare dividends or make any other capital distribution to the Company if, after the payment of such dividends or other distribution, the Bank would fall within any of the three undercapitalized categories under the prompt corrective action standards established by the OTS and the other federal banking agencies. Another regulation of the OTS also limits the Company's ability to pay dividends and make other capital distributions in a manner that depends upon the extent to which it meets regulatory capital requirements. In addition, HOLA generally requires savings association subsidiary of a savings and loan holding company to give the OTS at least 30 days advance notice of any proposed dividends to be made on its guarantee, permanent or other non-withdrawable stock or else the dividend will be invalid. See "Item 1. Business -- Regulation of the Bank -- Capital Distribution Limitations." Further, the OTS may prohibit any dividend or other capital distribution that it determines would constitute an unsafe or unsound practice. In addition to the regulation of dividends and other capital distributions, there are various statutory and regulatory limitations on the extent to which the Bank can finance or otherwise transfer funds to the Company or any of its non-banking subsidiaries, whether in the form of loans, extensions of credit, investments or asset purchases. The director of the OTS may further restrict these transactions in the interest of safety and soundness. 30 35 ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below is derived from the audited consolidated financial statements of the Company and should be read in conjunction with the Consolidated Financial Statements presented elsewhere herein.
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ---------- ---------- ---------- -------- -------- Statement of Operations Data: Interest revenues....................... $ 148,988 $ 132,747 $ 106,992 $ 75,616 $ 65,354 Interest costs.......................... (88,682) (73,626) (61,874) (43,825) (39,960) ---------- ---------- ---------- -------- -------- Net interest income..................... 60,306 59,121 45,118 31,791 25,394 Provision for credit losses............. (6,000) (12,000) (7,135) (5,137) (6,067) ---------- ---------- ---------- -------- -------- Net interest income after provision for credit losses........................ 54,306 47,121 37,983 26,654 19,327 Noninterest revenues, net............... 8,094 7,820 4,653 3,588 8,588 (Loss)/income from real estate operations, net.................................. (924) 324 1,909 229 (2,378) General and administrative expenses..... (34,328) (32,363) (28,802) (22,009) (21,046) Other non-operating (expense)/ income... (2,196) (4,672) (31) 112 (3,366)(1) ---------- ---------- ---------- -------- -------- Total noninterest expenses...... (36,524) (37,035) (28,833) (21,897) (24,412) Income before income tax (expense)/ benefit and extraordinary item............... 24,952 18,230 15,712 8,574 1,125 Income tax (expense)/benefit............ (10,668) (8,030) (4,674) 2,577 6,382 ---------- ---------- ---------- -------- -------- Income before extraordinary item........ 14,284 10,200 11,038 11,151 7,507 Extraordinary item...................... -- -- -- (1,534)(2) -- ---------- ---------- ---------- -------- -------- Net income.............................. $ 14,284 $ 10,200 $ 11,038 $ 9,617 $ 7,507 ========== ========== ========== ======== ======== Net income available for common stock... $ 14,284 $ 10,200 $ 11,038 $ 5,254 $ 5,070 ========== ========== ========== ======== ======== Per Share Amounts: Basic earnings per share before extraordinary item................... $ 2.69 $ 1.93 $ 2.64 $ 2.35 $ 1.95 Basic earnings per share after extraordinary item................... 2.69 1.93 2.64 1.82 1.95 Diluted earnings per share before extraordinary item................... 1.94 1.33 1.65 1.30 1.17 Diluted earnings per share after extraordinary item................... 1.94 1.33 1.65 1.00 1.17 Diluted book value per share............ 13.91 12.10 10.43 7.67 7.14 Balance Sheet Data at Period End: Total assets............................ $1,753,395 $1,581,153 $1,412,434 $928,197 $847,195 Cash and cash equivalents............... 99,919 86,722 45,449 51,620 93,978 Investment securities................... -- -- -- 578 38,371 Loans receivable, net................... 1,608,067 1,444,968 1,326,791 838,251 672,401 Real estate owned, net.................. 2,859 5,587 4,070 9,859 20,140 Deposits................................ 1,214,856 1,086,635 1,019,450 799,501 717,809 Senior notes due 2004................... 39,358 40,000 40,000 40,000 -- Senior notes due 2000................... -- -- -- -- 12,307 Other borrowings........................ 384,000 349,000 264,000 40,000 50,000 Stockholders' equity.................... 104,161 92,304 81,424 42,319 43,922 Allowance for estimated credit losses... 29,450 24,285 17,111 13,274 13,515
31 36
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 2000 1999 1998 1997 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ---------- ---------- ---------- -------- -------- Asset Quality at Period End: Nonaccrual loans........................ $ 31,601 $ 44,031 $ 47,688 $ 15,396 $ 28,624 Real estate owned, net.................. 2,859 5,587 4,070 9,859 20,140 ---------- ---------- ---------- -------- -------- $ 34,460 $ 49,618 $ 51,758 $ 25,255 $ 48,764 ========== ========== ========== ======== ======== Net charge-offs........................... $ 835 $ 4,826 $ 3,298 $ 5,378 $ 7,744 Yields and Costs (for the period): Interest-earnings assets................ 8.94% 8.68% 9.06% 9.00% 8.43% Interest-bearing liabilities............ 5.81% 5.21% 5.60% 5.44% 5.29% Interest rate spread(3)................. 3.13% 3.47% 3.46% 3.56% 3.14% Net interest margin(4).................. 3.62% 3.87% 3.82% 3.78% 3.28% Performance Ratios(5): Return on average assets................ 0.85% 0.66% 0.93% 1.11% 0.93% Return on average common stockholders' equity............................... 14.58% 11.66% 18.22% 19.83% 17.75% Average stockholders' equity to average assets............................... 5.85% 5.68% 5.09% 5.60% 5.24% Efficiency ratio(6)..................... 50.19% 48.35% 57.88% 62.19% 77.03% Bank Capital Ratios at Period End: Tangible................................ 8.01% 8.05% 7.65% 7.55% 6.27% Core.................................... 8.01% 8.05% 7.65% 7.55% 6.27% Tier 1.................................. 11.30% 11.37% 10.10% 10.23% 9.85% Risk-based.............................. 12.23% 12.50% 11.10% 11.48% 11.11% Asset Quality Data at Period End: Total nonaccrual loans to total assets... 1.80% 2.78% 3.38% 1.66% 3.38% Nonaccrual loans to total gross loans... 1.93% 3.00% 3.55% 1.81% 4.17% Allowance for estimated credit losses to gross loans.......................... 1.80% 1.65% 1.27% 1.56% 1.97% Allowance for estimated credit losses to nonaccrual loans..................... 93.19% 55.15% 35.88% 86.22% 47.22% Net charge-offs to average loans........ 0.05% 0.34% 0.30% 0.72% 1.15%
- --------------- (1) Includes a one-time charge on all deposits insured by the SAIF as of March 31, 1996 to recapitalize the SAIF. (2) Relates to the accelerated write off of unamortized issue costs and original issue discount associated with Senior Notes due 2000, which were issued by the Company in December 1995 and repaid in full in December 1997, with a portion of the proceeds from the offering of Senior Notes due 2004. (3) Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. (4) Net interest income divided by average interest-earning assets. (5) With the exception of period end ratios, all ratios are based on average balances for the period. (6) Represents general and administrative expenses divided by net interest income before provision for credit losses and noninterest revenues. 32 37 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion provides information about the results of operations, financial condition, liquidity, and asset quality of the Company. This information is intended to facilitate the understanding and assessment of significant changes and trends related to the financial condition of the Company and the results of its operations. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying notes presented herein. See "Cautionary Statement Regarding Forward Looking Statements." RESULTS OF OPERATIONS 2000 COMPARED WITH 1999 GENERAL Net income for the year ended December 31, 2000 was $14.3 million, or $1.94 per diluted share, compared with $10.2 million, or $1.33 per diluted share, for the same period in 1999. This net income resulted in a return on average assets ("ROA") of 0.85%, and a return on average equity ("ROE") of 14.58% for the year ended December 31, 2000, compared with a ROA of 0.66% and a ROE of 11.66%, during the same period in 1999. Pre-tax income increased 36.87% for the year ended December 31, 2000 to $25.0 million in 2000 from $18.2 million generated during the same period in 1999. The Company's net interest income before provision for credit losses increased 2.00% to $60.3 million for the year ended December 31, 2000, compared with $59.1 million in 1999. The Company's yield on average earning assets was 8.94% for the year ended December 31, 2000, compared with 8.68% during the same period in 1999. The average cost of interest-bearing liabilities for the Company increased to 5.81% during the year ended December 31, 2000, compared with 5.21% during the same period in 1999. The Company's resulting net interest margin for the year ended December 31, 2000 was 3.62%, compared with 3.87% during the same period in 1999. The compression in the net interest margin is the result of the inverted yield curve environment in which short term rates are higher than long term rates. In turn, adjustable rate assets are repricing off of the lower, long term rates while interest-bearing liabilities are pricing off of the higher short term rates. Provisions for credit losses totaled $6.0 million in 2000, compared with $12.0 million in 1999. At December 31, 2000, the ratio of total allowance for estimated credit losses to gross loans reached 1.80%, compared with 1.65% at December 31, 1999. Nonaccrual loans totaled $31.6 million at December 31, 2000 (or 1.80% of total assets), compared with nonaccrual loans of $44.0 million (or 2.78% of total assets) at December 31, 1999. Other classified loans were $40.6 million at December 31, 2000, compared with $25.6 million at December 31, 1999. Delinquent loans totaled $26.9 million at December 31, 2000, compared with $24.0 million at December 31, 1999. Noninterest revenues were $8.1 million in 2000, compared with noninterest revenues of $7.8 million earned in 1999. Noninterest revenues in 2000 included a $1.2 million award from the United States Treasury Department's Bank Enterprise Award program for its community involvement and the financing of affordable housing and other community projects in under-secured neighborhoods, as discussed elsewhere herein. Losses from real estate operations, net, were $0.9 million in 2000, compared with income of $0.3 million in 1999. The loss from real estate operations resulted primarily from a $0.5 million write-down and subsequent loss of $0.3 million on the sale of one property versus net recoveries during 1999. Total general and administrative expenses ("G&A") were $34.3 million for the year ended December 31, 2000, a 6.07% increase over the $32.4 million of G&A incurred during the same period in 1999. The increase in G&A was primarily due to increases in employee costs and professional fees. The $2.5 million decrease in other non-operating expenses was primarily due to fewer legal settlements in 2000 compared with 1999. 33 38 NET INTEREST INCOME The following table shows average balance sheet data, related revenues and costs, and effective weighted average yields and costs for each of the three years ended December 31. The interest costs associated with the Company's issuance of 1997 Senior Notes are included in the table.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------- ------------------------------- ------------------------------- AVERAGE REVENUES/ YIELD/ AVERAGE REVENUES/ YIELD/ AVERAGE REVENUES/ YIELD/ BALANCE COST COST BALANCE COST COST BALANCE COST COST (DOLLARS IN THOUSANDS) ---------- --------- ------ ---------- --------- ------ ---------- --------- ------ Assets: Interest-earning assets: Loans receivable(1)..... $1,547,206 $141,279 9.13% $1,411,697 $126,854 8.99% $1,081,382 $102,213 9.45% Cash and cash equivalents........... 98,071 6,233 6.36 99,179 4,911 4.95 81,188 3,698 4.55 Investment securities... -- -- -- -- -- -- 8,801 510 5.79 Investment in capital stock of Federal Home Loan Bank............. 20,566 1,476 7.18 18,344 982 5.35 9,862 571 5.79 ---------- -------- ---------- -------- ---------- -------- Total interest-earning assets............ 1,665,843 148,988 8.94 1,529,220 132,747 8.68 1,181,233 106,992 9.06 -------- -------- -------- Noninterest-earning assets.................. 9,410 11,005 8,839 ---------- ---------- ---------- Total assets........ $1,675,253 $1,540,225 $1,190,072 ========== ========== ========== Liabilities and Stockholders' Equity: Interest-bearing liabilities: Deposits................ $1,138,119 $ 63,513 5.58 $1,029,701 $ 50,831 4.94 $ 894,337 $ 47,642 5.33 FHLB advances........... 346,983 20,180 5.82 343,205 17,795 5.18 170,060 9,232 5.43 Senior notes............ 39,912 4,989 12.50 40,000 5,000 12.50 40,000 5,000 12.50 ---------- -------- ---------- -------- ---------- -------- Total interest-bearing liabilities....... 1,525,014 88,682 5.81 1,412,906 73,626 5.21 1,104,397 61,874 5.60 -------- -------- -------- Noninterest-bearing checking................ 31,174 24,469 13,378 Noninterest-bearing liabilities............. 21,124 15,337 11,703 ---------- ---------- ---------- Stockholders' equity...... 97,941 87,513 60,594 ---------- ---------- ---------- Total liabilities and stockholders' equity............ $1,675,253 $1,540,225 $1,190,072 ========== ========== ========== Net interest income......... $ 60,306 $ 59,121 $ 45,118 ======== ======== ======== Interest rate spread........ 3.13% 3.47% 3.46% ==== ===== ==== Net interest margin......... 3.62% 3.87% 3.82% ==== ===== ====
- --------------- (1) Includes the interest on nonaccrual loans only to the extent that it was paid and recognized as interest income. The operations of the Company are substantially dependent on its net interest income, which is the difference between the interest income earned from its interest-earning assets and the interest expense incurred on its interest-bearing liabilities. The Company's net interest margin is its net interest income divided by its average interest-earning assets. Net interest income and net interest margin are affected by several factors, including (1) the level of, and the relationship between, the dollar amount of interest-earning assets and interest-bearing liabilities, (2) the relationship between the repricing or maturity of the Company's adjustable rate and fixed rate loans and short term investment securities and its deposits and borrowings, and (3) the magnitude of the Company's noninterest-earning assets, including nonaccrual loans and REO. The Company recorded net interest income before provision for credit losses of $60.3 million and $59.1 million for the years ended December 31, 2000 and 1999, respectively, reflecting an increase of 2.00%. Average earning assets were $1.7 billion for the year ended December 31, 2000, compared with $1.5 billion during 1999, reflecting an increase of 8.93%. The yield on interest-earning assets was 8.94% in 2000, compared with 8.68% in 1999. The steady growth in loans was funded through deposit growth and borrowings from the FHLB. The average cost of interest-bearing liabilities for the Company increased to 5.81% during the year ended December 31, 2000, compared with 5.21% during the same period in 1999. Expressed as a percentage of interest-earning assets, the Company's resulting net interest margin was 3.62% and 3.87% in 2000 and 1999, respectively. The compression in the net interest margin is the result of the inverted yield curve environment in 34 39 which short term rates are higher than long term rates. In turn, adjustable rate assets are repricing off of the lower, long term rates, while interest-bearing liabilities are repricing off of the higher, short term rates. The substantial majority of the Company's earning assets (principally loans) are adjustable rate. The Company's deposits are primarily comprised of term certificate accounts, which carry fixed interest rates and predominantly possess original terms ranging from six to twelve months. The Company's borrowings, which are principally derived from the FHLB, are for terms ranging from one to ten years (though such terms are subject to certain early call provisions) and carry both variable and fixed interest rates. As of December 31, 2000, 89.45% of the Company's net loan portfolio was adjustable rate, with 83.41% of such loans subject to repricing no less frequently than annually. The substantial majority of such loans are priced at a margin over various market sensitive indices, including the one year CMT, the one month CMT, the MTA, LIBOR and the Prime Rate. Based upon the recent decline in the effective yield of these indices, the Company expects that the yield on its loan portfolio will decline over the coming months to fully incorporate the recent decrease in market interest rates. At December 31, 2000, 76.11% of the Company's interest-bearing deposits were comprised of certificate accounts, the majority of which have original terms averaging twelve months. The remaining, weighted average term to maturity for the Company's certificate accounts approximated six months at December 31, 2000. Generally, the Company's offering rates for certificate accounts move directionally with the general level of short term interest rates, though the margin may vary due to competitive pressures. The maturities, as reflected in the repricing table under "Interest Rate Risk Management," indicate that the Company will continue to see a compression in the net interest margin in the first half of 2001. The Company expects that the cost of its certificate accounts will decrease in the coming months, as maturing and newly acquired accounts are priced at current, lower offering rates. As of December 31, 2000, 67.45% of the Company's borrowings from the FHLB are fixed rate, with remaining terms ranging from one to ten years (though such remaining terms are subject to early call provisions). The remaining 32.55% of the borrowings carry an adjustable interest rate, with 80% of the adjustable borrowings tied to the Prime Rate, maturing in February 2003. The remaining 20% is tied to one month LIBOR, and matures in May 2002. Accordingly, the recent decrease in market interest rates is expected to result in a gradual decrease in the cost of the Company's currently outstanding FHLB borrowings, and the cost of any newly acquired borrowings will reflect current market pricing. The following table sets forth the dollar amount of changes in interest revenues and interest costs attributable to changes in the balances of interest-earning assets and interest-bearing liabilities, and changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (i.e., changes in volume multiplied by old rate), 35 40 (2) changes in rate (i.e., changes in rate multiplied by old volume) and (3) changes attributable to both rate and volume.
YEARS ENDED DECEMBER 31, YEARS ENDED DECEMBER 31, 2000 AND 1999 1999 AND 1998 INCREASE (DECREASE) DUE TO CHANGE IN INCREASE (DECREASE) DUE TO CHANGE IN ---------------------------------------- ---------------------------------------- VOLUME AND NET VOLUME AND NET VOLUME RATE RATE(1) CHANGE VOLUME RATE RATE(1) CHANGE (DOLLARS IN THOUSANDS) ------- ------- ---------- ------- ------- ------- ---------- ------- Interest-earning assets: Loans receivable(2).................. $12,177 $ 2,051 $ 197 $14,425 $31,222 $(5,041) $(1,540) $24,641 Cash and cash equivalents............ (55) 1,392 (15) 1,322 819 322 72 1,213 Investment securities................ -- -- -- -- (510) (510) 510 (510) Investment in capital stock of Federal Home Loan Bank............. 119 335 40 494 491 (43) (37) 411 ------- ------- ----- ------- ------- ------- ------- ------- 12,241 3,778 222 16,241 32,022 (5,272) (995) 25,755 ------- ------- ----- ------- ------- ------- ------- ------- Interest-bearing liabilities: Deposits............................. 5,352 6,632 698 12,682 7,211 (3,493) (529) 3,189 FHLB advances........................ 196 2,165 24 2,385 9,399 (414) (422) 8,563 Senior notes......................... (11) -- -- (11) -- -- -- -- ------- ------- ----- ------- ------- ------- ------- ------- 5,537 8,797 722 15,056 16,610 (3,907) (951) 11,752 ------- ------- ----- ------- ------- ------- ------- ------- Change in net interest income.......... $ 6,704 $(5,019) $(500) $ 1,185 $15,412 $(1,365) $ (44) $14,003 ======= ======= ===== ======= ======= ======= ======= =======
- --------------- (1) Calculated by multiplying change in rate by change in volume. (2) Includes the interest on nonaccrual loans only to the extent that it was paid and recognized as interest income. The Company's interest revenues increased by $16.2 million, or 12.23%, during the year ended December 31, 2000, compared with the same period in 1999. This increase was primarily attributable to a 9.60% increase in the average balance of loans outstanding and a 14 basis point increase in the yield on average loans outstanding, which averaged 9.13% during 2000, compared with 8.99% in 1999. Average total loans, net of deferred fees, grew to $1.5 billion in 2000, an increase of 9.60% over $1.4 billion in 1999. Interest costs increased by $15.1 million, or 20.45%, during the ended December 31, 2000, compared with the same period in 1999. The average balance of certificates of deposits increased $80.6 million, to $891.0 million and 5.94% in average cost of funds during the year ended December 31, 2000, compared with $810.4 million and 5.22% in average cost of funds during the same period in 1999. In addition, the average balance of money market accounts reflected an increase of $24.3 million, to $180.8 million and 4.99% in average cost of funds in 2000, compared with $156.5 million and 4.37% in average cost of funds in 1999. The increase in volume and rates on deposits had a negative impact on the Company's average cost of interest-bearing liabilities. These changes in interest revenues and interest costs produced an increase of $1.2 million, or 2.00%, in the Company's net interest income for the year ended December 31, 2000, compared with the same period during 1999. Expressed as a percentage of interest-earning assets, the Company's net interest margin decreased to 3.62% during 2000, compared with the net interest margin of 3.87% produced during the same period in 1999. The compression in the net interest margin is the result of the inverted yield curve environment in which short term rates are higher than long term rates. In turn, adjustable rate assets are repricing off of the lower, long term rates and interest bearing liabilities are pricing off of the higher, short term rates. PROVISION FOR ESTIMATED CREDIT LOSSES Provisions for estimated credit losses were $6.0 million and $12.0 million for 2000 and 1999, respectively. The Company's ratio of net charge-offs was 0.05% in 2000, an improvement over 0.34% in 1999. Additionally, total classified assets to Bank core capital and general allowance for estimated credit losses have decreased to 45.78% in 2000, compared with 49.96% in 1999. Average loans outstanding during 2000 increased by $135.5 million, or 9.60% over 1999, while the provision for credit losses decreased by $6.0 million in 2000, or 50.0%, compared to 1999 provisions. The 36 41 Company reported a ratio of the general allowance for estimated credit losses to loans receivable, net of specific reserves, of 1.45% as of December 31, 2000, compared with 1.60% as of December 31, 1999. Although the Company maintains its allowance for estimated credit losses at a level which it considers to be adequate to provide for potential losses, based on presently known conditions, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations. The calculation of the adequacy of the allowance for estimated credit losses, and therefore the requisite amount of provision for credit losses, is based on several factors, including underlying loan collateral values, delinquency trends and historical loan loss experience, all of which can change without notice based on market and economic conditions and other factors. See "Asset Quality" for a more complete discussion of the Company's allowance for estimated credit losses. NONINTEREST REVENUES Noninterest revenues were $8.1 million for the year ended December 31, 2000, an increase of $0.3 million, or 3.50%, from $7.8 million earned in 1999. Loan related fees primarily consist of fees collected from borrowers (1) for the early repayment of their loans, (2) for the extension of the maturity of loans (predominantly short term construction loans, with respect to which extension options are often included in the original term of the Company's loan) and (3) in connection with certain loans which contain exit or release fees payable to the Company upon the maturity or repayment of the Company's loan. The Company anticipates that these loan related fees will decrease as the nature of loans that we are currently underwriting will not allow us to charge the same level of fees as in prior years. Noninterest revenues for the year ended December 31, 2000 included a $1.2 million award from the United States Treasury Department's Bank Enterprise Award Program for its lending and financial services activities in distressed communities. The Bank was one of 158 depository institutions that received awards in 2000. In addition, the Bank's service fees on deposits of $1.0 million in 2000 increased 106.05% from 1999, primarily due to a new fee schedule rolled out in July 2000. REAL ESTATE OPERATIONS The table below sets forth the costs and revenues attributable to the Company's REO properties for the periods indicated. The compensatory and legal costs directly associated with the Company's property management and disposal operations are included in general and administrative expenses.
YEAR ENDED DECEMBER 31, ------------------------ 2000 1999 1998 (DOLLARS IN THOUSANDS) ----- ----- ------ Expenses associated with real estate operations: Repairs, maintenance and renovation..................... $(294) $(219) $ (277) Insurance and property taxes............................ (18) (132) (123) ----- ----- ------ (312) (351) (400) Net (loss)/recoveries from sales of REO................... (166) 754 2,278 Property operations, net.................................. 30 1 91 Charge-off/provision for estimated losses on REO.......... (476) (80) (60) ----- ----- ------ (Loss)/income from real estate operations, net............ $(924) $ 324 $1,909 ===== ===== ======
Net (loss)/income from sales of REO properties represent the difference between the proceeds received from property disposal and the carrying value of such properties upon disposal. Property operations principally include the net operating income (collected rental revenues less operating expenses and certain renovation costs) from foreclosed income producing properties or receipt, following foreclosure, of similar funds held by receivers during the period the original loan was in default. 37 42 During the year ended December 31, 2000, the Company sold 14 properties generating net cash proceeds of $5.1 million and a net loss of $0.2 million, compared with sales of 22 properties generating net cash proceeds of $10.4 million and a net recovery of $0.8 million during the year ended December 31, 1999. NONINTEREST EXPENSES General and Administrative Expenses The table below details the Company's general and administrative expenses for the periods indicated.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 2000 AND 1999 1999 AND 1998 ---------------------------- ---------------------------- 2000 1999 CHANGE 1999 1998 CHANGE (DOLLARS IN THOUSANDS) ------- ------- ------ ------- ------- ------ Employee................. $17,391 $14,822 $2,569 $14,822 $14,414 $ 408 Operating................ 6,092 6,393 (301) 6,393 6,177 216 Occupancy................ 3,758 3,889 (131) 3,889 3,404 485 Professional............. 4,255 4,035 220 4,035 1,738 2,297 Technology............... 1,939 1,988 (49) 1,988 2,117 (129) SAIF premiums and OTS assessments............ 893 1,236 (343) 1,236 952 284 ------- ------- ------ ------- ------- ------ Total.......... $34,328 $32,363 $1,965 $32,363 $28,802 $3,561 ======= ======= ====== ======= ======= ======
Total general and administrative expenses were $34.3 million in 2000, a 6.07% increase over the $32.4 million of G&A incurred during the same period in 1999. The increase in G&A expenses was primarily due to increases in employee costs and professional fees. The increase in employee costs was primarily due to $1.2 million in higher incentive costs and a decrease of $1.5 million in deferred costs related to more standardized loan structures and underwriting procedures. The increase in professional fees was primarily comprised of outside consultants working on operational projects, partially offset by decreases in legal fees attributable to ongoing litigation matters previously disclosed as well as loan documentation and restructurings. See "Item 3 -- Legal Proceedings." The Company pays premiums to the SAIF based upon the dollar amount of deposits it holds and the assessment rate charged by the FDIC, which is based upon the Company's financial condition, its capital ratios and the rating it receives in connection with annual regulatory examinations by the OTS. The increase in G&A expenses had a negative impact on the Company's efficiency ratio (defined as total general and administrative expenses divided by net interest income before provision and noninterest revenues, excluding REO, net). The efficiency ratio for the year ended December 31, 2000, increased to 50.19% compared with 48.35% during the same period in 1999. Other Non-Operating Expense Other non-operating expense totaled $2.2 million for the year ended December 31, 2000, primarily incurred during the first quarter, of which $2.0 million related to amounts paid, or reserved for payment, in connection with ongoing litigation and/or satisfaction of judgments against the Company. The remaining expense was primarily in connection with the early termination of the Irvine office lease. INCOME TAXES The Company recorded an income tax provision of $10.7 million for the year ended December 31, 2000, compared with $8.0 million during 1999. The Company's effective tax rate was 42.75% for the year ended December 31, 2000, compared with 44.05% during the same period in 1999. 38 43 1999 COMPARED WITH 1998 GENERAL Net income for the year ended December 31, 1999 was $10.2 million, or $1.33 per diluted share, compared with $11.0 million, or $1.65 per diluted share, for the same period in 1998. This net income resulted in a return on average assets of 0.66%, and a return on average equity of 11.66%, compared with a ROA of 0.93% and ROE of 18.22%, during the same period in 1998. Pre-tax income increased 16.03% for the year ended December 31, 1999 to $18.2 million from $15.7 million generated during the same period in 1998. The Company's net interest income before provision for credit losses increased 31.04% to $59.1 million for the year ended December 31, 1999, compared with $45.1 million in 1998. The Company's yield on average earning assets was 8.68% for the year ended December 31, 1999, compared with 9.06% during the same period in 1998. The average cost of interest-bearing liabilities for the Company decreased to 5.21% during the year ended December 31, 1999, compared with 5.60% during the same period in 1998. The Company's resulting net interest margin for the year ended December 31, 1999, was 3.87%, compared with 3.82% during the same period in 1998. Provisions for credit losses totaled $12.0 million in 1999, compared with $7.1 million in 1998. This growth in the provision for credit losses was the result of management's previously announced commitment to increase the Bank's allowance for estimated credit losses by the end of 1999. This commitment acknowledged (1) the significant growth in net loans, (2) the introduction during 1998 and 1999 of new loan products, and (3) the resulting lack of seasoning of many of the Bank's loans. At December 31, 1999, the ratio of total allowance for estimated credit losses to gross loans reached 1.65%, compared with 1.27% at December 31, 1998. Nonaccrual loans totaled $44.0 million at December 31, 1999 (or 2.78% of total assets), compared with nonaccrual loans of $47.7 million (or 3.38% of total assets) at December 31, 1998. Included in nonaccrual loans at December 31, 1999, were five single family residential loans with balances greater than $1.0 million representing $18.0 million, or 40.93% of total nonaccrual loans, and one commercial loan with a $10.5 million balance, or 23.84% of total nonaccrual loans, at December 31, 1999. The average LTV for the five single family residential loans was 73.80%. Other classified loans were $25.6 million at December 31, 1999, compared with $45.4 million at December 31, 1998. Delinquent loans totaled $24.0 million at December 31, 1999, compared with $51.1 million at December 31, 1998. Noninterest revenues were $7.8 million in 1999, compared with $4.7 million earned in 1998. The increase in noninterest revenues resulted primarily from a greater amount of exit and release fees and prepayment penalties in connection with loans repaid during the period. Income from real estate operations, net, was $0.3 million for the year ended December 31, 1999, compared with $1.9 million earned in 1998. The decrease in income from real estate operations in 1999 was the result of higher net recoveries in 1998, as discussed elsewhere herein. Total general and administrative expenses were $32.4 million for the year ended December 31, 1999, a 12.36% increase over the $28.8 million of G&A incurred during the same period in 1998. The increase in G&A was primarily due to increases in professional fees, occupancy expenses attributable to leasehold improvements at the corporate headquarters and employee costs. The increase in professional fees was primarily comprised of legal fees attributable to ongoing litigation matters as well as loan documentation and restructurings. The remaining professional fees consisted of the Company's independent accountants, other professional fees related to operational projects and recruiting fees. The increase in employee costs in 1999 was primarily due to additional personnel added to the Company's various business and staff support groups. The Company incurred $4.7 million in other non-operating expenses during 1999, of which $4.3 million related to amounts paid, or reserved for payment, in connection with ongoing litigation and/or satisfaction of judgments against the Company, and for severance for the former CEO. During 1998, the Company incurred minimal non-operating expenses primarily related to losses on the sale of certain fixed assets. 39 44 NET INTEREST INCOME The Company recorded net interest income of $59.1 million and $45.1 million for the years ended December 31, 1999 and 1998, respectively, reflecting an increase of 31.04%. Average earning assets were $1.5 billion for the year ended December 31, 1999, compared with $1.2 billion during 1998, reflecting an increase of 29.46%. The yield on interest-earning assets was 8.68% in 1999, compared with 9.06% in 1998. The Company's interest revenues increased by $25.8 million, or 24.07%, during the year ended December 31, 1999, compared with the same period in 1998. Average total loans, net of deferred fees, grew to $1.4 billion in 1999, an increase of 30.55%, which was partially offset by a 46 basis point decrease in the yield on average loans outstanding, which averaged 8.99% during 1999, compared with 9.45% during 1998. The primary reason for the decline in the loan portfolio yield is due to lower yielding loans being added to the loan portfolio during 1997, 1998 and 1999, reflecting the increased competitive rate pressure in the marketplace and a change in the portfolio mix. In addition, higher yielding loans were paying off during 1998 and 1999, adding to the overall decline in the yield on average earning assets. The steady growth in loans was funded through core deposit growth and borrowings from the FHLB. The average cost of interest-bearing liabilities for the Company decreased to 5.21% during the year ended December 31, 1999, compared with 5.60% during the same period in 1998. Interest costs increased by $11.8 million, or 18.99%, during the year ended December 31, 1999, compared with the same period in 1998, primarily due to a 27.93% increase in the average balance of the Company's interest-bearing liabilities. This increase was partially offset by a decrease in the weighted average rates incurred on the Company's deposits and FHLB advances, which together averaged 5.00% for the year ended December 31, 1999, compared with 5.34% during the same period of 1998. The average balance of certificates of deposits increased $37.6 million, to $810.4 million and 5.22% in average cost of funds during the year ended December 31, 1999, compared with $772.7 million and 5.60% in average cost of funds during the same period in 1998. At December 31, 1999, certificates of deposit totaled $838.1 million, or 77.13% of total deposits, from $833.7 million, or 81.78% of total deposits at December 31, 1998. This reduced reliance on certificates of deposit, in conjunction with a decrease in the weighted average rate on deposits and FHLB advances, had a positive impact on the Company's cost of interest-bearing liabilities and was achieved by capitalizing on the Bank's strong community involvement. Expressed as a percentage of interest-earning assets, the Company's resulting net interest margin was 3.87% and 3.82% in 1999 and 1998, respectively. The increase in net interest income was primarily due to significant growth in earning assets, which was a direct result of the Bank's continuing successful pursuit of real estate secured financing business. PROVISION FOR ESTIMATED CREDIT LOSSES Provisions for estimated credit losses were $12.0 million and $7.1 million for 1999 and 1998, respectively. The Company's ratio of net charge-offs was 0.34% in 1999, compared with 0.30% in 1998. Additionally, total classified assets to Bank core capital and general allowance for estimated credit losses have decreased to 49.96% in 1999, compared with 80.56% in 1998. The increase of $4.9 million, or 68.19%, in the level of provision for estimated credit losses in 1999, compared with 1998, reflected management's intention to increase the ratio of the Company's general valuation reserves to approximately 1.50% of net loans by the end of 1999, a level deemed by management to be prudent in view of the significant growth in the Company's loan portfolio since 1997, the relative lack of seasoning of many of the Company's loans, and the significant amount of construction loans in the Company's loan portfolio directed at financing real estate development. The Company achieved a ratio of the general allowance for estimated credit losses to loans receivable, net of specific reserves, of 1.60% as of December 31, 1999, compared with 0.89% in 1998. See "Asset Quality" for a more complete discussion of the Company's allowance for estimated credit losses. 40 45 NONINTEREST REVENUES Noninterest revenues were $7.8 million for the year ended December 31, 1999, an increase of $3.2 million, or 68.06%, from $4.7 million earned in 1998. During the last half of 1998, the sharp drop in market interest rates increased the volume of prepayments and refinancings during the first half of 1999 to $7.3 million, resulting in a $3.1 million, or 73.84%, increase. REAL ESTATE OPERATIONS During the year ended December 31, 1999, the Company sold 22 properties generating net cash proceeds of $10.4 million and a net recovery of $0.8 million, compared with sales of 102 properties generating net cash proceeds of $15.2 million and a net recovery of $2.3 million during the same period of 1998. NONINTEREST EXPENSES General and Administrative Expenses General and administrative expenses totaled $32.4 million in 1999, an increase of 12.36% over the $28.8 million of G&A incurred during the same period in 1998. Professional fees totaled $4.0 million, which included expenses of $1.6 million related to outside litigation counsel, who represent the Company in a variety of legal matters due to ongoing litigation as well as loan documentation and restructurings. The remaining professional fees consisted of the Company's independent accountants, other professional fees related to operational projects and recruiting fees. The increase of $0.5 million in occupancy expenses was attributable to leasehold improvements at the corporate headquarters. The increase of $0.4 million in employee costs in 1999 was primarily due to additional personnel added to the Company's various business and staff support groups. During 1999 and 1998, the Company employed an average of 272 and 251 full-time equivalent individuals, respectively. The corresponding growth in employee-related expenses, which consist primarily of base salaries, incentive compensation and the Company's share of benefit expenses, was successfully leveraged resulting in greater growth in the dollar amount of the Company's net interest income. The efficiency ratio for the twelve months ended December 31, 1999, was 48.35% compared with 57.88% during the same period in 1998. Other Non-Operating Expense The Company incurred $4.7 million in other non-operating expenses during 1999, primarily during the fourth quarter, of which $4.3 million related to amounts paid, or reserved for payment, in connection with ongoing litigation and/or satisfaction of judgments against the Company, and for severance for the former CEO. During 1998, the Company incurred minimal non-operating expenses primarily related to losses on sale of certain fixed assets. INCOME TAXES The Company recorded an income tax provision of $8.0 million for the year ended December 31, 1999, compared with $4.7 million during 1998. The Company's effective tax rate was 44.05% for the year ended December 31, 1999, compared with 29.75% during the same period in 1998. The Company returned to taxable status during 1998, following several years in which it realized substantial income tax benefits from utilization of accumulated operating loss carry-forwards. BALANCE SHEET ANALYSIS The Company's total assets at December 31, 2000 were $1.8 billion, an increase of $172.2 million, or 10.89%, over December 31, 1999. As of December 31, 2000, asset growth was reflected in all categories of interest-earning assets, with the exception of FHLB stock. Loan receivables, net, reflected the largest growth, increasing by $163.1 million over 1999. The steady growth in loans was funded through core deposit growth and borrowings from the FHLB. Deposits increased by 11.80% year-over-year to $1.2 billion from $1.1 billion, with transaction accounts increasing $66.9 million, or 26.92%, to $315.4 million at December 31, 2000 from 41 46 $248.5 million at December 31, 1999. At December 31, 2000, certificates of deposit totaled $899.5 million, or 74.04% of total deposits, down from 77.13% of total deposits, or $838.1 million at December 31, 1999. The cross-sell ratio, defined as the number of different types of loan and/or deposit products per household serviced, was 1.51 services per household at December 31, 2000, compared with 1.32 at December 31, 1999. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL The Company's capital consists of common stockholders' equity, which amounted to $104.2 million, or 5.94% of total assets at December 31, 2000, compared with $92.3 million, or 5.84% of total assets at December 31, 1999. Management is committed to maintaining capital at a level sufficient to assure shareholders, customers, and regulators that the Company and its Bank subsidiary are financially sound. The Company and the Bank are subject to risk-based capital regulations adopted by the federal banking regulators in January 1990. These guidelines are used to evaluate capital adequacy and are based on an institution's asset risk profile and off-balance sheet exposures. According to the regulations, institutions whose Tier 1 and total capital ratios meet or exceed 6% and 10%, respectively, are deemed "well capitalized". The table below compares the Company's actual capital ratios to those required by regulatory agencies to meet the minimum capital requirements required by the OTS and to be categorized as "well capitalized" under the PCA Rules for the periods indicated:
TO BE WELL FOR CAPITAL CAPITALIZED ADEQUACY UNDER PCA ACTUAL PURPOSES PROVISIONS ---------------- --------------- ---------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO (DOLLARS IN THOUSANDS) -------- ----- ------- ----- -------- ----- As of December 31, 2000: Total capital to risk weighted assets... $151,914 12.23% $99,407 8.00% $124,259 10.00% Core capital to adjusted tangible assets............................... 140,387 8.01% 70,078 4.00% 87,598 5.00% Tangible capital to adjusted tangible assets............................... 140,387 8.01% 26,279 1.50% n/a n/a Tier 1 capital to risk weighted assets............................... 140,387 11.30% n/a n/a 74,555 6.00% As of December 31, 1999: Total capital to risk weighted assets... $139,815 12.50% $89,468 8.00% $111,835 10.00% Core capital to adjusted tangible assets............................... 127,160 8.05% 63,174 4.00% 78,967 5.00% Tangible capital to adjusted tangible assets............................... 127,160 8.05% 23,690 1.50% n/a n/a Tier 1 capital to risk weighted assets............................... 127,160 11.37% n/a n/a 67,101 6.00%
The following table summarizes the regulatory capital requirements under the Home Owners' Loan Act ("HOLA") for the Bank as of December 31, 2000. As indicated in the table below, the Bank's capital levels exceed all three of the currently applicable minimum HOLA capital requirements.
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL ------------------ ------------------ ------------------- BALANCE % BALANCE % BALANCE % (DOLLARS IN THOUSANDS) ---------- ---- ---------- ---- ---------- ----- Stockholders' equity........... $ 140,387 -- $ 140,387 -- $ 140,387 -- Adjustments: General reserves............. -- -- -- -- 15,632 -- Other(1)..................... -- -- -- -- (4,105) -- ---------- ---- ---------- ---- ---------- ----- Regulatory capital............. 140,387 8.01% 140,387 8.01% 151,914 12.23% Regulatory capital requirement.................. 26,279 1.50 70,078 4.00 99,407 8.00 ---------- ---- ---------- ---- ---------- ----- Excess capital................. $ 114,108 6.51% $ 70,309 4.01% $ 52,507 4.23% ========== ==== ========== ==== ========== ===== Adjusted assets(2)............. $1,751,960 $1,751,960 $1,242,588 ========== ========== ==========
- --------------- (1) Includes the portion of non-residential construction and land development loans that exceed a loan to value ratio of 80%. 42 47 (2) The term "adjusted assets" refers to (i) the term "adjusted total assets" as defined in 12 C.F.R. Section 567.1 (a) for purposes of tangible and core capital requirements, and (ii) the term "risk-weighted assets" as defined in 12 C.F.R. Section 567.5 (d) for purposes of the risk-based capital requirements. CAPITAL RESOURCES AND LIQUIDITY The Company had $2.1 million cash on hand at December 31, 2000. The Company is a holding company with no significant business operations outside of the Bank. Its requisite obligations, which pertain to its debt and operations, are dependent upon its sole source of funds, which are dividends from the Bank. The Company's liquidity position refers to the extent to which the Company's funding sources are sufficient to meet its current and long term cash requirements. Federal regulations currently require savings associations to maintain a monthly average daily balance of liquid assets equal to 4% of the average daily balance of its net withdrawable accounts and short term borrowings during the preceding calendar quarter. The Bank has liquidity ratios of 6.22% and 8.76% for December 2000 and 1999, respectively. On March 14, 2001, the OTS issued an interim final rule that eliminates the 4% liquidity requirement and replaced it with a general requirement that thrifts maintain sufficient liquidity to ensure safety and soundness. The Company's current primary funding resources are deposit accounts, principal payments on loans, proceeds from sales of REO, advances from the FHLB and cash flows from operations. Other possible sources of liquidity available to the Company include whole loan sales, commercial bank lines of credit, and direct access, under certain conditions, to borrowings from the Federal Reserve System. The cash needs of the Company are principally for the payment of interest on and withdrawals of deposit accounts, the funding of loans, operating costs and expenses, and holding and refurbishment costs on REO. In July 2000, the Company authorized the repurchase of up to an additional 5% of its Common Stock, or approximately 264,000 shares. This is in addition to the 5% repurchase authorization announced in March 2000, for approximately 277,000 shares. As of February 26, 2001, the Company has repurchased 421,006 shares at an average price of $9.74. In November 2000, the Company repurchased $642,000 of its 1997 Senior Notes at an average price of 96.2% of par value. As of February 26, 2001, the Company repurchased $2.1 million of its 1997 Senior Notes at an average price of 99.6% of par value. On March 28, 2001, HFC Capital Trust I (the "Trust"), a statutory business trust and wholly owned subsidiary of the Company, issued in a private placement transaction $9.0 million of 10.18% capital securities (the "Capital Securities"), which represent undivided preferred beneficial interests in the assets of the Trust. The Company is the owner of all the beneficial interests represented by the common securities of the Trust (the "Common Securities") together with the Capital Securities (the "Trust Securities"). The Trust exists for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 10.18% junior subordinated deferrable interest debentures (the "Junior Subordinated Debentures") issued by the Company and engaging in certain other limited activities. The Junior Subordinated Debentures held by the Trust will mature on June 8, 2031, at which time the Company is obligated to redeem the Capital Securities. The Company intends to use the proceeds to repurchase some of its outstanding 12.50% 1997 Senior Notes due 2004 in order to reduce its overall interest costs. To the extent that the Company is unable to use the full amount of the proceeds to repurchase 1997 Senior Notes, the capital will be used to repurchase Common Stock or to fund acquisitions of complementary lines of business. Some portion of the proceeds may be invested in the Bank to support future growth. Pending use of the proceeds as described above, the proceeds will be invested in short term investments. LIQUIDITY OTS regulations require a savings association to maintain an average daily balance of liquid assets (including cash and cash equivalents, and certain marketable securities that are not committed) equal to at least 4% of either (1) the average daily balance of its net withdrawable accounts and short term borrowings 43 48 during the preceding calendar quarter, or (2) the amount of its net withdrawable accounts and short term borrowings at the end of its preceding calendar quarter. Under FIRREA, this liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10% of such accounts and borrowings depending upon economic conditions and the deposit flows of the member associations. Monetary penalties may be imposed for failure to meet this liquidity ratio requirement. The Company's average liquidity for the quarter ending December 31, 2000, was 8.30%, which exceeds the applicable requirements. On March 14, 2001, the OTS issued an interim final rule that eliminates the 4% liquidity requirement and replaced it with a general requirement that thrifts maintain sufficient liquidity to ensure safety and soundness. INTEREST RATE RISK MANAGEMENT Interest rate risk ("IRR") and credit risk constitute the two greatest sources of financial exposure for insured financial institutions. Please refer to "Item 1 -- Business -- Statistical Financial Data -- Loan Portfolio," for a thorough discussion of the Company's lending activities. IRR represents the impact that changes in absolute and relative levels of market interest rates may have upon the Company's net interest income ("NII") and theoretical liquidation value, also referred to as net portfolio value ("NPV"). NPV is defined as the present value of expected net cash flows from existing assets minus the present value of expected net cash flows from existing liabilities. Changes in the NII (the net interest spread between interest-earning assets and interest-bearing liabilities) are influenced to a significant degree by the repricing characteristics of assets and liabilities (timing risk), the relationship between various rates (basis risk), and changes in the shape of the yield curve. The Company realizes income principally from the differential or spread between the interest earned on loans, investments, other interest-earning assets and the interest incurred on deposits and borrowings. The volumes and yields on loans, deposits and borrowings are affected by market interest rates. As of December 31, 2000, 89.45% of the Company's loan portfolio was tied to adjustable rate indices, such as COFI, Prime Rate, CMT, MTA and LIBOR. The majority of the Company's deposits are time deposits with a stated maturity (generally one year or less) and a fixed rate of interest. As of December 31, 2000, 67.45% of the Company's borrowings from the FHLB are fixed rate, with remaining terms ranging from one to ten years (though such remaining terms are subject to early call provisions). The remaining 32.55% of the borrowings carry an adjustable interest rate, with 80% of the adjustable borrowings tied to the Prime Rate, maturing in February 2003. Changes in the market level of interest rates directly and immediately affect the Company's interest spread, and therefore profitability. Sharp and significant changes to market rates can cause the interest spread to shrink or expand significantly in the near term, principally because of the timing differences between the adjustable rate loans and the maturities (and therefore repricing) of the deposits and borrowings. The Company's Asset/Liability Committee ("ALCO") is responsible for managing the Company's assets and liabilities in a manner that balances profitability, IRR and various other risks including liquidity. ALCO operates under policies and within risk limits prescribed by, reviewed and approved by the Board of Directors. ALCO seeks to stabilize the Company's NII and NPV by matching its rate-sensitive assets and liabilities through maintaining the maturity and repricing of these assets and liabilities at appropriate levels given the interest rate environment. When the amount of rate-sensitive liabilities exceeds rate-sensitive assets within specified time periods, the NII generally will be negatively impacted by increasing rates and positively impacted by decreasing rates. Conversely, when the amount of rate-sensitive assets exceeds the amount of rate-sensitive liabilities within specified time periods, net interest income will generally be positively impacted by increasing rates and negatively impacted by decreasing rates. The speed and velocity of the repricing of assets and liabilities will also contribute to the effects on the Company's NII and NPV, as will the presence or absence of periodic and lifetime interest rate caps and floors. The Company utilizes two methods for measuring interest rate risk, gap analysis and interest rate simulations. Gap analysis focuses on measuring absolute dollar amounts subject to repricing within certain periods of time, particularly the one year maturity horizon. Interest rate simulations are produced using a 44 49 software model that is based on actual cash flows and repricing characteristics for all of the Company's financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on current volumes of applicable financial instruments. These assumptions are inherently uncertain, and, consequently, the model cannot precisely measure net interest income or precisely predict the impact of changes in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, as well as changes in market conditions and management strategies. See "Item 7A, Quantitative and Qualitative Disclosure about Market Risks." Interest rate simulations provide the Company with an estimate of both the dollar amount and percentage change in NII under various rate scenarios. All assets and liabilities are subjected to tests of up to 300 basis points in increases and decreases in interest rates in 100 basis point increments. Under each interest rate scenario, the Company projects its net interest income and the NPV of its current balance sheet. From these results, the Company can then develop alternatives in dealing with the tolerance thresholds. Since 1995, the Company has been utilizing interest rate floors to mitigate the risk of interest margin compression in a decreasing rate environment. Additionally, on most new income property loans, the Company utilizes interest rate caps. These are life caps and are usually three points above the rate at underwriting or at an amount that would still allow for one-to-one debt service coverage at the maximum rate, thereby reducing the likelihood of borrower default in a rising rate environment. The risk to the Company associated with the interest rate floors is that interest rates may decline, and the borrower may choose to refinance the loan, either with the Company or with another financial institution, resulting in the Company having to replace the higher-yielding asset at a lower rate. The risk to the Company associated with interest rate caps is that interest rates will exceed the maximum rates on such loans, and while the Company's cost of funds continues to rise, the interest income derived from these loans will be fixed, resulting in an overall compression on net interest income. A traditional, although analytically limited measure, of a financial institution's IRR is the "static gap." Static gap is the difference between the amount of assets and liabilities (adjusted for any off-balance positions) which are expected to mature or reprice within a specific period. Generally, a positive gap benefits an institution during periods of rising interest rates, and a negative gap benefits an institution during periods of declining interest rates. However, because a portion of the indices that the Company's loan products are priced to may lag changes in market interest rates by three months or more, the Company's net interest income may not reflect changes in interest rates immediately. At December 31, 2000, 76.11% of the Company's interest-bearing deposits were comprised of certificate accounts, the majority of which have original terms averaging twelve months. The remaining, weighted average term to maturity for the Company's certificate accounts approximated six months at December 31, 2000. Generally, the Company's offering rates for certificate accounts move directionally with the general level of short term interest rates, though the margin may vary due to competitive pressures. The maturities, as reflected in the repricing table under "Interest Rate Risk Management," indicate that the Company will continue to see a compression in the net interest margin in the first half of 2001. The Company expects that the cost of its certificate accounts will decrease in the coming months, as maturing and newly acquired accounts are priced at current, lower offering rates. However, if interest rates continue to fall, the Company may be unable to match the decrease in its offered deposit rates in order to mitigate the risk of deposit outflows. The following table sets forth information concerning repricing opportunities for the Company's interest-earning assets and interest-bearing liabilities as of December 31, 2000. The amount of assets and liabilities shown within a particular period were determined in accordance with their contractual maturities, except that adjustable rate products are included in the period in which they are first scheduled to adjust and not in the 45 50 period in which they mature. Such assets and liabilities are classified by the earlier of their maturity or repricing date.
DECEMBER 31, 2000 ------------------------------------------------------------------------ OVER THREE OVER SIX OVER ONE THREE THROUGH THROUGH YEAR OVER MONTHS SIX TWELVE THROUGH FIVE OR LESS MONTHS MONTHS FIVE YEARS YEARS TOTAL (DOLLARS IN THOUSANDS) ---------- ---------- --------- ---------- -------- ---------- Interest-earning assets: Cash and cash equivalents(1)............ $ 82,450 $ -- $ -- $ -- $ -- $ 82,450 Investments and FHLB Stock... 20,730 -- -- -- -- 20,730 Loans receivable(2).......... 1,068,468 402,093 31,767 7,087 125,905 1,635,320 ---------- -------- --------- --------- -------- ---------- Total interest-earning assets............. $1,171,648 $402,093 $ 31,767 $ 7,087 $125,905 $1,738,500 ========== ======== ========= ========= ======== ========== Interest-bearing liabilities: Deposits Non-certificates of deposit(2).............. $ 282,399 $ -- $ -- $ -- $ -- $ 282,399 Certificates of deposit... 260,224 223,033 392,320 23,886 -- 899,463 FHLB advances................ 30,000 125,000 74,000 155,000 -- 384,000 Senior notes................. -- -- -- 39,358 -- 39,358 ---------- -------- --------- --------- -------- ---------- Total interest-bearing liabilities........ $ 572,623 $348,033 $ 466,320 $ 218,244 $ -- $1,605,220 ========== ======== ========= ========= ======== ========== Interest rate sensitivity gap.......................... $ 599,025 $ 54,060 $(434,553) $(211,157) $125,905 $ 133,280 Cumulative interest rate sensitivity gap.............. 599,025 653,085 218,532 7,375 133,280 133,280 As percentage of total interest-earning assets...... 34.46% 37.57% 12.57% 0.42% 7.67% 7.67%
- --------------- (1) Excludes noninterest-earning cash balances. (2) Balances include $31.6 million of nonaccrual loans, and are gross of deferred fees and cost and allowance for estimated credit losses. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The Company realizes income principally from the differential or spread between the interest earned on loans, investments, and other interest-earning assets and the interest paid on deposits and borrowings. The Company, like other financial institutions, is subject to interest rate risk to the degree that its interest-earning assets reprice differently than its interest-bearing liabilities. The Company's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company's net interest income and capital, while structuring the Company's asset-liability mix to obtain the maximum yield-cost spread on that structure. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's income to the extent that the interest rates borne by the assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company has adopted formal policies and practices to monitor its interest rate risk exposure. As a part of this effort, the Company uses the NPV methodology to gauge interest rate risk exposure. Using an internally generated model, the Company monitors interest rate sensitivity by estimating the change in NPV over a range of interest rate scenarios. NPV is the discounted present value of the difference between incoming cashflows on interest-earning assets and other assets, and the outgoing cashflows on interest-bearing liabilities and other liabilities. The NPV ratio is defined as the NPV for a given rate scenario divided by the market value of the assets in the same scenario. The Sensitivity Measure is the decline in the NPV ratio, in basis points, caused by a 200 basis point increase or decrease in interest rates, whichever 46 51 produces the largest decline. The higher an institution's Sensitivity Measure, the greater is considered its exposure to IRR. The OTS also produces a similar analysis using its own model, based upon data submitted on the Bank's quarterly Thrift Financial Report ("TFR"). At December 31, 2000, based on the Company's internally generated model, it was estimated that the Company's NPV ratio was 9.51% in the event of a 200 basis point increase in rates, a decrease of 6.12% from basecase of 10.13%. If rates were to decrease by 200 basis points, the Company's NPV ratio was estimated at 10.49%, an increase of 3.55% from basecase. Presented below, as of December 31, 2000, is an analysis of the Company's IRR as measured in the NPV for instantaneous and sustained parallel shifts of 100, 200, and 300 basis point increments in market interest rates.
NET PORTFOLIO VALUE --------------------------- CHANGE $ CHANGE FROM CHANGE FROM IN RATES $ AMOUNT BASECASE RATIO BASECASE (DOLLARS IN THOUSANDS) -------- -------- ------------- ----- ----------- +300 bp $151,141 $(31,027) 8.64% -149 bp +200 bp 168,575 (13,594) 9.51% -62 bp +100 bp 178,702 (3,467) 9.99% -14 bp 0 bp 182,169 10.13% -100 bp 179,001 (3,167) 9.85% -28 bp -200 bp 193,920 11,751 10.49% +36 bp -300 bp 211,368 29,199 11.21% +108 bp
Management believes that the NPV methodology overcomes three shortcomings of the typical maturity gap methodology. First, it does not use arbitrary repricing intervals and accounts for all expected cash flows, weighing each by its appropriate discount factor. Second, because the NPV method projects cash flows of each financial instrument under different rate environments, it can incorporate the effect of embedded options on an association's IRR exposure. Third, it allows interest rates on different instruments to change by varying amounts in response to a change in market interest rates, resulting in more accurate estimates of cash flows. On a quarterly basis, the results of the internally generated model are reconciled to the results of the OTS model. Historically the OTS has valued the NPV higher, but the changes in NPV as a result of the rate increases and decreases are normally directionally consistent between the two models. The difference between the two models resides in the prepayment assumptions, the ability of the Company to analyze each individual rate index in a changing environment, and the ability of the Company's model to include caps and floors on loans in the rate shock analyses. Through the inclusion of more specific information regarding the Company's unique loan portfolio, the internal model reflects greater sensitivity in both an increasing and a declining rate environment. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information regarding Financial Statements and Supplementary Data appears on pages A-1 through A-39 under the captions "Consolidated Statements of Financial Condition," "Consolidated Statements of Operations," "Consolidated Statements of Stockholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 47 52 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except as hereinafter noted, the information concerning directors and executive officers of the Company is incorporated by reference from the section entitled "Election of Directors" of the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. For information concerning executive officers of the Company, see "Item 4(A). Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from the section entitled "Compensation of Directors and Executive Officers" in the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated by reference from the sections entitled "Principal Shareholders" and "Election of Directors" of the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated by reference from the section entitled "Certain Transactions" of the Company's Proxy Statement, which is filed as Exhibit No. 99 to this Annual Report on Form 10-K. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: (1) FINANCIAL STATEMENTS Independent Auditors' Report Consolidated Financial Statements Consolidated Statements of Financial Condition as of December 31, 2000 and 1999. Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. Notes to Consolidated Financial Statements for the years ended December 31, 2000, 1999 and 1998. (2) FINANCIAL STATEMENT SCHEDULES Schedules are omitted because they are not applicable or because the required information is provided in the Consolidated Financial Statements, including the Notes thereto. (B) REPORTS ON FORM 8-K Not applicable. 48 53 (C) EXHIBITS Exhibits are listed by number corresponding to the Exhibit Table of Item 601 of Regulation S-K.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 3.1 Certificate of Incorporation of the Company and Amendment of Certificate of Incorporation of the Company(1) 3.2 Bylaws of the Company(1) 4.1 Specimen certificate of the Company's Common Stock 4.2 Indenture, dated as of December 31, 1997, between the Company and United States Trust Company of New York, as Trustee, relating to the Company's 12 1/2% Notes due 2004(2) 4.3 Form of the Company's 12 1/2% Notes due 2004 (included in Section 2.02 of the Indenture included as Exhibit 4.2)(2) 4.4 Form of Warrants to purchase an aggregate of 2,512,188 shares of Common Stock 4.5 Registration Rights Agreement among the Company and certain investors 4.6 Unit Purchase Agreement among the Company and the investors named therein 4.7 Indenture dated as of March 28, 2001 between Hawthorne Financial Corporation and Wilmington Trust Company, as Trustee 4.8 Certificate of Trust of HFC Capital Trust I 4.9 Amended and Restated Trust Agreement of HFC Capital Trust I, among Hawthorne Financial Corporation, Wilmington Trust Company and the Administrative Trustees named therein dated as of March 28, 2001 4.10 Capital Securities Certificate of HFC Capital Trust I 4.11 Common Securities Certificate of HFC Capital Trust I 4.12 Capital Securities Guarantee Agreement between Hawthorne Financial Corporation and Wilmington Trust Company, dated as of March 28, 2001 4.13 Common Securities Guarantee Agreement between Hawthorne Financial Corporation and Wilmington Trust Company, dated as of March 28, 2001 4.14 10.18% Junior Subordinated Deferrable Interest Debentures due June 8, 2031 10.1 Hawthorne Financial Corporation 1994 Stock Option Plan(3)* 10.2 Hawthorne Financial Corporation 1995 Stock Option Plan(4) 10.3 Lease of corporate headquarters(5) 10.4 Change in Control Employment Agreement between Company and Simone Lagomarsino(6)* 10.5 Change in Control Employment Agreement(6)* 10.6 Deferred Compensation Plan* 10.7 Deferred Compensation Loan Agreement between Hawthorne and Karen Abajian* 11.1 Statement on computation of per share earnings(7) 21.1 Subsidiaries of the Registrant, Hawthorne Savings, F.S.B. 23.1 Consent of Deloitte & Touche LLP 99 Proxy Statement for Annual Meeting of Shareholders to be held May 21, 2001(8)
- --------------- * Designates management contract, compensatory plan or arrangement. (1) Incorporated by reference from the Company's Registration Statement on Form S-8 (No. 33-74800) filed on February 3, 1994. 49 54 (2) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997, as amended on May 11, 1998 and November 3, 1998. (3) Incorporated by reference from the Company's Registration Statement on Form S-8 (No. 333-59879) filed on July 24, 1998. (4) Incorporated by reference from the Company's Registration Statement on Form S-8 (No. 333-59875) filed on July 24, 1998. (5) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1996. (6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000. (7) See Note 1 to the Notes to Consolidated Financial Statements included in Item 8 and listed in Item 14(a) of this Annual Report on Form 10-K. (8) To be filed within 120 days after the end of the fiscal year ended December 31, 2000. 50 55 SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED: March 30, 2001 HAWTHORNE FINANCIAL CORPORATION By: /s/ SIMONE LAGOMARSINO ------------------------------------ Simone Lagomarsino President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE DATE --------- ---- /s/ SIMONE LAGOMARSINO March 30, 2001 - ----------------------------------------------------------- Simone Lagomarsino Director, President, and Chief Executive Officer (Principal Executive Officer) /s/ KAREN C. ABAJIAN March 30, 2001 - ----------------------------------------------------------- Karen C. Abajian Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ TIMOTHY R. CHRISMAN March 30, 2001 - ----------------------------------------------------------- Timothy R. Chrisman, Chairman of the Board /s/ MARILYN G. AMATO March 30, 2001 - ----------------------------------------------------------- Marilyn G. Amato, Director /s/ GARY W. BRUMMETT March 30, 2001 - ----------------------------------------------------------- Gary W. Brummett, Director /s/ ANTHONY W. LIBERATI March 30, 2001 - ----------------------------------------------------------- Anthony W. Liberati, Director /s/ HARRY F. RADCLIFFE March 30, 2001 - ----------------------------------------------------------- Harry F. Radcliffe, Director /s/ HOWARD E. RITT March 30, 2001 - ----------------------------------------------------------- Howard E. Ritt, Director
51 56 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS, INDEPENDENT AUDITORS' REPORT CONTENTS
PAGE ---- Independent Auditors' Report................................ A-2 Consolidated Financial Statements Consolidated Statements of Financial Condition............ A-3 Consolidated Statements of Income......................... A-4 Consolidated Statements of Stockholders' Equity........... A-5 Consolidated Statements of Cash Flows..................... A-6 Notes to Consolidated Financial Statements................ A-8
A-1 57 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders Hawthorne Financial Corporation El Segundo, California: We have audited the accompanying consolidated statements of financial condition of Hawthorne Financial Corporation and Subsidiary (the "Company") as of December 31, 2000 and 1999 and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based upon our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial condition of Hawthorne Financial Corporation and Subsidiary as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Los Angeles, California February 9, 2001 (March 28, 2001 as to Note 17) A-2 58 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ------------------------ 2000 1999 (DOLLARS IN THOUSANDS) ---------- ---------- Assets: Cash and cash equivalents................................. $ 99,919 $ 86,722 Loans receivable (net of allowance for estimated credit losses of $29,450 in 2000 and $24,285 in 1999)......... 1,608,067 1,444,968 Real estate owned, net.................................... 2,859 5,587 Accrued interest receivable............................... 11,040 9,250 Investment in capital stock of Federal Home Loan Bank, at cost................................................... 20,730 22,236 Office property and equipment at cost, net................ 4,808 5,939 Deferred tax asset, net................................... 2,867 2,203 Other assets.............................................. 3,105 4,248 ---------- ---------- Total assets...................................... $1,753,395 $1,581,153 ========== ========== Liabilities and Stockholders' Equity: Liabilities: Deposits: Noninterest-bearing.................................. $ 32,994 $ 28,838 Interest-bearing..................................... 1,181,862 1,057,797 ---------- ---------- Total deposits.................................... 1,214,856 1,086,635 FHLB advances.......................................... 384,000 349,000 Senior notes........................................... 39,358 40,000 Accounts payable and other liabilities................. 11,020 13,214 ---------- ---------- Total liabilities................................. 1,649,234 1,488,849 Commitments and contingencies (Note 13) Stockholders' Equity: Common stock -- $0.01 par value; authorized 20,000,000 shares; issued and outstanding, 5,566,801 shares (2000) and 5,331,301 shares (1999)............................ 56 53 Capital in excess of par value -- common stock............ 42,095 40,981 Retained earnings......................................... 65,602 51,318 Less: Treasury stock, at cost -- 391,406 shares (2000) and 5,400 shares (1999)................................... (3,592) (48) ---------- ---------- Total stockholders' equity........................ 104,161 92,304 ---------- ---------- Total liabilities and stockholders' equity........ $1,753,395 $1,581,153 ========== ==========
See Accompanying Notes to Consolidated Financial Statements A-3 59 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) -------- -------- -------- Interest revenues: Loans.................................................... $141,279 $126,854 $102,213 Investments.............................................. 7,709 5,893 4,779 -------- -------- -------- Total interest revenues.......................... 148,988 132,747 106,992 -------- -------- -------- Interest costs: Deposits................................................. 63,513 50,831 47,642 FHLB advances............................................ 20,180 17,795 9,232 Senior notes............................................. 4,989 5,000 5,000 -------- -------- -------- Total interest costs............................. 88,682 73,626 61,874 -------- -------- -------- Net interest income........................................ 60,306 59,121 45,118 Provision for credit losses................................ 6,000 12,000 7,135 -------- -------- -------- Net interest income after provision for credit losses.... 54,306 47,121 37,983 Noninterest revenues: Loan related and other fees.............................. 7,072 7,324 4,213 Deposit fees............................................. 1,022 496 433 Gain on sales of investment securities................... -- -- 7 -------- -------- -------- Total noninterest revenues....................... 8,094 7,820 4,653 (Loss)/income from real estate operations, net............. (924) 324 1,909 Noninterest expenses: General and administrative expenses: Employee.............................................. 17,391 14,822 14,414 Operating............................................. 6,092 6,393 6,177 Occupancy............................................. 3,758 3,889 3,404 Professional.......................................... 4,255 4,035 1,738 Technology............................................ 1,939 1,988 2,117 SAIF premiums and OTS assessments..................... 893 1,236 952 -------- -------- -------- Total general and administrative expenses........ 34,328 32,363 28,802 Other non-operating expense: Legal settlement expenses............................. 2,049 3,539 -- Other................................................. 147 1,133 31 -------- -------- -------- Total noninterest expenses....................... 36,524 37,035 28,833 -------- -------- -------- Income before income taxes................................. 24,952 18,230 15,712 Income tax provision....................................... 10,668 8,030 4,674 -------- -------- -------- Net income................................................. $ 14,284 $ 10,200 $ 11,038 ======== ======== ======== Basic earnings per share................................... $ 2.69 $ 1.93 $ 2.64 ======== ======== ======== Diluted earnings per share................................. $ 1.94 $ 1.33 $ 1.65 ======== ======== ======== Weighted average basic shares outstanding.................. 5,300 5,288 4,176 ======== ======== ======== Weighted average diluted shares outstanding................ 7,371 7,697 6,692 ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements A-4 60 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CAPITAL IN EXCESS OF ACCUMULATED NUMBER OF PAR VALUE -- OTHER COMMON COMMON COMMON COMPREHENSIVE SHARES STOCK STOCK INCOME/(LOSS) (IN THOUSANDS) --------- ------ ------------ ------------- Balance at January 1, 1998................... 3,091 $31 $12,310 $ 6 Exercised stock options...................... 86 1 436 -- Stock offering proceeds, net................. 2,013 20 27,603 -- Other comprehensive income, net of tax, net change in unrealized gain (loss) on securities................................. -- -- (6) Net income................................... -- -- -- Repayments................................... -- -- Comprehensive Income......................... -- -- -- ----- --- ------- --- Balance at December 31, 1998................. 5,190 52 40,349 -- Exercised stock options...................... 110 1 576 -- Exercised warrants........................... 26 -- 56 -- Net income................................... -- -- -- Other........................................ -- -- -- Repayments................................... -- -- -- Comprehensive Income......................... -- -- -- ----- --- ------- --- Balance at December 31, 1999................. 5,326 53 40,981 -- Exercised stock options...................... 236 3 1,114 -- Treasury stock............................... (387) Net income................................... -- -- -- Comprehensive Income......................... -- -- -- ----- --- ------- --- Balance at December 31, 2000................. 5,175 $56 $42,095 $-- ===== === ======= === LOAN TO EMPLOYEE STOCK TOTAL RETAINED TREASURY OWNERSHIP STOCKHOLDERS' COMPREHENSIVE EARNINGS STOCK PLAN EQUITY INCOME (IN THOUSANDS) -------- -------- --------- ------------- ------------- Balance at January 1, 1998................... $30,112 $ (48) $(92) $ 42,319 Exercised stock options...................... -- -- -- 437 Stock offering proceeds, net................. -- -- -- 27,623 Other comprehensive income, net of tax, net change in unrealized gain (loss) on securities................................. -- -- -- (6) $ (6) Net income................................... 11,038 -- -- 11,038 11,038 Repayments................................... -- -- 13 13 ------- Comprehensive Income......................... -- -- -- -- $11,032 ------- ------- ---- -------- ------- Balance at December 31, 1998................. 41,150 (48) (79) 81,424 Exercised stock options...................... -- -- -- 577 Exercised warrants........................... -- -- -- 56 Net income................................... 10,200 -- -- 10,200 $10,200 Other........................................ (32) -- -- (32) Repayments................................... -- -- 79 79 ------- Comprehensive Income......................... -- -- -- -- $10,200 ------- ------- ---- -------- ------- Balance at December 31, 1999................. 51,318 (48) -- 92,304 Exercised stock options...................... -- -- -- 1,117 Treasury stock............................... (3,544) (3,544) Net income................................... 14,284 -- -- 14,284 $14,284 ------- Comprehensive Income......................... -- -- -- -- $14,284 ------- ------- ---- -------- ======= Balance at December 31, 2000................. $65,602 $(3,592) $ -- $104,161 ======= ======= ==== ========
See Accompanying Notes to Consolidated Financial Statements A-5 61 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................ $ 14,284 $ 10,200 $ 11,038 Adjustments: Deferred income tax (benefit)/provision............ (664) 619 3,999 Provision for credit losses on loans............... 6,000 12,000 7,135 Provision for estimated losses on real estate owned............................................ 476 80 60 Net gain on sale of investment securities.......... -- -- (7) Net loss/(gain) from sale of real estate owned..... 166 (754) (2,278) Net loss from disposal of other assets............. -- 7 34 Loan fee and discount accretion.................... (2,822) (5,108) (6,396) Depreciation and amortization...................... 2,778 2,389 1,551 FHLB dividends..................................... (1,476) (961) (571) Increase in accrued interest receivable............ (1,790) (826) (3,126) Decrease/(increase) in other assets................ 1,143 563 (453) (Decrease)/increase in other liabilities........... (1,788) 5,654 1,183 --------- --------- --------- Net cash provided by operating activities..... 16,307 23,863 12,169 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment securities: Purchases.......................................... -- -- (27,919) Maturities......................................... -- -- 27,900 Sales proceeds..................................... -- -- 596 Loans: New loans funded................................... (488,560) (377,267) (487,097) Construction disbursements......................... (264,506) (336,806) (354,326) Payoffs............................................ 551,851 544,156 345,044 Sales proceeds..................................... 14,961 3,000 -- Purchases.......................................... (8,568) (1,155) -- Principal payments................................. 24,355 24,806 121,940 Other, net......................................... 466 7,092 (118,823) Real estate owned, net: Sales proceeds..................................... 5,105 10,385 15,184 Capitalized costs.................................. (62) (149) (1,058) Other, net......................................... -- (30) (2,134) Purchase of FHLB stock................................ (630) (7,721) (5,770) Redemption of FHLB stock.............................. 3,612 -- -- Office property & equipment: Sales proceeds..................................... 51 233 5 Additions.......................................... (1,337) (2,031) (3,904) --------- --------- --------- Net cash used in investing activities......... (163,262) (135,487) (490,362) --------- --------- ---------
See Accompanying Notes to Consolidated Financial Statements A-6 62 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Deposit activity, net.................................... 128,221 67,185 219,949 Net increase in FHLB advances............................ 35,000 85,000 224,000 Net proceeds from exercise of stock options and warrants.............................................. 1,117 633 437 Collection of ESOP loan.................................. -- 79 13 Reduction in senior notes................................ (642) -- -- Payments to acquire treasury stock....................... (3,544) -- -- Proceeds from stock offering............................. -- -- 27,623 -------- -------- -------- Net cash provided by financing activities........ 160,152 152,897 472,022 -------- -------- -------- Increase (decrease) in cash and cash equivalents........... 13,197 41,273 (6,171) Cash and cash equivalents, beginning of year............... 86,722 45,449 51,620 -------- -------- -------- Cash and cash equivalents, end of year..................... $ 99,919 $ 86,722 $ 45,449 ======== ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest.............................................. $ 87,204 $ 73,214 $ 61,272 Income taxes, net..................................... 11,050 4,233 3,017 Non-cash investing and financing activities: Real estate acquired in settlement of loans........... 3,277 13,649 6,387 Loans originated to finance sales of real estate owned............................................... -- 1,500 2,402 Loans originated to refinance existing bank loans..... 28,229 48,008 44,060 Net change in unrealized gains/(losses) on available-for-sale securities....................... -- -- (6) Disposal of other assets.............................. -- -- 39
See Accompanying Notes to Consolidated Financial Statements A-7 63 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and general practices within the banking industry. The following is a summary of significant principles used in the preparation of the accompanying financial statements. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Hawthorne Savings, F.S.B. ("Bank"). All significant intercompany transactions and accounts have been eliminated in consolidation. NATURE OF OPERATIONS The Company is principally engaged in the business of attracting deposits from the general public and using those deposits, together with borrowings and other funds, to originate residential and income property real estate loans. The Company's principal sources of revenue are interest earned on mortgage loans and fees received concerning various deposit account services and miscellaneous loan processing activities. The Company's principal expenses are interest paid on deposit accounts and the costs necessary to operate the Company. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant estimates include the allowance for estimated credit losses, valuation of real estate owned, fair value of stock options and fair values of financial instruments. CASH AND CASH EQUIVALENTS The Bank, in accordance with regulations, must maintain qualifying liquid assets at an average monthly balance of not less than 4% of the average of all deposits and other borrowings due in less than one year. Liquid assets consist primarily of cash, certificates of deposit and overnight investments. On March 14, 2001, the OTS issued an interim final rule that eliminates the 4% liquidity requirement and replaced it with a general requirement that thrifts maintain sufficient liquidity to ensure safety and soundness. In addition, bankers' acceptances and certain U.S. Government securities, corporate notes and mortgage-backed securities qualify as liquid assets for regulatory purposes. In the consolidated statements of financial condition and cash flows, cash and cash equivalents include cash, amounts due from banks and overnight investments. INVESTMENT SECURITIES The Company has authority to invest in a variety of investment securities, including U.S. Government and agency securities, mortgage-backed securities and corporate securities. However, in recent years the Company's strategy has been to deploy its assets through loan originations, rather than purchases of investment securities. As a result, the investment activity has been steadily decreasing over the last six years, and during 2000 and 1999 there was no investment activity. The Company classifies all securities acquired as available-for-sale under GAAP, and thus the securities are carried at fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders' equity, net of taxes. A-8 64 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LOANS RECEIVABLE Loans are generally carried at principal amounts, less net deferred loan fees. Net deferred loan fees include deferred unamortized fees, less direct incremental loan origination costs. The Company defers all loan fees, net of certain direct costs associated with originating loans, and recognizes these net deferred fees into interest revenue as a yield adjustment over the term of the loans using the interest method for permanent loans and the straight-line method for construction loans. When a loan is paid off, any unamortized net deferred fees and costs are recognized in interest income. Interest on loans, including impaired loans, is recognized in revenue as earned and is accrued only if deemed collectible. When loans are 90 days or more delinquent, or when collection of interest or principal becomes uncertain, the loans are placed on nonaccrual status, meaning that the Company stops accruing interest on such loans and reverses any interest previously accrued but not collected. A nonaccrual loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected. The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, the impairment is measured by using the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measurement of the impaired loan is less than the recorded amount of the loan, the Company recognizes an impairment is recognized by creating a valuation allowance with a corresponding charge to the allowance for credit losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the allowance for credit losses. All loans are classified as held-to-maturity as the Company has the current intent and ability to hold these loans in its portfolio until maturity. ALLOWANCE FOR ESTIMATED CREDIT LOSSES Management establishes specific allowances for estimated losses on individual loans and REO when it has determined that recovery of the Company's gross investment is not probable and when the amount of loss can be reasonably determined. In making this determination, management considers (1) the status of the asset, (2) the probable future status of the asset, (3) the value of the asset or underlying collateral and (4) management's intent with respect to the asset. In quantifying the loss, if any, associated with individual loans and REO, management utilizes external sources of information (i.e., appraisals, price opinions from real estate professionals, comparable sales data and internal estimates). In establishing specific allowances, management estimates the revenues expected to be generated from disposal of the Company's collateral or owned property, less construction and renovation costs (if any), holding costs and transaction costs. For tract construction and land development, the resulting projected cash flows are discounted utilizing a market rate of return to determine their value. The Company maintains an allowance for estimated credit losses, which is not tied to individual loans or properties ("General Reserves"). General Reserves are maintained for each of the Company's principal loan segments and supplemented by periodic additions through provisions for estimated credit losses. In measuring the adequacy of the Company's General Reserves, management considers (1) the Company's historical loss experience for each loan portfolio segment and in total, (2) the historical migration of loans within each portfolio segment and in total (i.e., from performing to nonperforming, from nonperforming to REO), (3) observable trends in the performance of each loan portfolio segment, (4) observable trends in the region's economy and in its real property markets and (5) guidelines published by the OTS for maintaining General Reserves. A-9 65 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) REAL ESTATE OWNED Properties acquired through foreclosure, or deed in lieu of foreclosure ("real estate owned"), are transferred to REO and carried at the lower of cost or estimated fair value less the estimated costs to sell the property. The fair value of the property is based upon a current appraisal. Subsequent to foreclosure, management periodically performs valuations and the REO property is carried at the lower of carrying value or fair value, less costs to sell. The determination of a property's estimated fair value incorporates (1) revenues projected to be realized from disposal of the property, (2) construction and renovation costs, (3) marketing and transaction costs and (4) holding costs (e.g., property taxes, insurance and homeowners' association dues). For multi-family construction and land developments, these projected cash flows are discounted utilizing a market rate of return to determine their fair value. In many instances following foreclosure, these properties require significant time for the completion of construction and their marketing and eventual sale. Revenue recognition upon disposition of the property is dependent upon the sale having met certain criteria relating to the buyer's initial investment in the property sold. OFFICE PROPERTY AND EQUIPMENT Company property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the various classes of assets. The ranges of useful lives for the principal classes of assets are as follows: Buildings................................... 20 - 30 years Computers and related software.............. 3 - 5 years Facsimiles, copiers and printers............ 3 - 7 years Furniture and fixtures...................... 7 years Leasehold improvements...................... Shorter of 5 years or term of lease Automobiles................................. 3 years
PARENT COMPANY In connection with the issuance of its 1997 Senior Notes, the Company capitalized $2.5 million of issuance costs. In 2000, 1999 and 1998, the Company amortized $361,000 of its 1997 Senior Notes issuance costs which are being amortized over the life of the debt, which is seven years. INCOME TAXES The Company and its subsidiary have historically filed a consolidated federal income tax return and a combined state franchise tax return on a fiscal year ending September 30. The Company adopted a December 31 tax year-end for its consolidated federal income tax return and its combined state franchise tax returns beginning with the stub period ending December 31, 1998 and continuing each year thereafter. Deferred tax assets and liabilities represent the tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. If it is more likely than not that any of a deferred tax asset will not be realized, a valuation allowance is recorded. STOCK BASED COMPENSATION PLANS The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure requirements of Statement of Financial Accounting Standards ("SFAS") No. 123 in the footnotes to its consolidated financial statements. SFAS No. 123 requires pro forma disclosure of net income and, if presented, earnings per share, as if the fair-value based method of accounting defined in this statement had A-10 66 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) been applied. APB Opinion No. 25 and related interpretations requires accounting for stock compensation awards based on their intrinsic value as of the grant date. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets related to those assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. SFAS No. 121 requires that certain long-lived assets to be disposed of be reported at the lower of historical cost or fair value, less cost to sell. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company will adopt SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 will not have a significant impact on the financial position, results of operations, or cash flows of the Company. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which is effective for financial statements for periods beginning after December 15, 2000. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral, and requires certain disclosures. Management does not believe that there will be a material impact on the financial position or results of operations of the Company from adoption of this statement. RECLASSIFICATIONS Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform with 2000. EARNINGS PER SHARE CALCULATION The following table sets forth the Company's earnings per share calculations for the years ended December 31, 2000, 1999 and 1998. In the following table, (1) "Warrants" refers to the Warrants issued by the Company in December 1995, which are currently exercisable, and which expire December 11, 2005, and (2) "Options" refer to stock options previously granted to employees of the Company and which were outstanding at each measurement date (see Note 10). In July 1998, the Company completed an offering of 2,012,500 shares of its Common Stock (including 262,500 shares issued upon exercise by the underwriters of their overallotment option) at a price of $15.00 per share, realizing net proceeds (after offering costs) of approximately $27.6 million. As an additional result of A-11 67 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) this offering, the exercise price of the Warrants was reduced to $2.128 per share and the number of shares of Common Stock purchasable upon the exercise of the Warrants was increased to 2,512,188.
YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA) -------- ------- ------- Average shares outstanding: Basic..................................................... 5,300 5,288 4,176 Warrants.................................................. 2,486 2,496 2,444 Options(1)................................................ 360 445 587 Less: Treasury stock(2)................................... (775) (532) (515) -------- ------- ------- Diluted................................................... 7,371 7,697 6,692 ======== ======= ======= Net income.................................................. $ 14,284 $10,200 $11,038 ======== ======= ======= Basic earnings per share.................................... $ 2.69 $ 1.93 $ 2.64 ======== ======= ======= Diluted earnings per share.................................. $ 1.94 $ 1.33 $ 1.65 ======== ======= ======= Year end shares outstanding: Basic..................................................... 5,175 5,326 5,190 Warrants.................................................. 2,486 2,486 2,512 Options(3)................................................ 446 403 527 Less: Treasury stock(2)................................... (619) (584) (510) -------- ------- ------- Diluted................................................... 7,488 7,631 7,719 ======== ======= ======= Basic book value per share.................................. $ 20.13 $ 17.33 $ 15.69 ======== ======= ======= Diluted book value per share................................ $ 13.91 $ 12.10 $ 10.43 ======== ======= =======
- --------------- (1) Excludes 225,327 options outstanding for the year ended December 31, 2000 for which the exercise price exceeded the average market price of the Company's Common Stock during the periods. (2) Under the Diluted Method, it is assumed that the Company will use proceeds from the pro forma exercise of the Warrants and Options to acquire actual shares currently outstanding, thus increasing treasury stock. In this calculation, treasury stock was assumed to be repurchased at the average closing stock price for the respective period. (3) Excludes 160,000 options outstanding for the month of December 2000 for which the exercise price exceeded the monthly average market price of the Company's Common Stock at period-end. NOTE 2 -- CASH AND CASH EQUIVALENTS The table below reflects cash and cash equivalents for the dates indicated:
DECEMBER 31, ------------------ 2000 1999 (DOLLARS IN THOUSANDS) ------- ------- Cash and due from banks.................................. $19,919 $86,722 Federal funds sold....................................... 80,000 -- ------- ------- Total.......................................... $99,919 $86,722 ======= =======
NOTE 3 -- INVESTMENT SECURITIES AVAILABLE-FOR-SALE As of December 31, 2000, the Company did not have any investment securities available-for-sale. The Company has authority to invest in a variety of investment securities, including U.S. Government and agency securities, mortgage-backed securities and corporate securities. However, in recent years the Company's A-12 68 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) strategy has been to deploy its assets through loan originations, rather than purchases of investment securities. As a result, the investment activity has been steadily decreasing over the last six years, and in both 2000 and 1999 there was no investment activity. The Company classifies all securities acquired as available-for-sale under GAAP, and thus the securities are carried at fair value, with unrealized gains and losses excluded from income and reported as a separate component of stockholders' equity, net of taxes. The table below reflects comprehensive income, comprised of unrealized gains arising during the period, net of tax, and reclassification adjustments for the periods indicated:
YEAR ENDED DECEMBER 31, ----------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) ----- ----- ----- Unrealized holding gains arising during period, net of tax expense of $0 in 2000, $0 in 1999 and $2 in 1998.......... $-- $-- $ 1 Less: Reclassification adjustment for gains included in net income, net of tax expense of $0 in 2000, $0 in 1999 and $4 in 1998.................................... -- -- 7 --- --- --- Net change in unrealized loss on securities, net of tax (expense)................................................. $-- $-- $(6) === === ===
NOTE 4 -- LOANS RECEIVABLE The Company's loan portfolio consists almost exclusively of loans secured by real estate located in Southern California. The table below sets forth the composition of the Company's loan portfolio as of the dates indicated.
DECEMBER 31, ------------------------ 2000 1999 (DOLLARS IN THOUSANDS) ---------- ---------- Single family residential................................... $ 888,416 $ 683,250 Income property: Multi-family(1)........................................... 253,039 222,616 Commercial(1)............................................. 200,372 232,938 Development(2)............................................ 203,894 148,092 Single family construction: Single family residential(3).............................. 195,983 274,697 Tract..................................................... 3,495 24,056 Land(4)..................................................... 46,520 59,095 Other....................................................... 15,390 22,053 ---------- ---------- Gross loans receivable(5)......................... 1,807,109 1,666,797 Less: Undisbursed funds......................................... (171,789) (196,249) Deferred (fees) and costs, net............................ 2,197 (1,295) Allowance for estimated credit losses..................... (29,450) (24,285) ---------- ---------- Net loans receivable........................................ $1,608,067 $1,444,968 ========== ==========
- --------------- (1) Predominantly term loans secured by improved properties, with respect to which the properties' cash flows are sufficient to service the Company's loan. (2) Predominantly loans to finance the construction of income-producing improvements. Also includes loans to finance the renovation of existing improvements. (3) Predominantly loans for the construction of individual and custom homes. (4) The Company expects that a majority of these loans will be converted into construction loans, and the land-secured loans repaid with the proceeds of these construction loans, within 12 months. A-13 69 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) Gross loans receivable includes the principal balance of loans outstanding, plus outstanding but unfunded loan commitments, predominantly in connection with construction loans. The table below summarizes the maturities for fixed rate loans and the repricing intervals for adjustable rate loans as of December 31, 2000:
PRINCIPAL BALANCE ------------------------------------------- FIXED RATE ADJUSTABLE RATE TOTAL (DOLLARS IN THOUSANDS) ---------- --------------- ---------- Interval: G 3 months.......................... $ 36,692 $1,201,247 $1,237,939 H 3 to 6 months..................... 1,011 401,151 402,162 H 6 to 12 months.................... 5,979 26,030 32,009 H 1 to 2 years...................... 6,270 -- 6,270 H 2 to 5 years...................... 817 -- 817 H 5 to 10 years..................... 12,447 -- 12,447 H 10 to 20 years.................... 13,623 -- 13,623 More than 20 years.................. 101,842 -- 101,842 -------- ---------- ---------- Gross loans receivable...... $178,681 $1,628,428 $1,807,109 ======== ========== ==========
The contractual weighted average interest rates on loans at December 31, 2000 and 1999 were 8.98% and 8.64%, respectively. The table below summarizes nonaccrual loans for the dates indicated.
DECEMBER 31, ------------------ 2000 1999 (DOLLARS IN THOUSANDS) ------- ------- Single family residential................................ $13,954 $22,579 Income property: Commercial............................................. -- 10,498 Development............................................ 10,987 -- Single family construction: Single family residential.............................. 2,712 6,847 Tract.................................................. -- 1,945 Land..................................................... 3,930 2,140 Other.................................................... 18 22 ------- ------- Total(1)....................................... $31,601 $44,031 ======= =======
- --------------- (1) At December 31, 2000, nonaccrual loans included ten loans, totaling $7.1 million, in bankruptcy. Includes $3.7 million and $18.7 million of TDRs at December 31, 2000 and 1999, respectively. Excludes $15.1 million and $16.2 million of TDRs that were paying in accordance with their modified terms at December 31, 2000 and 1999, respectively. The interest income recognized on loans that were on nonaccrual status at December 31, 2000, 1999 and 1998 was $1.7 million, $2.3 million and $3.3 million, respectively. If these loans had been performing for the entire year, the income recognized would have been $3.3 million, $4.5 million and $4.9 million for 2000, 1999 and 1998, respectively. The table below summarizes the amounts of interest income that would have been recognized on TDRs had borrowers paid at the original loan interest rate throughout each of the years below, the interest income that would have been recognized based upon the modified interest rate, and the interest income that was included in the consolidated statements of income for the periods indicated. For this purpose, a TDR is a loan with respect to which (1) the original interest rate was changed for a defined period of time, (2) the loan's A-14 70 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) maturity was extended due to borrowers' financial difficulty, and/or (3) the Company agreed to suspend principal or interest payments for a defined period of time.
PRINCIPAL ORIGINAL MODIFIED RECOGNIZED BALANCE INTEREST INTEREST INTEREST (DOLLARS IN THOUSANDS) --------- -------- -------- ---------- Year ended December 31, 2000: Permanent loans........................... $18,787 $2,049 $1,804 $1,273 ======= ====== ====== ====== Year ended December 31, 1999: Construction loans........................ $ 5,072 $ 684 $ 681 $ 392 Permanent loans........................... 29,766 3,319 2,842 1,636 ------- ------ ------ ------ $34,838 $4,003 $3,523 $2,028 ======= ====== ====== ====== Year ended December 31, 1998: Permanent loans........................... $34,276 $2,873 $2,695 $2,484 ======= ====== ====== ======
The table below summarizes the activity within the allowance for estimated credit losses on loans for the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) ------- ------- ------- Balance, beginning of year............................ $24,285 $17,111 $13,274 Provision for credit losses......................... 6,000 12,000 7,135 Charge-offs......................................... (1,084) (4,872) (3,298) Recoveries.......................................... 249 46 -- ------- ------- ------- Balance, end of year.................................. $29,450 $24,285 $17,111 ======= ======= =======
Management believes the level of allowance for estimated credit losses on loans is adequate to absorb losses inherent in the loan portfolio; however, circumstances might change which could adversely affect the performance of the loan portfolio resulting in increasing loan losses which cannot be reasonably predicted at December 31, 2000. The recorded investment in loans considered to be impaired under SFAS No. 114 as amended by SFAS No. 118, was as follows:
AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) ------- ------- ------- Impaired loans with specific loss reserves............ $11,364 $ 3,991 $41,124 Impaired loans without specific loss reserves......... 26,583 49,615 28,770 Specific loss reserves allocated to impaired loans.... (5,270) (659) (5,177) ------- ------- ------- Total impaired loans, net of specific reserves.................................. $32,677 $52,947 $64,717 ======= ======= ======= Average investment in impaired loans.................. $38,000 $65,500 $60,000 Interest income recognized on impaired loans.......... $ 2,775 $ 3,417 $ 4,879
A-15 71 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The table below reconciles the principal balance of impaired loans and TDRs for the dates indicated:
DECEMBER 31, -------------------- 2000 1999 (DOLLARS IN THOUSANDS) -------- -------- Total impaired loans........................................ $ 37,947 $ 53,606 Impaired loans 90 days or more delinquent................... (10,042) (11,853) -------- -------- Performing impaired loans................................. 27,905 41,753 Impaired loans which are not TDRs........................... (12,768) (14,445) -------- -------- Performing TDRs........................................... 15,137 27,308 TDRs which are 90 days or more delinquent................... 3,650 7,530 -------- -------- Total TDRs........................................ $ 18,787 $ 34,838 ======== ========
No additional funds are committed to be advanced in connection with impaired loans. LOANS TO EXECUTIVE OFFICERS AND DIRECTORS In the ordinary course of business, the Company has granted loans to certain executive officers and directors and the companies with which they are associated. In management's opinion, such loans and commitments to lend were made under terms that are consistent with the Company's normal lending policies. During the year ended December 31, 2000, the Company granted $228,000 in loans to executive officers and directors. During the year ended December 31, 1998, the Company granted $155,000 in loans to executive officers and directors and received repayments of $1,000. During 1999, all loans to executive officers and directors were paid in full. NOTE 5 -- REAL ESTATE OPERATIONS Real estate acquired in satisfaction of loans is transferred from loans to properties at the lower of the carrying values or the estimated fair values, less any estimated disposal costs. The difference between the fair value of the real estate collateral and the loan balance at the time of transfer is recorded as a loan charge-off. Any subsequent declines in the fair value of the properties after the date of transfer are recorded through a write-down of the asset. The table below summarizes real estate owned ("REO") properties for the dates indicated:
DECEMBER 31, ---------------- 2000 1999 (DOLLARS IN THOUSANDS) ------ ------ Single family residential(1)................................ $2,859 $1,218 Land(2)..................................................... -- 4,398 ------ ------ Gross investment(3)......................................... 2,859 5,616 Less allowance for estimated losses....................... -- 29 ------ ------ Real estate owned, net...................................... $2,859 $5,587 ====== ======
- --------------- (1) As of December 31, 2000, the Company held five properties. (2) In December 1999, the Bank acquired 18 lots of a tract development in La Quinta, California with a carrying value of $4.4 million. (3) Fair value of collateral at foreclosure, plus post-foreclosure capitalized costs. A-16 72 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The table below summarizes activity in the allowance for estimated losses on real estate owned for the periods indicated:
YEARS ENDED DECEMBER 31, -------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) ----- ----- -------- Total allowance for estimated losses at beginning of period................................................... $ 29 $ 45 $ 2,563 Provision for estimated losses........................... -- 80 60 Charge-offs.............................................. (29) (96) (2,578) ---- ---- ------- Total allowance for estimated losses at end of period......................................... -- $ 29 $ 45 ==== ==== =======
The following table sets forth the costs and revenues attributable to the Company's REO properties for the periods indicated. The compensatory and legal costs directly associated with the Company's property management and disposal operations are included in general and administrative expenses.
YEARS ENDED DECEMBER 31, ------------------------ 2000 1999 1998 (DOLLARS IN THOUSANDS) ----- ----- ------ Expenses associated with real estate operations: Repairs, maintenance and renovation..................... $(294) $(219) $ (277) Insurance and property taxes............................ (18) (132) (123) ----- ----- ------ (312) (351) (400) Net (loss)/recoveries from sales of REO................... (166) 754 2,278 Property operations, net.................................. 30 1 91 Charge-off/provision for estimated losses on REO.......... (476) (80) (60) ----- ----- ------ (Loss)/income from real estate operations, net............ $(924) $ 324 $1,909 ===== ===== ======
NOTE 6 -- OFFICE PROPERTY AND EQUIPMENT -- AT COST The following table summarizes property and equipment for the dates indicated:
DECEMBER 31, ------------------- 2000 1999 (DOLLARS IN THOUSANDS) -------- -------- Office buildings............................................ $ 1,415 $ 1,421 Furniture and equipment..................................... 6,449 5,927 Computer hardware/software.................................. 3,486 3,200 Leasehold improvements...................................... 3,482 3,054 -------- -------- Total............................................. 14,832 13,602 Less: Accumulated depreciation and amortization................. (10,214) (7,853) -------- -------- 4,618 5,749 Land........................................................ 190 190 -------- -------- Net............................................... $ 4,808 $ 5,939 ======== ========
The Company recognized $2.8 million, $2.3 million and $1.6 million of depreciation and amortization expense for the years ended December 31, 2000, 1999, and 1998, respectively. A-17 73 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- DEPOSITS The table below summarizes the Company's deposit portfolio by original term, weighted average interest rates ("WAIR") and weighted average remaining maturities in months ("WARM") as of the dates indicated.
DECEMBER 31, 2000 DECEMBER 31, 1999 ---------------------------------- ---------------------------------- BALANCE(1) PERCENT WAIR WARM BALANCE(1) PERCENT WAIR WARM (DOLLARS IN THOUSANDS) ---------- ------- ---- ---- ---------- ------- ---- ---- Transaction accounts: Noninterest-bearing checking.... $ 32,994 2.71% -- -- $ 28,838 2.66% -- -- Checking/NOW.................... 42,774 3.52% 2.67% -- 40,563 3.73% 2.17% -- Passbook........................ 25,868 2.13% 2.00% -- 23,568 2.17% 1.41% -- Money Market.................... 213,757 17.60% 5.20% -- 155,537 14.31% 4.45% -- ---------- ------ ---------- ------ Total transaction accounts............... 315,393 25.96% 248,506 22.87% ---------- ------ ---------- ------ Certificates of deposit: 7 day maturities................ 20,905 1.72% 4.04% -- 30,631 2.82% 4.08% -- Less than 6 months.............. 11,248 0.93% 4.93% 2 42,082 3.87% 4.78% 2 6 months to 1 year.............. 106,193 8.74% 6.18% 4 147,407 13.57% 5.24% 3 1 year to 2 years............... 744,058 61.25% 6.43% 6 584,488 53.79% 5.46% 8 Greater than 2 years............ 17,059 1.40% 5.35% 14 33,521 3.08% 5.31% 12 ---------- ------ ---------- ------ Total certificates of deposit................ 899,463 74.04% 838,129 77.13% ---------- ------ ---------- ------ Total deposits....... $1,214,856 100.00% 5.71% 6 $1,086,635 100.00% 4.86% 5 ========== ====== ========== ======
- --------------- (1) Deposits in excess of $100,000 were 29.87% of total deposits at December 31, 2000, compared to 23.47% of total deposits at December 31, 1999. The table below summarizes interest expense on deposits, by type of account, for the periods indicated:
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) ------- ------- ------- Checking/NOW.......................................... $ 1,006 $ 801 $ 765 Passbook.............................................. 582 918 632 Money Market.......................................... 8,986 6,803 2,957 Certificates of deposit............................... 52,939 42,309 43,288 ------- ------- ------- Total....................................... $63,513 $50,831 $47,642 ======= ======= =======
A-18 74 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) This table sets forth the remaining maturities of the certificates of deposit outstanding for the periods indicated:
CERTIFICATES OF DEPOSIT OUTSTANDING AT DECEMBER 31, 2000 ----------------------------------------------------------- OVER THREE THREE THROUGH OVER SIX MONTHS SIX THROUGH OVER ONE OR LESS MONTHS TWELVE MONTHS YEAR TOTAL (DOLLARS IN THOUSANDS) -------- ---------- ------------- -------- -------- Balances < $100,000 4.00% or less........................... $ 1,533 $ 55 $ 26 $ 4 $ 1,618 4.01% - 5.00%........................... 19,599 2,122 1,396 2,182 25,299 5.01% - 6.00%........................... 69,672 15,634 5,427 6,097 96,830 6.01% - 7.00%........................... 90,468 141,680 265,421 10,860 508,429 7.01% or more........................... -- -- 175 -- 175 -------- -------- -------- ------- -------- 181,272 159,491 272,445 19,143 632,351 Balances > $100,000 4.00% or less........................... -- -- -- -- -- 4.01% - 5.00%........................... 6,764 337 486 498 8,085 5.01% - 6.00%........................... 33,051 5,911 1,247 1,205 41,414 6.01% - 7.00%........................... 39,137 57,294 117,937 3,040 217,408 7.01% or more........................... -- -- 205 -- 205 -------- -------- -------- ------- -------- 78,952 63,542 119,875 4,743 267,112 -------- -------- -------- ------- -------- Total........................... $260,224 $223,033 $392,320 $23,886 $899,463 ======== ======== ======== ======= ========
CERTIFICATES OF DEPOSIT OUTSTANDING AT DECEMBER 31, 1999 ----------------------------------------------------------- Balances < $100,000 4.00% or less.......................... $ 1,645 $ 114 $ 74 $ 12 $ 1,845 4.01% - 5.00%.......................... 76,930 43,765 14,758 6,704 142,157 5.01% - 6.00%.......................... 110,906 93,532 123,972 58,904 387,314 6.01% - 7.00%.......................... -- 95 68,582 7,848 76,525 7.01% or more.......................... -- 1 -- -- 1 -------- -------- -------- -------- -------- 189,481 137,507 207,386 73,468 607,842 Balances > $100,000 4.00% or less.......................... 1,155 -- -- -- 1,155 4.01% - 5.00%.......................... 26,883 12,065 5,133 1,379 45,460 5.01% - 6.00%.......................... 45,952 36,074 46,553 24,860 153,439 6.01% - 7.00%.......................... 189 421 27,319 2,304 30,233 7.01% or more.......................... -- -- -- -- -- -------- -------- -------- -------- -------- 74,179 48,560 79,005 28,543 230,287 -------- -------- -------- -------- -------- Total.......................... $263,660 $186,067 $286,391 $102,011 $838,129 ======== ======== ======== ======== ========
NOTE 8 -- FHLB ADVANCES A primary alternate funding source for the Company is a credit line with the FHLB with a maximum advance of up 35% of the Company's total assets based on qualifying collateral. The FHLB system functions as a source of credit to savings institutions which are members of the FHLB. Advances are secured by the Company's mortgage loans and the capital stock of the FHLB owned by the Company. Subject to the FHLB's advance policies and requirements, these advances can be requested for any business purpose in which the A-19 75 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Company is authorized to engage. In granting advances, the FHLB considers a member's creditworthiness and other relevant factors. The table below summarizes the balance and rate of FHLB advances for the dates indicated:
DECEMBER 31, ---------------------------------------------- 2000 1999 --------------------- --------------------- AVERAGE AVERAGE RATE AT RATE AT PRINCIPAL YEAR END PRINCIPAL YEAR END (DOLLARS IN THOUSANDS) --------- -------- --------- -------- Original Term: 12 Months............................... $ 25,000 5.81% $ -- -- 24 Months............................... 25,000 6.56% -- -- 36 Months............................... 100,000 6.73% -- -- 60 Months............................... 135,000 5.92% 300,000 5.30% 120 Months.............................. 99,000 5.19% 49,000 4.36% -------- -------- Total........................... $384,000 5.98% $349,000 5.16% ======== ========
The following table summarizes information relating to the Company's FHLB advances for the periods or dates indicated:
YEAR ENDED DECEMBER 31, ------------------------ 2000 1999 (DOLLARS IN THOUSANDS) ---------- ---------- Average balance during the year........................ $346,983 $343,205 Average interest rate during the year.................. 5.82% 5.18% Maximum month-end balance during the year.............. $384,000 $379,000 Loans underlying the agreements at year end............ $751,628 $799,866
NOTE 9 -- INCOME TAXES The provision for income taxes consists of the following components for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 (DOLLARS IN THOUSANDS) -------- ------- ------- Current income tax expense: Federal............................................ $ (9,203) $(7,409) $ (654) State.............................................. (2,129) (2) (21) -------- ------- ------- Total current.............................. (11,332) (7,411) (675) Deferred income tax expense: Federal............................................ 1,843 1,168 (4,013) State.............................................. (1,179) (1,787) 14 -------- ------- ------- Total deferred............................. 664 (619) (3,999) -------- ------- ------- Income tax provision................................. $(10,668) $(8,030) $(4,674) ======== ======= =======
A-20 76 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The table below summarizes the components of the net deferred income tax assets for the dates indicated:
DECEMBER 31, -------------------- 2000 1999 (DOLLARS IN THOUSANDS) -------- -------- Deferred income tax liabilities: Loan fees............................................ $ (7,523) $ (6,503) FHLB stock........................................... (2,390) (2,001) Depreciation......................................... (438) (962) Other................................................ (888) (699) -------- -------- Total........................................ (11,239) (10,165) Deferred income tax assets: Bad debts............................................ 10,826 7,317 Federal AMT credit carry-forward..................... -- 30 Other................................................ 3,280 5,021 -------- -------- Total........................................ 14,106 12,368 -------- -------- Deferred tax assets, net............................... $ 2,867 $ 2,203 ======== ========
The table below summarizes the differences between the statutory income tax and the Company's effective tax for the periods indicated:
YEAR ENDED DECEMBER 31, ---------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) ------- ------ ------- Federal income tax..................................... $ 8,733 $6,379 $ 5,497 Addition/(reduction) resulting from: Change in federal valuation allowance................ -- -- (1,084) California franchise tax, net of federal income taxes............................................. 1,785 1,163 5 Other................................................ 150 488 256 ------- ------ ------- Total........................................ $10,668 $8,030 $ 4,674 ======= ====== =======
NOTE 10 -- STOCKHOLDERS' EQUITY EMPLOYEE BENEFIT PLANS The Company has an Employee Stock Ownership Plan ("ESOP") that previously covered substantially all employees over 21 years of age who met minimum service requirements. As of December 15, 1995, the Company froze the ESOP and all accounts became fully vested and nonforfeitable. At December 31, 2000, the ESOP owned 92,223 shares of the Company's common stock. Effective April 1, 1996, the ESOP was amended to include a 401(k) plan. The Company makes a matching contribution equal to 100% of the amount each participant elects to defer up to a maximum of 5% of the participant's compensation for the calendar quarter. Employees are eligible to participate if they were employed by the Company on March 1, 1996 or have been employed for 6 months, worked at least 500 hours, and are over 21 years of age. Contributions under the plan were $416,727, $420,935 and $382,559 for 2000, 1999 and 1998, respectively. DEFERRED COMPENSATION PLAN In October 2000, the Bank adopted a Deferred Compensation Plan ("the Plan") in order to provide specified benefits to a select group of management and highly compensated employees. Under the Plan, participants are allowed to defer up to 100% of their annual salaries and bonuses. The Bank does not currently A-21 77 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) match participants' deferrals. The balance in each participants' deferred compensation account earns interest at a rate equal to the interest rate on 10-Year Treasury notes as in effect on the last date of the calendar year quarter immediately preceding the valuation date, plus 2.50%. The interest crediting rate was 8.30% for the year ended December 31, 2000. The expense of funding the deferred compensation plan was minimal for the year ended December 31, 2000. STOCK OPTION PLANS The Company has two stock option plans ("Option Plans"), one of which provides for the issuance of stock options to directors and employees of the Company and the other of which provides for the issuance of stock options to employees other than certain executive officers of the Company. At December 31, 2000, the Option Plans provide for the issuance of 1,300,000 maximum aggregate shares of Company Common Stock upon exercise of options. The exercise price of any option may not be less than the fair market value of the Common Stock on the date of grant and the term of any option may not exceed 10 years. Presented below is a summary of the transactions under the stock option plans described above for the periods indicated:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------------- 2000 1999 1998 ------------------------- ------------------------- ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE -------- -------------- -------- -------------- ------- -------------- Outstanding, beginning of year...... 787,800 $10.79 882,300 $10.19 721,800 $ 7.03 Granted........................... 301,500 8.51 135,000 14.36 255,000 17.23 Exercised......................... (235,500) 4.74 (110,000) 5.24 (86,500) 5.06 Canceled or expired............... (247,500) 16.72 (119,500) 15.47 (8,000) 5.26 -------- -------- ------- Outstanding, end of year............ 606,300 9.58 787,800 10.79 882,300 10.19 ======== ======== ======= Options exercisable, end of year.... 142,300 480,733 580,400 ======== ======== =======
The table below summarizes information about stock options outstanding and exercisable at December 31, 2000.
WEIGHTED AVERAGE RANGE OF NUMBER REMAINING CONTRACTUAL NUMBER EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISABLE - --------------- ----------- --------------------- ----------- $ 4.65......... 57,000 2.92 57,000 5.26........... 69,300 5.00 69,300 7.74 - 9.91.. 320,000 7.32 16,000 13.73.......... 35,000 7.00 -- 15.09 - 16.31.. 125,000 6.08 -- ------- ------- $ 4.65 - 16.31.. 606,300 6.37 142,300 ======= =======
A-22 78 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) If compensation costs for the Option Plans had been determined based on the fair value at the grant date for awards in 2000, 1999 and 1998 consistent with the provisions of SFAS No. 123, the Company's net income and net earnings per share would have been reduced to the pro forma amounts indicated below.
YEARS ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) ------- ------- ------- Net earnings: As reported......................................... $14,284 $10,200 $11,038 Pro forma........................................... $14,022 $ 8,677 $ 9,371 Basic earnings per share: As reported......................................... $ 2.69 $ 1.93 $ 2.64 Pro forma........................................... $ 2.65 $ 1.64 $ 2.24 Diluted earnings per share: As reported......................................... $ 1.94 $ 1.33 $ 1.65 Pro forma........................................... $ 1.90 $ 1.13 $ 1.40 Weighted average fair value at date of grant.......... $ 3.71 $ 6.62 $ 8.33
The fair value of options granted under the Option Plans was estimated on the date of grant using the Black-Scholes option-pricing model. In 2000, the following weighted average assumptions were used: no dividend yield, expected volatility of 56.46%, risk free interest rate of 4.76% and expected lives of 2 to 4 years. In 1999, no dividend yield, expected volatility of 30.55%, risk free interest rate of 6.76%, and expected lives of 4 to 8 years. In 1998, no dividend yield, expected volatility of 32.97%, risk free interest rate of 5.25% and expected lives of 5 to 8 years. NOTE 11 -- CAPITAL AND DEBT OFFERINGS On December 31, 1997, the Company sold $40.0 million of 12.50% 1997 Senior Notes due 2004 ("1997 Senior Notes") in a private placement (the "1997 Offering"), which included registration rights. Interest on the 1997 Senior Notes is payable semiannually. On or after December 31, 2002, the 1997 Senior Notes will be redeemable at any time at the option of the Company, in whole or in part, at the redemption price of 106.25% for the twelve-month period beginning December 31, 2002, and 103.125% thereafter. In July 1998, the Company sold 2,012,500 shares of its Common Stock (including 262,500 shares, issued upon exercise by the underwriters of their over allotment option) at a price of $15.00 per share, realizing net proceeds (after offering costs) of approximately $27.6 million. As a result of this offering, the exercise price of the Warrants was reduced to $2.128 and the number of shares of Common Stock acquirable upon the exercise of the Warrants was increased to 2,512,188. A-23 79 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 -- REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and to average assets (as defined). Management believes, as of December 31, 2000, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2000 and 1999, the most recent notification from the OTS categorized the Bank as well capitalized under the regulatory framework for Prompt Corrective Action ("PCA") Rules. There are no conditions or events since that notification that management believes have changed the Bank's category. The following table sets forth the Bank's actual regulatory capital amounts and ratios and the regulatory capital amounts and ratios for the Bank to meet the minimum capital requirements required by the OTS and to be categorized as "well capitalized" under the PCA Rules as of December 31, 2000 and 1999.
TO BE WELL CAPITALIZED UNDER PROMPT FOR CAPITAL CORRECTIVE ACTION ACTUAL ADEQUACY PURPOSES PROVISIONS ------------------ ----------------- ------------------ AMOUNT RATIOS AMOUNT RATIOS AMOUNT RATIOS (DOLLARS IN THOUSANDS) -------- ------ ------- ------ -------- ------ As of December 31, 2000: Total capital (to risk weighted assets)........ $151,914 12.23% $99,407 8.00% $124,259 10.00% Core capital (to adjusted tangible assets).... 140,387 8.01% 70,078 4.00% 87,598 5.00% Tangible capital (to adjusted tangible assets).... 140,387 8.01% 26,279 1.50% n/a n/a Tier 1 capital (to risk weighted assets)........ 140,387 11.30% n/a n/a 74,555 6.00% As of December 31, 1999: Total capital (to risk weighted assets)........ $139,815 12.50% $89,468 8.00% $111,835 10.00% Core capital (to adjusted tangible assets).... 127,160 8.05% 63,174 4.00% 78,967 5.00% Tangible capital (to adjusted tangible assets).... 127,160 8.05% 23,690 1.50% n/a n/a Tier 1 capital (to risk weighted assets)........ 127,160 11.37% n/a n/a 67,101 6.00%
NOTE 13 -- COMMITMENTS AND CONTINGENCIES LITIGATION The Bank is a defendant in a construction defect case entitled Marine Village Townhomes Homeowners' Association v. Hawthorne Savings and Loan Association that was filed in the Superior Court of the State of A-24 80 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) California, County of Los Angeles. In this action, Plaintiffs allege, under several theories of recovery, that the Bank was responsible for construction defects in a multi-unit condominium complex, and further alleges fraud by the Bank in connection with the sales of the condominiums. The Bank initially provided a construction loan to the developer, but took over the completion of a portion of the projects after the developer defaulted. Plaintiffs are seeking damages of approximately $3.3 million, plus punitive damages. The Bank has denied that it is responsible for all of the defects Plaintiffs are alleging, and has made claims for indemnification against the contractor and subcontractors. The Bank is also seeking reimbursement from various insurance carriers for defense costs and indemnification for any amounts the Bank is obligated to pay. No assurances can be given that the responsible parties will ultimately indemnify the Bank. Further, there can be no insurance coverage for intentional acts or punitive damages, if awarded. Although the Bank intends to vigorously defend its position and to pursue indemnification, there can be no assurances that the Bank will prevail. In addition, the Bank has incurred substantial legal fees defending the case. In addition, the inherent uncertainty of jury or judicial verdicts makes it impossible to determine with certainty the Company's maximum exposure in these actions. The Bank was a defendant in a construction defect case entitled Stone Water Terrace HOA v. Hawthorne Savings and Loan Association, which was filed in the Superior Court of the State of California, County of Los Angeles. In this action, Plaintiff alleged, under several theories of recovery, that the Bank was responsible for construction defects in a multi-unit condominium complex. The Bank initially provided construction loans to the developer, but took over the completion of a portion of the projects after the developer defaulted. The plaintiff sought damages in an unspecified amount, plus punitive damages. The Bank denied the allegations in the complaint and sought indemnification against the responsible parties. On September 18, 2000, the Court entered an order dismissing the Stonewater Terrace HOA case because Plaintiffs failed to take certain actions. In March 2001, the Plaintiffs filed a motion seeking to have the case reinstated. The Bank intends to oppose the motion, but there can be no assurances that the case will not be reinstated. If the case is reinstated, it is probable that the Bank will incur substantial legal fees defending this matter. At the time the case was dismissed, discovery had not yet begun, so the Bank is not in a position to estimate the extent of any liability. In addition, the inherent uncertainty of jury or judicial verdicts makes it impossible to determine with certainty the Company's maximum exposure in this action. The Bank is involved in a variety of other litigation matters in the ordinary course of its business, and anticipates that it will become involved in new litigation matters from time to time in the future. Based on the current assessment of these other matters, management does not presently believe that any one of these existing other matters is likely to have a material adverse impact on the Company's financial condition or results of operations. However, the Company will incur legal and related costs concerning the litigation and may from time to time determine to settle some or all of the cases, regardless of management's assessment of the Company's legal position. The amount of legal defense costs and settlements in any period will depend on many factors, including the status of cases (and the number of cases that are in trial or about to be brought to trial) and the opposing parties' aggressiveness in pursuing their cases and their perception of their legal position. Further, the inherent uncertainty of jury or judicial verdicts makes it impossible to determine with certainty the Company's maximum cost in any pending litigation. Accordingly, the Company's litigation costs and expenses may vary materially from period to period, and no assurance can be given that these costs will not be material in any particular period. LENDING COMMITMENTS At December 31, 2000, the Company had commitments to fund the undisbursed portion of existing construction and land loans of $147.0 million and income property and estate loans of $4.5 million. The commitments to fund the undisbursed portion of existing lines of credit, excluding construction and land lines of credit, totaled $20.3 million. A-25 81 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LEASES The Company has entered into agreements to lease certain office facilities under noncancelable operating leases that expire at various dates to the year 2010. The leases generally provide that the Company pays property taxes, insurance and other items. Current rental commitments for the remaining terms of these noncancelable leases as of December 31, 2000 are as follows:
(DOLLARS IN THOUSANDS) YEAR AMOUNT ---- ------ 2001........................................................ $1,896 2002........................................................ 1,733 2003........................................................ 1,750 2004........................................................ 1,735 2005........................................................ 1,543 Thereafter.................................................. 1,250 ------ Total............................................. $9,907 ======
Lease expense for office facilities was $1.9 million, $1.7 million and $1.4 million for the years ended December 31, 2000, 1999 and 1998, respectively. NOTE 14 -- ESTIMATED FAIR VALUE INFORMATION The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." The Company, using available market information and appropriate valuation methodologies, has determined the estimated fair value amounts. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and or estimation methodologies may have a material effect on the estimated fair value amounts.
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 2000 1999 ------------------------ ------------------------ CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE (DOLLARS IN THOUSANDS) ---------- ---------- ---------- ---------- Assets: Cash and cash equivalents............... $ 99,919 $ 99,919 $ 86,722 $ 86,722 Loans receivable........................ 1,608,067 1,645,338 1,444,968 1,455,635 Investment in FHLB stock................ 20,730 20,730 22,236 22,236 Accrued interest receivable............. 11,040 11,040 9,250 9,250 Liabilities: Deposits: Noninterest-bearing checking......... 32,994 32,994 28,838 28,838 Checking/NOW......................... 42,774 42,774 40,563 40,563 Passbook............................. 25,868 25,868 23,568 23,568 Money market......................... 213,757 213,757 155,537 155,537 Certificates of deposit.............. 899,463 898,640 838,129 836,101 FHLB advances........................... 384,000 389,295 349,000 346,881 Senior notes............................ 39,358 39,752 40,000 38,600 Accrued interest payable................ 1,351 1,351 1,224 1,224
A-26 82 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value are explained below: For cash and cash equivalents, the carrying amounts approximate fair values due to the short term nature of these instruments. The carrying amount of loans receivable is their contractual amounts outstanding reduced by net deferred loan origination fees and the allowance for loan losses (Note 4). Adjustable rate loans consist primarily of loans whose interest rates float with changes in either a specified bank's reference rate or current market indices. The fair value of both adjustable and fixed rate loans was estimated by discounting the remaining contractual cash flows using the estimated current rate at which similar loans would be made to borrowers with similar credit risk characteristics over the same remaining maturities, reduced by net deferred loan origination fees and the allocable portion of the allowance for the estimated credit losses. The estimated current rate for discounting purposes was not adjusted for any change in borrowers' credit risks since the origination of such loans. Rather, the allocable portion of the allowance for estimated credit losses is considered to provide for such changes in estimating fair value. The fair value of nonaccrual loans (Note 4) has been estimated at the carrying amount of these loans, as it is not practicable to reasonably assess the credit risk adjustment that would be applied in the market place for such loans. For FHLB stock, the carrying amount approximates fair value, as the stock may be sold back to the FHLB at the carrying value. The withdrawable amounts for noninterest-bearing checking, checking/NOW, passbook and money market accounts are considered stated at their estimated fair value. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of FHLB advances is estimated using the rates currently offered on similar instruments with similar terms. The fair value of the 1997 Senior Notes in 2000 and 1999 is based on quoted market price. Additionally, optional commitments to originate mortgages are excluded from this presentation because such commitments are typically at market terms, are typically for adjustable rate loans, and are generally cancelable by borrower without significant fees or costs upon cancellation. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2000 and 1999. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented. A-27 83 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- PARENT COMPANY ONLY FINANCIAL STATEMENTS STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, -------------------- 2000 1999 (DOLLARS IN THOUSANDS) -------- -------- Assets: Cash at the Bank and cash equivalents..................... $ 2,126 $ 1,259 Loans receivable, net..................................... 228 -- Investment in subsidiary.................................. 140,387 127,160 Other assets.............................................. 1,457 4,716 -------- -------- Total assets...................................... $144,198 $133,135 ======== ======== Liabilities and Stockholders' Equity: Liabilities: Senior notes........................................... $ 39,358 $ 40,000 Accounts payable and other liabilities................. 679 831 -------- -------- Total liabilities................................. 40,037 40,831 Stockholders' Equity: Common stock -- $0.01 par value; authorized 20,000,000 shares; issued and outstanding, 5,566,801 shares (2000) and 5,331,301 shares (1999).................... 56 53 Capital in excess of par value -- common stock......... 42,095 40,981 Retained earnings...................................... 65,602 51,318 Less: Treasury stock, at cost -- 391,406 shares (2000) and 5,400 shares (1999)................................... (3,592) (48) -------- -------- Total stockholders' equity........................ 104,161 92,304 -------- -------- Total liabilities and stockholders' equity........ $144,198 $133,135 ======== ========
A-28 84 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) ------- ------- ------- Interest revenues from investments.......................... $ 38 $ 55 $ 571 Interest costs.............................................. 4,989 5,000 5,000 ------- ------- ------- Net interest (loss)......................................... (4,951) (4,945) (4,429) Noninterest revenues/(expenses), net: Operating................................................. -- -- 1 Other non-operating....................................... 25 (808) -- Operating costs............................................. (1,137) (939) (1,307) ------- ------- ------- Loss before income taxes and equity in subsidiary........... (6,063) (6,692) (5,735) Income tax benefit.......................................... 2,620 2,903 -- ------- ------- ------- Loss before equity in subsidiary............................ (3,443) (3,789) (5,735) Equity in earnings of subsidiary............................ 17,727 13,989 16,773 ------- ------- ------- Net income.................................................. $14,284 $10,200 $11,038 ======= ======= =======
A-29 85 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 15 -- PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 14,284 $ 10,200 $ 11,038 Adjustments: Equity in undistributed earnings of subsidiary........ (17,727) (13,989) (16,773) Depreciation and amortization......................... 361 361 361 Increase in interest receivable....................... (6) -- -- Decrease/(increase) in other assets................... 2,904 (2,890) (44) (Decrease)/increase in accounts payable and other liabilities......................................... (152) (9,390) 10,188 Other................................................. -- (32) -- -------- -------- -------- Net cash (used in)/provided by operating activities..................................... (336) (15,740) 4,770 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of securities.................................. -- -- (27,900) Maturities of securities................................. -- -- 27,900 Net (increase)/decrease in loans receivable.............. (228) 150 (150) -------- -------- -------- Net cash (used in)/provided by investing activities..................................... (228) 150 (150) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from exercise of stock options and warrants.............................................. 1,117 633 437 Payments to acquire treasury stock....................... (3,544) -- -- Net collection of ESOP loan.............................. -- 79 13 Cash contribution to subsidiary.......................... -- (7,500) (22,000) Cash dividends received.................................. 4,500 3,000 -- Reduction in senior notes................................ (642) -- -- Stock offering proceeds, net............................. -- -- 27,623 -------- -------- -------- Net cash provided by/(used in) financing activities..................................... 1,431 (3,788) 6,073 -------- -------- -------- Net increase/(decrease) in cash and cash equivalents....... 867 (19,378) 10,693 Cash and cash equivalents, beginning of year............... 1,259 20,637 9,944 -------- -------- -------- Cash and cash equivalents, end of year..................... $ 2,126 $ 1,259 $ 20,637 ======== ======== ======== Non-cash investing and financing items: Net change in unrealized loss on available-for-sale securities............................................ -- -- (6)
A-30 86 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 16 -- QUARTERLY INFORMATION (UNAUDITED)
THREE MONTHS ENDED FOR 2000 -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 IN THOUSANDS, EXCEPT PER SHARE DATA) -------- ------- ------------ ----------- Interest revenues............................. $34,436 $36,375 $39,190 $38,987 Interest costs................................ 19,691 20,868 23,812 24,311 ------- ------- ------- ------- Net interest income......................... 14,745 15,507 15,378 14,676 Provision for credit losses................... 1,500 1,500 1,500 1,500 ------- ------- ------- ------- Net interest income after provision for credit losses...................................... 13,245 14,007 13,878 13,176 Noninterest revenues.......................... 1,760 2,134 2,965 1,235 Loss from real estate operations, net......... (59) (90) (537) (238) Noninterest expenses: General and administrative expenses......... 8,099 8,711 8,672 8,846 Other non-operating expense................. 1,828 196 117 55 ------- ------- ------- ------- Total noninterest expenses.......... 9,927 8,907 8,789 8,901 ------- ------- ------- ------- Income before income taxes.................... 5,019 7,144 7,517 5,272 Income tax provision.......................... 2,115 3,072 3,233 2,248 ------- ------- ------- ------- Net income.................................... $ 2,904 $ 4,072 $ 4,284 $ 3,024 ======= ======= ======= ======= Basic earnings per share...................... $ 0.53 $ 0.77 $ 0.81 $ 0.58 ======= ======= ======= ======= Diluted earning per share..................... $ 0.39 $ 0.57 $ 0.58 $ 0.41 ======= ======= ======= =======
THREE MONTHS ENDED FOR 1999 -------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 (IN THOUSANDS, EXCEPT PER SHARE DATA) -------- ------- ------------ ----------- Interest revenues............................. $32,014 $32,680 $34,531 $33,522 Interest costs................................ 17,544 18,315 18,782 18,985 ------- ------- ------- ------- Net interest income......................... 14,470 14,365 15,749 14,537 Provision for credit losses................... 3,000 2,500 3,500 3,000 ------- ------- ------- ------- Net interest income after provision for credit losses...................................... 11,470 11,865 12,249 11,537 Noninterest revenues.......................... 1,970 1,925 2,045 1,880 Income (loss) from real estate operations, net......................................... 434 (17) 3 (96) Noninterest expenses: General and administrative expenses......... 7,798 7,852 7,315 9,398 Other non-operating expense................. 992 8 622 3,050 ------- ------- ------- ------- Total noninterest expenses.......... 8,790 7,860 7,937 12,448 ------- ------- ------- ------- Income before income taxes.................... 5,084 5,913 6,360 873 Income tax provision.......................... 2,112 2,487 2,686 745 ------- ------- ------- ------- Net income.................................... $ 2,972 $ 3,426 $ 3,674 $ 128 ======= ======= ======= ======= Basic earnings per share...................... $ 0.57 $ 0.65 $ 0.69 $ 0.02 ======= ======= ======= ======= Diluted earning per share..................... $ 0.38 $ 0.44 $ 0.48 $ 0.02 ======= ======= ======= =======
NOTE 17 -- SUBSEQUENT EVENT On March 28, 2001, HFC Capital Trust I (the "Trust"), a statutory business trust and wholly owned subsidiary of the Company, issued in a private placement transaction $9.0 million of 10.18% capital securities (the "Capital Securities"), which represent undivided preferred beneficial interests in the assets of the Trust. The Company is the owner of all the beneficial interests represented by the common securities of the Trust A-31 87 HAWTHORNE FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (the "Common Securities") together with the Capital Securities (the "Trust Securities"). The Trust exists for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 10.18% junior subordinated deferrable interest debentures (the "Junior Subordinated Debentures") issued by the Company and engaging in certain other limited activities. The Junior Subordinated Debentures held by the Trust will mature on June 8, 2031, at which time the Company is obligated to redeem the Capital Securities. Holders of the Capital Securities are entitled to receive cumulative cash distributions, accumulating from March 28, 2001, the date of original issuance, and payable semi-annually in arrears on June 8 and December 8 of each year, commencing June 8, 2001, at an annual rate of 10.18% of the liquidation amount of $1,000 per Trust Security. The Company has the right under certain circumstances to defer payments of interest on the Junior Subordinated Debentures at any time and from time to time for a period not exceeding 10 consecutive semi-annual periods with respect to each deferral period, provided that no deferral period may end on a day other than an interest payment date or extend beyond the stated maturity date of the Junior Subordinated Debentures. If and for so long as interest payments on the Junior Subordinated Debentures are so deferred, cash distributions on the Trust Securities will also be deferred and the Company will not be permitted, subject to certain exceptions, to declare or pay any cash distributions with respect to the Company's capital stock (which includes common and preferred stock) or to make any payment with respect to debt securities of the Company that rank equal with or junior to the Junior Subordinated Debentures. Upon the repayment on June 8, 2031, the stated maturity date, or prepayment prior to this date of the Junior Subordinated Debentures, the proceeds from such repayment or prepayment shall be applied to redeem the Trust Securities upon not less than 30 nor more than 60 days notice of a date of redemption at the applicable redemption price. At maturity, the redemption price shall equal the principal of and accrued and unpaid interest on the Junior Subordinated Debentures. The Junior Subordinated Debentures will be prepayable prior to the maturity date at the option of the Company on or after June 8, 2011, in whole or in part, at a prepayment price equal to 105.09% of the principal amount thereof on the prepayment date, declining ratably on each June 8 thereafter to 100% on or after June 8, 2021, plus accrued and unpaid interest thereon to the date of prepayment. The Indenture for the Capital Securities includes provisions that restrict the payment of dividends under certain conditions and changes in ownership of the Trust. The Indenture also includes provisions relating to the payment of expenses associated with the issuance of the Capital Securities. The Company intends to use the proceeds to repurchase some of its outstanding 12.50% 1997 Senior Notes due 2004 in order to reduce its overall interest costs. To the extent that the Company is unable to use the full amount of the proceeds to repurchase 1997 Senior Notes, the capital will be used to repurchase common stock or to fund acquisitions of complementary lines of business. Some portion of the proceeds may be invested in the Bank to support future growth. Pending use of the proceeds as described above, the proceeds will be invested in short term investments. A-32 EX-4.1 2 a70896ex4-1.txt EXHIBIT 4.1 1 EXHIBIT 4.01 HAWTHORNE FINANCIAL CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE HAWTHORNE FINANCIAL CORP TRUSTEES THE HAWTHORNE SAVINGS & LOAN ASSOCIATION EMPLOYEE STOCK OWNERSHIP PLAN SEVENTY FIVE THOUSAND SEVENTY SEVEN FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF HAWTHORNE FINANCIAL CORPORATION transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: 03/01/01 SECRETARY PRESIDENT 2 The Corporation shall furnish without charge to each stockholder who so requests a statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock of the Corporation or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Such requests shall be made to the Corporation's Secretary at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act in common (State) UNIF TRF MIN ACT - Custodian (until age Cust) under Uniform Transfers (Minor) to Minors Act (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated X X NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed By THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-4.4 3 a70896ex4-4.txt EXHIBIT 4.4 1 Exhibit 4.4 NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY ITS ACCEPTANCE HEREOF, AGREES FOR THE BENEFIT OF THE COMPANY THAT THIS WARRANT MAY BE OFFERED, SOLD OR OTHERWISE DISPOSED OF ONLY (1) TO THE COMPANY, (2) SO LONG AS THIS WARRANT IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER," AS DEFINED IN RULE 144A, THAT IS PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE SALE OR OTHER DISPOSITION IS BEING MADE IN RELIANCE ON RULE 144A, (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION IN ACCORDANCE WITH RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (4) TO AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501 UNDER THE SECURITIES ACT ("ACCREDITED INVESTOR"), THAT IS ACQUIRING THIS WARRANT FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER ACCREDITED INVESTOR FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IF A SIGNED CERTIFICATION LETTER (A FORM OF WHICH MAY BE OBTAINED FROM THE COMPANY) IS DELIVERED BY THE TRANSFEREE TO THE COMPANY, (5) AS OTHERWISE PROVIDED IN THE UNIT PURCHASE AGREEMENT (AS DEFINED BELOW) OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, AND IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. BY PURCHASING THIS WARRANT, THE HOLDER HEREOF AGREES AND REPRESENTS FOR THE BENEFIT OF THE COMPANY THAT (A) IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN ACCREDITED INVESTOR ACQUIRING THIS WARRANT FOR INVESTMENT PURPOSES FOR ITS OWN ACCOUNT OR THE ACCOUNT OF ANOTHER ACCREDITED INVESTOR FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT AND (B) IT WILL NOTIFY ANY PURCHASER OF THIS WARRANT FROM IT OF THE RESALE RESTRICTIONS REFERRED TO ABOVE. THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO CERTAIN ADDITIONAL RESTRICTIONS ON TRANSFER CONTAINED IN SECTION 3.2 OF THE UNIT PURCHASE AGREEMENT DATED AS OF OCTOBER 10, 1995 AMONG THE COMPANY AND THE OTHER PARTIES NAMED ON THE SIGNATURE PAGES THEREOF, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. ANY SALE OR TRANSFER NOT IN COMPLIANCE WITH SUCH UNIT PURCHASE AGREEMENT SHALL BE NULL AND VOID. VOID AFTER 5:00 P.M., PACIFIC TIME, ON DECEMBER __, 2005 No. ___ -1- 2 HAWTHORNE FINANCIAL CORPORATION WARRANT TO PURCHASE _______ SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT) THIS CERTIFIES THAT, FOR VALUE RECEIVED, _______ or its registered assigns (the "Holder"), is entitled to purchase from Hawthorne Financial Corporation (the "Company"), subject to the terms and conditions set forth hereinafter, _______ fully paid and nonassessable shares of the Common Stock, $.01 par value, of the Company (the "Common Stock") at an exercise price of $2.25 per share upon surrender of this Warrant to the Company at the Company's principal office in El Segundo, California with the form of election to purchase attached to this Warrant duly completed and signed, together with payment of the exercise price by wire transfer or other payment of immediately available funds. The exercise price and the number of shares of Common Stock for which this Warrant is exercisable are subject to change or adjustment upon the occurrence of certain events as set forth below. SECTION 1. DURATION AND EXERCISE OF WARRANTS. 1.1 (a) This Warrant may be exercised on or after December __, 1998 and will expire at 5:00 p.m., Pacific Time, on December __, 2005 (the "Expiration Date"), provided that, notwithstanding anything to the contrary contained herein, this Warrant may be exercised in whole or in part prior to December __, 1998 in connection with or following a Change in Control. On the Expiration Date, all rights evidenced by this Warrant shall cease and this Warrant shall become void. For purposes of this Warrant, a "Change in Control" means the occurrence of any of the following events after the date of issuance of this Warrant: (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of the aggregate voting power of all classes of capital stock of the Company entitled to vote generally in an election of directors; (ii) the Company is merged with or into another corporation or another corporation is merged with or into the Company with the effect that immediately after such transaction the stockholders of the Company immediately prior to such transaction hold less than a majority in interest of the total voting power entitled to vote in the election of directors, managers or trustees of the entity surviving the transaction; (iii) all or substantially all of the assets of the Company or Hawthorne Savings, F.S.B., or any successor thereto, are sold to any person or persons (as an entirety in one transaction or a series of related transactions); or (iv) the voluntary or involuntary dissolution, liquidation or winding up of the Company. -2- 3 (b) Subject to the provisions of this Warrant, the registered holder of this Warrant shall have the right to purchase from the Company (and the Company shall issue and sell to such registered holder) the number of fully paid and nonassessable shares of Common Stock set forth on the face of this Warrant (or such number of shares of Common Stock as may result from adjustments made from time to time as provided herein), at the price of $2.25 per share in lawful money of the United States of America (such exercise price per share, as adjusted from time to time as provided herein, being referred to herein as the "Exercise Price"), upon (i) surrender of this Warrant to the Company at the Company's principal office in El Segundo, California with the exercise form attached hereto duly completed and signed by the registered holder or holders thereof, and (ii) payment by wire transfer or other payment of immediately available funds, in lawful money of the United States of America, of the Exercise Price for the shares of Common Stock in respect of which this Warrant is then exercised (and any applicable transfer taxes pursuant to Section 2 hereof). Upon surrender of this Warrant, and payment of the Exercise Price as provided above, the Company shall promptly issue and cause to be delivered to or upon the written order of the registered holder of this Warrant and in such name or names as such registered holder may designate, a certificate or certificates for the number of shares of Common Stock so purchased upon the exercise of this Warrant, together with payment in respect of any fraction of a share of Common Stock issuable upon such surrender pursuant to Section 11 hereof. (c) The exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day (as defined in Section 17 hereof) on which the holder surrenders this Warrant to the Company and payment of the Exercise Price (and any applicable transfer taxes pursuant to Section 2 hereof) is made, and at such time the person in whose name any certificate for shares of Common Stock shall be issuable upon such exercise shall be deemed to be the record holder of such shares of Common Stock for all purposes. 1.2 In the event that less than all of the shares of Common Stock represented by this Warrant are exercised on or prior to the Expiration Date, a new Warrant, duly executed by the Company, will be issued for the remaining number of shares of Common Stock exercisable pursuant to the Warrant so surrendered, and the Company shall deliver the required new Warrant pursuant to the provisions of this Section 1. 1.3 The number of shares of Common Stock to be received upon the exercise of this Warrant and the Exercise Price are subject to adjustment from time to time as hereinafter set forth. SECTION 2. PAYMENT OF TAXES. -3- 4 The Company will pay all stamp transfer and other similar taxes payable in connection with the original issuance of this Warrant and the shares of Common Stock issuable upon exercise thereof, provided, however, that the Company shall not be required to (i) pay any such tax which may be payable in respect of any transfer involving the transfer and delivery of this Warrant or the issuance or delivery of certificates for shares of Common Stock issuable upon exercise thereof in a name other than that of the registered holder of this Warrant or (ii) issue or deliver any certificate for shares of Common Stock upon the exercise of this Warrant until any such tax required to be paid under clause (i) shall have been paid, all such tax being payable by the holder of this Warrant at the time of surrender. SECTION 3. MUTILATED OR MISSING WARRANTS. In case this Warrant shall be mutilated, lost, stolen or destroyed, the Company will issue and deliver in exchange and substitution for and upon cancellation of, the mutilated Warrant, or in substitution for the lost, stolen or destroyed Warrant, a new Warrant of like tenor evidencing the number of shares of Common Stock purchasable upon exercise of the Warrant so mutilated, lost, stolen or destroyed, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant and an indemnity, if requested, reasonably satisfactory to it. Any such new Warrant shall constitute an original contractual obligation of the Company, whether or not the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time enforceable by anyone. SECTION 4. RESERVATION OF WARRANT SHARES. The Company shall at all times reserve for issuance and delivery upon exercise of this Warrant such number of shares of Common Stock or other shares of capital stock of the Company as from time to time shall be issuable upon exercise of this Warrant. All such shares shall be duly authorized and, when issued upon such exercise, shall be validly issued, fully paid and nonassessable, free and clear of all liens, security interests, charges and other encumbrances and free and clear of all preemptive rights. After 5:00 p.m., Pacific Time, on the Expiration Date, no shares of Common Stock shall be subject to reservation in respect of this Warrant. SECTION 5. RESTRICTIONS ON TRANSFER. Neither this Warrant nor the shares of Common Stock issuable upon exercise thereof may be sold, transferred or otherwise disposed of, except in accordance with and subject to (i) the provisions of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated -4- 5 thereunder and (ii) the applicable requirements of Section 3.2 of the Unit Purchase Agreement dated as of October 10, 1995 among the Company and the Purchasers named on the signature pages thereto (as amended, supplemented or otherwise modified from time to time, the "Unit Purchase Agreement"). SECTION 6. RIGHTS AND LIABILITY OF WARRANT HOLDER. The holder of this Warrant shall not, by virtue thereof, be (i) entitled to any rights of a stockholder of the Company, either at law or in equity, and the rights of such holder are limited to those expressed herein, or (ii) subject to any liability as a stockholder of the Company. SECTION 7. ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SHARES OF COMMON STOCK. The Exercise Price and the number and kind of shares of Common Stock issuable upon the exercise of this Warrant will be subject to change or adjustment from time to time as follows: (a) Change in Common Stock. In the event the Company shall, at any time or from time to time after the date hereof, (i) issue any shares of Common Stock as a stock dividend to the holders of Common Stock (other than pursuant to Section 2(b) of the Certificate of Designations and Preferences relating to the Company's Cumulative Preferred Stock, Series A), (ii) subdivide or combine the outstanding shares of Common Stock into a greater or lesser number of shares or (iii) issue any shares of its capital stock in a reclassification or reorganization of the Common Stock (any such issuance, subdivision, combination, reclassification or reorganization being herein called a "Change of Shares"), then (A) in the case of (i) or (ii) above, the number of shares of Common Stock that may be purchased upon the exercise of this Warrant shall be adjusted to the number of shares of Common Stock that the Holder of such Warrant would have owned or have been entitled to receive after the happening of such event had such Warrant been exercised immediately prior to the record date (or, if there is no record date, the effective date) for such event, and the Exercise Price shall be adjusted to the price (calculated to the nearest 1,000th of one cent) determined by multiplying the Exercise Price immediately prior to such event by a fraction, the numerator of which shall be the number of shares of Common Stock purchasable with this Warrant immediately prior to such event and the denominator of which shall be the number of shares of Common Stock purchasable with this Warrant after the adjustment referred to above and (B) in the case of clause (iii) above, paragraph (l) below shall apply. An adjustment made pursuant to clause (A) of this paragraph (a) shall become effective retroactively immediately after the record date in the case of such dividend and shall become effective immediately after the effective date in other cases, but -5- 6 any shares of Common Stock issuable solely as a result of such adjustment shall not be issued prior to the effective date of such event. (b) Common Stock Distribution. In the event the Company shall, at any time or from time to time after the date hereof, issue, sell or otherwise distribute (including by way of deemed distributions pursuant to paragraphs (c) and (d) below) any shares of Common Stock (other than pursuant to (A) a Change of Shares, (B) the exercise or conversion, as the case may be, of any Option, Convertible Security (each as defined in paragraph (c) below) or Warrant) or (C) Section 6(b) of the Company's Senior Notes due 2002 (any such event, including any deemed distributions described in paragraphs (c) and (d), being herein called a "Common Stock Distribution"), for a consideration per share less than the current market price per share of Common Stock (as defined in paragraph (f) below), on the date of such Common Stock Distribution, then, effective upon such Common Stock Distribution, the Exercise Price shall be reduced to the price (calculated to the nearest 1,000th of one cent) determined by multiplying the Exercise Price in effect immediately prior to such Common Stock Distribution by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding (exclusive of any treasury shares) immediately prior to such Common Stock Distribution multiplied by the current market price per share of Common Stock on the date of such Common Stock Distribution, plus (ii) the consideration, if any, received by the Company upon such Common Stock Distribution, and the denominator of which shall be the product of (A) the total number of shares of Common Stock issued and outstanding immediately after such Common Stock Distribution multiplied by (B) the current market price per share of Common Stock on the date of such Common Stock Distribution. If any Common Stock Distribution shall require an adjustment to the Exercise Price pursuant to the foregoing provisions of this paragraph (b), including by operation of paragraph (c) or (d) below, then, effective at the time such adjustment is made, the number of shares of Common Stock purchasable upon the exercise of this Warrant shall be increased to a number determined by multiplying the number of shares so purchasable immediately prior to such Common Stock Distribution by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to such adjustment and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. In computing adjustments under this paragraph, fractional interests in Common Stock shall be taken into account to the nearest 1,000th of a share. The provisions of this paragraph (b), including by operation of paragraph (c) or (d) below, shall not operate to increase the Exercise Price or reduce the number of shares of Common Stock -6- 7 purchasable upon the exercise of this Warrant, except by operation of paragraph (j) or (k) below. (c) Issuance of Options. In the event the Company shall, at any time or from time to time after the date hereof, issue, sell, distribute or otherwise grant in any manner (including by assumption) any rights to subscribe for or to purchase, or any warrants or options for the purchase of, Common Stock or any stock or securities convertible into or exchangeable for Common Stock (any such rights, warrants or options being herein called "Options" and any such convertible or exchangeable stock or securities being herein called "Convertible Securities"), whether or not such Options or the rights to convert or exchange such Convertible Securities are immediately exercisable, and the price per share at which Common Stock is issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the aggregate amount, if any, received or receivable by the Company as consideration for the issuance, sale, distribution or granting of such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the case of Options to acquire Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable upon the conversion or exchange of all such Convertible Securities, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of all such Options) shall be less than the current market price per share of Common Stock on the date of the issuance, sale, distribution or granting of such Options, then, for the purposes of paragraph (b) above, the total maximum number of shares of Common Stock issuable upon the exercise of all such Options or upon the conversion or exchange of the total maximum amount of the Convertible Securities issuable upon the exercise of all such Options shall be deemed to have been issued as of the date of the issuance, sale, distribution or granting of such Options and thereafter shall be deemed to be outstanding and the Company shall be deemed to have received as consideration such price per share, determined as provided above, therefor. Except as otherwise provided in paragraphs (j) and (k) below, no additional adjustment of the Exercise Price shall be made upon the actual exercise of such Options or upon conversion or exchange of the Convertible Securities issuable upon the exercise of such Options. If the minimum and maximum numbers or amounts referred to in this paragraph (c) or in paragraph (d) below cannot be calculated with certainty as of the date of the required adjustment, such numbers and amounts shall be determined in good faith by the Board of Directors of the Company. (d) Issuance of Convertible Securities. In the event the Company shall, at any time or from time to time after the date hereof, issue, sell or otherwise distribute (including by assumption) any Convertible Securities (other than upon the -7- 8 exercise of any Option), whether or not the rights to convert or exchange such Convertible Securities are immediately exercisable, and the price per share at which Common Stock is issuable upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the aggregate amount, if any, received or receivable by the Company as consideration for the issuance, sale or distribution of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange of all such Convertible Securities, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the current market price per share of Common Stock on the date of such issuance, sale or distribution, then, for the purposes of paragraph (b) above, the total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities shall be deemed to have been issued as of the date of the issuance, sale or distribution of such Convertible Securities and thereafter shall be deemed to be outstanding and the Company shall be deemed to have received as consideration such price per share, determined as provided above, therefor. Except as otherwise provided in paragraphs (j) and (k) below, no additional adjustment of the Exercise Price shall be made upon the actual conversion or exchange of such Convertible Securities. (e) Dividends and Distributions. In the event the Company shall, at any time or from time to time after the date hereof, distribute to the holders of Common Stock any dividend or other distribution of cash, evidences of its indebtedness, other securities or other properties or assets (in each case other than (i) dividends payable in Common Stock, Options or Convertible Securities and (ii) any cash dividend declared and paid pursuant to a regular quarterly dividend policy of the Company), or any options, warrants or other rights to subscribe for or purchase any of the foregoing, then (A) the Exercise Price shall be decreased to a price determined by multiplying the Exercise Price then in effect by a fraction, the numerator of which shall be the current market price per share of Common Stock on the record date for such distribution less the sum of (X) the cash portion, if any, of such distribution per share of Common Stock outstanding (exclusive of any treasury shares) plus (Y) the then fair market value (as determined in good faith by the Board of Directors of the Company) per share of Common Stock issued and outstanding on the record date for such distribution of that portion, if any, of such distribution consisting of evidences of indebtedness, other securities, properties, assets, options, warrants or subscription or purchase rights, and the denominator of which shall be such current market price per share of Common Stock and (B) the number of shares of Common Stock purchasable upon the exercise of this Warrant shall be increased to a number determined by multiplying the number of shares of Common Stock so purchasable immediately prior to the -8- 9 record date for such distribution by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment required by clause (A) of this sentence and the denominator of which shall be the Exercise Price in effect immediately after such adjustment. The adjustments required by this paragraph (e) shall be made whenever any such distribution is made and shall be retroactive to the record date for the determination of stockholders entitled to receive such distribution. (f) Current Market Price. For the purpose of any computation under paragraphs (b), (c), (d) and (e) of this Section 7, the current market price per share of Common Stock at any date shall be the average of the daily closing prices for the shorter of (i) the 20 consecutive trading days ending on the last full trading day on the exchange or market specified in the second succeeding sentence, prior to the Time of Determination and (ii) the period commencing on the date next succeeding the first public announcement of the issuance, sale, distribution or granting in question through such last full trading day prior to the Time of Determination. The term "Time of Determination" as used herein shall be the time and date of the earlier to occur of (A) the date as of which the current market price is to be computed and (B) the last full trading day on such exchange or market before the commencement of "ex-dividend" trading in the Common Stock relating to the event giving rise to the adjustment required by paragraph (b), (c), (d) or (e). The closing price for any day shall be the last reported sale price regular way or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in each case (1) on the principal national securities exchange on which the shares of Common Stock are listed or to which such shares are admitted to trading or (2) if the Common Stock is not listed or admitted to trading on a national securities exchange, in the over-the-counter market as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or any comparable system or (3) if the Common Stock is not listed on NASDAQ or a comparable system, as furnished by two members of the National Association of Securities Dealers, Inc. ("NASD") selected from time to time in good faith by the Board of Directors of the Company for that purpose. In the absence of all of the foregoing, or if for any other reason the current market price per share cannot be determined pursuant to the foregoing provisions of this paragraph (f), the current market price per share shall be the fair market value thereof as determined in good faith by the Board of Directors of the Company. (g) Certain Distributions. If the Company shall pay a dividend or make any other distribution payable in Options or Convertible Securities, then, for purposes of paragraph (b) above (including dividends or distributions by operation of paragraph (c) or (d) above, as the case may be), such Options or Convertible -9- 10 Securities shall be deemed to have been issued or sold without consideration except for such amounts of consideration as shall have been deemed to have been received by the Company pursuant to paragraphs (c) or (d) above, as, appropriate. (h) Consideration Received. If any shares of Common Stock shall be issued and sold in an underwritten public offering, the consideration received by the Company for such shares of Common Stock shall be deemed to include the underwriting discounts and commissions realized by the underwriters of such public offering. If any shares of Common Stock, Options or Convertible Securities shall be issued, sold or distributed for a consideration other than cash, the amount of the consideration other than cash received by the Company in respect thereof shall be deemed to be the then fair market value of such consideration (as determined in good faith by the Board of Directors of the Company). If any Options shall be issued in connection with the issuance and sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued, sold or distributed for such amount of consideration as shall be allocated to such Options in good faith by the Board of Directors of the Company. (i) Deferral of Certain Adjustments. No adjustments to the Exercise Price (including the related adjustment to the number of shares of Common Stock purchasable upon the exercise of this Warrant) shall be required hereunder unless such adjustment, together with other adjustments carried forward as provided below, would result in an increase or decrease of at least one percent of the Exercise Price; provided, however, that any adjustment which by reason of this paragraph (i) is not required to be made shall be carried forward and taken into account in any subsequent adjustment. (j) Changes in Options and Convertible Securities. If the exercise price provided for in any Options referred to in paragraph (c) above, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in paragraph (c) or (d) above, or the rate at which any Convertible Securities referred to in paragraph (c) or (d) above are convertible into or exchangeable for Common Stock shall change at any time (other than under or by reason of provisions designed to protect against dilution upon an event which results in a related adjustment pursuant to this Section 7), the Exercise Price then in effect and the number of shares of Common Stock purchasable upon the exercise of this Warrant shall forthwith be readjusted (effective only with respect to any exercise of this Warrant after such readjustment) to the Exercise Price and number of shares of Common Stock so purchasable that would then be in effect had the adjustment made upon the issuance, sale, distribution or granting -10- 11 of such Options or Convertible Securities been made based upon such changed purchase price, additional consideration or conversion rate, as the case may be, but only with respect to such Options and Convertible Securities as then remain outstanding. (k) Expiration of Options and Convertible Securities. If, at any time after any adjustment to the number of shares of Common Stock purchasable upon the exercise of this Warrant shall have been made pursuant to paragraph (c), (d) or (j) above or this paragraph (k), any Options or Convertible Securities shall have expired unexercised or, solely with respect to Options that are rights ("Rights"), are redeemed, the number of such shares so purchasable shall, upon such expiration or such redemption, be readjusted and shall thereafter be such as they would have been had they been originally adjusted (or had the original adjustment not been required, as the case may be) as if (i) the only shares of Common Stock deemed to have been issued in connection with such Options or Convertible Securities were the shares of Common Stock, if any, actually issued or sold upon the exercise of such Options or Convertible Securities and (ii) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for the issuance, sale, distribution or granting of all such Options or Convertible Securities, whether or not exercised; provided, however, that (x) no such readjustment shall have the effect of decreasing the number of shares so purchasable by an amount (calculated by adjusting such decrease to account for all other adjustments made pursuant to this Section 7 following the date of the original adjustment referred to above) in excess of the amount of the adjustment initially made in respect of the issuance, sale, distribution or granting of such Options or Convertible Securities and (y) in the case of the redemption of any Rights, there shall be deemed (for the purposes of paragraph (c) above) to have been issued as of the date of such redemption for no consideration a number of shares of Common Stock equal to the aggregate consideration paid to effect such redemption divided by the current market price of the Common Stock on the date of such redemption. (l) Other Adjustments. In the event that at any time the Holder shall become entitled to receive any securities of the Company other than shares of Common Stock as constituted on the date of issuance of his Warrant the number of such other securities so receivable upon exercise of this Warrant and the Exercise Price applicable to such exercise shall be adjusted at such time, and shall be subject to further adjustment from time to time thereafter, in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in this Section 7. -11- 12 (m) Excluded Transactions. Notwithstanding any provision in this Section 7 to the contrary, no adjustment shall be made pursuant to this Section 7 in respect of (i) any change in the par value of the Common Stock, (ii) the granting of any Options or the issuance of any shares of Common Stock, in either case, which would otherwise trigger an adjustment under paragraph (b) above, that may be registered on Form S-8 or any successor form under the Securities Act, to any directors, officers or employees of the Company, provided that the granting of Options or the issuance of shares of Common Stock pursuant to this clause (ii) are in the ordinary course of business and are usual and customary, or (iii) the issuance of Common Stock pursuant to any dividend reinvestment plan which provides that the price of the Common Stock purchased for plan participants from the Company will be no less than 95% of the average of the high and low sales prices of the Common Stock on the investment date or, if no trading in the Common Stock occurs on such date, the next preceding date on which trading occurred (1) on the principal national securities exchange on which the shares of Common Stock are listed or to which such shares are admitted to trading or (2) if the Common Stock is not listed or admitted to trading on a national securities exchange, in the over-the-counter market as reported by NASDAQ or any comparable system or (3) if the Common Stock is not listed on NASDAQ or a comparable system, as furnished by two members of the NASD selected from time to time in good faith by the Board of Directors of the Company for that purpose. In the absence of all of the foregoing, or if for any other reason the current market price per share cannot be determined pursuant to the foregoing provisions of this paragraph, the current market price per share shall be the fair market value thereof as determined in good faith by the Board of Directors of the Company. SECTION 8. REORGANIZATIONS AND ASSET SALES. If any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the Holder of this Warrant shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of the shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the -12- 13 rights represented hereby had such reorganization, reclassification, consolidation, merger or sale not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof (including without limitation provisions for adjustments of the Exercise Price and of the number of shares purchasable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume, by written instrument executed and mailed by first class mail, postage prepaid, to the Holder hereof at the last address of such Holder appearing on the register maintained by the Company, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. SECTION 9. NOTICE OF ADJUSTMENT. 9.1 Whenever the number of shares of Common Stock or other stock or property issuable upon the exercise of this Warrant is adjusted, as herein provided, the Company shall promptly mail by first class mail, postage prepaid, to the Holder at the last address of such Holder appearing on the register maintained by the Company, notice of such adjustment or adjustments. In addition, the Company at its sole expense shall within 90 calendar days following the end of each fiscal year of the Company during which this Warrant remains outstanding and an adjustment has occurred, and promptly upon the request of the Holder of this Warrant in connection with the exercise thereof, cause to be delivered to the Holder a certificate of a firm of independent public accountants selected by the Board of Directors of the Company (which may be the regular accountants employed by the Company) setting forth the number of shares of Common Stock or other stock or property issuable upon the exercise of this Warrant after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 9.2 If at any time after the date of issuance of this Warrant and ending on December __, 1998, the Company enters into an agreement providing for a Change in Control or otherwise becomes aware of the occurrence of a Change in Control not directly or indirectly resulting from actions taken by it, then the Company will cause to be mailed by first class mail, postage prepaid, to the Holder at the last address of such Holder appearing on the register maintained by the Company, as soon as practicable and in any event within 20 days thereafter, a notice describing any such -13- 14 agreement or the occurrence of such a Change in Control, and stating the anticipated effective date of the Change in Control if it has not yet occurred or, if it has occurred, the effective date thereof. SECTION 10. STATEMENT OF WARRANTS. This Warrant may continue to express the same number and kind of shares which may be purchased upon exercise hereof as are stated in the Warrant initially issued pursuant to the Unit Purchase Agreement or any substitute Warrant issued therefor, notwithstanding any adjustment in the Exercise Price and/or in the number or kind of shares issuable upon exercise of this Warrant. In the event of any such adjustment, the Company will, at its expense, promptly upon the Holder's surrender of this Warrant to the Company, execute a new Warrant or Warrants stating the Exercise Price and the number and kind of shares issuable upon exercise of this Warrant. SECTION 11. FRACTIONAL INTEREST. The Company shall not be required to issue fractional shares of Common Stock on the exercise of this Warrant. If more than one Warrant shall be presented for exercise at the same time by the Holder, the number of full shares of Common Stock which shall be issuable upon such exercise shall be computed on the basis of the aggregate number of shares of Common Stock acquirable on exercise of the Warrants so presented. If any fraction of a share of Common Stock would, except for the provisions of this Section 11, be issuable on the exercise of any Warrant (or specified portion thereof), the Company shall pay an amount in cash calculated by it to be equal to the then current market price per share multiplied by such fraction computed to the nearest whole cent. The Holder by his acceptance of this Warrant expressly waives any and all rights to receive any fraction of a share of Common Stock or a stock certificate representing a fraction of a share of Common Stock. SECTION 12. ENTIRE AGREEMENT. This Warrant, the Unit Purchase Agreement and the Related Agreements (as defined in the Unit Purchase Agreement) constitute the full and entire understanding and agreement among the parties with regard to the subject matter hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants or agreements except as specifically set forth herein or therein. SECTION 13. SUCCESSORS AND ASSIGNS. 13.1 All covenants and provisions of this Warrant by or for the benefit of the Company or the holder of this Warrant shall bind -14- 15 and inure to the benefit of their respective successors, assigns, heirs and personal representatives. 13.2 Subject to the requirements of Section 6 of this Warrant, this Warrant is assignable, in whole or in part, without charge to the holder hereof upon surrender of this Warrant with a properly executed assignment at the principal office of the Company. Upon any partial assignment, the Company will at its expense issue and deliver to the holder hereof a new Warrant of like tenor, in the name of the holder hereof, which shall be exercisable for such number of shares of Common Stock (or any shares of stock or other securities at the time issuable upon exercise of this Warrant) which were not so assigned. Except as provided in this Section 13.2, this Warrant may not be assigned or transferred. SECTION 14. TERMINATION. This Warrant shall terminate at 5:00 p.m., Pacific Time, on the Expiration Date or upon such earlier date on which all of this Warrant has been exercised. SECTION 15. HEADINGS. The headings of sections of this Warrant have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 16. AMENDMENTS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the Company and the holder of this Warrant. SECTION 17. NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (a) if to the holder of this Warrant, at the address set forth on the register of the Warrants maintained by the Company, or at such other address as the holder of this Warrant shall have furnished to the Company in writing; (b) if to the Company, initially at 2381 Rosecrans Avenue, El Segundo, California 90245, and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 17. -15- 16 All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being sent by certified mail, return receipt requested, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. For purposes of this Warrant, a "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the State of California are authorized by law to close. SECTION 18. BENEFITS OF THIS WARRANT. Nothing in this Warrant shall be construed to give to any person or corporation, other than the Company and the registered holder of this Warrant, any legal or equitable right, remedy or claim under this Warrant, it being intended that this Warrant shall be for the sole and exclusive benefit of the Company and the registered holder thereof. SECTION 19. GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware. -16- 17 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its duly authorized officers. Dated: December __, 1995 HAWTHORNE FINANCIAL CORPORATION By: - -------------------------- ------------------------------------- Executive Officer Name: Scott A. Braly Title: President and Chief Attest: By: ------------------------------------------------- Name: James D. Sage Title: Senior Vice President and Corporate Secretary -17- 18 ELECTION TO PURCHASE DATED: ________ The undersigned hereby irrevocably exercises this Warrant to purchase _______ shares of Common Stock and herewith makes payment of $_______ in payment of the Exercise Price thereof on the terms and conditions specified in this Warrant, surrenders this Warrant and all right, title and interest herein to the Company and directs that the shares of Common Stock deliverable upon the exercise of this Warrant be registered in the name and at the address specified below and delivered thereto. Name: --------------------------------------------------------------------------- (Please Print) Address: ------------------------------------------------------------------------ City, State and Zip Code: ------------------------------------------------------- If such number of shares of Common Stock is less than the aggregate number of shares of Common Stock purchasable hereunder, the undersigned requests that a new Warrant representing the balance of such shares of Common Stock be registered in the name and at the address specified below and delivered thereto. Name: --------------------------------------------------------------------------- (Please Print) Address: ------------------------------------------------------------------------ City, State and Zip Code: ------------------------------------------------------- Taxpayer Identification or Social Security Number: ------------------------------ 19 Signature: ----------------------------------------------------------------- Note: The above signature must correspond with the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatsoever. EX-4.5 4 a70896ex4-5.txt EXHIBIT 4.5 1 Exhibit 4.5 REGISTRATION RIGHTS AGREEMENT Registration Rights Agreement (the "Agreement"), dated as of ______ __, 1995, by and among Hawthorne Financial Corporation (the "Company"), a Delaware corporation, and each of the undersigned Investors (hereinafter referred to individually as an "Investor" and collectively as the "Investors"). WITNESSETH: WHEREAS, the Company and each of the Investors have entered into a Unit Purchase Agreement, dated as of October 10, 1995, providing for the purchase by the Investors of units consisting of the Company's Senior Notes due 2000 (the "Senior Notes"), the Company's Cumulative Preferred Stock, Series A (the "Series A Preferred Stock") and the Company's Warrants (the "Warrants") entitling the holders thereof to purchase shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"), subject to the terms and conditions set forth therein; and WHEREAS, Common Stock may be issued to the Investors pursuant to the sinking fund provisions of the Senior Notes and the dividend provisions of the Series A Preferred Stock; and WHEREAS, the Company desires to provide the Investors with certain registration rights with respect to the Warrants, the shares of Common Stock issuable upon exercise of the Warrants and shares of Common Stock which may be issued pursuant to the terms of the Senior Notes and the Series A Preferred Stock; NOW, THEREFORE, in consideration of the premises and mutual agreements set forth herein, the Company and the Investors agree as follows: SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (a) "Affiliate" shall mean, with respect to any Person, any Person that, directly or indirectly, controls, is controlled by or is under common control with such Person. -1- 2 (b) "Business Day" shall mean any day except a Saturday, Sunday or other day on which commercial banks in the State of California are authorized by law to close. (c) "Commission" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. (d) "Common Stock" shall mean the common stock, par value $.01 per share, of the Company. (e) "Demand Registration" shall have the meaning set forth in Section 3(a). (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (g) "Holder" shall mean any holder of outstanding Registrable Securities or anyone who holds outstanding Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with this Agreement. (h) "Initiating Holders" shall mean any Holder or Holders of at least 10% of the Registrable Securities then outstanding. (i) "Person" shall mean an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. (j) "Registrable Securities" shall mean (i) the Warrants, (ii) any and all shares of Common Stock issued or issuable upon exercise of the Warrants, (iii) Common Stock issued pursuant to Section 6(b) of the Senior Notes, (iv) Common Stock issued pursuant to Section 2(b) of the Certificate of Designations and Preferences relating to the Series A Preferred Stock and (v) any shares of the capital stock (or rights to receive capital stock of the Company) issued in respect of the securities described in clauses (i)-(iv) of this definition by reason of or in connection with any stock dividend, stock distribution, stock split, purchase in any rights offering or in connection with any combination of shares, recapitalization, merger or consolidation, or any other equity securities issued pursuant to any other pro rata distribution with respect to any of the securities included in clauses (i)-(iv) of this definition. Notwithstanding the foregoing, Registrable Securities shall not include otherwise Registrable Securities (i) sold to or through a broker or dealer or underwriter or (ii) sold in a transaction exempt -2- 3 from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof, if in any such case all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale. (k) "Registration Statement" shall mean any registration statement filed with the Commission pursuant to Sections 2, 3, 4 or 5 of this Agreement. (l) "Required Registration" shall have the meaning set forth in Section 3 of this Agreement. (m) "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. (n) "Senior Notes" shall mean the Senior Notes due 2002 of the Company issued by the Company pursuant to the Unit Purchase Agreement, as amended, supplemented or otherwise modified from time to time. (o) "Series A Preferred Stock" shall mean the shares of Cumulative Preferred Stock, Series A, of the Company issued pursuant to the Unit Purchase Agreement, as amended, supplemented or otherwise modified from time to time. (p) "Underwritten Offering" shall mean a bona fide underwritten public offering pursuant to a Registration Statement. (q) "Unit Purchase Agreement" shall mean the Unit Purchase Agreement, dated as of October 10, 1995, among the Company and the Investors, as amended, supplemented or otherwise modified from time to time. (r) "Warrants" shall mean the Warrants of the Company issued by the Company pursuant to the Unit Purchase Agreement, as amended, supplemented or otherwise modified from time to time. SECTION 2. RESTRICTIONS ON TRANSFERABILITY. The Registrable Securities shall not be sold, transferred or otherwise disposed of, except in accordance with and subject to (i) the provisions of the Securities Act and the rules and regulations promulgated thereunder and (ii) the applicable requirements of Section 3.2 of the Unit Purchase Agreement. SECTION 3. REQUIRED REGISTRATION. -3- 4 The Company hereby agrees to register under the Securities Act and applicable state securities or blue sky laws the shares of Common Stock issuable upon exercise of the Warrants within sixty (60) days prior to the time that the Warrants become exercisable in accordance with their terms and to keep such Registration Statement current under the Securities Act and applicable state securities or blue sky laws until such time as all Warrants have been exercised or the Warrants expire in accordance with their terms (the "Required Registration"). The terms and procedures for the Required Registration shall be as set forth in Sections 7, 8 and 9 of this Agreement. SECTION 4. DEMAND REGISTRATION RIGHTS. (a) At any time after the Warrants become exercisable in accordance with their terms, and upon thirty (30) days' prior written notice to the Company, Initiating Holders may make written requests for a total, in the aggregate, of not more than three registrations under the Securities Act for at least 10% of the Registrable Securities then outstanding which are not then subject to an effective Registration Statement (each a "Demand Registration"). The Company will use its best efforts to effect each Demand Registration as soon as practicable after the expiration of such thirty (30) days, provided that the Company shall not be required to effect more than one Demand Registration for Initiating Holders in any twelve (12) month period, and further provided that the Company shall not be obligated to file a registration statement relating to any Demand Registration under this Section 4(a) if counsel to the Company renders an opinion, in form and substance reasonably satisfactory to the Initiating Holders requesting such Demand Registration, to the effect that registration is not required for the proposed transfer of Registrable Securities or if either (i) the proposed transfer of Registrable Securities is the subject of an effective Registration Statement which is current under the Securities Act or (ii) a post-effective amendment to an existing registration statement would be sufficient for such proposed transfer. Each request for a Demand Registration will specify the number of shares of Registrable Securities proposed to be sold by the Initiating Holders requesting the Demand Registration and will also specify the intended method of disposition thereof. Upon receipt of a request for a Demand Registration, the Company shall give prompt written notice to all other Holders of the proposed registration and of such Holders' rights to include Registrable Securities in such registration, and each such Holder shall within ten (10) days after the receipt of any such notice notify the Company in writing of the number of shares of Registrable Securities it proposes to include in such registration. Unless the Initiating Holders requesting the Demand Registration shall consent in writing, no other party, including the Company (but excluding another Holder), shall be permitted to offer securities under any such Demand Registration. The Company may delay filing the registration statement relating to any Demand -4- 5 Registration under this Section 4(a) for not more than 90 days if (i) the Company has filed, or has taken substantial steps toward filing, a registration statement relating to the sale of any of the Company's securities (the "Company Securities") in an Underwritten Offering and the managing underwriter is of the opinion that the filing of a registration statement with respect to the Demand Registration would adversely affect the offering by the Company of Company Securities, or (ii) the Board of Directors of the Company determines in good faith, by resolution, that the filing of a registration statement would, if not so deferred, materially and adversely affect a then proposed or pending financial project, acquisition, merger or corporate reorganization. (b) A registration will not count as a Demand Registration unless and until it has become effective. (c) If the Initiating Holders who have requested a Demand Registration so elect, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an Underwritten Offering. In such event, if the managing underwriter or underwriters of such offering advises the Company and such Initiating Holders in writing that in their reasonable opinion the aggregate amount of Registrable Securities requested to be included in such offering is more than can be sold without materially and adversely affecting the success of such offering, the Company will include in such registration only such aggregate amount of Registrable Securities which in the reasonable opinion of such managing underwriter or underwriters can be sold without any such material adverse effect, and such securities shall be allocated among the holders of Registrable Securities pro rata based on the number of Registrable Securities requested to be included in such registration by Holders. (d) If any Demand Registration is in the form of an Underwritten Offering, the Initiating Holders requesting such Demand Registration will select and retain the investment banker or investment bankers and manager or managers that will administer the offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. SECTION 5. PIGGYBACK REGISTRATION RIGHTS. (a) If at any time or from time to time after the Warrants become exercisable in accordance with their terms, the Company shall determine to register any of its securities, for its own account or the account of any of its stockholders, other than a registration on Form S-4 or Form S-8 or any successor or similar forms thereto, the Company will: (i) give to each Holder written notice thereof as soon as practicable prior to filing the Registration Statement; and (ii) include in such registration and in any underwriting involved therein, all the Registrable -5- 6 Securities specified in a written request or requests, made within fifteen (15) days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in paragraph (b) below, provided that if, at any time after giving such notice the Company shall determine for any reason or for no reason not to register or to delay registration of the securities of the Company which were to be included in the Registration Statement, the Company may, at its election, give written notice of such determination to each Holder desiring to include Registrable Securities in such Registration Statement, and, thereupon, (i) in the case of determination not to register, shall be relieved of its obligation to register any of such Holders' Registrable Securities in connection with such registration (but not from its obligations to pay expenses incurred in connection therewith, limited as set forth in Section 7), and (ii) in the case of a delay in registering, shall be permitted to delay registering all Holders' Registrable Securities for the same period as the delay in registering such other securities. The Company will pay the expenses in connection with each registration pursuant to this Section 5, to the extent provided in Section 7. (b) In the case where the Company is registering securities for the purpose of an Underwritten Offering, if the managing underwriter of the offering advises the Company and each Holder desiring to include Registrable Securities in such Registration Statement in writing that, in its opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without materially and adversely affecting the success of such offering, the Company will include in such registration to the extent of the number which the Company is so advised can be sold in such offering securities determined as follows: First, the securities proposed by the Company to be sold for its own account; and Second, allocated among the Holders desiring to include Registrable Securities in such Registration Statement pro rata based on the number of Registrable Securities to be included in such registration by such Holders. SECTION 6. UNDERWRITTEN OFFERINGS. (a) The Company agrees that if at any time it proposes to register any of its securities under the Securities Act as contemplated by Section 5 and such securities are to be distributed by or through one or more underwriters, the Company will, subject to the provisions of Section 5(b), if requested by any Holder desiring to include Registrable Securities in such Registration Statement, arrange for such underwriters to include the shares to be offered and sold by such holder among the securities to be -6- 7 distributed by such underwriters, and each such Holder agrees that all securities shall be distributed and sold through such underwriters. The selection of the underwriter or underwriters shall be made by the Company, in its sole discretion, from amongst underwriting firms of national reputation. The Holders of Registrable Securities to be distributed by such underwriters shall be parties to the underwriting agreement between the Company and such underwriters and may, at their option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters also shall be made to and for the benefit of such Holders and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of such Holders. (b) No Holder may participate in any underwritten registration under Sections 4 and 5 unless such Holder (i) agrees to sell its Registrable Securities on the basis provided in any underwriting arrangement approved by the Company and (ii) completes and executes all questionnaires, powers of attorney, indemnities, securities escrow agreements, underwriting agreements and other documents required under the terms of such underwriting, and furnishes to the Company such information as the Company may reasonably request in writing for inclusion in the Registration Statement (and the prospectus included therein); provided, however, that no Holder shall be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding such Holder and such Holder's intended method of distribution and any other representation required by law. (c)(i) Each Holder, whether or not such Holder participates in an underwritten registration, agrees, if so required by the managing underwriter, not to effect any public sale or distribution of such Holder's Registrable Securities or sales of such shares pursuant to Rule 144, during the seven days prior to and the ninety (90) days after any firm commitment underwritten registration pursuant to Section 4 or 5 has become effective or, if the managing underwriter advises the Company in writing that, in its opinion, no such public sale or distribution should be effected for a specified period longer than ninety (90) days after such underwritten registration in order to complete the sale and distribution of securities included in such registration and the Company gives notice to such Holder of such advice, during a reasonably longer period after such underwritten registration but in no event longer than one hundred twenty (120) days, except as part of such underwritten registration. (ii) The Company agrees, if so required by the managing underwriter, (x) not to effect any public sale or distribution of its equity securities or securities convertible into or -7- 8 exchangeable or exercisable for any of such securities during the seven days prior to and the ninety (90) days after any firm commitment underwritten registration pursuant to Section 4 or 5 has become effective, except as part of such underwritten registration and except pursuant to registrations on Form S-4 and Form S-8 or any successor or similar forms thereto, and (y) to use its best efforts to cause each holder of its equity securities or any securities convertible into or exchangeable or exercisable for any of such securities, in each case purchased from the Company at any time after the date hereof (other than in a public offering), to agree not to effect any such public sale or distribution of such securities during such period or, in either case, if the managing underwriter advises the Company in writing that in its opinion no such public sale or distribution should be effected for a specified period longer than ninety (90) days after such underwritten registration in order to complete the sale and distribution of securities included in such registration, during a reasonably longer period after such underwritten registration but in no event longer than one hundred twenty (120) days, except as part of such underwritten registration. SECTION 7. REGISTRATION EXPENSES. The Company will pay all reasonable registration expenses in connection with any registration pursuant to Section 2, 3 or 4 of this Agreement, including without limitation all registration and filing fees, fees with respect to filings required to be made with the National Association of Securities Dealers, fees and expenses of compliance with securities or blue sky laws, printing expenses, and fees and expenses of counsel for the Company and of all independent public accountants of the Company (including the expenses of any "comfort" letters or update thereof required by or incident to the foregoing) in connection with the Required Registration or the exercise of rights pursuant to Section 3 or 4, except that the following expenses shall not be borne by the Company: (a) underwriting discounts and commissions, underwriting expenses and transfer taxes, if any (other than discounts, commissions, expenses and transfer taxes relating to securities offered and sold by the Company) and cost of liability insurance (except to the extent carried by the Company on its own behalf); and (b) the cost of any special audit required by the Securities Act or the rules and regulations of the Commission thereunder as a result of the Company's obligation to maintain a Registration Statement current for more than 90 days pursuant to Section 8, which costs shall be prorated among the holders of Registrable Securities according to the number of -8- 9 shares of Registrable Securities so covered by such Registration Statement during such extended period. SECTION 8. REGISTRATION PROCEDURES. Whenever the Company seeks to effect the registration of any shares of Registrable Securities under the Securities Act as provided in Sections 2, 3 and 4, the Company agrees it will as expeditiously as possible, subject to the terms and conditions of such sections (including without limitation the Company's right to terminate or delay a registration pursuant to Sections 3 or 4): (a) prepare the file with the Commission and requisite Registration Statement to effect such registration, use its best efforts to cause such Registration Statement to become effective and promptly notify each holder of securities covered by such Registration Statement and any managing underwriter of the effectiveness thereof; (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective, notify each holder of securities covered by such Registration Statement and any managing underwriter as promptly as practicable of any request by the Commission for amendments or supplements to such Registration Statement or related prospectus or for additional information and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement until the earlier of such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such Registration Statement, but for no longer than 90 days subsequent to the effective date of such registration; provided that if less than all the securities covered by the Registration Statement are withdrawn from registration after the expiration of such period, the securities so withdrawn shall be allocated pro rata among the holders thereof on the basis of the respective numbers of Registrable Securities held by them included in such registration; (c) Furnish to each seller of shares covered by such Registration Statement such number of conformed copies of such Registration Statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such Registration Statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other -9- 10 documents as such seller or such holder may reasonably request; (d) use its best efforts to register or qualify all shares covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions as each seller thereof shall reasonably request, to keep such registration or qualification in effect for so long as such Registration Statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the securities owned by such seller, except that the Company shall not for any such purpose be required to (i) qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this section (d) be obligated to be so qualified, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction; (e) use its best efforts to cause all shares covered by such Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such shares; (f) enter into customary agreements (including, in the case of an Underwritten Offering, an underwriting agreement in customary form) and take all other action in connection therewith in order to expedite or facilitate the distribution of the Registrable Securities included in such Registration Statement, and, in the case of an Underwritten Offering, make representations and warranties to the holders of Registrable Securities covered by such Registration Statement and to the underwriters in such form and scope as are customarily made by issuers to underwriters in primary underwritten offerings and confirm the same to the extent customary if and when requested; (g) make available for inspection during normal business hours by a representative of the holders of Registrable Securities covered by such Registration Statement and any managing underwriter, and any attorney or accountant retained by such holders or managing underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the officers, directors and employees of the Company to supply all information reasonably requested by such representative, managing underwriter, attorney or accountant in connection with such Registration Statement; -10- 11 (h) use its best efforts to furnish to each holder of Registrable Securities covered by such Registration Statement a signed counterpart, addressed to such holder (and, in the case of an Underwritten Offering by the Company, the underwriters), of (i) an opinion of counsel for the Company, dated the effective date of such Registration Statement (and, in case of an Underwritten Offering by the Company, dated the date of each closing under the underwriting agreement), reasonably satisfactory in form and substance to such holder, and (ii) a "comfort" letter, dated the effective date of such Registration Statement (and, in the case of an Underwritten Offering, dated the date of each closing under the underwriting agreement), signed by the independent public accountants who have certified the Company's financial statements included in such Registration Statement, covering substantially the same matters with respect to such Registration Statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in accountants' letters delivered to underwriters in underwritten public offerings of securities and such other financial matters as such holder (or the underwriters) may reasonably request; (i) immediately notify each holder of Registrable Securities covered by such Registration Statement and any managing underwriter, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and at the request of any such seller or holder promptly prepare and furnish to such seller or holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; -11- 12 (j) notify each holder of Registrable Securities covered by such Registration Statement and any managing underwriter as promptly as practicable after becoming aware of the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement or the initiation of any proceedings for that purpose or the receipt by the Company of any notification with respect to the suspension of qualification of any Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and make all reasonable efforts to obtain as promptly as practicable the withdrawal of any order or other action suspending the qualification of the Registrable Securities for sale in any jurisdiction; (k) (i) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, (ii) make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act, and (iii) not file any Registration Statement or prospectus or amendment or supplement to such Registration Statement or prospectus to which any such selling Holder shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the Securities Act, having been furnished with a copy thereof at least two Business Days prior to the filing thereof; (l) provide a transfer agent and registrar for all shares covered by such Registration Statement not later than the effective date of such Registration Statement; and (m) use its best efforts to list all shares of Common Stock covered by such Registration Statement on any securities exchange or national market system on which the Common Stock is then listed. The Company may require each holder of Registrable Securities as to which any registration is being effected to furnish the Company with such information and undertakings regarding such holder and the distribution of such securities as the Company may from time to time reasonably request in writing. Each holder of Registrable Securities covered by any Registration Statement agrees (i) that upon receipt of any notice from the Company of the happening of any event of the kind described in paragraph (i) of this Section 8, such holder will forthwith discontinue such holder's disposition of Registrable Securities pursuant to the Registration Statement relating to such -12- 13 Registrable Securities until such holder's receipt of the copies of the supplemented or amended prospectus contemplated by paragraph (i) of this Section 8 and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies (which shall be conspicuously marked as such), then in such holder's possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice and (ii) that it will immediately notify the Company, at any time when a prospectus relating to the registration of such shares is required to be delivered under the Securities Act, of the happening of any event as a result of which information previously furnished by such holder to the Company in writing for inclusion in such prospectus contains an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. In the event the Company or any such holder shall give any such notice, the period referred to in paragraph (b) of this Section 8 shall be extended by a number of days equal to the number of days during the period from and including the giving of notice pursuant to paragraph (i) of this Section 8 to and including the date when each seller of any securities covered by such Registration Statement shall have received the copies of the supplemented or amended prospectus contemplated by paragraph (i) of this Section 8. SECTION 9. INDEMNIFICATION. (a) In the event of any registration of any Holder's Registrable Securities under the Securities Act pursuant to this Agreement, the Company shall indemnify and hold harmless each such Holder (a "Selling Holder"), its directors, each underwriter and each controlling Person of any Selling Holder, if any, against any losses, claims, damages or liabilities, joint or several (or actions in respect thereof), including attorneys' fees and costs, to which such holder, underwriter or controlling Person may be subject under the Securities Act, under any other statute or at common law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement (or alleged untrue statement) of any material fact contained in any Registration Statement under which such securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, any summary prospectus issued in connection with any securities being registered, any other document used to sell the securities (including an illegal prospectus) (collectively, the "Selling Documents"), or any amendment or supplement thereto (an "Amended Selling Document"), or (ii) any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances in which they were made with respect to any prospectus) not misleading, and shall reimburse each such Selling Holder, its directors, underwriter or controlling Person for any -13- 14 legal or other expenses reasonably incurred by such selling Holder, its directors, underwriter or controlling Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable to any Selling Holder, its directors, underwriter or controlling Person in any such event to the extent that any loss, claim, damage or liability arises out of or is based upon any untrue statement or omission made in such Registration Statement, Selling Document, Amended Selling Document, or any other document, in reliance upon and in strict conformity with written information furnished to the Company by such Selling Holder, its directors, underwriter or controlling Person, respectively, specifically for use therein; and provided further that the Company shall not be liable under this paragraph (a) with respect to any misstatement or omission or alleged misstatement or omission in any Selling Document to the extent that any such loss, claim, damage or liability results from the fact that the Selling Holder, underwriter or controlling Person sold securities to a Person to whom there was not sent or given, at or prior to the written confirmation of such sale, a copy of any Amended Selling Document if the Company had previously furnished copies thereof to such Selling Holder, underwriter or controlling Person and if the misstatement or omission or alleged misstatement or omission was corrected in the Amended Selling Document. The indemnity provided for herein shall remain in full force and effect regardless of any investigation made by or on behalf of such Selling Holder, its directors, underwriter or controlling Person. (b) In the event of any registration of any of the Company's securities or any Registrable Securities under the Securities Act, each Selling Holder shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with such Registration Statement and agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, each underwriter and each controlling Person of the Company, if any, against any losses, claims, damages or liabilities, joint or several (or actions in respect thereof), to which the Company, its directors, such Selling Holder, underwriter or controlling Person may be subject under the Securities Act or under any other statute or at common law, insofar as such losses, claims, damages or liabilities, joint or several (or actions in respect thereof) arise out of or are based upon (i) any untrue statement (or alleged untrue statement) of any material fact contained in any Registration Statement under which such securities were registered under the Securities Act, any Selling Document or any Amended Selling Document, or (ii) any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein (in light of the circumstances in which they were made with respect to any prospectus) not misleading, and shall reimburse the Company, its directors, such underwriter and controlling Person for any legal or other expenses reasonably incurred by such Persons in -14- 15 connection with investigating or defending any such loss, claim, damage, liability or action; in each case, to the extent, and only to the extent, that each untrue statement or omission (or alleged untrue statement or omission) is made in reliance upon and in strict conformity with written information furnished to the Company by such Selling Holder. (c) If the indemnification provided for in paragraph (a) or (b) above is unavailable to an indemnified party in accordance with its terms in respect of any losses, claims, damages or liabilities referred to therein, then the obligations of each indemnitor thereunder shall be limited to such amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities, in such proportion as is appropriate to reflect the relative fault of such indemnitor on the one hand and of the indemnified parties on the other hand in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of each indemnitor and of the indemnified parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such indemnitor, or by the indemnified parities, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities or actions in respect thereof referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expense reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 9, no Selling Holder shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Securities sold by it exceeds the amount of any damages which such person has otherwise been required to pay and has actually paid by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of a fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. (d) Promptly after receipt by an indemnified party of notice of the commencement of any action, such indemnified party shall, if -15- 16 a claim in respect thereof is to be made against an indemnitor under paragraph (a) or (b) above, as the case may be, notify the indemnitor in writing of the commencement thereof; but the omission so to notify the indemnitor shall not relieve it from any liability which it may have to any indemnified party under such subsection unless the failure to provide such notice results in the forfeiture by the indemnitor of substantial rights or defenses. In case any such action shall be brought against any indemnified party, and it shall notify the indemnitor of the commencement thereof, the indemnitor shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnitor and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are in addition to or in conflict with those available to the indemnitor, the indemnified party or parties shall have the right to select separate counsel to assert such legal defenses (in which case the indemnitor shall not have the right to direct the defense of such action on behalf of the indemnified party or parties). Upon the permitted assumption by the indemnitor of the defense of such action, and approval by the indemnified party of counsel, the indemnitor shall not be liable to such indemnified party under this Section 9 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof (other than reasonable costs of investigation) unless (i) the indemnified party shall have employed separate counsel in connection with the assertion of legal defenses in accordance with the proviso to the next preceding sentence, (ii) the indemnitor shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time, (iii) the indemnitor and its counsel do not actively and vigorously pursue the defense of such action, or (iv) the indemnitor has authorized the employment of counsel for the indemnified party at the expense of the indemnitor. The indemnitor shall not be liable for any settlement of any action or proceeding effected without its written consent, which consent shall not be unreasonably withheld. SECTION 10. TERMINATION OF RIGHTS. All rights of any particular Holder under this Agreement shall terminate at 5:00 p.m., Pacific Time, on the date ten (10) years after the date of this Agreement, provided that the provisions of Section 9 hereof shall survive any termination of this Agreement. SECTION 11. CALCULATION OF SHARES. For purposes of calculating the number of Registrable Securities held by a Holder (including without limitation pursuant to Sections 4(c) and 5(b) hereof), a Warrant shall be deemed to -16- 17 count as the number of shares of Common Stock which may be acquired upon exercise thereof. SECTION 12. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by and construed under the internal substantive laws of the State of California. (b) SUCCESSORS AND ASSIGNS. The provisions hereof shall inure to the benefit of, and be binding upon, the parties and their respective successors, assigns, heirs, executors and administrators. The rights and obligations of any Investor hereunder may be assigned by such Investor to any Person acquiring Registrable Securities from the Investor contemporaneously with such assignment, provided that the rights so assumed shall apply only to the Registrable Securities so acquired. The rights and obligations of the Company hereunder may not be assigned by it without the prior written consent of the Investors. (c) ENTIRE AGREEMENT. This Agreement, the Unit Purchase Agreement and the Related Agreements (as defined in the Unit Purchase Agreement) constitute the full and entire understanding and agreement among the parties with regard to the subject matter hereof and no party shall be liable or bound to any other party in any manner by any representations, warranties, covenants or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. (d) SEPARABILITY. Any invalidity, illegality or limitation of the enforceability of any one or more of the provisions of this Agreement, or any part thereof, shall in no way affect or impair the validity, legality or enforceability of the other provisions of this Agreement. In case any provision of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent practicable, be modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. (e) AMENDMENT AND WAIVER. Any provision of this Agreement may be amended and the observance of any provision of this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), with the written consent of the Company and the holders of not less than two thirds of the -17- 18 Registrable Securities; provided, however, that no such amendment or waiver shall reduce the aforesaid percentage of Registrable Securities the holders of which are required to consent to any waiver or supplemental agreement without the consent of the holders of all outstanding Registrable Securities. Any amendment or waiver effected in accordance with this paragraph shall be binding upon the Company and each Holder under this Agreement. Upon the effectuation of each such amendment or waiver, the Company shall promptly give written notice thereof to the Holders who have not previously consented thereto in writing. (f) DELAYS OR OMISSIONS. No delay or omission to exercise any right, power or remedy accruing to any Holder or any subsequent holder of any Registrable Securities upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Holders' part of any breach, default or noncompliance under this Agreement or any waiver on the Holders' part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing, and that all remedies afforded to the Holders under this Agreement shall be cumulative and not alternative. (g) NOTICES, ETC. All notices, demands and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to any Holder, initially at the address set forth below its name on Exhibit A to the Unit Purchase Agreement, and thereafter at such other address, notice of which is given in accordance with this Section 12(g); and (ii) if to the Company, initially at 2381 Rosecrans Avenue, El Segundo, California 90245, Attention: President, and thereafter at such other address notice of which is given in accordance with this Section 12(g). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being sent by certified mail, return receipt requested, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. -18- 19 (h) TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. (i) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. HAWTHORNE FINANCIAL CORPORATION By: ----------------------------------- Name: Scott A. Braly Title: Chief Executive Officer [NAME OF INVESTOR] By: ----------------------------------- Name: Title: [NAME OF INVESTOR] By: ----------------------------------- Name: Title: -19- 20 [NAME OF INVESTOR] By: ----------------------------------- Name: Title: [NAME OF INVESTOR] By: ----------------------------------- Name: Title: [NAME OF INVESTOR] By: EX-4.6 5 a70896ex4-6.txt EXHIBIT 4.6 1 Exhibit 4.6 UNIT PURCHASE AGREEMENT Unit Purchase Agreement, dated as of October 10, 1995 (the "Agreement"), by and among Hawthorne Financial Corporation, a Delaware corporation, and the other parties named on the signature pages hereof (each of which is acting severally and not jointly and as to itself only). In consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 DEFINITIONS. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "Affiliate" means, with respect to any Person, any Person that, directly or indirectly, controls, is controlled by or is under common control with such Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means this Unit Purchase Agreement, as amended, supplemented or modified from time to time. "Bank" means Hawthorne Savings, F.S.B., a federally-chartered savings bank, together with its successors. "Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in the city of Los Angeles, California are authorized by law to close. "Capital Securities" of any Person means Capital Stock of the Person and Stock Equivalents of the Person. "Capital Stock" of any Person means any and all shares or other equity interest of such Person. "Certificate of Designations" means the Certificate of Designations and Preferences relating to the Series A Preferred Stock, substantially in the form of Exhibit C hereto, as amended, supplemented or otherwise modified from time to time. - 1 - 2 "Closing" has the meaning set forth in Section 2.2. "Closing Date" has the meaning set forth in Section 2.2. "Code" means the Internal Revenue Code of 1986, as amended (or any successor statute in effect from time to time), and the rules and regulations promulgated thereunder. "Commission" means the Securities and Exchange Commission and any successor thereto. "Common Stock" means the Common Stock, par value $.01 per share, of the Company. "Company" means Hawthorne Financial Corporation, a Delaware corporation, together with its successors. "Confidential Memorandum" means the Private Placement Memorandum, dated August 22, 1995, with respect to the Units referred to therein, as amended or supplemented at any time prior to the Closing. "Director Agreements" means the Director Agreements to be entered into by the Company and each of Value Partners, LTD, Lee M. Bass and Fort Pitt Fund, substantially in the form of Exhibit F hereto, as amended, supplemented or otherwise modified from time to time. "Environmental Claim" means any written notice from any governmental authority or third party alleging potential liability (including without limitation potential liability for investigating costs, cleanup costs, governmental response costs, natural resource damages, property damages, personal injuries or penalties) arising out of, based on, or resulting from the presence, or release into the environment of any Materials of Environmental Concern. "Environmental Laws" means any law, statute, rule or regulation of any governmental, judicial, legislative, executive, administrative or regulatory authority of the United States, or of any state, local or foreign government or any subdivision thereof or of any governmental body or other regulatory or administrative agency or commission, domestic or foreign (a "Law"), relating to pollution or protection of the environment (including ambient air, surface water, groundwater, land surface or subsurface strata), including without limitation the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Resource Conservation and Recovery Act of 1976, as amended, and other Laws relating to (i) emissions, discharges or releases of pollutants, contaminants, chemicals, or industrial toxic or hazardous substances or wastes (collectively known as "Polluting - 2 - 3 Substances") or (ii) the handling, storage, disposal, reclamation, recycling or transportation of Polluting Substances. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended (or any successor statute in effect from time to time). "Exchange Act" means the Securities Exchange Act of 1934, as amended and in effect from time to time (or any successor statute in effect from time to time), and the rules and regulations of the Commission promulgated thereunder. "FDIA" means the Federal Deposit Insurance Act, as amended (or any successor statute in effect from time to time). "FDIC" means the Federal Deposit Insurance Corporation and any successor thereto. "Fractional Unit" shall mean one fifth, two fifths, three fifths or four fifths of a Unit. "HOLA" means the Home Owners' Loan Act, as amended (or any successor statute in effect from time to time). "HSR" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (or any successor statute in effect from time to time), and the rules and regulations of the Federal Trade Commission promulgated thereunder. "Lien" means, with respect to any asset, any mortgage, lien, pledge, encumbrance, charge or security interest of any kind in respect of such asset. "Management" means the following members of the senior management of the Company: President and Chief Executive Officer, Chief Financial Officer and any Executive Vice President. "Material Adverse Effect" means a material adverse effect on the condition (financial or otherwise), business, assets or results of operations of the Company and the Bank taken as a whole. "Material Securityholder" means any Person who holds, either directly or indirectly with any of its Affiliates, any of (i) $1,250,000 principal amount of Senior Notes, (ii) 25 shares of Series A Preferred Stock or (iii) Warrants to purchase 220,000 shares of Common Stock or 220,000 shares of Common Stock acquired through the exercise of such Warrants, or any combination of such Warrants and shares of Common Stock. "Materials of Environmental Concern" means pollutants, contaminants, wastes, toxic substances, petroleum and petroleum - 3 - 4 products and any other materials regulated under Environmental Laws. "NASD" means National Association of Securities Dealers, Inc. "Non-performing Assets" means the following consolidated assets of the Company: (i) non-performing loans, securities or other assets (i.e., all assets on which the Company or the Bank has ceased recognizing interest under generally accepted accounting principles or as to which any payments of principal or interest are past due 90 days or more as of the applicable date) and (ii) Real Estate Owned, exclusive of apartment buildings included in Real Estate Owned; and references herein to the amounts of Non-performing Assets shall mean and refer to the aggregate carrying value of such assets as stated in the books and financial statements of the Company and the Bank under generally accepted accounting principles. "OTS" means the Office of Thrift Supervision and any successor thereto. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or a political subdivision or an agency or instrumentality thereof. "Placement Agent" means Sandler O'Neill, in its capacity as private placement agent with respect to the offering of Units described in the Confidential Memorandum. "Preferred Stock" means the Preferred Stock, par value $.01 per share, of the Company. "Previously Disclosed" means disclosed in a letter dated the date hereof delivered from the Company to each Purchaser or from a Purchaser to the Company, as applicable, specifically referring to the appropriate section of this Agreement and describing in reasonable detail the matters contained therein. "Purchaser" means each Person (other than the Company) listed on the signature pages of this Agreement, and its permitted successors and assigns as provided herein, including any Person who becomes a party hereto by executing and delivering a signature page hereto after the date of this Agreement. "Real Estate Owned" means the consolidated properties of the Company acquired by foreclosure on a loan or deed-in-lieu thereof or otherwise included in the Company's real estate owned for purposes of reporting asset quality of the Company in its reports filed with the Commission under the Exchange Act and the asset quality of the Bank in its reports filed with the OTS. - 4 - 5 "Registration Rights Agreement" means the Registration Rights Agreement by and among the Company and the Purchasers, substantially in the form of Exhibit G hereto, as amended, supplemented or otherwise modified from time to time. "Related Agreements" means the Senior Notes, the Security Agreement, the Director Agreements and the Registration Rights Agreement. "SAIF" means the Savings Association Insurance Fund administered by the FDIC, and any successor thereto. "Securities" means (i) the Senior Notes, the Series A Preferred Stock and the Warrants included in the Units to be issued and sold by the Company and purchased by the Purchasers pursuant to this Agreement and (ii) the Common Stock issuable by the Company (x) upon exercise of the Warrants and (y) pursuant to Section 6(b) of the Senior Notes and/or Section 2(b) of the Certificate of Designations. "Securities Act" means the Securities Act of 1933, as amended (or any successor statute thereto as in effect from time to time), and the rules and regulations of the Commission promulgated thereunder. "Security Agreement" means the Security Agreement by and among the Company and the Purchasers, substantially in the form of Exhibit E hereto, as amended, supplemented or otherwise modified from time to time. "Senior Notes" means the Senior Notes due 2000 included in the Units to be issued and sold by the Company and purchased by the Purchasers pursuant to this Agreement, substantially in the form of Exhibit B hereto, as amended, supplemented or otherwise modified from time to time. "Series A Preferred Stock" means the Cumulative Preferred Stock, Series A, par value $.01 per share, of the Company included in the Units to be issued and sold by the Company and purchased by the Purchasers pursuant to this Agreement. "State" means each of the states of the United States, the District of Columbia and the Commonwealth of Puerto Rico. "Stock Equivalents" means, with respect to any Person, options, warrants, calls, contracts or other rights entered into or issued by such Person which confer upon the holder thereof the right (whether or not contingent) to acquire any Capital Stock, voting securities or securities convertible into or exchangeable for Capital Stock or voting securities of such Person. - 5 - 6 "Stock Option Plan" means the Stock Option Plan adopted by the Company in 1993 and approved by its shareholders in 1994. "Subsidiary" of any Person means any entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are owned directly or indirectly by such Person. "Taxes" means all taxes, charges, fees, levies or other governmental assessments, including, without limitation, all net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, estimated, severance, stamp, occupation, property or other taxes, customs, dues, fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any taxing authority (domestic or foreign). "Tax Returns" means all foreign, federal, State and local returns relating to Taxes. "Unit" means a package of the following securities to be issued and sold by the Company and purchased by Purchasers pursuant to the terms of this Agreement: (i) $250,000 principal amount of Senior Notes, (ii) five shares of Series A Preferred Stock and (iii) a Warrant to purchase 44,000 shares of Common Stock. "Warrants" means the Warrants to purchase shares of Common Stock included in the Units to be issued and sold by the Company and purchased by the Purchasers pursuant to this Agreement, substantially in the form of Exhibit D hereto, as amended, supplemented or otherwise modified from time to time. ARTICLE II PURCHASE AND SALE OF UNITS SECTION 2.1 PURCHASE AND SALE OF UNITS. Subject to the terms and conditions herein set forth, the Company agrees that it will issue and sell to each Purchaser and each such Purchaser agrees, severally and not jointly, that it will purchase from the Company the number of Units set forth below such Purchaser's name on Exhibit A hereto at a price equal to $500,000 per Unit (subject to pro rata adjustment in the case of any Fractional Unit). SECTION 2.2 CLOSING. The purchase and sale of the Units will take place at a closing (the "Closing") to be held at the offices of Mayer, Brown & Platt, Los Angeles, California, at 10:00 a.m., Pacific Time, on December 15, 1995, or on such earlier date - 6 - 7 as all of the conditions to the parties' obligations hereunder specified in Article IV of this Agreement (other than the delivery of certificates, opinions and other instruments and documents to be delivered at the Closing) have been satisfied or waived, or at such other location, and on such other Business Day and time as the parties hereto shall mutually agree. The date on which the Closing is to occur is referred to herein as the "Closing Date." SECTION 2.3 PRICE ALLOCATION. The Company and the Purchasers each hereby acknowledge and agree that for United States Federal, State and local income tax purposes, the "issue price" of the Senior Notes, Series A Preferred Stock and Warrants included in the Units will be determined by Deloitte & Touche LLP prior to the Closing and the Company and the Purchasers each agree to use the issue prices as so determined for all income tax purposes with respect to this transaction. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as Previously Disclosed, the Company represents and warrants to, and covenants and agrees with, each of the Purchasers as follows: (a) CAPITAL STRUCTURE. The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. As of the date hereof, there are (i) 2,599,275 shares of Common Stock issued and outstanding and 5,400 shares of Common Stock are held as treasury shares which are issued but not outstanding, and (ii) no shares of Preferred Stock are issued and outstanding or held as treasury shares. Immediately prior to the Closing on the Closing Date, the Company's outstanding Capital Stock will be as set forth in the preceding sentence, except for any increases in outstanding Common Stock as a result of the exercise of options referred to in the last sentence of this Section 3.1(a). All outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and none of the outstanding shares of Common Stock has been issued in violation of the preemptive rights of any Person. Except for options to purchase 252,500 shares of Common Stock pursuant to the Stock Option Plan as of the date hereof and as contemplated by this Agreement, there are no Stock Equivalents authorized, issued or outstanding with respect to the Capital Stock of the Company as of the date hereof. (b) ORGANIZATION, STANDING AND AUTHORITY OF THE COMPANY. The Company is a corporation duly organized and validly existing under the laws of Delaware with full corporate power and authority to own or lease all of its properties and assets and to carry on its -7- 8 business as now conducted and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which its ownership or leasing of property or the conduct of its business requires such licensing or qualification and where the failure to be so licensed, qualified or in good standing would have a Material Adverse Effect. The Company is duly registered as a savings and loan holding company under the HOLA and the regulations of the OTS thereunder. The Company has heretofore delivered true and complete copies of the Certificate of Incorporation and Bylaws of the Company as in effect as of the date hereof to each Purchaser which has requested the same. Prior to the Closing, the Certificate of Designations will have been filed with the Secretary of State of the State of Delaware in accordance with the Delaware General Corporation Law. (c) OWNERSHIP OF THE BANK. The Bank is the only Subsidiary of the Company and except for (i) 15,000 shares of the Bank's common stock, which constitutes all of the Bank's outstanding Capital Stock, (ii) stock in the Federal Home Loan Bank of San Francisco, and (iii) securities and other interests taken in consideration of debts previously contracted, the Company does not own or have the right to acquire, directly or indirectly, any outstanding Capital Stock or other voting securities or ownership interests of any corporation, bank, savings association, partnership, joint venture or other organization. The outstanding shares of Capital Stock of the Bank have been duly authorized and validly issued, are fully paid and nonassessable, and are directly owned by the Company free and clear of all Liens. No Stock Equivalents are authorized, issued or outstanding with respect to the Capital Stock of the Bank and there are no agreements, understandings or commitments relating to the right of the Company to vote or to dispose of such Capital Stock. (d) ORGANIZATION, STANDING AND AUTHORITY OF THE BANK. The Bank is a federally-chartered savings bank duly organized and validly existing under the laws of the United States. The deposit accounts of the Bank are insured by the SAIF to the maximum extent permitted by the FDIA, and the Bank has paid all premiums and assessments required by the FDIA and the regulations thereunder. The Bank has full power and authority to own or lease all of its properties and assets and to carry on its business as now conducted and is duly licensed or qualified to do business and is in good standing in each jurisdiction in which its ownership or leasing of property or the conduct of its business requires such qualification, except where the failure to be so licensed, qualified or in good standing would not have a Material Adverse Effect. The Company has heretofore delivered true and complete copies of the Charter and Bylaws of the Bank as in effect as of the date hereof to each Purchaser which has requested the same. -8- 9 (e) AUTHORITY. Each of the Company and the Bank has full corporate power and authority to perform its respective obligations under this Agreement and each of the Related Agreements to which it is or will become a party, and the execution, delivery and performance by (i) the Company of this Agreement and (ii) the Company and the Bank of each Related Agreement to which it is or will become a party have been duly authorized by all necessary corporate action on the part of the Company or the Bank, as the case may be. (f) DUE EXECUTION. This Agreement constitutes, and each of the Related Agreements to which the Company or the Bank is or will become a party, when duly authorized, executed and delivered by the Company or the Bank, as the case may be, will constitute a valid and binding obligation of the Company or the Bank, as the case may be, enforceable against the Company or the Bank, as the case may be, in accordance with its terms, except (i) rights to indemnity and contribution under the Registration Rights Agreement may be limited by applicable law, (ii) enforceability may be limited by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights generally and (iii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (g) NO CONFLICT. The execution, delivery and performance of this Agreement and each of the Related Agreements to which the Company or the Bank, as the case may be, is or will become a party will not conflict with or constitute a breach of, or a default under (i) the Certificate of Incorporation or Charter, as the case may be, or the Bylaws of the Company or the Bank, (ii) any material obligation, agreement, indenture, bond, debenture, note, instrument or any other evidence of indebtedness to which the Company or the Bank is a party or the assets of either of which are subject, or (iii) subject to the approvals and compliance referred to in the next sentence, any law, ordinance, order, license, rule or other regulation or demand of any court or governmental agency, arbitration panel or authority applicable to the Company or the Bank. Except for (i) the approval of the issuance of the Warrants by the shareholders of the Company pursuant to Section 6(i)(1)(d) of Part III to Schedule D of the Bylaws of the NASD (unless exempted therefrom upon application to the NASD), (ii) compliance with applicable federal and State securities laws in connection with this Agreement and the performance by the Company of its obligations under the Registration Rights Agreement and (iii) any required compliance by the Company with applicable federal and State securities laws and/or HSR in connection with (x) the issuance of shares of Common Stock upon exercise of the Warrants in accordance with their terms or (y) any issuance of Common Stock pursuant to Section 6(b) of the Senior Notes or Section 2(b) of the Certificate of Designations, no consent, approval, order or other authorization of any governmental, administrative or regulatory -9- 10 body or agency is legally required by or on behalf of the Company or the Bank in connection with the execution, delivery and performance of this Agreement and each of the Related Agreements to which the Company or the Bank, as the case may be, is or will become a party. The representations and warranties contained in this Section 3.1(g), insofar as they relate to federal and State securities laws requirements, are made in reliance on the representations and warranties of the Purchasers contained in Section 3.2 of this Agreement. (h) STATUS OF SECURITIES. Subject to satisfaction of the condition set forth in Section 4.1(a) hereof, the Units and the shares of Common Stock issuable upon exercise of the Warrants have been authorized by all necessary corporate action on the part of the Company. When the Units are delivered to the Purchasers at the Closing against payment therefor as provided herein, the Senior Notes, Series A Preferred Stock and Warrants included therein will be duly authorized, validly issued and, in the case of the Series A Preferred Stock, fully paid and nonassessable, and in each case will not be issued in violation of the preemptive rights of any Person. Subject to the approvals and compliance referred to in the second sentence of Section 3.1(g) hereof, shares of Common Stock issued by the Company (i) upon exercise of Warrants in accordance with their terms or (ii) pursuant to Section 6(b) of the Senior Notes or Section 2(b) of the Certificate of Designations, will be duly authorized, validly issued and non-assessable at the time of issuance and will not be issued in violation of the preemptive rights of any Person. The representations and warranties contained in this Section 3.1(h), insofar as they relate to federal and State securities laws requirements, are made in reliance on the representations and warranties of the Purchasers contained in Section 3.2 of this Agreement. (i) SECURITIES REPORTS. The Company has filed all reports and other documents required to be filed by it under the Exchange Act and the Securities Act on a timely basis or has received a valid extension of such time of filing, and all such reports and other documents complied in all material respects with the requirements of the Exchange Act and the Securities Act, as applicable, and did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, at the time and in light of the circumstances under which they were made, not misleading. (j) FINANCIAL STATEMENTS. (i) The Company has previously delivered to each Purchaser (x) consolidated balance sheets of the Company as of December 31, 1994 and 1993 and consolidated statements of operations, changes in shareholders' equity and cash flows of -10- 11 the Company for each of the years ended December 31, 1994, 1993 and 1992, accompanied by the related audit report of Deloitte & Touche LLP, and (y) an unaudited consolidated balance sheet of the Company as of June 30, 1995 and unaudited consolidated statements of operations, changes in shareholders' equity and cash flows of the Company for the six months ended June 30, 1995. The foregoing financial statements, as well as the financial statements of the Company to be delivered pursuant to Section 5.7(a) hereof (collectively the "Company Financial Statements"), fairly present or will fairly present, as the case may be, the consolidated financial condition of the Company as of the respective dates set forth therein, and the consolidated results of operations, changes in shareholders' equity and cash flows of the Company for the respective periods or as of the respective dates set forth therein. (ii) Each of the Company Financial Statements has been or will be, as the case may be, prepared in accordance with generally accepted accounting principles consistently applied during the periods involved, except as stated therein, and except that unaudited Company Financial Statements need not contain all of the footnote and line item disclosures that would be required for financial statements prepared in accordance with generally accepted accounting principles. The books and records of the Company and the Bank are being maintained in material compliance with applicable legal and accounting requirements, and such books and records accurately reflect in all material respects all dealings and transactions in respect of the business, assets, liabilities and affairs of the Company and the Bank. (iii) Except to the extent (x) reflected, disclosed or provided for in the consolidated statement of financial condition of the Company as of June 30, 1995 (including related notes) and (y) of liabilities incurred since such date in the ordinary course of business, neither the Company nor the Bank has any liabilities, whether absolute, accrued, contingent or otherwise, which would have a Material Adverse Effect. (k) MATERIAL ADVERSE CHANGE. Except as Previously Disclosed, since June 30, 1995, no events or developments involving the Company or the Bank have occurred which, individually or in the aggregate, (i) have had, or would reasonably be likely to have, a Material Adverse Effect, provided that any special assessment of SAIF-insured institutions to recapitalize the SAIF shall not be deemed to have such an effect if the condition set forth in Section 4.1(f)(iii) hereof is satisfied, or (ii) materially impair the ability of the Company or the Bank to perform its obligations under -11- 12 this Agreement, any Related Agreement to which it will become a party or any of the Securities. (l) ENVIRONMENTAL MATTERS. (i) To the best of the knowledge of the Company and the Bank, the Company and the Bank are in compliance with all Environmental Laws, except for any violations of any Environmental Law which would not, individually or in the aggregate, have a Material Adverse Effect. Neither the Company nor the Bank has received any communication alleging that the Company or any Company Subsidiary is not in such compliance and, to the best knowledge of the Company, there are no present circumstances that would prevent or interfere with the continuation of such compliance. (ii) To the best of the knowledge of the Company and the Bank, none of the properties owned, leased or operated by the Company or the Bank has been or is in violation of or liable under any Environmental Law, except for any such violations or liabilities which would not individually or in the aggregate have a Material Adverse Effect. (iii) To the best of the knowledge of the Company and the Bank, there are no past or present actions, activities, circumstances, conditions, events or incidents that could reasonably form the basis of any Environmental Claim or other claim or action or governmental investigation that could result in the imposition of any liability arising under any Environmental Law against the Company or the Bank or against any Person whose liability for any Environmental Claim the Company or the Bank has or may have retained or assumed either contractually or by operation of law, except such as would not have a Material Adverse Effect. (m) TAX MATTERS. The Company and the Bank have timely filed all Tax Returns required by applicable law to be filed by them (including, without limitation, estimated tax returns, income tax returns, information returns and withholding and employment tax returns) and have paid, or where payment is not required to have been made, have set up an adequate reserve or accrual for the payment of, all Taxes required to be paid in respect of the periods covered by such Tax Returns, except in all cases where the failure to do so does not or will not have a Material Adverse Effect. As of the date hereof, there is no audit examination, assessed deficiency, deficiency litigation or refund litigation with respect to any Taxes of the Company or the Bank. All Taxes due with respect to completed and settled examinations or concluded litigation relating to the Company have been paid in full or adequate provision has been made for any such Taxes on the Company's consolidated statement of financial condition in -12- 13 accordance with generally accepted accounting principles. The Company has not executed an extension or waiver of any statute of limitations on the assessment or collection of any material tax due that is currently in effect. Nothing has occurred, whether by action or by failure to act, which would subject to recapture the bad debt reserves established by the Bank for federal income tax purposes under Section 593 of the Code. (n) ERISA. The Company is in compliance in all material respects with all presently applicable provisions of ERISA; no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any material liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 (whether or not waived) or 4971 of the Code; and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (o) LITIGATION. There are no actions, suits, investigations or legal proceedings pending against, or to the knowledge of the Company threatened against, or affecting the Company or the Bank or their respective properties before any court or governmental body or agency which would reasonably be expected to have a Material Adverse Effect or which in any manner challenge the legality, validity or enforceability of this Agreement, any of the Related Agreements or any of the Securities, or which would reasonably be expected to materially impair the ability or obligation of the Company or the Bank to perform fully on a timely basis their respective obligations under this Agreement, any Related Agreement to which it will become a party or any of the Securities. (p) COMPLIANCE WITH LAWS. Each of the Company and the Bank has all permits, licenses, certificates of authority, orders and approvals of, and has made all filings, applications and registrations with, federal, State, local and foreign governmental or regulatory bodies that are necessary in order to permit it to carry on its business as it is presently being conducted and the absence of which could have a Material Adverse Effect; all such permits, licenses, certificates of authority, orders and approvals are in full force and effect; and to the best knowledge of the Company, no suspension or cancellation of any of the same is threatened. (q) NO DEFAULT OR VIOLATION. Neither the Company nor the Bank currently is in violation of its Certificate of Incorporation and Charter, respectively, its Bylaws, or of any applicable federal, state or local law or ordinance or any order, rule or -13- 14 regulation of any federal, state, local or other governmental agency or body (including, without limitation, all banking, securities, safety, health, environmental, zoning, anti-discrimination, antitrust, and wage and hour laws, ordinances, orders, rules and regulations), or in default with respect to any order, writ, injunction or decree of any court, or in default under any order, license, regulation or demand of any governmental agency, any of which violations or defaults could, individually or in the aggregate, reasonably be deemed (i) to have a Material Adverse Effect or (ii) materially adversely impair the ability of the Company or the Bank to perform on a timely basis any obligation which it has under this Agreement, any Related Agreement to which it will become a party or any of the Securities and neither the Company nor the Bank has received any notice or communication from any federal, state or local governmental authority asserting that the Company or the Bank is in violation of any of the foregoing which could reasonably be deemed to have any effect set forth in clauses (i) or (ii) above. Except for the Capital Directive issued by the OTS to the Bank as of June 30, 1995 and as Previously Disclosed, neither the Company nor the Bank is subject to any regulatory or supervisory cease and desist order, agreement, written directive, memorandum of understanding or written commitment, and none of them has received any written communication requesting that they enter into any of the foregoing. (r) CERTAIN FEES. Except for fees and expenses payable by the Company to the Placement Agent, as Previously Disclosed, no fees or commissions will be payable by the Company or the Bank to brokers, finders, investment bankers or banks pursuant to any agreement entered into by the Company or the Bank with respect to the offer and sale of the Units or any of the other transactions contemplated hereby. (s) USURY LAWS. The Senior Notes will not be subject to a defense that the interest rate is in violation of the usury laws of the State of California, as currently in effect. The Company hereby waives, to the fullest extent permitted by applicable law, its right to assert the violation of any such usury law and the usury law of any other applicable jurisdiction as a defense to the fulfillment of any of its obligations under the Senior Notes and covenants and agrees to take all reasonable actions as may be necessary in the future to make such waiver effective. (t) CERTAIN ASSETS. The Company has Previously Disclosed a true and correct listing of the following assets of the Company and its Subsidiaries as of August 31, 1995: (i) all non-performing loans, securities or other assets (i.e., all assets on which the Company or the Bank has ceased recognizing interest under generally accepted accounting principles or as to which any payments of principal or interest are past due 90 or more days as of such date), (ii) all loans, securities or other assets as to which any -14- 15 payments of principal or interest are past due 60 or more days, (iii) all loans, securities or other assets not included in the foregoing which have been classified special mention, substandard, doubtful or loss by management of the Company or the Bank or regulatory examiners, and (iv) each parcel of Real Estate Owned (excepting such parcels as may have been disposed of in the ordinary course of business subsequent to such date), including an identification of the amount of reserves which have been established with respect to each such parcel and its net carrying value. (u) NO DEBT. Except for the Senior Notes and Permitted Debt (as defined in Section 4(c)(i) and (ii) of the Senior Notes), as of the date hereof the Company, on an unconsolidated basis, does not have any outstanding Debt (as defined in Section 3 of the Senior Notes), and except for the Senior Notes and Permitted Debt, the Company will have no outstanding Debt on the Closing Date. (v) PRIVATE OFFERING. Neither the Company nor, assuming the accuracy of such representations of the Placement Agent as may be requested by the Company in connection with the transactions contemplated hereby, any Person acting on its behalf, has taken or will take any action which might subject the offering, issuance or sale of the Units to the registration requirements of the Securities Act or comparable provisions of any applicable State securities laws. (w) DISCLOSURE. None of the representations and warranties of the Company or any of the information or documents which have been Previously Disclosed to a Purchaser pursuant hereto are false or misleading in any material respect or contain any untrue statement of a material fact, or omit to state any material fact required to be stated or necessary to make any such information or document, at the time and in light of the circumstances, not misleading. Copies of all documents referred to in this Section 3.1 are true, correct and complete copies thereof and include all amendments, supplements and modifications thereto and all waivers thereunder. SECTION 3.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. (a) INVESTMENT INTENT. Each Purchaser, severally and not jointly and as to itself only, represents and warrants to, and covenants and agrees with, the Company that the Securities to be acquired by it hereunder are being acquired for its own account for investment and with no intention of distributing or reselling such Securities or any part thereof or interest therein in any transaction which would be in violation of the securities laws of the United States of America or any State, without prejudice, however, to a Purchaser's right, subject to the provisions of this -15- 16 Agreement and the Registration Rights Agreement, at all times to sell or otherwise dispose of all or any part of such Securities under an effective registration statement under the Securities Act and other applicable State securities laws or under an exemption from such registration, and subject, nevertheless, to the disposition of a Purchaser's property being at all times within its control. Each Purchaser, severally and not jointly and as to itself only, further represents and warrants to the Company that such Purchaser has no present agreement, understanding, plan or intent to transfer the Units (including the Warrants) to be purchased by it to any transferee. (b) TRANSFER RESTRICTIONS. (i) If a Purchaser should decide to dispose of any of the Securities, such Purchaser understands and agrees that it may do so only pursuant to an effective registration statement under the Securities Act or as set forth below: (i) to the Company, (ii) to any Person reasonably believed by such Purchaser to be a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in compliance with Rule 144A under the Securities Act, (iii) pursuant to an exemption from registration set forth in Rule 144 under the Securities Act, (iv) to any Person who is reasonably believed by such Purchaser to be an "accredited investor" (as defined in Rule 501(a) under the Securities Act) and that, prior to such transfer, furnishes to the Purchaser and the Company a signed letter confirming its status as an accredited investor and agreeing to the restrictions on transfer of the Securities set forth in this Agreement or (v) to any Affiliate of such Purchaser pursuant to an applicable exemption under the Securities Act. In connection with any transfer of any Securities other than (i) any transfer pursuant to an effective registration statement or (ii) any transfer by a qualified institutional buyer (as defined in Rule 144A under the Securities Act) pursuant to clause (i) or (ii) above, the Company may require that the transferor of any such Securities provide to the Company an opinion of counsel experienced in the area of United States securities laws selected by the transferor (which may include in-house counsel of a transferor), which counsel shall be and the form and substance of which opinion shall be, reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such Securities under the Securities Act or any State securities laws. In connection with any transfer pursuant to clause (ii) above, the Company may request reasonable certification as to the status of the transferor's transferee as a qualified institutional buyer. Each Purchaser agrees to the imprinting, so long as appropriate, (i) on the Senior Notes of the first legend set forth on the form of Senior Note included as Exhibit B hereto, (ii) on the Warrants -16- 17 of the first legend set forth on the form of Warrant included as Exhibit D hereto and (iii) on certificates representing the Series A Preferred Stock and the Common Stock issuable (x) upon exercise of the Warrants or (y) pursuant to Section 6(b) of the Senior Notes and/or Section 2(b) of the Certificate of Designations, a legend substantially similar to the foregoing legends. The legends set forth above may be removed if and when the applicable Securities are disposed of pursuant to an effective registration statement under the Securities Act or in the opinion of counsel to the Company experienced in the area of United States securities laws such legend is no longer required under applicable requirements of the Securities Act. The Senior Notes, Warrants and certificates evidencing the Series A Preferred Stock and Common Stock referred to in clauses (i), (ii) and (iii) above also shall bear any other legends required by applicable federal or state securities laws, which legends may be removed when, in the opinion of counsel to the Company experienced in the applicable securities laws, the same are no longer required under the applicable requirements of such securities laws. The Company agrees that it will provide each Purchaser, upon request, with a substitute document evidencing the Securities not bearing such legend at such time as such legend is no longer applicable. (ii) Each Purchaser understands and agrees that it may transfer the Senior Note, shares of Series A Preferred Stock and Warrant which comprise a Unit (including any Fractional Unit) only together as such until the earlier of (x) the date the Company files with the Commission its annual report on Form 10-K for the year ended December 31, 1996 and (y) March 30, 1997. Each Purchaser agrees to the imprinting, so long as appropriate, of the second legend set forth on the form of Senior Notes and the form of Warrant included as Exhibit B and Exhibit D hereto, respectively, on the Senior Notes, certificates evidencing Series A Preferred Stock and Warrants which are included in the Units. Such legends may be removed following the expiration of the restrictions on transfer contained in paragraph (b)(ii) and (iii) of this Section 3.2, and the Company agrees that it will provide each Purchaser, upon request, with a substitute document evidencing the Senior Notes, Series A Preferred Stock and Warrants comprising the Units not bearing such legend at such time as such legend is no longer applicable. (iii) Each Purchaser understands and agrees that until the Warrants become exercisable in accordance with their terms, it will give the Company not less than 10 Business Days' notice of any proposed transfer of Units and/or Securities, accompanied by information related to such transfer which is reasonably sufficient to enable the Company -17- 18 to make the determinations referred to herein, so that the Company may determine in its reasonable judgment whether (i) such proposed transfer involves a person who is a "5% shareholder" of the Company, as that term is defined in Section 382(k)(7) of the Code, or who would become a 5% shareholder of the Company as a result of such proposed transfer, and, if so, (ii) whether such proposed transfer could reasonably be expected to result in an "ownership change" under Section 382 of the Code and the regulations promulgated thereunder (taking into account both the proposed transfer and any other transactions of which the Company is aware) and, if so, (iii) whether such "ownership change" would result in a material loss of tax benefits to the Company. In the event the Company makes such determinations and provides the Purchaser with written notice of the same within 10 Business Days of its receipt of the above-referenced notice from the Purchaser, or in the event the Company makes a reasonable written request to such Purchaser for further information concerning such proposed transfer within the same 10-Business Day period and makes the foregoing determinations within 10 Business Days after receipt of such further information, the Purchaser agrees not to effect any such transfer as the Company may request in order to avoid such an "ownership change." (c) STOP TRANSFER INSTRUCTIONS. Each Purchaser agrees that the Company shall be entitled to make a notation on its records and give instructions to any transfer agent of the Securities in order to implement the restrictions on transfer set forth in Section 3.2(b) of this Agreement. (d) ACCREDITED INVESTOR. Each Purchaser, severally and not jointly and as to itself only, represents and warrants to, and covenants and agrees with, the Company that (i) at the time it was offered the Units, it was, (ii) at the date hereof, it is, and (iii) at the Closing, it will be, an "accredited investor" as defined in Rule 501(a) under the Securities Act, and has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment, is able to bear the economic risk of such investment and, at the present time, is able to afford a complete loss of such investment. (e) DUE EXECUTION. Each Purchaser, severally and not jointly and as to itself only, represents and warrants to the Company that this Agreement has been, and each Related Agreement to which it will become a party will be, duly executed and delivered by it or on its behalf and constitutes, or will constitute, as applicable, a valid and binding obligation of such Purchaser, enforceable against the Purchaser in accordance with its terms, except that (i) -18- 19 rights to indemnity and contribution under the Registration Rights Agreement may be limited by applicable law, (ii) enforceability may be limited by bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights generally and (iii) rights of acceleration and the availability of equitable remedies may be limited by equitable principles of general applicability. (f) NO CONFLICT. Each Purchaser, severally and not jointly and as to itself only, represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement and each of the Related Agreements to which it will become a party do not and will not, as applicable, conflict with or constitute a breach or a default under (i) its articles of incorporation, charter or other organizational document or bylaws, as applicable, (ii) any material obligation, agreement, indenture, bond, debenture, note, instrument or any other evidence of indebtedness to which it is a party or its assets are subject or (iii) subject to Section 3.2(i) hereof, any law, ordinance, order, license, rule or other regulation or demand of any court or governmental agency, arbitration panel or authority applicable to it. (g) ACCESS TO INFORMATION. Each Purchaser acknowledges receipt of the Confidential Memorandum and further acknowledges that prior to the date hereof and, subject to the Company's compliance with its obligations pursuant to Section 5.3(a) hereof, on and subsequent to the date hereof, it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Units and the merits and risks of investing in the Units and (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment in the Units. (h) RELIANCE. Each Purchaser also understands and acknowledges that (i) the Units are being offered and sold without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) such exemption depends in part on, and that the Company, its counsel and the Private Placement Agent will rely upon, the accuracy and truthfulness of the foregoing representations and warranties of such Purchaser, and such Purchaser hereby consents to such reliance. (i) GOVERNMENTAL AUTHORIZATION. Except for (i) compliance with applicable federal and State securities laws in connection with the performance by a Purchaser of its obligations under the Registration Rights Agreement, (ii) any required compliance by a Purchaser with applicable federal and State securities laws, HSR and/or federal banking laws and regulations in connection with (x) -19- 20 the issuance of shares of Common Stock upon exercise of the Warrants in accordance with their terms or (y) any issuance of Common Stock pursuant to Section 6(b) of the Senior Notes or Section 2(b) of the Certificate of Designations and (iii) such written confirmations from the OTS as may be reasonably determined by a Purchaser to be necessary to ensure that upon consummation of the transactions contemplated by Section 2.1 hereof it will not be deemed to be in control of the Company or subject to a rebuttable presumption of control of the Company under the HOLA and 12 C.F.R. Part 574, each Purchaser, severally and not jointly and as to itself only, represents and warrants to the Company that no consent, approval, order or other authorization of any governmental, administrative or regulatory body or agency is legally required by or on behalf of the Purchaser in connection with the execution, delivery and performance of this Agreement and each Related Agreement to which it will become a party. (j) OWNERSHIP OF COMPANY STOCK. (i) Each Purchaser who is an individual, severally and not jointly and as to itself only, represents and warrants to the Company that, other than by virtue of this Agreement and in the case of Management as Previously Disclosed, (A) he does not own any Capital Stock or Stock Equivalents of the Company, and that to his knowledge after due inquiry none of his spouse, parents, children or grandchildren (including for this purpose, persons related by blood or adoption) (collectively, the "Related Persons") owns any Capital Stock or Stock Equivalents of the Company, (B) to his knowledge after due inquiry no partnership, limited liability company or corporation in which he or any of his Related Persons owns a 5% or greater interest and no estate or trust of which he or any of his Related Persons is a beneficiary (collectively, "Related Entities"), owns, directly or indirectly, any Capital Stock or Stock Equivalents of the Company, and (C) neither such Purchaser nor to the knowledge of such Purchaser after due inquiry any of such Purchaser's Related Persons or any entity that constitutes a Related Entity with respect to such Purchaser has any present intention or plan to acquire Common Stock or Stock Equivalents of the Company otherwise than through the exercise of the Warrants and the terms of the Units. (ii) Each Purchaser that is not an individual, severally and not jointly and as to itself only, represents and warrants to the Company that, other than by virtue of this Agreement, (A) it does not own any Capital Stock or Stock Equivalents of the Company, (B) to such Purchaser's knowledge after due inquiry, no partnership, limited liability company or corporation in which it owns a 5% or greater interest, or estate or trust of which it is a beneficiary owns, directly or -20- 21 indirectly, any Capital Stock or Stock Equivalents of the Company and (C) neither it nor to its knowledge after due inquiry any Affiliate has any present intention or plan to acquire Common Stock or Stock Equivalents of the Company otherwise than through the exercise of the Warrants and the terms of the Units. (iii) Each Purchaser, whether or not an individual, severally and not jointly and as to itself only, further represents and warrants to the Company that (A) such Purchaser owns no shares of stock of any funds advised by Heine Securities Corporation or Dimensional Fund Advisors Inc and (B) to such Purchaser's knowledge, no partnership, limited liability company or corporation in which he or it owns an interest of less than 5% owns, directly or indirectly, any Common Stock, or Stock Equivalents of the Company, nor does any such partnership, limited liability company or corporation have any present intention or plan to acquire any such Common Stock or Stock Equivalents. (iv) Each Purchaser, severally and not jointly and as to itself only, represents and warrants to the Company that, except as Previously Disclosed, it does not bear a relationship to any other Purchaser that is specified in Section 267(b) or Section 707(b) of the Code. ARTICLE IV CONDITIONS PRECEDENT TO THE CLOSING SECTION 4.1 CONDITIONS TO OBLIGATIONS OF THE PARTIES. The respective obligations of each of the parties hereto to fulfill their obligations under Section 2.1 hereof at the Closing shall be subject to the satisfaction or waiver prior to the Closing of the following conditions: (a) All requirements prescribed by law which are necessary to the consummation of the transactions contemplated by this Agreement shall have been satisfied. (b) No party hereto shall be subject to any order, decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits the consummation of any of the transactions contemplated by this Agreement. (c) No statute, rule or regulation shall have been enacted, entered, promulgated, interpreted, applied or enforced by any governmental authority which prohibits, restricts or makes illegal consummation of any of the transactions contemplated by this Agreement. -21- 22 (d) Each of the parties hereto shall have received (i) a counterpart to this Agreement, duly executed and delivered by the parties hereto, and (ii) a counterpart of each Related Agreement (other than the Senior Notes) to which it is a party, in form and substance satisfactory to the parties, which shall have been duly executed and delivered by the Company, the Bank and the Purchaser or Purchasers, as applicable. (e) The Certificate of Designations shall have been filed with the Secretary of State of the State of Delaware in accordance with the Delaware General Corporation Law. (f) The OTS shall have indicated in writing to the Bank that upon the submission by the Company of notice to the OTS of the consummation of the transactions contemplated by Section 2.1 hereof, (i) the Prompt Corrective Action Directive issued to the Bank by the OTS as of June 30, 1995 will be terminated, (ii) the regulatory capital requirements applicable to the Bank will be the requirements of general applicability set forth at 12 C.F.R. Section 567.2 and related regulations and there will be no individual minimum regulatory capital requirement required to be maintained by the Bank, (iii) the OTS will not, solely by virtue of any special assessment to recapitalize the SAIF, require the Bank to meet an individual minimum regulatory capital requirement or otherwise increase the amount of regulatory capital required to be maintained by the Bank, and (iv) the Bank will not be subject to any capital restoration plan filing requirement and the Bank's revised capital plan submitted to the OTS on June 22, 1995 will be void. SECTION 4.2 CONDITIONS TO THE OBLIGATIONS OF THE PURCHASERS. The obligations of each of the Purchasers to fulfill its obligations under Section 2.1 hereof shall be subject to the satisfaction or waiver prior to the Closing of the following conditions: (a) Each of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as if made on the Closing Date (or on the date when made in the case of any representation or warranty which specifically relates to an earlier date); the Company shall have performed, in all material respects, each of its covenants and agreements contained in this Agreement to be performed prior to the Closing; and each of the Purchasers shall have received a certificate signed by the Chief Executive Officer and the Chief Financial Officer of the Company, dated the Closing Date, to the foregoing effect. -22- 23 (b) The Company shall have delivered to each Purchaser a Senior Note, certificate evidencing Series A Preferred Stock and a Warrant, in each case registered in the name of the Purchaser, sufficient to evidence the Securities in the Units to be issued and sold by the Company and purchased by the Purchaser, as set forth on Exhibit A hereto, against payment therefor to the Company in the amount of $500,000 per Unit (subject to pro rata adjustment in the case of any Fractional Unit). (c) Each Purchaser shall have received such written confirmations from the OTS as may be reasonably determined by it to be necessary to ensure that upon consummation of the transactions contemplated by Section 2.1 hereof it will not be deemed to be in control of the Company or subject to a rebuttable presumption of control of the Company under the HOLA and 12 C.F.R. Part 574, and no such confirmation shall include any condition or requirement that, individually or in the aggregate, would reduce the benefits of the transactions contemplated by this Agreement in so significant a manner that the party, in its judgment, would not have entered into this Agreement had such condition or requirement been known at the date hereof. (d) The Company shall have delivered to each Purchaser a certificate signed by the Chief Executive Officer and Chief Financial Officer of the Company, dated the Closing Date, to the following effect: (i) at November 30, 1995, the Company had not less than $23,500,000 of consolidated shareholders' equity under generally accepted accounting principles; (ii) at November 30, 1995, the Company's consolidated general allowance for loan losses and consolidated general allowance for losses on Real Estate Owned (x) amounted to not less than $12,500,000 in the aggregate and (y) complied with any applicable requirement of the OTS, including without limitation the requirements set forth in a letter, dated October 5, 1995, from Timothy J. Layne, Assistant Regional Director of the OTS, to Scott A. Braly; (iii) from August 1, 1995 to November 30, 1995, the Company received not less than $14,000,000 of net proceeds from the sale of Real Estate Owned (other than apartment buildings), which sales in each case have been recorded by the Company as such under generally accepted accounting principles; -23- 24 (iv) at November 30, 1995, the Company's consolidated Non- performing Assets amounted to not more than $50,600,000; and (v) to the best of the knowledge and belief of each such officer, no event has occurred subsequent to November 30, 1995 which would make the statements in clauses (i)-(iv) above inaccurate. (e) Unless waived by the Purchasers in accordance with Section 6.3(a) hereof, either (i) the Company's issuance of the Warrants included in the Units to be sold pursuant to this Agreement shall have been approved by the requisite vote of the holders of the Common Stock pursuant to Section 6(i)(1)(D) of Part III to Schedule D of the Bylaws of the NASD or (ii) the Company shall have obtained an exemption from such requirement to obtain shareholder approval upon application to the NASD and mailed to all shareholders of the Company the notice referred to in Section 6(i)(1)(e) of Part III to Schedule D of the Bylaws of the NASD. (f) Members of Management shall have agreed, by their execution of this Agreement, to purchase in the aggregate not less than 5% of the aggregate Units to be sold by the Company pursuant to this Agreement. (g) Each Purchaser shall have received, in form and substance reasonably satisfactory to it, an opinion, addressed to the Purchasers and dated the Closing Date, of Mayer, Brown & Platt, counsel for the Company and the Bank, with respect to the matters set forth in Exhibit H hereto. (h) No party to this Agreement (other than the relevant Purchaser) shall be in material breach of this Agreement unless such breach shall have been waived in writing by each of the other parties to this Agreement. (i) Each Purchaser shall have received such other certificates, opinions, documents and instruments related to the transactions contemplated hereby as may have been reasonably required by it and are customary for transactions of this type, and all corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement, shall be reasonably satisfactory in form and substance to it and its counsel. SECTION 4.3 CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The obligations of the Company to fulfill its obligations under this Agreement, including without limitation the obligations set forth in Section 2.1 hereof, shall be subject to the satisfaction -24- 25 or waiver prior to the Closing of the following conditions, provided that the condition set forth at paragraph (e) below may not be waived without the prior written consent of the Purchasers: (a) Each of the representations and warranties of the Purchasers contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Closing Date as if made on the Closing Date, and the Company shall have received a certificate signed by each Purchaser who is an individual and by a duly authorized officer of each other Purchaser to the foregoing effect. (b) Each Purchaser shall have delivered to the Company $500,000 per Unit (subject to pro rata adjustment in the case of any Fractional Unit) for each of the Units to be issued and sold by the Company and purchased by the Purchaser pursuant to this Agreement, as set forth on Exhibit A hereto, such amount to be payable (i) by wire transfer of immediately available funds to an account with a bank designated by the Company, by notice to each of the Purchasers to be provided no later than two Business Days prior to the Closing Date, or (ii) a federal (same day) funds check payable to the order of the Company. (c) No party to this Agreement (other than the Company) shall be in material breach of this Agreement unless such breach shall have been waived in writing by each of the other parties to this Agreement. (d) The Company shall have received such other certificates, opinions, documents and instruments related to the transactions contemplated hereby as may have been reasonably required by the Company and are customary for transactions of this type, and all corporate and other proceedings, and all documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement, shall be reasonably satisfactory in form and substance to the Company and its counsel. (e) The Company shall have received, in form and substance reasonably satisfactory to the Company, an opinion, addressed to it and dated the Closing Date of Mayer, Brown & Platt, counsel for the Company and the Bank, to the effect that there is "substantial authority" within the meaning of Treasury Regulation 1.6662-4(d) to support the conclusion that consummation of the transactions contemplated by Section 2.1 hereof will not result in a change of ownership of the Company for purposes of Section 382 of the Code. ARTICLE V -25- 26 COVENANTS SECTION 5.1 SHAREHOLDER MEETING; EXEMPTION. The Company agrees to use its best efforts to obtain from the NASD an exemption from the requirement, pursuant to Section 6(i)(1)(d) of Part III to Schedule D of the Bylaws of the NASD, to obtain shareholder approval of the issuance of the Warrants included in the Units to be sold pursuant to this Agreement and, in the event it obtains such exemption, to mail to all shareholders of the Company the notice referred to in Section 6(i)(1)(e) of Part III to Schedule D of the Bylaws of the NASD (collectively, the "NASD Exemption"). In the event that the Company does not obtain the NASD Exemption by October 15, 1995, the Company shall (i) take all action necessary (including without limitation the preparation, filing and dissemination of requisite proxy materials) to have its shareholders consider the issuance of the Warrants included in the Units to be sold pursuant to this Agreement at a special meeting of shareholders which is called for the purpose as promptly as practicable after the date hereof, (ii) recommend that its shareholders approve the issuance of the Warrants included in the Units to be sold pursuant to this Agreement and use its best efforts to obtain (including without limitation retaining a proxy solicitor if requested by any Purchaser), as promptly as practicable, such approval and (iii) cooperate and consult with the Purchasers with respect to each of the foregoing matters, provided that the Company may cease taking any of the actions set forth in the foregoing clauses if it obtains the NASD Exemption. SECTION 5.2 APPLICATIONS. In the event that any approval, consent or non-objection need be obtained by the Company, the Bank or any Purchaser from, or a notice or other filing need be filed by the Company, the Bank or any Purchaser with, the OTS, the FDIC or any other governmental authority (including without limitation the Federal Trade Commission and the Assistant Attorney General in charge of the Antitrust Division of the U.S. Department of Justice pursuant to the HSR) in connection with (i) the execution, delivery and performance of this Agreement or any Related Agreement by the Company, the Bank or any Purchaser or (ii) the Company's issuance of Common Stock upon exercise of Warrants or pursuant to Section 6(b) of the Senior Notes or Section 2(b) of the Certificate of Designations, such party shall take all actions necessary to obtain any such approval, consent or non-objection or file such notice or other filing as promptly as practicable, and the other parties hereto agree to cooperate with such party in obtaining or filing the same. Any party that is required to file any notice, application or other document pursuant to the preceding sentence shall provide copies thereof (excluding any confidential information) for review to each Purchaser who is a Material Securityholder in the case of the Company, and to the Company in the case of a Purchaser, not less than three Business Days prior to -26- 27 the making of such filing and shall keep such other party or parties hereto, as applicable, apprised of the status of such filing and the consideration thereof by the relevant governmental authority. SECTION 5.3 INVESTIGATION AND CONFIDENTIALITY. (a) Prior to the Closing, the Company shall permit each Purchaser and its representatives reasonable access to its properties and personnel, and shall disclose and make available to each Purchaser all books, papers and records relating to the assets, stock ownership, properties, operations, obligations and liabilities of the Company and its Subsidiaries, including, but not limited to, all books of account (including the general ledger), tax records, minute books of meetings of boards of directors (and any committees thereof) and shareholders, organizational documents, bylaws, material contracts and agreements, filings with any regulatory authority, accountants' work papers, litigation files, loan files, plans affecting employees, and any other business activities or prospects in which a Purchaser may have a reasonable interest, provided that such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations, and provided further that in the event that any of the foregoing are in the control of any third party, the Company shall use its best efforts to cause such third party to provide access to such materials to each Purchaser who shall request the same. In the event that the Company is prohibited by law from providing any of the access referred to in the preceding sentence to a Purchaser, it shall use its best efforts to obtain promptly waivers thereof so as to permit such access. The Company shall make the directors, officers, employees and agents and authorized representatives (including counsel and independent public accountants) of the Company and its Subsidiaries available to confer with a Purchaser and its representatives, provided that such access shall be reasonably related to the transactions contemplated hereby and not unduly interfere with normal operations. (b) All information furnished to a Purchaser by the Company previously in connection with the transactions contemplated by this Agreement or pursuant hereto shall be treated as the sole property of the Company and each Purchaser covenants, severally and not jointly and as to itself only, that it shall use its best efforts to keep confidential all such information and shall not directly or indirectly use such information for any competitive or other commercial purposes. The obligation to keep such information confidential shall continue for five years from the date hereof but shall not apply to (i) any information which (x) a Purchaser can establish by convincing evidence was already in its possession prior to the disclosure thereof by the Company; (y) was then generally known to the public; or (z) became known to the public through no fault of a Purchaser; or (ii) disclosures pursuant to a -27- 28 legal requirement or in accordance with an order of a court of competent jurisdiction, provided that a Purchaser shall use its best efforts to give the Company at least ten Business Days prior notice thereof and shall limit such disclosure to the minimum amount required by such legal requirement or court order. SECTION 5.4 PRESS RELEASES. The Company and each Purchaser who will be a Material Securityholder upon consummation of the transactions specified in Section 2.1 hereof shall agree with each other as to the form and substance of any press release related to this Agreement or the transactions contemplated hereby, and consult with each other as to the form and substance of other public disclosures which may relate to the transactions contemplated by this Agreement, provided, however, that nothing contained herein shall prohibit any party, following notification to such other parties, from making any disclosure which it determines in good faith is required by law or regulation. For purposes of the foregoing, the Company may treat a law firm designated from time to time by the Purchasers who are Material Securityholders as the authorized representative of each of the Purchasers. SECTION 5.5 NO SOLICITATION. Prior to the Closing, neither the Company nor the Bank, nor any of the directors, officers, employees, representatives or agents of the Company or other persons controlled by the Company, shall solicit or encourage inquiries or proposals with respect to, furnish any information relating to, or participate in any negotiations or discussions concerning, any acquisition, lease or purchase of all or a substantial portion of the assets of, or any equity interest in, the Company or the Bank, or any business combination with the Company or the Bank, other than as contemplated by this Agreement. The Company will immediately notify the Purchasers orally and in writing if any such inquiries or proposals are received by, or such information is requested from, or any such negotiations or discussions are sought to be initiated with, the Company or the Bank. SECTION 5.6 USE OF PROCEEDS. On the Closing Date the Company shall apply the net proceeds from the sale of Units pursuant to this Agreement as follows: (i) not less than $17,500,000 of such net proceeds shall be contributed by the Company to the Bank as additional paid-in capital on the Capital Stock of the Bank held by the Company; and (ii) an amount of such net proceeds equal to the first six full semi-annual interest payments which become due on the Senior Notes shall be used to establish and maintain the Interest Reserve Account required by Section 1(b) of the Senior Notes and the Security Agreement. -28- 29 SECTION 5.7 CURRENT INFORMATION. (a) Between the date hereof and the Closing, the Company shall provide to each Purchaser (i) promptly following the filing thereof, copies of each report filed by the Company under the Exchange Act and each regular and periodic report filed by the Company and the Bank with the OTS, (ii) concurrently with the mailing thereof, copies of each communication sent by the Company to its shareholders generally and (iii) within 15 days after the end of the month of November 1995 (and in any event prior to the Closing), a consolidated statement of operations of the Company for each of October and November 1995 and for the period beginning at the commencement of the fiscal year and ending at the end of each such monthly period, and a consolidated balance sheet of the Company as of November 30, 1995, in each case prepared in accordance with generally accepted accounting principles. (b) Subsequent to the Closing, the Company shall furnish to each Purchaser who holds Series A Preferred Stock and/or Warrants, promptly upon their becoming available, (i) each communication sent by the Company to its shareholders generally, (ii) each report filed by the Company with the Commission pursuant to the Exchange Act and (iii) each registration statement and prospectus filed by the Company with the Commission under the Securities Act, provided that the Company shall not be required to furnish any such Purchaser any of the same to the extent that it already has done so pursuant to Section 4(h)(iv) of the Senior Notes or the Registration Rights Agreement. SECTION 5.8 LISTING OF ADDITIONAL SHARES OF COMMON STOCK. The Company shall take all action which is necessary to ensure that Common Stock issuable upon exercise of the Warrants and Common Stock which may be issued pursuant to Section 6(b) of the Senior Notes or Section 2(b) of the Certificate of Designations will be eligible upon issuance for quotation on the Nasdaq Stock Market's National Market or any exchange on which the Common Stock is then traded. SECTION 5.9 RIGHTS OF FIRST REFUSAL. (a) Subject to subsection (g), for so long as a Purchaser is a holder of a Unit (an "Eligible Purchaser"), the Company agrees not to issue any of its Capital Securities or to permit the Bank to issue any of its Capital Securities (such Capital Securities of the Company and the Bank hereinafter deemed to be jointly covered by the term "Capital Securities") to any Person or Persons, other than in the case of Capital Securities of the Bank to the Company (a "Third Party Purchaser"), without first offering or causing the Bank to offer, as applicable, to such Eligible Purchaser the opportunity to purchase all or part of such Capital Securities being issued at the same purchase price and on the same terms as are proposed to be offered to a Third Party Purchaser. For this purpose, the Company -29- 30 shall deliver a written notice, or cause the Bank to deliver a written notice, as applicable (in each case a "Notice"), to each Eligible Purchaser of any proposed issuance of Capital Securities which shall contain all of the material terms of the proposed issuance, including, without limitation, the purchase price and total amount of Capital Securities proposed to be issued, which terms, including without limitation the purchase price and any conversion price or rate of such Capital Securities, may to the extent necessary be expressed in the form of good faith estimates by the Board of Directors of the Company. (b) Upon receipt of the Notice, each Eligible Purchaser will have the right to subscribe for all or part of the Capital Securities on the same terms set forth in the Notice, by delivery of written notice to the Company or the Bank, as applicable ("Acceptance Notice"), in accordance with the instructions set forth in the Notice, within 20 days from the date of its receipt of the Notice (the "Offer Period"). The Acceptance Notice shall specify the amount (not exceeding all) of the Capital Securities being offered with respect to which the Eligible Purchaser wishes to exercise its subscription rights. (c) An Acceptance Notice, once given by an Eligible Purchaser in accordance with subsection (b), shall become irrevocable at the end of the Offer Period unless it is withdrawn prior to the expiration of the Offer Period (any such Acceptance Notice which so becomes irrevocable being called an "Irrevocable Acceptance" and the Eligible Purchaser giving such notice being an "Accepting Eligible Purchaser"). (d) (i) In the event that any Eligible Purchaser fails to have delivered an Irrevocable Acceptance with respect to any Notice on or prior to the last day of the Offer Period with respect to such Notice, such Eligible Purchaser will have no further right to subscribe for the Capital Securities proposed to be issued in such Notice during a Free Sale Period commencing on the date immediately following the end of the Offer Period with respect to such Notice. (ii) In the event that no Eligible Purchasers shall have delivered an Irrevocable Acceptance with respect to a Notice on or prior to the last day of the Offer Period with respect to such Notice, the Company or the Bank, as applicable, will be entitled to a Free Sale Period with respect to the Capital Securities proposed to be issued in such Notice commencing on the date immediately following the end of the Offer Period with respect to such notice. (iii) In the event that Accepting Eligible Purchasers deliver Irrevocable Acceptances relating to an amount of Capital Securities in the aggregate in excess of the amount of Capital Securities proposed to be issued pursuant to the -30- 31 Notice, the amount of Capital Securities which each Accepting Eligible Purchaser shall be obligated to purchase will be such Eligible Purchaser's Purchaser Percentage of the Capital Securities proposed to be issued pursuant to such Notice (provided that, if one or more Accepting Eligible Purchasers deliver Irrevocable Acceptances to subscribe for less than such Eligible Purchaser's Purchaser Percentage, then the Capital Securities that would have been allocated to such Eligible Purchaser or Purchasers pursuant to this subsection (d)(iii) shall be allocated to the other Accepting Eligible Purchasers in accordance with their respective Purchaser's Percentages, except that no Accepting Eligible Purchaser shall be required to purchase any Capital Securities in an amount greater than the amount elected to be subscribed for by such Accepting Eligible Purchaser pursuant to its Irrevocable Acceptance). (iv) In the event that Accepting Eligible Purchasers exercise their option to purchase, pursuant to the foregoing provisions of this Section 5.9, in the aggregate, all (or, if the Company or the Bank, as applicable, shall so elect, more than 90%) of the Capital Securities proposed to be issued in the Notice, all such Eligible Purchasers and the Company or the Bank, as applicable, shall complete the purchase of the Capital Securities on the terms set forth in the Notice within 30 days of the expiration of the Offer Period, or within such longer period (not to exceed six months from the date of the Accepting Eligible Purchaser's Irrevocable Acceptance) as may be required for such Accepting Eligible Purchaser to obtain any applicable regulatory approvals that such Accepting Eligible Purchaser is making a good faith effort to obtain. If an Accepting Eligible Purchaser does not complete the purchase of Capital Securities as set forth above, other than as a result of the negligence, bad faith or wilful misconduct of the Company or the Bank or any action or omission made by the Company or the Bank that would prevent such an Accepting Eligible Purchaser from completing its purchase, the Company or the Bank, as applicable, will be entitled to a Free Sale Period commencing on the 31st day following the expiration of the Offer Period, subject to extension as set forth in the immediately preceding sentence. (v) Other than as set forth in subsection (vi) below (and subject to subsection (iv) above), in the event that Accepting Eligible Purchasers shall have delivered Irrevocable Acceptances for all or less than all of the Capital Securities set forth in the Notice, each Accepting Eligible Purchaser shall purchase, within the applicable period set forth in subsection (iv) above or subsection (vi) below, as the case may be, the amount of Capital Securities set forth in its Irrevocable Acceptance. -31- 32 (vi) In the event that Accepting Eligible Purchasers elect to subscribe for, in the aggregate, less than all (or if the Company or the Bank, as applicable, shall so elect 90%) of the Capital Securities proposed to be offered pursuant to the Notice, the Company or the Bank, as applicable, shall have a Free Sale Period commencing on the date immediately following the end of the Offer Period with respect to the Capital Securities offered pursuant to such Notice as to which Accepting Eligible Purchasers do not elect to subscribe and the Company agrees to sell, and to cause the Bank to sell, as applicable, and the Accepting Eligible Purchasers shall be obligated to purchase, the Capital Securities for which they subscribed substantially simultaneously (or, with respect to any Accepting Eligible Purchaser, within such longer period (not to exceed four months from the relevant purchase by the Third Party Purchaser) as may be required for such Accepting Eligible Purchaser to obtain any applicable regulatory approvals that such Accepting Eligible Purchaser is making a good faith effort to obtain) with the purchase by the Third Party Purchaser of the balance of the Capital Securities proposed to be offered pursuant to such Notice, it being understood that if such balance of Capital Securities is not so purchased on the terms set forth in the Notice, no Eligible Purchaser will be required or entitled to purchase such Capital Securities as to which its Irrevocable Acceptance applied. (e) If at any time during a Free Sale Period the terms of a proposed issuance shall have changed in any material respect from the terms set forth in the Notice, the Company or the Bank, as applicable, shall give notice (the "Alteration Notice") to the Eligible Purchasers describing the changes in terms. Upon receipt of any Alteration Notice, each Eligible Purchaser will have the right to subscribe for all or part of the Capital Securities on the terms set forth in the Alteration Notice, by delivery of an Acceptance Notice to the Company or the Bank, as applicable, in accordance with the instructions set forth in the Alteration Notice, within 20 days from the date of receipt of the Alteration Notice (the "Altered Offer Period"), stating the amount (not exceeding all) of Capital Securities proposed to be offered as to which such Eligible Purchaser wishes to exercise its right to subscribe. In any such case, the procedures set forth in subsection (d), to the extent applicable, shall be followed. (f) The failure of an Eligible Purchaser to respond to any particular Notice or Alteration Notice will not constitute a waiver of such Eligible Purchaser's rights with respect to any proposed issuance of Capital Securities pursuant to a subsequent Notice or Alteration Notice. -32- 33 (g) Subsections (a)-(f) shall not apply to the issuance of Capital Securities pursuant to or in connection with (i) the purchase and sale of the Securities contemplated by this Agreement, (ii) a reorganization, merger or consolidation of the Company or the Bank or a sale, disposition or other transfer of all or substantially all of the assets of the Company or the Bank to any Person or any Person to the Company or the Bank pursuant to one transaction or series of related transactions, (iii) any conversion or exchange of any Capital Securities (including without limitation the Warrants) in accordance with the terms of such securities or of the instruments relating to or governing the issuance of such Capital Securities, (iv) any employee benefit plans, other than the Employee Stock Ownership Plan or any similar plan of the Company, (v) any stock dividends, or pro rata (as to any class) split-ups, combinations or exchanges of or similar transactions involving Capital Securities, (vi) the issuance of Common Stock pursuant to Section 6(b) of the Senior Notes or Section 2(b) of the Certificate of Designations, (vii) any bona fide public offering of Capital Securities which is registered under the Securities Act and underwritten by an underwriting firm or firms of national reputation or (viii) any issuance of Common Stock, Options (as defined in the Warrants) or Convertible Securities (as defined in the Warrants) which would result in an adjustment in accordance with the terms of the Warrants to the number of shares of Common Stock issuable upon exercise of the Warrants or the exercise price of a share of Common Stock which may be acquired upon exercise thereof and (ix) any issuance of Common Stock, Options (as so defined) or Convertible Securities (as so defined) to the holders of Common Stock in their capacities as such which would not result in an adjustment in accordance with the terms of the Warrants to the number of shares of Common Stock issuable upon exercise of the Warrants or the exercise price of a share of Common Stock which may be acquired upon exercise thereof, provided that the Company concurrently therewith grants to each Eligible Purchaser as of the record date for such transaction the rights, warrants or options to which each Eligible Purchaser would have been entitled if, on the record date used to determine the stockholders entitled to the rights, warrants or options being granted by the Company, the Eligible Purchaser was the holder of record of the number of whole shares of Common Stock then issuable upon exercise of the Warrants held by such Eligible Purchaser. (h) Notwithstanding anything to the contrary contained in this Section 5.9, except as permitted under subsection (g) above, neither Eligible Purchasers nor any Third Party Purchaser will be permitted to purchase an amount of Capital Securities of the Bank which, when combined with any other Capital Securities of the Bank owned by such Purchasers, would result in the Company and the Bank not being permitted to file a consolidated federal income tax return in the opinion of independent public accountants or counsel -33- 34 for the Company, in form and substance reasonably satisfactory to each Accepting Eligible Purchaser. (i) For the purposes of this Section 5.9, "Purchaser Percentage" means, at any time of determination with respect to an Eligible Purchaser, the aggregate number of shares of Common Stock (including shares of Common Stock which may be acquired upon exercise of outstanding Warrants, whether or not then exercisable) then held by such Eligible Purchaser divided by the aggregate number of shares of Common Stock (including shares of Common Stock which may be acquired upon exercise of outstanding Warrants, whether or not then exercisable) outstanding at such time, expressed as a percentage, with fractional percentages of .5 or more and less than .5 rounded up and down, respectively. "Free Sale Period" means a period of three months (or such longer period of time, not in excess of one year, required to obtain any regulatory approvals, consents or other actions necessary to consummate a sale to a Third Party Purchaser which has agreed in writing (subject to such regulatory approvals, consents or actions and other reasonable closing conditions) to purchase Capital Securities on or prior to the end of such three-month period), during which the Company or the Bank, as applicable, shall be permitted to issue the Capital Securities which were proposed to be issued pursuant to a Notice or Alteration Notice to a Third Party Purchaser on terms no more favorable to the Third Party Purchaser than those set forth in such Notice or Alteration Notice, as the case may be. SECTION 5.10 RULE 144 AND RULE 144A REPORTING. With a view to making available to holders of Securities the benefits of certain rules and regulations of the Commission which may permit the sale of the Securities to the public without registration, the Company agrees at all times to: (a) make and keep public information available, as those terms are understood and defined in Rules 144 and 144A under the Securities Act (or any successors thereto); and (b) use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act. SECTION 5.11 PURCHASES OF SECURITIES. - 34 - 35 The Company will not, and will not permit any of its Subsidiaries to, purchase any: (i) Senior Notes except in accordance with Section 4(m) of the Senior Notes; (ii) Series A Preferred Stock except pursuant to a repurchase offer made to each holder of shares of Series A Preferred Stock pro rata in accordance with the aggregate number of shares of Series A Preferred Stock held by such holder; and (iii) Warrants except pursuant to a repurchase offer made to each holder of a Warrant pro rata in accordance with the aggregate number of shares of Common Stock which may be acquired upon exercise of the Warrants held by such holder. SECTION 5.12 STOCK OPTIONS. Between the date hereof and the Closing, the Company shall use its best efforts to cancel all unexercised stock options issued to Management pursuant to the Stock Option Plan prior to the Closing and to grant to members of Management substitute options under the Stock Option Plan to purchase an aggregate of 360,000 shares of Common Stock, which options shall (i) have a per share exercise price equal to the greater of the fair market value of a share of Common Stock on the date of grant, as determined pursuant to the Stock Option Plan, and $3.875, (ii) become vested and exercisable in three equal annual installments commencing on the first anniversary of the date of grant and (iii) terminate seriatim in three equal annual installments commencing on the fifth anniversary of the date of grant. The Purchasers acknowledge that an aggregate of an additional 240,000 shares of Common Stock may be made subject to options to be granted to other employees of the Company or the Bank in connection with a program to reduce the amounts of annual cash compensation payable by the Company and the Bank. SECTION 5.13 EXCHANGE OF SECURITIES. The Company will, at its expense, promptly upon surrender of (i) any Senior Note, (ii) any certificate evidencing Series A Preferred Stock and (iii) any Warrant, at the office of the Company referred to in, or designated pursuant to, Section 6.4, respectively execute and deliver to the Purchaser (i) a new Senior Note or Senior Notes in aggregate principal amounts specified by the Purchaser (subject to the minimum denomination of the Senior Notes) for an aggregate principal amount equal to the Senior Note or Senior Notes surrendered, (ii) a new certificate or certificates in denominations specified by the Purchaser for an aggregate number of shares of Series A Preferred Stock equal to the number of shares of such stock represented by the certificate or certificates surrendered and (iii) a new Warrant or Warrants covering a number of shares of Common Stock specified by the Purchaser for an - 35 - 36 aggregate number of shares of Common Stock equal to the shares of Common Stock covered by the Warrant or Warrants surrendered. SECTION 5.14 ACQUISITION OF COMMON STOCK. Until the Warrants become exercisable in accordance with their terms, each Purchaser who is a Material Securityholder agrees to give the Company not less than 10 Business Days' notice of any proposed purchase or other acquisition of "stock" of the Company (as defined under Section 382 of the Code and the regulations thereunder), including any acquisition of "stock" pursuant to Section 5.9 hereof but excluding shares of Common Stock which may be acquired pursuant to Section 6(b) of the Senior Notes and/or Section 2(b) of the Certificate of Designations, accompanied by information related to such proposed transaction which is reasonably sufficient to enable the Company to make the determinations referred to herein, so that the Company may determine in its reasonable judgment whether such purchase or other acquisition (i) would result in such Material Securityholder becoming a "5% shareholder" of the Company, as that term is defined in Section 382(k)(7) of the Code and, if so, (ii) whether such purchase or other acquisition could reasonably be expected to result in an "ownership change" under Section 382 of the Code and the regulations promulgated thereunder (taking into account both the proposed transfer and any other transactions of which the Company is aware) and, if so, (iii) whether such "ownership change" would result in a material loss of tax benefits to the Company. In the event the Company makes such determinations and provides the Purchaser with written notice of the same within 10 Business Days of its receipt of the above-referenced notice from the Purchaser, or in the event the Company makes a reasonable written request to such Purchaser for further information concerning such proposed transaction within the same 10-Business Day period and makes the foregoing determinations within 10 Business Days after receipt of such further information, the Purchaser agrees not to effect any such purchase or other acquisition as the Company may request in order to avoid such an "ownership change." ARTICLE VI MISCELLANEOUS SECTION 6.1 SURVIVAL OF PROVISIONS. The representations, warranties and covenants of the Company and the Purchasers made herein and each of the provisions of Articles V and VI shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Purchaser or the Company, as the case may be, (ii) acceptance of any of the Securities and payment by the Purchasers therefor and retirement thereof, (iii) the transfer of any Securities or interest therein by any - 36 - 37 Purchaser, provided that no transferee may claim the benefit of any such representation or warranty, or (iv) any termination of this Agreement. SECTION 6.2 TERMINATION. This Agreement may be terminated (as between the party electing so to terminate it and the counterparty to which termination is directed) by giving written notice of termination to the applicable counterparty at any time prior to the Closing: (a) By the Company if any of the conditions specified in Sections 4.1 and 4.3 of this Agreement has not been met or waived by it pursuant to the terms of this Agreement by 3:00 p.m., Pacific Time on December 15, 1995; or (b) By any Purchaser if any of the conditions specified in Sections 4.1 and 4.2 of this Agreement has not been met or waived by such Purchaser pursuant to the terms of this Agreement by 3:00 p.m., Pacific Time, on December 15, 1995. SECTION 6.3 WAIVER; AMENDMENTS. (a) No failure or delay on the part of the Company or any Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or any Purchaser at law or in equity. No waiver of or consent to any departure by the Company or any Purchaser from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof. Except as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of the Company and each Purchaser. Any amendment, supplement or modification of or to any of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given. Except where notice is specifically required by this Agreement, no notice to or demand on any party hereto in any case shall entitle another party hereto to any other or further notice or demand in similar or other circumstances. (b) The Company shall not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of dividends, redemption premiums, fees or otherwise, to any holder of any Securities as consideration for or as an inducement to any consent, waiver or amendment of any of the terms and provisions of this - 37 - 38 Agreement unless such remuneration is paid to all Purchasers; provided, however, that this Section 6.3(b) does not restrict the Company's ability to deal individually with any Purchaser or any subsequent holder with respect to any settlement of a dispute or in the ordinary course of business. SECTION 6.4 COMMUNICATIONS. All notices, demands and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to any Purchaser, initially at the address set forth below its name on Exhibit A hereto, and thereafter at such other address, notice of which is given in accordance with this Section 6.4; and (ii) if to the Company, initially at 2381 Rosecrans Avenue, El Segundo, California 90245, Attention: President; and thereafter at such other address notice of which is given in accordance with this Section 6.4. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being sent by certified mail, return receipt requested, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day if timely delivered to an air courier guaranteeing overnight delivery. SECTION 6.5 COSTS, EXPENSES AND TAXES. The Company agrees to pay all reasonable costs and expenses incurred by it in connection with the negotiation, preparation, typing, reproduction, execution, delivery and performance of this Agreement and the Related Agreements and any amendment or supplement or modification hereof or thereof (except to the extent otherwise provided in the Registration Rights Agreement), including without limitation, attorneys fees and expenses and all reasonable costs and expenses incurred by it in connection with the Company's administration of this Agreement and any Related Agreement. The Company also agrees to pay up to $150,000 of the expenses of the Purchasers incurred in connection with the transactions provided for herein, including reasonable fees and expenses payable to Elias, Matz, Tiernan & Herrick L.L.P. in connection with the negotiation, preparation, typing, reproduction, execution and delivery of this Agreement and the Related Agreements. The Company shall pay all reasonable costs and expenses (including, without limitation, attorneys' fees and expenses), if any, incurred by the Purchasers in connection with any waiver, amendment or modification of any provision of this Agreement or any Related Agreement with respect to an obligation of, or requested by, the Company. In addition, the Company shall pay any and all stamp, transfer and other similar taxes payable in - 38 - 39 connection with the execution and delivery of this Agreement or the original issuance of any Securities, and shall save and hold each Purchaser harmless from and against any and all liabilities with respect to or resulting from any delay in paying, or omission to pay, such taxes. SECTION 6.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement. SECTION 6.7 BINDING EFFECT; ASSIGNMENT. Prior to the Closing, the rights and obligations of any Purchaser under this Agreement may not be assigned to any other Person except with the prior written consent of the Company, and after the Closing the rights and obligations of any Purchaser may be assigned by such Purchaser to any Person purchasing Securities from the Purchaser contemporaneously with such assignment (provided the rights so assigned shall apply to the Securities so purchased), subject to the provisions of Section 3.2(b), provided that the rights of a Purchaser pursuant to Section 5.9 hereof may not be assigned to any Person other than an Affiliate of such Purchaser. The rights and obligations of the Company under this Agreement may not be assigned by the Company without the consent of each Purchaser. Except as expressly provided in this Agreement, this Agreement shall not be construed so as to confer any right or benefit upon any Person other than the parties to this Agreement, and their respective successors and permitted assigns. This Agreement shall be binding upon the Company and each Purchaser, and their respective successors and permitted assigns. SECTION 6.8 GOVERNING LAW. This Agreement shall be deemed to be a contract made under the laws of the State of California, and for all purposes shall be construed in accordance with the laws of said state, without regard to principles of conflict of laws. SECTION 6.9 SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability only without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 6.10 HEADINGS AND GENDER. The Article and Section headings and Table of Contents used or contained in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. Use of a particular gender herein - 39 - 40 shall be considered to represent the masculine, feminine or neuter gender whenever appropriate. SECTION 6.11 INTEGRATION. This Agreement (including documents delivered pursuant hereto) and the Related Agreements constitute the entire agreement among the parties with respect to the subject matter thereof and there are no promises or undertakings with respect thereto not expressly set forth or referred to herein or therein. - 40 - 41 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. HAWTHORNE FINANCIAL CORPORATION By: /s/ Scott A. Braly ----------------------------------- Name: Scott A. Braly Title: President and Chief Executive Officer VALUE PARTNERS, LTD By: /s/ Timothy G. Ewing ----------------------------------- Name: Timothy G. Ewing Title: Partner-in-Charge SID R. BASS MANAGEMENT TRUST By: /s/ Sid R. Bass* ----------------------------------- Name: Sid R. Bass Title: Trustee THE BASS MANAGEMENT TRUST By: /s/ Perry R. Bass ----------------------------------- Name: Perry R. Bass Title: Trustee /s/ Mr. Lee M. Bass* ----------------------------------- Mr. Lee M. Bass - ---------- *By William P. Hallman, Jr., Attorney-in-fact. -41- 42 FORT PITT FUND, L.P. By: FORT PITT CAPITAL MANAGEMENT CORPORATION By: /s/ Harry F. Radcliffe ----------------------------------- Name: Harry F. Radcliffe Title: President and Chief Executive Officer PROSPER VALUE FUND, L.P. By: PROSPER CAPITAL MANAGEMENT, L.P., its General Partner By: CHAPARRAL CAPITAL CORPORATION, its General Partner By: /s/ David S. Hunt ----------------------------------- Name: David S. Hunt Title: President TYNDALL PARTNERS By: HALO CAPITAL PARTNERS, L.P., its General Partner By: /s/ Jeffrey Halis ----------------------------------- Name: Jeffrey Halis Title: General Partner -42- 43 /s/ Scott A. Braly ----------------------------------- Mr. Scott A. Braly /s/ Mr. David Hardin ----------------------------------- Mr. David Hardin /s/ Mr. Norman Morales ----------------------------------- Mr. Norman Morales /s/ Dr. Jeff Schultz ----------------------------------- Dr. Jeff Schultz /s/ Mr. Timothy B. Matz ----------------------------------- Mr. Timothy B. Matz -43- 44 EXHIBIT A
Name and Address of Purchaser No. of Units Dollar Amount - ----------------------------- ------------ ------------- Value Partners, LTD 17 Units $8,500,000 2200 Ross Avenue 4660 West Dallas, TX 75201 Attn: Mr. Timothy Ewing W (214) 999-1900 FAX (214) 999-1901 Lee M. Bass 6 Units $3,000,000 201 Main Street (32nd Floor) Fort Worth, TX 76102 Attn: Mr. Brian McManus W (817) 338-2681 FAX (817) 338-8366 Sid R. Bass Management 6 Units $3,000,000 Trust 201 Main Street (32nd Floor) Fort Worth, TX 76102 Attn: Mr. Brian McManus W (817) 338-2681 FAX (817) 338-8366 The Bass Management Trust 5 Units $2,500,000 201 Main Street (32nd Floor) Fort Worth, TX 76102 Attn: Mr. Brian McManus W (817) 338-2681 FAX (817) 338-8366 Fort Pitt Fund, L.P. 7 Units $3,500,000 Birmingham Tower Suite 710 2100 Wharton Street Pittsburgh, PA 15203 Attn: Mr. Harry F. Radcliffe W (412) 488-1550 FAX (412) 488-1930
-44- 45 Mr. Scott A. Braly 2.4 Units $1,200,000 Hawthorne Financial Corporation 2381 Rosecrans Avenue 2nd Floor El Segundo, CA 90245 W (310) 725-5600 FAX (310) 725-5038 Mr. David Hardin .2 Units $ 100,000 Hawthorne Financial Corporation 2381 Rosecrans Avenue 2nd Floor El Segundo, CA 90245 W (310) 725-5600 FAX (310) 725-5038 Mr. Norman Morales .4 Units $ 200,000 Hawthorne Financial Corporation 2381 Rosecrans Avenue 2nd Floor El Segundo, CA 90245 W (310) 725-5600 FAX (310) 725-5038 Prosper Value Fund, L.P. 2 Units $1,000,000 3900 Thanksgiving Tower Dallas, TX 75201 Attn: Mr. David Hunt W (214) 880-8484 FAX (214) 880-7101 Tyndall Partners 1 Unit $ 500,000 500 Park Avenue New York, NY 10022 Attn: Mr. Jeff Halis W (212) 486-4794 FAX (212) 644-4482 Dr. Jeff Schultz 3 Units $1,500,000 Christian Brothers University 650 East Parkway South Memphis, TN 38104 W (901) 722-0300 FAX (901) 722-0580
-45- 46 Mr. Timothy B. Matz 1 Unit $ 500,000 Elias, Matz, Tiernan & Herrick L.L.P. 734 15th Street, N.W. 12th Floor Washington, D.C. 20005 W (202) 347-0300 FAX (202) 347-2172
-46- EX-4.7 6 a70896ex4-7.txt EXHIBIT 4.7 1 EXHIBIT 4.7 ================================================================================ HAWTHORNE FINANCIAL CORPORATION ------------------------- ------------------------- INDENTURE Dated as of March 28, 2001 ------------------------- WILMINGTON TRUST COMPANY, as Debenture Trustee ------------------------- JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS .......................................................................... 1 SECTION 1.01 Definitions .............................................................. 1 SECTION 1.02 Business Day Certificate ................................................. 9 ARTICLE II SECURITIES .......................................................................... 9 SECTION 2.01 Forms Generally .......................................................... 9 SECTION 2.02 Execution and Authentication ............................................. 9 SECTION 2.03 Form and Payment ......................................................... 10 SECTION 2.04 Legends .................................................................. 10 SECTION 2.05 Interest ................................................................. 10 SECTION 2.06 Transfer and Exchange .................................................... 11 SECTION 2.07 Replacement Securities ................................................... 12 SECTION 2.08 Temporary Securities ..................................................... 12 SECTION 2.09 Cancellation ............................................................. 13 SECTION 2.10 Defaulted Interest ....................................................... 13 SECTION 2.11 CUSIP Numbers ............................................................ 14 ARTICLE III PARTICULAR COVENANTS OF THE CORPORATION ............................................ 14 SECTION 3.01 Payment of Principal and Interest ........................................ 14 SECTION 3.02 Offices for Notices and Payments, etc. ................................... 14 SECTION 3.03 Appointments to Fill Vacancies in Debenture Trustee's Office ............. 15 SECTION 3.04 Provision as to Paying Agent ............................................. 15 SECTION 3.05 Certificate to Debenture Trustee ......................................... 16 SECTION 3.06 Compliance with Consolidation Provisions ................................. 16 SECTION 3.07 Limitation on Dividends .................................................. 16 SECTION 3.08 Covenants as to the Trust ................................................ 17 SECTION 3.09 Payment of Expenses ...................................................... 17 SECTION 3.10 Payment Upon Resignation or Removal ...................................... 18 ARTICLE IV LIST OF SECURITYHOLDERS AND REPORTS BY THE CORPORATION AND THE DEBENTURE TRUSTEE .... 18 SECTION 4.01 List of Securityholders .................................................. 18 SECTION 4.02 Preservation and Disclosure of Lists ..................................... 18 SECTION 4.03 Reports by the Corporation ............................................... 20 SECTION 4.04 Reports by the Debenture Trustee ......................................... 21 ARTICLE V REMEDIES OF THE DEBENTURE TRUSTEE AND SECURITYHOLDERS UPON EVENT OF DEFAULT .......... 21
i 3 SECTION 5.01 Events of Default ............................................. 21 SECTION 5.02 Payment of Securities on Default; Suit Therefor ............... 23 SECTION 5.03 Application of Moneys Collected by Debenture Trustee .......... 24 SECTION 5.04 Proceedings by Securityholders ................................ 25 SECTION 5.05 Proceedings by Debenture Trustee .............................. 26 SECTION 5.06 Remedies Cumulative and Continuing ............................ 26 SECTION 5.07 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders ............................................ 26 SECTION 5.08 Notice of Defaults ............................................ 27 SECTION 5.09 Undertaking to Pay Costs ...................................... 28 ARTICLE VI CONCERNING THE DEBENTURE TRUSTEE ......................................... 28 SECTION 6.01 Duties and Responsibilities of Debenture Trustee .............. 28 SECTION 6.02 Reliance on Documents, Opinions, etc. ......................... 29 SECTION 6.03 No Responsibility for Recitals, etc. .......................... 31 SECTION 6.04 Debenture Trustee, Authenticating Agent, Paying Agents, Transfer Agents and Registrar May Own Securities .............. 31 SECTION 6.05 Moneys to be Held in Trust .................................... 31 SECTION 6.06 Compensation and Expenses of Debenture Trustee ................ 31 SECTION 6.07 Officers' Certificate as Evidence ............................. 32 SECTION 6.08 Conflicting Interest of Debenture Trustee ..................... 32 SECTION 6.09 Eligibility of Debenture Trustee .............................. 33 SECTION 6.10 Resignation or Removal of Debenture Trustee ................... 33 SECTION 6.11 Acceptance by Successor Debenture Trustee ..................... 34 SECTION 6.12 Succession by Merger, etc. .................................... 35 SECTION 6.13 Limitation on Rights of Debenture Trustee as a Creditor ....... 35 SECTION 6.14 Authenticating Agents ......................................... 35 ARTICLE VII CONCERNING THE SECURITYHOLDERS .......................................... 37 SECTION 7.01 Action by Securityholders ..................................... 37 SECTION 7.02 Proof of Execution by Securityholders ......................... 37 SECTION 7.03 Who Are Deemed Absolute Owners ................................ 38 SECTION 7.04 Securities Owned by Corporation Deemed Not Outstanding ........ 38 SECTION 7.05 Revocation of Consents; Future Holders Bound .................. 38 ARTICLE VIII MEETINGS OF SECURITYHOLDERS ............................................ 39 SECTION 8.01 Purposes of Meetings .......................................... 39 SECTION 8.02 Call of Meetings by Debenture Trustee ......................... 39 SECTION 8.03 Call of Meetings by Corporation or Securityholders ............ 39 SECTION 8.04 Qualifications for Voting ..................................... 40 SECTION 8.05 Regulations ................................................... 40 SECTION 8.06 Voting ........................................................ 40 ARTICLE IX AMENDMENTS ............................................................... 41
ii 4 SECTION 9.01 Without Consent of Securityholders .............................. 41 SECTION 9.02 With Consent of Securityholders ................................. 42 SECTION 9.03 Compliance with Trust Indenture Act; Effect of Supplemental Indentures ...................................................... 43 SECTION 9.04 Notation on Securities .......................................... 43 SECTION 9.05 Evidence of Compliance of Supplemental Indenture to be Furnished to Debenture Trustee .................................. 44 ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE, TRANSFER AND LEASE .................. 44 SECTION 10.01 Corporation May Consolidate, etc., on Certain Terms ............. 44 SECTION 10.02 Successor Person to be Substituted for Corporation .............. 44 SECTION 10.03 Opinion of Counsel to be Given Debenture Trustee ................ 45 ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE ..................................... 45 SECTION 11.01 Discharge of Indenture .......................................... 45 SECTION 11.02 Deposited Moneys and U.S. Government Obligations to be Held in Trust by Debenture Trustee ................................... 46 SECTION 11.03 Paying Agent to Repay Moneys Held ............................... 46 SECTION 11.04 Return of Unclaimed Moneys ...................................... 46 SECTION 11.05 Defeasance Upon Deposit of Moneys or U.S. Government Obligations ..................................................... 47 ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS ............ 48 SECTION 12.01 Indenture and Securities Solely Corporate Obligations ........... 48 ARTICLE XIII MISCELLANEOUS PROVISIONS .................................................. 48 SECTION 13.01 Successors ...................................................... 48 SECTION 13.02 Official Acts by Successor Corporation .......................... 48 SECTION 13.03 Surrender of Corporation Powers ................................. 49 SECTION 13.04 Addresses for Notices, etc. ..................................... 49 SECTION 13.05 Governing Law ................................................... 49 SECTION 13.06 Evidence of Compliance with Conditions Precedent ................ 49 SECTION 13.07 Business Days ................................................... 50 SECTION 13.08 Trust Indenture Act to Control .................................. 50 SECTION 13.09 Table of Contents, Headings, etc. ............................... 50 SECTION 13.10 Execution in Counterparts ....................................... 50 SECTION 13.11 Separability .................................................... 50 SECTION 13.12 Assignment ...................................................... 50 SECTION 13.13 Acknowledgment of Rights ........................................ 51 ARTICLE XIV PREPAYMENT OF SECURITIES ................................................... 51
iii 5 SECTION 14.01 Special Event Prepayment ................................ 51 SECTION 14.02 Optional Prepayment by Corporation ...................... 51 SECTION 14.03 No Sinking Fund ......................................... 52 SECTION 14.04 Notice of Prepayment; Selection of Securities ........... 53 SECTION 14.05 Payment of Securities Called for Prepayment ............. 53 ARTICLE XV SUBORDINATION OF SECURITIES ......................................... 54 SECTION 15.01 Agreement to Subordinate ................................ 54 SECTION 15.02 Default on Senior Indebtedness .......................... 54 SECTION 15.03 Liquidation; Dissolution; Bankruptcy .................... 55 SECTION 15.04 Subrogation ............................................. 56 SECTION 15.05 Debenture Trustee to Effectuate Subordination ........... 57 SECTION 15.06 Notice by the Corporation ............................... 57 SECTION 15.07 Rights of the Debenture Trustee; Holders of Senior Indebtedness ............................................ 58 SECTION 15.08 Subordination May Not Be Impaired ....................... 58 ARTICLE XVI EXTENSION OF INTEREST PAYMENT PERIOD ............................... 59 SECTION 16.01 Extension of Interest Payment Period .................... 59 SECTION 16.02 Notice of Extension ..................................... 60
TESTIMONIUM SIGNATURES EXHIBIT A iv 6 Tie Sheet of provisions of Trust Indenture Act of 1939 with Indenture dated as of March 28, 2001 between Hawthorne Financial Corporation and Wilmington Trust Company, as Debenture Trustee:
ACT SECTION INDENTURE SECTION 310(a)(1) ...................................... 6.09 (a)(2) ...................................... 6.09, 6.10, 6.11 310(a)(3) ...................................... N/A (a)(4) ...................................... N/A 310(a)(5) ...................................... 6.09, 6.10, 6.11 310(b) ...................................... 6.08 310(c) ...................................... N/A 311(a) ...................................... 6.13 311(b) ...................................... 6.13 311(c) ...................................... N/A 312(a) ...................................... 4.01(a) and 4.02(a) 312(b) ...................................... 4.02(b) 312(c) ...................................... 4.02(c) 313(a) ...................................... 4.04(a) 313(b)(1) ...................................... 4.04(a) 313(b)(2) ...................................... 4.04(a) 313(c) ...................................... 4.04(a) 313(d) ...................................... 4.04(b) 314(a) ...................................... 3.05, 4.03 314(b) ...................................... N/A 314(c)(1) ...................................... 6.07 and 13.06 314(c)(2) ...................................... 6.07 and 13.06 314(c)(3) ...................................... N/A 314(d) ...................................... N/A 314(e) ...................................... 6.07, 13.06 314(f) ...................................... N/A 315(a)(c) and (d) ...................................... 6.01 315(b) ...................................... 5.08 315(e) ...................................... 5.09 316(a)(1) ...................................... 5.07 316(a)(2) ...................................... N/A 316(a) last sentence ...................................... 9.02 316(b) ...................................... 5.07 and 9.02 316(c) ...................................... 7.01 and 9.02 317(a) ...................................... 5.05 317(b) ...................................... 6.05 318 ...................................... 13.08
- ---------------- THIS TIE-SHEET IS NOT PART OF THE INDENTURE AS EXECUTED. v 7 THIS INDENTURE, dated as of March 28, 2001, between Hawthorne Financial Corporation, a Delaware corporation (hereinafter called the "Corporation"), and Wilmington Trust Company, a Delaware banking corporation, as debenture trustee (hereinafter sometimes called the "Debenture Trustee"). W I T N E S S E T H : In consideration of the premises, and the purchase of the Securities (as defined below) by the holders thereof, the Corporation covenants and agrees with the Debenture Trustee for the equal and proportionate benefit of the respective holders from time to time of the Securities, as follows: ARTICLE I DEFINITIONS SECTION 1.01 Definitions. The terms defined in this Section 1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture shall have the respective meanings specified in this Section 1.01. All other terms used in this Indenture which are defined in the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), or which are by reference therein defined in the Securities Act of 1933, as amended (the "Securities Act"), shall (except as herein otherwise expressly provided or unless the context otherwise requires) have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of this Indenture as originally executed. The following terms have the meanings given to them in the Declaration (as defined below): (i) Delaware Trustee; (ii) Property Trustee; (iii) Administrative Trustees; (iv) Capital Securities; (v) Direct Action; (vi) Capital Securities Guarantee; (vii) Distributions; (viii) Common Securities; and (ix) Common Securities Guarantee. All accounting terms used herein and not expressly defined shall have the meanings assigned to such terms in accordance with generally accepted accounting principles, and the term "generally accepted accounting principles" means such accounting principles as are generally accepted at the time of any computation. The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Headings are used for convenience of reference only and do not affect interpretation. The singular includes the plural and vice versa. "Additional Sums" shall have the meaning set forth in Section 2.05(c). "Affiliate" shall have the meaning given to that term in Rule 405 under the Securities Act or any successor rule thereunder. "Allocable Amounts," when used with respect to any Senior Indebtedness, means all amounts due or to become due on such Senior Indebtedness less, if applicable, any amount which would have been paid to, and retained by, the holders of such Senior Indebtedness (whether as a result of the receipt of payments by the holders of such Senior Indebtedness from the Corporation or any other obligor thereon or from any holders of, or trustee in respect of, other indebtedness that is subordinate and junior in right of payment to such Senior Indebtedness 8 pursuant to any provision of such indebtedness for the payment over of amounts received on account of such indebtedness to the holders of such Senior Indebtedness or otherwise) but for the fact that such Senior Indebtedness is subordinate or junior in right of payment to (or subject to a requirement that amounts received on such Senior Indebtedness be paid over to obligees on) trade accounts payable or accrued liabilities arising in the ordinary course of business. "Authenticating Agent" shall mean any agent or agents of the Debenture Trustee which at the time shall be appointed and acting pursuant to Section 6.14. "Bankruptcy Law" shall mean Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" shall mean either the Board of Directors of the Corporation or any duly authorized committee of that board. "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Corporation to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Debenture Trustee. "Business Day" shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in Wilmington, Delaware, El Segundo, California or New York, New York are authorized or required by law or executive order to remain closed. "Capital Securities" shall mean undivided beneficial interests in the assets of the Trust which are designated as "MMCapS(SM)" and rank pari passu with the Common Securities issued by the Trust; provided, however, that if an Event of Default has occurred and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the holders of the Capital Securities shall be paid in full the Distributions and the liquidation, redemption and other payments to which they are entitled. "Capital Securities Guarantee" shall mean any guarantee agreement that the Corporation may enter into with Wilmington Trust Company or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities. "Commission" shall mean the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Securities" shall mean undivided beneficial interests in the assets of the Trust which are designated as "Common Securities" and rank pari passu with Capital Securities issued by the Trust; provided, however, that if an Event of Default has occurred and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the holders of the Capital Securities shall be paid in full the Distributions and the liquidation, redemption and other payments to which they are then entitled. 2 9 "Common Securities Guarantee" shall mean any guarantee that the Corporation may enter into that operates directly or indirectly for the benefit of holders of Common Securities. "Common Stock" shall mean the Common Stock, $.01 par value per share, of the Corporation or any other class of stock resulting from changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. "Compounded Interest" shall have the meaning set forth in Section 16.01. "Corporation" shall mean the person identified as "corporation" in the preamble to this Indenture and, subject to the provisions of Article X, shall also include its successors and assigns. "Corporation Request" or "Corporation Order" shall mean a written request or order signed in the name of the Corporation by an Officer and delivered to the Debenture Trustee. "Coupon Rate" shall have the meaning set forth in Section 2.05(a). "Custodian" shall mean any receiver, trustee, assignee, liquidator, or similar official under any Bankruptcy Law. "Debenture Trustee" shall mean the Person identified as "Debenture Trustee" in the preamble to this Indenture and, subject to the provisions of Article VI hereof, shall also include its successors and assigns. "Declaration" shall mean the Amended and Restated Declaration of Trust of the Trust, dated as of March 28, 2001, by and among the Trustees (as defined therein), the Corporation, as sponsor, and the holders from time to time of undivided beneficial interest in the assets of the Trust, as amended from time to time. "Default" shall mean any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Interest" shall have the meaning set forth in Section 2.10. "Deferred Interest" shall have the meaning set forth in Section 16.01. "Dissolution Event" shall mean any event resulting in the dissolution of the Trust pursuant to the Declaration, and the distribution of the Securities held by the Property Trustee to the holders of the Trust Securities issued by the Trust pro rata in accordance with the Declaration. "Event of Default" shall mean any event specified in Section 5.01, continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 3 10 "Extended Interest Payment Period" shall have the meaning set forth in Section 16.01. "Federal Reserve" shall mean the Board of Governors of the Federal Reserve System. "Indebtedness" shall mean, whether recourse as to all or a portion of the assets of the Corporation and whether or not contingent, (i) every obligation of the Corporation for money borrowed; (ii) every obligation of the Corporation evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of the Corporation with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of the Corporation; (iv) every obligation of the Corporation issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of the Corporation; (vi) all indebtedness of the Corporation, whether incurred on or prior to the date of this Indenture or hereafter incurred, for claims in respect of derivative products, including interest rate, foreign exchange rate and commodity forward contracts, options and swaps and similar arrangements; and (vii) every obligation of the type referred to in clauses (i) through (vi) of another Person and all dividends of another Person the payment of which, in either case, the Corporation has guaranteed or is responsible or liable for directly or indirectly, as obligor or otherwise. "Indebtedness Ranking on a Parity with the Securities" shall mean (i) Indebtedness, whether outstanding on the date of execution of this Indenture or hereafter created, assumed or incurred, to the extent such Indebtedness by its terms ranks pari passu with and not junior to or prior or senior to the Securities in the right of payment upon the happening of the dissolution, winding-up, liquidation or reorganization of the Corporation, and (ii) all other debt securities, and guarantees in respect of those debt securities, issued to any trust other than the Trust, or a trustee of such trust, partnership or other entity affiliated with the Corporation, that is a financing vehicle of the Corporation (a "financing entity") in connection with the issuance by such financing entity of equity securities or other securities guaranteed by the Corporation pursuant to an instrument that ranks pari passu with or junior in right of payment to the Capital Securities Guarantee. The securing of any Indebtedness otherwise constituting Indebtedness Ranking on a Parity with the Securities shall not be deemed to prevent such Indebtedness from constituting Indebtedness Ranking on a Parity with the Securities with respect to any assets of the Corporation not securing such Indebtedness. "Indebtedness Ranking Junior to the Securities" shall mean any Indebtedness, whether outstanding on the date of execution of this Indenture or hereafter created, assumed or incurred, to the extent such Indebtedness by its terms ranks junior to and not pari passu with or prior or senior to the Securities in right of payment upon the happening of the dissolution or winding-up or liquidation or reorganization of the Corporation. The securing of any Indebtedness otherwise constituting Indebtedness Ranking Junior to the Securities shall not be deemed to prevent such Indebtedness from constituting Indebtedness Ranking Junior to the Securities with respect to any assets of the Corporation not securing such Indebtedness. "Indenture" shall mean this instrument as originally executed or, if amended as herein provided, as so amended. 4 11 "Initial Optional Prepayment Date" shall mean June 8, 2011. "Interest Payment Date" shall have the meaning set forth in Section 2.05(a). "Investment Company" shall mean an investment company as defined in the Investment Company Act. "Investment Company Act" shall mean the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Investment Company Event" shall mean the receipt by the Corporation and the Trust of a written opinion of independent securities counsel experienced in such matters to the effect that as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any rules, guidelines or policies of any applicable regulatory authority for the Corporation or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of original issuance of the Securities, the Trust is, or within 90 days of the date of such opinion will be, considered an investment company that is required to be registered under the Investment Company Act. "Like Amount" shall mean (i) with respect to a redemption of the Trust Securities, Trust Securities having a liquidation amount equal to the principal amount of Securities to be paid with their terms and (ii) with respect to a distribution of Securities upon the liquidation of the Trust, Securities having a principal amount equal to the liquidation amount of the Trust Securities of the holder to whom Securities are distributed, pursuant to Section 2.06(c). "Maturity Date" shall mean June 8, 2031. "Officers" shall mean any of the Chairman, the Chief Executive Officer, the President, an Executive or Senior Vice President, the Chief Financial Officer, the Secretary or an Assistant Secretary of the Corporation. "Officers' Certificate" shall mean a certificate signed by two Officers and delivered to the Debenture Trustee. "Opinion of Counsel" shall mean a written opinion of counsel, who may be an employee of the Corporation, and who shall be reasonably acceptable to the Debenture Trustee. "Optional Prepayment Price" shall have the meaning set forth in Section 14.02(a). "Other Debentures" shall mean all junior subordinated debentures other than the Securities issued by the Corporation from time to time and sold to trusts other than the Trust to be established by the Corporation (if any), in each case similar to the Trust. "Other Guarantees" shall mean all guarantees other than the Capital Securities Guarantee and the Common Securities Guarantee issued by the Corporation with respect to preferred 5 12 beneficial interests (if any) issued to trusts other than the Trust to be established by the Corporation (if any), in each case similar to the Trust. "Outstanding" when used with reference to the Securities, shall mean, subject to the provisions of Section 7.04, as of any particular time, all Securities authenticated and delivered by the Debenture Trustee or the Authenticating Agent under this Indenture, except (a) Securities theretofore canceled by the Debenture Trustee or the Authenticating Agent or delivered to the Debenture Trustee for cancellation; (b) Securities, or portions thereof, for the payment or prepayment of which moneys in the necessary amount shall have been deposited in trust with the Debenture Trustee or with any paying agent (other than the Corporation) or shall have been set aside and segregated in trust by the Corporation (if the Corporation shall act as its own paying agent); provided that, if such Securities, or portions thereof, are to be prepaid prior to maturity thereof, notice of such prepayment shall have been given as set forth in Article XIV or provision satisfactory to the Debenture Trustee shall have been made for giving such notice; (c) Securities in lieu of or in substitution for which other Securities shall have been authenticated and delivered pursuant to the terms of Section 2.07 unless proof satisfactory to the Corporation and the Debenture Trustee is presented that any such Securities are held by bona fide holders in due course and; (d) Securities held by the Corporation, the Trust or any Affiliate thereof. "Person" shall mean any individual, corporation, estate, partnership, joint venture, national banking association, association, joint-stock company, limited liability company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Placement Agency Agreement" shall mean the Placement Agency Agreement, dated March 21, 2001, by and among the Corporation, the Trust and the Placement Agent. "Placement Agent" shall mean Sandler O'Neill & Partners, L.P. "Predecessor Security" of any particular Security shall mean every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 2.07 in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Security. "Prepayment Price" shall mean the Special Event Prepayment Price or Optional Prepayment Price, as the context requires. "Principal Office of the Debenture Trustee," or other similar term, shall mean the office of the Debenture Trustee, at which at any particular time its corporate trust business shall be administered. 6 13 "Regulatory Capital Event" shall mean the receipt by the Corporation and the Trust of a written opinion of independent bank regulatory counsel experienced in such matters to the effect that as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any rules, guidelines or policies of an applicable regulatory authority for the Corporation or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of original issuance of the Securities, the Capital Securities do not constitute, or within 90 days of the date of such opinion will not constitute, Tier 1 Capital (or its then equivalent) if the Corporation is a bank holding company or if the Corporation is a savings and loan holding company and is then subject to similar capital adequacy requirements; provided, however, that the distribution of the Securities in connection with the liquidation of the Trust by the Corporation shall not in and of itself constitute a Regulatory Capital Event. "Responsible Officer" shall mean any officer of the Debenture Trustee's Corporate Trust Administration department with direct responsibility for the administration of the Indenture and also means, with respect to a particular corporate trust matter, any other officer of the Debenture Trustee to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. "Restricted Security" shall mean Securities that bear or are required to bear the legends relating to transfer restrictions under the Securities Act set forth in Exhibit A hereto. "Rule 144A" shall mean Rule 144A under the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. "Securities" shall mean the Corporation's 10.18% Junior Subordinated Deferrable Interest Debentures due June 8, 2031, as authenticated and issued under this Indenture. "Securities Act" shall mean the Securities Act of 1933, as amended. "Securityholder," "holder of Securities," or other similar terms, shall mean any Person in whose name at the time a particular Security is registered in the Security Register kept by the Corporation or the Debenture Trustee for that purpose in accordance with the terms of this Indenture. "Security Register" shall mean (i) prior to a Dissolution Event, the list of holders provided to the Debenture Trustee pursuant to Section 4.01, and (ii) following a Dissolution Event, any security register maintained by a security registrar for the Securities appointed by the Corporation following the execution of a supplemental indenture providing for transfer procedures as provided for in Section 2.06(a). "Senior Indebtedness" shall mean the principal of (and premium, if any) and interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Corporation whether or not such claim for post petition interest is allowed in such proceedings), on all Indebtedness, whether outstanding on the date of execution of this Indenture, or hereafter created, assumed or incurred, except Indebtedness Ranking on a 7 14 Parity with the Securities or Indebtedness Ranking Junior to the Securities, and any deferrals, renewals or extensions of such Senior Indebtedness. "Special Event" shall mean an Investment Company Event, a Regulatory Capital Event or a Tax Event, as the context requires. "Special Event Prepayment Price" shall mean, with respect to any prepayment of the Securities following a Special Event, an amount in cash equal to (i) 106.090 of the principal amount of the Securities to be prepaid if the Special Event occurs prior to June 8, 2011 and (ii) if the Special Event occurs on or after June 8, 2011, the amount of the Optional Prepayment Price (calculated as if the Corporation had prepaid such Securities on such date), plus, in the case of (i) and (ii), any accrued and unpaid interest thereon (including Compounded Interest and Additional Sums, if any) to the date of such prepayment. "Subscription Agreement" shall mean the Capital Securities Subscription Agreement, dated March 21, 2001, by and among the Corporation, the Trust and the Purchaser named therein. "Subsidiary" shall mean with respect to any Person, (i) any corporation at least a majority of the outstanding voting stock of which is owned, directly or indirectly, by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries, (ii) any general partnership, joint venture, limited liability company or similar entity, at least a majority of whose outstanding partnership, membership or similar interests shall at the time be owned by such Person or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries and (iii) any limited partnership of which such Person or any of its Subsidiaries is a general partner. For the purposes of this definition, "voting stock" means shares, interests, participations or other equivalents in the equity interest (however designated) in such Person having ordinary voting power for the election of a majority of the directors (or the equivalent) of such Person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency. "Tax Event" shall mean the receipt by the Trust and the Corporation of a written opinion of independent tax counsel experienced in such matters to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of original issuance of the Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Securities, (ii) the interest payable by the Corporation on the Securities is not, or within 90 days of the date of such opinion will not be, deductible by the Corporation, in whole or in part, for United States federal income tax purposes or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. 8 15 "Trust" shall mean HFC Capital Trust I, a Delaware business trust created for the purpose of issuing its undivided beneficial interests in connection with the issuance of Securities under this Indenture. "Trust Securities" shall mean, collectively, the Capital Securities and the Common Securities. "U.S. Government Obligations" shall mean securities that are (i) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case under clauses (i) or (ii), are not callable or prepayable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank or trust company as custodian with respect to any such U.S. Government Obligation or a specific payment of interest on or principal of any such U.S. Government Obligation held by such custodian for the account of the holder of a depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction with respect to the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of interest on or principal of the U.S. Government Obligation evidenced by such depository receipt. SECTION 1.02 Business Day Certificate. On the date of execution and delivery of this Indenture (with respect to the remainder of calendar year 2001) and within 15 days prior to the end of each calendar year while this Indenture remains in effect (with respect to succeeding calendar years), the Corporation shall deliver to the Debenture Trustee an Officers' Certificate specifying the days on which banking institutions or trust companies in Wilmington, Delaware, El Segundo, California and New York, New York are then authorized or obligated by law or executive order to remain closed. ARTICLE II SECURITIES SECTION 2.01 Forms Generally. The Securities and the Debenture Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, the terms of which are incorporated in and made a part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Corporation is subject or usage. Each Security shall be dated the date of its authentication. SECTION 2.02 Execution and Authentication. An Officer shall sign the Securities for the Corporation by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. 9 16 A Security shall not be valid until authenticated by the manual signature of the Debenture Trustee. The signature of the Debenture Trustee shall be conclusive evidence that the Security has been authenticated under this Indenture. The Debenture Trustee shall, upon a Corporation Order, authenticate for original issue up to, and the aggregate principal amount of Securities outstanding at any time may not exceed, $9,300,000 aggregate principal amount of the Securities, except as provided in Sections 2.06, 2.07, 2.08 and 14.05. SECTION 2.03 Form and Payment. The Securities shall be issued in fully registered certificated form without interest coupons. Principal of and premium, if any, and interest on the Securities will be payable in immediately available funds, the transfer of such Securities will be registerable and such Securities will be exchangeable for Securities bearing identical terms and provisions, at the office or agency of the Corporation maintained for such purpose under Section 3.02; provided, however, that payments of interest shall be made by transfer to an account maintained by the Person entitled thereto unless proper transfer instructions have not been received in writing by the relevant record date, in which case such payments shall be made by check mailed to the holder at such address as shall appear in the Security Register. Notwithstanding the foregoing, so long as the holder of any Securities is the Property Trustee, the payment of the principal of and premium, if any, and interest (including Compounded Interest if any) and Additional Sums, if any, on such Securities held by the Property Trustee will be made at such place and to such account as may be designated by the Property Trustee. SECTION 2.04 Legends. Except as otherwise determined by the Corporation in accordance with applicable law, each Security shall bear the applicable legends relating to restrictions on transfer pursuant to the Securities Act and any other applicable securities laws in substantially the form set forth on Exhibit A hereto. SECTION 2.05 Interest. (a) Each Security will bear interest, at the rate of 10.18% per annum (the "Coupon Rate"), from the most recent date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from March 28, 2001, until the principal thereof becomes due and payable, and at the Coupon Rate on any overdue principal (and premium, if any) and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest, compounded semi-annually, payable (subject to the provisions of Article XVI) semi-annually in arrears on June 8th and December 8th of each year, commencing June 8, 2001 (each, an "Interest Payment Date"), to the Person in whose name such Security or any predecessor Security is registered at the close of business on the regular record date for such interest installment, which shall be the 15th day of the month immediately preceding the month in which the relevant Interest Payment Date falls. (b) The amount of interest payable on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. 10 17 (c) During such time as the Property Trustee is the holder of any Securities, the Corporation shall pay any additional amounts on the Securities as may be necessary in order that the amount of Distributions then due and payable by the Trust on the outstanding Trust Securities shall not be reduced as a result of any additional taxes, duties and other governmental charges to which the Trust has become subject as a result of a Tax Event ("Additional Sums"). SECTION 2.06 Transfer and Exchange. (a) Transfer Restrictions. (i) The Securities may not be transferred except in compliance with the legend contained in Exhibit A unless otherwise determined by the Corporation in accordance with applicable law. Upon any distribution of the Securities following a Dissolution Event, the Corporation and the Debenture Trustee shall enter into a supplemental indenture pursuant to Section 9.01 to provide for the transfer restrictions and procedures with respect to the Securities substantially similar to those contained in the Declaration to the extent applicable in the circumstances existing at such time. (ii) The Securities will be issued and may be transferred only in blocks having an aggregate principal amount of not less than $100,000 and in multiples of $1,000 in excess thereof. Any attempted transfer of the Securities in a block having an aggregate principal amount of less than $100,000 shall be deemed to be voided and of no legal effect whatsoever. Any such purported transferee shall be deemed not to be a holder of such Securities for any purpose, including, but not limited to the receipt of payments on such Securities, and such purported transferee shall be deemed to have no interest whatsoever in such Securities. (b) General Provisions Relating to Transfers and Exchanges. To permit registrations of transfers and exchanges, the Corporation shall execute and the Debenture Trustee shall authenticate Securities at the request of the security registrar. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Corporation, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. No service charge shall be made to a holder for any registration of transfer or exchange, but the Corporation may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith. The Corporation shall not be required to: (i) issue, register the transfer of or exchange Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of prepayment or any notice of selection of Securities for prepayment under Article XIV hereof and ending at the close of business on the day of such mailing; or (ii) register the transfer of or exchange any Security so selected for prepayment in whole or in part, except the nonprepaid portion of any Security being prepaid in part. Prior to due presentment for the registration of a transfer of any Security, the Debenture Trustee, the Corporation and any agent of the Debenture Trustee or the Corporation may deem and treat the Person in whose name any Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and premium, if any, and interest 11 18 on such Securities, and none of the Debenture Trustee, the Corporation or any agents of the Debenture Trustee or the Corporation shall be affected by notice to the contrary. (c) Exchanges in Connection With a Dissolution Event. In connection with a Dissolution Event, the Securities shall be presented to the Debenture Trustee by the Property Trustee and any Capital Security certificates which represent Capital Securities will be deemed to represent a beneficial interest in Securities having an aggregate principal amount equal to the aggregate liquidation amount of the Capital Securities until such Capital Security certificates are presented to the security registrar for the Securities for transfer or reissuance, at which time such Capital Security certificates will be canceled, and a Security in a Like Amount, registered in the name of the holder of the Capital Security certificate or the transferee of the holder of such Capital Security certificate, as the case may be, will be executed by the Corporation and delivered to the Debenture Trustee for authentication and delivery in accordance with this Indenture; and upon the issuance of such Securities to the holders, or transferee of the holder, of such Capital Security certificate, Securities with an equivalent aggregate principal amount that were presented by the Property Trustee to the Debenture Trustee will be canceled. SECTION 2.07 Replacement Securities. If any mutilated Security is surrendered to the Debenture Trustee, or the Corporation and the Debenture Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, the Corporation shall issue and the Debenture Trustee shall authenticate a replacement Security if the Debenture Trustee's requirements for replacements of Securities are met. An indemnity bond must be supplied by the holder that is sufficient in the judgment of the Debenture Trustee and the Corporation to protect the Corporation, the Debenture Trustee, any agent thereof or any Authenticating Agent from any loss that any of them may suffer if a Security is replaced. The Corporation or the Debenture Trustee may charge for its expenses in replacing a Security. Every replacement Security is an obligation of the Corporation and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Securities duly issued hereunder. SECTION 2.08 Temporary Securities. Pending the preparation of definitive Securities, the Corporation may execute, and upon Corporation Order the Debenture Trustee shall authenticate and make available for delivery, temporary Securities that are printed, lithographed, typewritten, mimeographed or otherwise reproduced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the Officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Corporation shall cause definitive Securities to be prepared without unreasonable delay. The definitive Securities shall be printed, lithographed or engraved, or provided by any combination thereof, or in any other manner permitted by the rules and regulations of any applicable securities exchange, all as determined by the Officers 12 19 executing such definitive Securities. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency maintained by the Corporation for such purpose pursuant to Section 3.02 hereof, without charge to the holder thereof. Upon surrender for cancellation of any one or more temporary Securities, the Corporation shall execute, and the Debenture Trustee shall authenticate and make available for delivery, in exchange therefor the same aggregate principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 2.09 Cancellation. The Corporation at any time may deliver Securities to the Debenture Trustee for cancellation. The Debenture Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation and shall return such canceled Securities to the Corporation. The Corporation may not issue new Securities to replace Securities that have been prepaid or paid or that have been delivered to the Debenture Trustee for cancellation. SECTION 2.10 Defaulted Interest. Any interest on any Security that is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the holder on the relevant regular record date by virtue of having been such holder; and such Defaulted Interest shall be paid by the Corporation, at its election, as provided in clause (a) or clause (b) below: (a) The Corporation may make payment of any Defaulted Interest on Securities to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner: the Corporation shall notify the Debenture Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Security and the date of the proposed payment, and at the same time the Corporation shall deposit with the Debenture Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Debenture Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon, the Debenture Trustee shall fix a special record date for the payment of such Defaulted Interest which shall not be more than 15 nor less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Debenture Trustee of the notice of the proposed payment. The Debenture Trustee shall promptly notify the Corporation of such special record date and, in the name and at the expense of the Corporation, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first class postage prepaid, to each Securityholder at his or her address as it appears in the Security Register, not less than 10 days prior to such special record date. Notice of the proposed payment of such Defaulted 13 20 Interest and the special record date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the Persons in whose names such Securities (or their respective Predecessor Securities) are registered on such special record date and shall be no longer payable pursuant to the following clause (b). (b) The Corporation may make payment of any Defaulted Interest on any Securities in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Corporation to the Debenture Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Debenture Trustee. SECTION 2.11 CUSIP Numbers. The Corporation in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Debenture Trustee shall use "CUSIP" numbers in notices of prepayment as a convenience to Securityholders; provided, however, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a prepayment and that reliance may be placed only on the other identification numbers printed on the Securities, and any such prepayment shall not be affected by any defect in or omission of such numbers. The Corporation will promptly notify the Debenture Trustee of any change in the CUSIP numbers. ARTICLE III PARTICULAR COVENANTS OF THE CORPORATION SECTION 3.01 Payment of Principal and Interest. The Corporation covenants and agrees for the benefit of the holders of the Securities that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on the Securities at the place, at the respective times and in the manner provided herein. The Corporation further covenants to pay any and all amounts due in respect of the Securities, including, without limitation, Additional Sums, as may be required pursuant to Section 2.05(c) and Compounded Interest, as may be required pursuant to Section 16.01. SECTION 3.02 Offices for Notices and Payments, etc. So long as any of the Securities remain outstanding, the Corporation will maintain in Wilmington, Delaware an office or agency where the Securities may be presented for payment, an office or agency where the Securities may be presented for registration of transfer and for exchange as in this Indenture provided and an office or agency where notices and demands to or upon the Corporation in respect of the Securities or this Indenture may be served. The Corporation will give to the Debenture Trustee written notice of the location of any such office or agency and of any change of location thereof. Until otherwise designated from time to time by the Corporation in a notice to the Debenture Trustee, any such office or agency for all of the above purposes shall be the Principal Office of the Debenture Trustee. In case the Corporation shall fail to maintain any such office or agency or shall fail to give such notice of the location or 14 21 of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Debenture Trustee. In addition to any such office or agency, the Corporation may from time to time designate one or more offices or agencies outside Wilmington, Delaware where the Securities may be presented for payment, for registration of transfer and for exchange and where notices and demands to or upon the Corporation in respect of the Securities or this Indenture may be served in the manner provided in this Indenture, and the Corporation may from time to time rescind such designation, as the Corporation may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Corporation of its obligation to maintain any such office or agency in Wilmington, Delaware for the purposes above mentioned. The Corporation will give to the Debenture Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.03 Appointments to Fill Vacancies in Debenture Trustee's Office. The Corporation, whenever necessary to avoid or fill a vacancy in the office of Debenture Trustee, will appoint, in the manner provided in Section 6.10, a Debenture Trustee, so that there shall at all times be a Debenture Trustee hereunder. SECTION 3.04 Provision as to Paying Agent. (a) If the Corporation shall appoint a paying agent other than the Debenture Trustee with respect to the Securities, it will cause such paying agent to execute and deliver to the Debenture Trustee an instrument in which such agent shall agree with the Debenture Trustee, subject to the provisions of this Section 3.04, (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest on the Securities (whether such sums have been paid to it by the Corporation or by any other obligor on the Securities) in trust for the benefit of the holders of the Securities; and (2) that it will give the Debenture Trustee notice of any failure by the Corporation (or by any other obligor on the Securities) to make any payment of the principal of or premium, if any, or interest (including Additional Sums and Compounded Interest, if any) on the Securities when the same shall be due and payable. (b) If the Corporation shall act as its own paying agent, it will, on or before each due date of the principal of and premium, if any, or interest on the Securities, set aside, segregate and hold in trust for the benefit of the holders of the Securities a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Debenture Trustee of any failure to take such action and of any failure by the Corporation (or by any other obligor under the Securities) to make any payment of the principal of and premium, if any, or interest on the Securities when the same shall become due and payable. 15 22 (c) Anything in this Section 3.04 to the contrary notwithstanding, the Corporation may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Securities hereunder, or for any other reason, pay or cause to be paid to the Debenture Trustee all sums payable with respect to the Securities, such sums to be held by the Debenture Trustee upon the trusts herein contained. (d) Anything in this Section 3.04 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 3.04 is subject to Sections 11.03 and 11.04. SECTION 3.05 Certificate to Debenture Trustee. The Corporation will deliver to the Debenture Trustee on or before 120 days after the end of each fiscal year of the Corporation, commencing with the first fiscal year ending after the date hereof, so long as Securities are outstanding hereunder, an Officers' Certificate, one of the signers of which shall be the principal executive, principal financial or principal accounting officer of the Corporation, stating that in the course of the performance by the signers of their duties as officers of the Corporation they would normally have knowledge of any Default by the Corporation in the performance of any covenants contained herein, stating whether or not they have knowledge of any such Default and, if so, specifying each such Default of which the signers have knowledge, the nature thereof and the action, if any, the Corporation intends to undertake as a result of such Default. SECTION 3.06 Compliance with Consolidation Provisions. The Corporation will not, while any of the Securities remain outstanding, consolidate with, or merge into, or merge into itself, or sell or convey all or substantially all of its property to any other Person unless the provisions of Article X hereof are complied with. SECTION 3.07 Limitation on Dividends. The Corporation will not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Corporation's capital stock, (ii) make any payment of principal of or interest or premium, if any, on, or repay, repurchase or redeem any debt securities of the Corporation (including Other Debentures) that rank pari passu with or junior in right of payment to the Securities or (iii) make any guarantee payments with respect to any guarantee by the Corporation of the debt securities of any Subsidiary of the Corporation (including Other Guarantees) if such guarantee ranks pari passu with or junior in right of payment to the Securities (other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, (d) as a result of a reclassification of the Corporation's capital stock or the exchange or conversion of one class or series of the Corporation's capital stock for another class or series of the Corporation's capital stock, (e) the purchase of fractional interests in shares of the Corporation's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged and (f) purchases of Common Stock related to the issuance of Common 16 23 Stock or rights under any of the Corporation's benefit or compensation plans for its directors, officers or employees or any of the Corporation's dividend reinvestment plans), if at such time (1) there shall have occurred any event of which the Corporation has actual knowledge that (a) is a Default or an Event of Default and (b) in respect of which the Corporation shall not have taken reasonable steps to cure, (2) such Securities are held by the Property Trustee, and the Corporation shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee or (3) the Corporation shall have given notice of its election to exercise its right to commence an Extended Interest Payment Period and shall not have rescinded such notice, and such Extended Interest Payment Period or any extension thereof shall have commenced and be continuing. SECTION 3.08 Covenants as to the Trust In the event Securities are issued to the Trust or a trustee of such Trust in connection with the issuance of Trust Securities by the Trust, for so long as such Trust Securities remain outstanding, the Corporation (i) will maintain 100% direct or indirect ownership of the Common Securities of the Trust; provided, however, that any successor of the Corporation, permitted pursuant to Article X, may succeed to the Corporation's ownership of such Common Securities, (ii) will use commercially reasonable efforts to cause the Trust (a) to remain a business trust, except in connection with a distribution of Securities to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities of the Trust, or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, and (b) to otherwise continue to be classified as a grantor trust and not an association taxable as a corporation for United States federal income tax purposes, (iii) will use commercially reasonable efforts to cause each holder of the Trust Securities to be treated as owning an undivided beneficial interest in the Securities and (iv) will not cause, as sponsor of the Trust, or permit, as holder of the Common Securities, the dissolution, winding-up or liquidation of the Trust, except as provided in the Declaration. SECTION 3.09 Payment of Expenses. In connection with the offering, sale and issuance of the Securities to the Trust and in connection with the sale of the Trust Securities by the Trust, the Corporation, in its capacity as borrower with respect to the Securities, shall: (a) pay all costs and expenses relating to the offering, sale and issuance of the Securities, including compensation of the Debenture Trustee in accordance with the provisions of Section 6.06; (b) pay all costs and expenses of the Trust, including, but not limited to, costs and expenses relating to the organization of the Trust, the sale and issuance of the Trust Securities (including commissions payable to the Placement Agent pursuant to the Placement Agency Agreement in connection therewith), the fees and expenses of the Property Trustee and the Delaware Trustee, the costs and expenses relating to the operation of the Trust, including without limitation, costs and expenses of accountants, attorneys, statistical or bookkeeping services, expenses for printing and engraving and computing or accounting equipment, 17 24 paying agent(s), registrar(s), transfer agent(s), duplicating, travel and telephone and other telecommunications expenses and costs and expenses incurred in connection with the acquisition, financing, and disposition of assets of the Trust; (c) be primarily and fully liable for any indemnification obligations arising with respect to the Declaration; (d) pay any and all taxes (other than United States withholding taxes attributable to the Trust or its assets) and all liabilities, costs and expenses with respect to such taxes of the Trust; and (e) pay all other fees, expenses, debts and obligations (other than in respect of the Trust Securities) related to the Trust. SECTION 3.10 Payment Upon Resignation or Removal. Upon termination of this Indenture or the removal or resignation of the Debenture Trustee, unless otherwise stated, the Corporation shall pay to the Debenture Trustee all amounts accrued and owing to the Debenture Trustee to the date of such termination, removal or resignation. Upon termination of the Declaration or the removal or resignation of the Delaware Trustee or the Property Trustee, as the case may be, pursuant to Section 5.7 of the Declaration, the Corporation shall pay to the Delaware Trustee or the Property Trustee, as the case may be, all amounts accrued and owing to such trustee(s) to the date of such termination, removal or resignation. ARTICLE IV LIST OF SECURITYHOLDERS AND REPORTS BY THE CORPORATION AND THE DEBENTURE TRUSTEE SECTION 4.01 List of Securityholders. The Corporation covenants and agrees that it will furnish or cause to be furnished to the Debenture Trustee: (a) on a semi-annual basis on each regular record date for the Securities, a list, in such form as the Debenture Trustee may reasonably require, of the names and addresses of the Securityholders as of such record date; and (b) at such other times as the Debenture Trustee may request in writing, within 30 days after the receipt by the Corporation, of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished, except that, no such lists need be furnished so long as the Debenture Trustee is in possession thereof by reason of its acting as security registrar for the Securities. SECTION 4.02 Preservation and Disclosure of Lists. 18 25 (a) The Debenture Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of the Securities (1) contained in the most recent list furnished to it as provided in Section 4.01 or (2) received by it in the capacity of security registrar (if so acting) hereunder. The Debenture Trustee may destroy any list furnished to it as provided in Section 4.01 upon receipt of a new list so furnished. (b) In case three or more holders of Securities (hereinafter referred to as "applicants") apply in writing to the Debenture Trustee and furnish to the Debenture Trustee reasonable proof that each such applicant has owned a Security for a period of at least six months preceding the date of such application, and such application states that the applicants desire to communicate with other holders of Securities or with holders of all Securities with respect to their rights under this Indenture and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the Debenture Trustee shall, within five Business Days after the receipt of such application, at its election, either: (1) afford such applicants access to the information preserved at the time by the Debenture Trustee in accordance with the provisions of subsection (a) of this Section 4.02, or (2) inform such applicants as to the approximate number of holders of all Securities whose names and addresses appear in the information preserved at the time by the Debenture Trustee in accordance with the provisions of subsection (a) of this Section 4.02, and as to the approximate cost of mailing to such Securityholders the form of proxy or other communication, if any, specified in such application. If the Debenture Trustee shall elect not to afford such applicants access to such information, the Debenture Trustee shall, upon the written request of such applicants, mail to each Securityholder whose name and address appear in the information preserved at the time by the Debenture Trustee in accordance with the provisions of subsection (a) of this Section 4.02 a copy of the form of proxy or other communication which is specified in such request with reasonable promptness after a tender to the Debenture Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five Business Days after such tender, the Debenture Trustee shall mail to such applicants and, if required by law, file with the Commission, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Debenture Trustee, such mailing would be contrary to the best interests of the holders of Securities or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If the Commission, after opportunity for a hearing upon the objections specified in the written statement so filed, shall enter an order refusing to sustain any of such objections or if, after the entry of an order sustaining one or more of such objections, the Commission shall find, after notice and opportunity for hearing, that all the objections so sustained have been met and shall enter an order so declaring, the Debenture Trustee shall mail copies of such material to all such Securityholders with reasonable promptness after the entry of such order and the renewal of such tender; otherwise the Debenture Trustee shall be relieved of any obligation or duty to such applicants respecting their application. 19 26 (c) Each and every holder of Securities, by receiving and holding the same, agrees with the Corporation and the Debenture Trustee that neither the Corporation nor the Debenture Trustee nor any paying agent shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the holders of Securities in accordance with the provisions of subsection (b) of this Section 4.02, regardless of the source from which such information was derived, and that the Debenture Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). SECTION 4.03 Reports by the Corporation. (a) The Corporation covenants and agrees to file with the Debenture Trustee, within 15 days after the date on which the Corporation is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as said Commission may from time to time by rules and regulations prescribe) which the Corporation may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Corporation is not required to file information, documents or reports pursuant to either of such sections, then to provide to the Debenture Trustee, such of the supplementary and periodic information, documents and reports which would have been required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange or copies of the call reports that the Corporation is required to file with its primary federal banking regulator. The Corporation also covenants and agrees to comply with the provisions of Section 314(a) of the Trust Indenture Act. (b) The Corporation covenants and agrees to file with the Debenture Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by said Commission, such additional information, documents and reports with respect to compliance by the Corporation with the conditions and covenants provided for in this Indenture as may be required from time to time by such rules and regulations. (c) The Corporation covenants and agrees to transmit by mail to MMCapS(SM) Funding I, Ltd. and to all holders of Securities, as the names and addresses of such holders appear upon the Security Register, within 30 days after the filing thereof with the Debenture Trustee, such summaries of any information, documents and reports required to be filed by the Corporation pursuant to subsections (a) and (b) of this Section 4.03 as may be required by rules and regulations prescribed from time to time by the Commission. (d) Delivery of such reports, information and documents to the Debenture Trustee is for informational purposes only and the Debenture Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Corporation's compliance with any of its covenants hereunder (as to which the Debenture Trustee is entitled to rely exclusively on Officers' Certificates). (e) So long as is required for an offer or sale of the Securities to qualify for an exemption under Rule 144A under the Securities Act, the Corporation shall, upon request, provide the information required by clause (d)(4) thereunder to each Securityholder and to each beneficial owner and prospective purchaser of Securities identified by each Securityholder of 20 27 Restricted Securities, unless such information is furnished to the Commission pursuant to Section 13 or 15(d) of the Exchange Act. SECTION 4.04 Reports by the Debenture Trustee. (a) The Debenture Trustee shall transmit to Securityholders such reports concerning the Debenture Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by Section 313(a) of the Trust Indenture Act, the Debenture Trustee shall, within 60 days after the date hereof, and no later than the anniversary date hereof in each succeeding year, deliver to Securityholders a brief report, dated as of each such date which complies with the provisions of such Section 313(a). (b) A copy of each such report shall, at the time of such transmission to Securityholders, be filed by the Debenture Trustee with each stock exchange, if any, upon which the Securities are listed, with the Commission and with the Corporation. The Corporation will promptly notify the Debenture Trustee when the Securities are listed on any stock exchange. ARTICLE V REMEDIES OF THE DEBENTURE TRUSTEE AND SECURITYHOLDERS UPON EVENT OF DEFAULT SECTION 5.01 Events of Default. One or more of the following events of default shall constitute an Event of Default hereunder (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of any interest (including Compounded Interest and Additional Sums, if any) on the Securities or any Other Debentures (about which a Responsible Officer of the Debenture Trustee has actual knowledge) when due, and continuance of such default for a period of 30 days; provided, however, that a valid extension of an interest payment period by the Corporation in accordance with the terms hereof or thereof shall not constitute a default in the payment of interest for this purpose; or (b) default in the payment of any principal of (or premium, if any, on) the Securities or any Other Debentures (about which a Responsible Officer of the Debenture Trustee has actual knowledge) when due, whether at maturity, upon prepayment, by declaration of acceleration of maturity or otherwise; or (c) default in the performance, or breach, of any covenant or warranty of the Corporation in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 90 days after there has been given, by registered or certified mail, to the Corporation by the 21 28 Debenture Trustee or to the Corporation and the Debenture Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (d) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Corporation in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Corporation or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and such decree or order shall remain unstayed and in effect for a period of 90 consecutive days; or (e) the Corporation shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, shall consent to the entry of an order for relief in an involuntary case under any such law, or shall consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or shall make any general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due. If an Event of Default with respect to Securities at the time outstanding occurs and is continuing, then in every such case the Debenture Trustee or the holders of not less than 25% in aggregate principal amount of the Securities then outstanding may declare the principal amount of all Securities to be due and payable immediately, by a notice in writing to the Corporation (and to the Debenture Trustee if given by the holders of the outstanding Securities), and upon any such declaration the same shall become immediately due and payable. The foregoing provisions, however, are subject to the condition that if, at any time after the principal of the Securities shall have been so declared due and payable, and before any judgment or decree for the payment of the moneys due shall have been obtained or entered as hereinafter provided, (i) the Corporation shall pay or shall deposit with the Debenture Trustee a sum sufficient to pay (A) all matured installments of interest (including Compounded Interest and Additional Sums, if any) on all the Securities and the principal of and premium, if any, on any and all Securities which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and, to the extent that payment of such interest is enforceable under applicable law, on overdue installments of interest, at the same rate as the rate of interest specified in the Securities to the date of such payment or deposit) and (B) such amount as shall be sufficient to cover compensation due to the Debenture Trustee and each predecessor Debenture Trustee, their respective agents, attorneys and counsel, pursuant to Section 6.06, and (ii) any and all Events of Default under the Indenture, other than the non-payment of the principal of the Securities which shall have become due solely by such declaration of acceleration, shall have been cured, waived or otherwise remedied as provided herein, then, in every such case, the holders of a majority in aggregate principal amount of the Securities then outstanding, by written notice to the Corporation and to the Debenture Trustee, may rescind and annul such declaration and its consequences, but no such waiver or rescission 22 29 and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the Debenture Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such rescission or annulment or for any other reason or shall have been determined adversely to the Debenture Trustee, then and in every such case the Corporation, the Debenture Trustee and the holders of the Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Corporation, the Debenture Trustee and the holders of the Securities shall continue as though no such proceeding had been taken. SECTION 5.02 Payment of Securities on Default; Suit Therefor. The Corporation covenants that (a) in case default shall be made in the payment of any installment of interest (including Compounded Interest and Additional Sums, if any) on any of the Securities as and when the same shall become due and payable, and such default shall have continued for a period of 30 days, or (b) in case default shall be made in the payment of the principal of or premium, if any, on any of the Securities as and when the same shall have become due and payable, whether at maturity of the Securities or upon prepayment or by declaration or otherwise, then, upon demand of the Debenture Trustee, the Corporation will pay to the Debenture Trustee, for the benefit of the holders of the Securities, the whole amount that then shall have become due and payable on all such Securities for principal and premium, if any, or interest (including Compounded Interest and Additional Sums, if any), with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law and, if the Securities are held by the Trust or a trustee of such Trust, without duplication of any other amounts paid by the Trust or a trustee in respect thereof) upon the overdue installments of interest (including Compounded Interest and Additional Sums, if any) at the rate borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Debenture Trustee, its agents, attorneys and counsel, and any other amount due to the Debenture Trustee pursuant to Section 6.06. In case the Corporation shall fail forthwith to pay such amounts upon such demand, the Debenture Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Corporation or any other obligor on the Securities and collect in the manner provided by law out of the property of the Corporation or any other obligor on the Securities, wherever situated, the moneys adjudged or decreed to be payable. In case there shall be pending proceedings for the bankruptcy or for the reorganization of the Corporation or any other obligor on the Securities under Title 11, United States Code, or any other applicable law, or in case a receiver or trustee shall have been appointed for the property of the Corporation or such other obligor, or in the case of any other similar judicial proceedings relative to the Corporation or other obligor upon the Securities, or to the creditors or property of the Corporation or such other obligor, the Debenture Trustee, irrespective of whether the 23 30 principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Debenture Trustee shall have made any demand pursuant to the provisions of this Section 5.02, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal and interest owing and unpaid in respect of the Securities and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Debenture Trustee (including any claim for amounts due to the Debenture Trustee pursuant to Section 6.06) and of the Securityholders allowed in such judicial proceedings relative to the Corporation or any other obligor on the Securities, or to the creditors or property of the Corporation or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Securities in any election of a trustee or a standby trustee in arrangement, reorganization, liquidation or other bankruptcy or insolvency proceedings or person performing similar functions in comparable proceedings, and to collect and receive any moneys or other property payable or deliverable on any such claims, and to distribute the same after the deduction of its charges and expenses; and any receiver, assignee or trustee in bankruptcy or reorganization is hereby authorized by each of the Securityholders to make such payments to the Debenture Trustee, and, in the event that the Debenture Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Debenture Trustee such amounts as shall be sufficient to cover reasonable compensation to, and expenses of, the Debenture Trustee, each predecessor Debenture Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Debenture Trustee pursuant to Section 6.06. Nothing herein contained shall be construed to authorize the Debenture Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any holder thereof or to authorize the Debenture Trustee to vote in respect of the claim of any Securityholder in any such proceeding. All rights of action and of asserting claims under this Indenture, or under any of the Securities, may be enforced by the Debenture Trustee without the possession of any of the Securities, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Debenture Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall be for the ratable benefit of the holders of the Securities. In any proceedings brought by the Debenture Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Debenture Trustee shall be a party), the Debenture Trustee shall be held to represent all the holders of the Securities, and it shall not be necessary to make any holders of the Securities parties to any such proceedings. SECTION 5.03 Application of Moneys Collected by Debenture Trustee. Any moneys collected by the Debenture Trustee shall be applied in the following order, at the date or dates fixed by the Debenture Trustee for the distribution of such moneys, upon 24 31 presentation of the Securities in respect of which moneys have been collected, and stamping thereon the payment, if only partially paid, and upon surrender thereof if fully paid: First: To the payment of costs and expenses of collection applicable to the Securities and all other amounts due to the Debenture Trustee under Section 6.06; Second: To the payment of all Senior Indebtedness of the Corporation if and to the extent required by Article XV; Third: To the payment of the amounts then due and unpaid upon Securities for principal of (and premium, if any) and interest (including Compounded Interest and Additional Sums, if any) on the Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference of priority of any kind, according to the amounts due on such Securities for principal (and premium, if any) and interest, respectively; and Fourth: To the Corporation. SECTION 5.04 Proceedings by Securityholders. No holder of any Security shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless such holder previously shall have given to the Debenture Trustee written notice of an Event of Default and of the continuance thereof with respect to the Securities specifying such Event of Default, as hereinbefore provided, and unless also the holders of not less than 25% in aggregate principal amount of the Securities then outstanding shall have made written request upon the Debenture Trustee to institute such action, suit or proceeding in its own name as Debenture Trustee hereunder and shall have offered to the Debenture Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Debenture Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action, suit or proceeding, it being understood and intended, and being expressly covenanted by the taker and holder of every Security with every other taker and holder and the Debenture Trustee, that no one or more holders of Securities shall have any right in any manner whatever by virtue of or by availing itself of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Security to receive payment of the principal of (and premium, if any) and interest on (including Compounded Interest and Additional Sums, if any) such Security, on or after the same shall have become due and payable, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder, and by accepting a Security hereunder it is expressly understood, intended and covenanted by the taker and holder of every Security with every other such taker and holder and the Debenture Trustee, that no one or more holders of Securities shall have any right in any manner whatsoever by virtue or by availing itself 25 32 of any provision of this Indenture to affect, disturb or prejudice the rights of the holders of any other Securities, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Securities. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Debenture Trustee shall be entitled to such relief as can be given either at law or in equity. The Corporation and the Debenture Trustee acknowledge that pursuant to the Declaration, the holders of Capital Securities are entitled, in the circumstances and subject to the limitations set forth therein, to commence a Direct Action with respect to any Event of Default referred to in clause (a) or (b) of Section 5.01. SECTION 5.05 Proceedings by Debenture Trustee. In case an Event of Default occurs with respect to Securities and is continuing, the Debenture Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Debenture Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Debenture Trustee by this Indenture or by law. SECTION 5.06 Remedies Cumulative and Continuing. All powers and remedies given by this Article V to the Debenture Trustee or to the Securityholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any other powers and remedies available to the Debenture Trustee or the holders of the Securities, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture or otherwise established with respect to the Securities, and no delay or omission of the Debenture Trustee or of any holder of any of the Securities to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or an acquiescence therein; and, subject to the provisions of Section 5.04, every power and remedy given by this Article V or by law to the Debenture Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the Debenture Trustee or by the Securityholders. SECTION 5.07 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders. The holders of a majority in aggregate principal amount of the Securities at the time outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Debenture Trustee, or exercising any trust or power conferred on the Debenture Trustee; provided, however, that (subject to the provisions of Section 6.01) the Debenture Trustee shall have the right to decline to follow any such direction if the Debenture Trustee shall determine that the action so directed would be unjustly prejudicial to the 26 33 holders not taking part in such direction or if the Debenture Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Debenture Trustee in good faith by one of its Responsible Officers shall determine that the action or proceedings so directed would involve the Debenture Trustee in personal liability. Prior to any declaration accelerating the maturity of the Securities, the holders of a majority in aggregate principal amount of the Securities at the time outstanding may on behalf of the holders of all of the Securities waive any past Default or Event of Default and its consequences except a Default (a) in the payment of principal of (or premium, if any) or interest on (including Compounded Interest and Additional Sums, if any) any of the Securities (unless such default has been cured and a sum sufficient to pay all matured installments of interest (including Compounded Interest and Additional Sums, if any) and principal (and premium, if any), due otherwise than by acceleration has been deposited with the Debenture Trustee) or (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Security affected; provided, however, that if the Securities are held by the Property Trustee, such waiver or modification to such waiver shall not be effective until the holders of a majority in aggregate liquidation amount of Trust Securities shall have consented to such waiver or modification to such waiver; provided, further, that if the consent of the holder of each outstanding Security is required, such waiver shall not be effective until each holder of the Trust Securities shall have consented to such waiver. Upon any such waiver, the Default covered thereby shall be deemed to be cured for all purposes of this Indenture and the Corporation, the Debenture Trustee and the holders of the Securities shall be restored to their former positions and rights hereunder, respectively; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Whenever any Default or Event of Default hereunder shall have been waived as permitted by this Section 5.07, said Default or Event of Default shall for all purposes of the Securities and this Indenture be deemed to have been cured and to be not continuing. SECTION 5.08 Notice of Defaults (a) The Debenture Trustee shall, within 90 days after the Debenture Trustee has knowledge of the occurrence of a Default with respect to the Securities, mail to all Securityholders, as the names and addresses of such holders appear upon the Security Register, notice of all such Defaults, unless such Default shall have been cured before the giving of such notice (the term "Default" for the purpose of this Section 5.08 being hereby defined to be any of the events specified in clauses (a), (b), (c), (d) and (e) of Section 5.01, not including periods of grace, if any, provided for therein, and irrespective of the giving of written notice specified in clause (c) of Section 5.01); provided, however, that, except in the case of Default in the payment of the principal of (or premium, if any) or interest (including Compounded Interest or Additional Sums, if any) on any of the Securities, the Debenture Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee, or a trust committee of directors and/or Responsible Officers of the Debenture Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders; provided, further, that in the case of any Default of the character specified in Section 5.01(c), no such notice to Securityholders shall be given until at least 60 days after the occurrence thereof, but shall be given within 90 days after such occurrence. 27 34 (b) Within ten Business Days after the Debenture Trustee has knowledge of the occurrence of any Event of Default, the Debenture Trustee shall transmit notice of such Event of Default to all Securityholders as their names and addresses appear on the Security Register, unless such Event of Default shall have been cured or waived. SECTION 5.09 Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Security by its acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Debenture Trustee for any action taken or omitted by it as Debenture Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.09 shall not apply to any suit instituted by the Debenture Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in aggregate principal amount of the Securities outstanding, or to any suit instituted by any Securityholder for the enforcement of the payment of the principal of (or premium, if any) or interest (including Compounded Interest and Additional Sums, if any) on any Security against the Corporation on or after the same shall have become due and payable. ARTICLE VI CONCERNING THE DEBENTURE TRUSTEE SECTION 6.01 Duties and Responsibilities of Debenture Trustee. With respect to the holders of the Securities issued hereunder, the Debenture Trustee, prior to the occurrence of an Event of Default (which, other than in the case of Sections 5.01(a) and 5.01(b) hereof, is known to the Debenture Trustee) and after the curing or waiving of all such Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default (which, other than in the case of Sections 5.01(a) and 5.01(b) hereof, is known to the Debenture Trustee) has occurred (which has not been cured or waived), the Debenture Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. No provision of this Indenture shall be construed to relieve the Debenture Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (a) prior to the occurrence of an Event of Default (which, other than in the case of Sections 5.01(a) and 5.01(b) hereof, is known to the Debenture Trustee) and after the curing or waiving of all such Events of Default which may have occurred, 28 35 (1) the duties and obligations of the Debenture Trustee shall be determined solely by the express provisions of this Indenture, and the Debenture Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Debenture Trustee; and (2) in the absence of bad faith on the part of the Debenture Trustee, the Debenture Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificate or opinion furnished to the Debenture Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificate or opinion which by any provision hereof is specifically required to be furnished to the Debenture Trustee, the Debenture Trustee shall be under a duty to examine the same to determine whether or not it conforms on its face to the requirements of this Indenture; (b) the Debenture Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers, unless it shall be proved that the Debenture Trustee was negligent in ascertaining the pertinent facts; and (c) the Debenture Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Securityholders pursuant to Section 5.07, relating to the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or exercising any trust or power conferred upon the Debenture Trustee, under this Indenture. None of the provisions contained in this Indenture shall require the Debenture Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it reasonably believes that the repayment of such funds or liability is not reasonably assured to it under the terms of this Indenture or adequate indemnity against such risk is not reasonably assured to it. SECTION 6.02 Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 6.01: (a) the Debenture Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, note, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Corporation mentioned herein may be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may 29 36 be evidenced to the Debenture Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Corporation; (c) the Debenture Trustee may consult with counsel of its selection and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Debenture Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Securityholders, pursuant to the provisions of this Indenture, unless such Securityholders shall have offered to the Debenture Trustee reasonable and sufficient security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Debenture Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; nothing contained herein shall, however, relieve the Debenture Trustee of the obligation, upon the occurrence of an Event of Default (which, other than in the case of Sections 5.01(a) and 5.01(b) hereof, is known to the Debenture Trustee) (that has not been cured or waived), to exercise such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in its exercise as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs; (f) the Debenture Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of a majority in aggregate principal amount of the outstanding Securities; provided, however, that if the payment within a reasonable time to the Debenture Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Debenture Trustee, not reasonably assured to the Debenture Trustee by the security afforded to it by the terms of this Indenture, the Debenture Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; (g) the Debenture Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents (including any Authenticating Agent) or attorneys, and the Debenture Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed by it with due care; (h) notwithstanding any provision in this Indenture to the contrary, the Debenture Trustee shall not be charged with knowledge of any Default or Event of Default unless (1) such Default or Event of Default falls within Section 5.01(a) (other than a default with respect to the payment or nonpayment of Compounded Interest or 30 37 Additional Sums or, unless the Debenture Trustee is also trustee with respect thereto, amounts on any Other Debentures) or Section 5.01(b) (other than a default with respect to the payment or nonpayment of amounts on any Other Debentures unless the Debenture Trustee is also trustee with respect thereto) of this Indenture, (2) a Responsible Officer shall have actual knowledge of such Default or Event of Default or (3) written notice of such Default or Event of Default shall have been given to the Debenture Trustee by the Corporation or any other obligor on the Securities or by any holder of the Securities; and (i) the Debenture Trustee shall not be liable for any action taken, suffered or omitted by it in good faith, without negligence or willful misconduct and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. SECTION 6.03 No Responsibility for Recitals, etc. The recitals contained herein and in the Securities (except in the certificate of authentication of the Debenture Trustee or the Authenticating Agent) shall be taken as the statements of the Corporation, and the Debenture Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Debenture Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Securities. The Debenture Trustee and the Authenticating Agent shall not be accountable for the use or application by the Corporation of any Securities or the proceeds of any Securities authenticated and delivered by the Debenture Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. SECTION 6.04 Debenture Trustee, Authenticating Agent, Paying Agents, Transfer Agents and Registrar May Own Securities. The Debenture Trustee or any Authenticating Agent or any paying agent or any transfer agent or any security registrar for the Securities, in its individual or any other capacity, may become the owner or pledgee of Securities with the same rights it would have if it were not Debenture Trustee, Authenticating Agent, paying agent, transfer agent or security registrar for the Securities. SECTION 6.05 Moneys to be Held in Trust. Subject to the provisions of Section 11.04, all moneys received by the Debenture Trustee or any paying agent shall, until used or applied as herein provided, be held in trust for the purpose for which they were received, but need not be segregated from other funds except to the extent required by law. The Debenture Trustee and any paying agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Corporation. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys shall be paid from time to time upon the written order of the Corporation, signed by an Officer thereof. SECTION 6.06 Compensation and Expenses of Debenture Trustee. 31 38 The Corporation, as issuer of Securities under this Indenture, covenants and agrees to pay to the Debenture Trustee from time to time, and the Debenture Trustee shall be entitled to, such compensation as shall be agreed to in writing between the Corporation and the Debenture Trustee (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Corporation will pay or reimburse the Debenture Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Debenture Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ), except any such expense, disbursement or advance as may arise from its negligence or bad faith. The Corporation also covenants to indemnify each of the Debenture Trustee (including in its individual capacity) and any predecessor Debenture Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, action, suit, liability or expense including taxes (other than taxes based on the income of the Debenture Trustee) incurred without negligence or bad faith on the part of the Debenture Trustee and arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim of liability. The obligations of the Corporation under this Section 6.06 to compensate and indemnify the Debenture Trustee and to pay or reimburse the Debenture Trustee for expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Securities upon all property and funds held or collected by the Debenture Trustee as such, except funds held in trust for the benefit of the holders of particular Securities. When the Debenture Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 5.01(d) or Section 5.01(e), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for its services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the resignation or removal of the Debenture Trustee and the defeasance or other termination of this Indenture. SECTION 6.07 Officers' Certificate as Evidence. Except as otherwise provided in Sections 6.01 and 6.02, whenever in the administration of the provisions of this Indenture, the Debenture Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof is herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Debenture Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Debenture Trustee, and such Officers' Certificate, in the absence of negligence or bad faith on the part of the Debenture Trustee, shall be full warrant to the Debenture Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.08 Conflicting Interest of Debenture Trustee. 32 39 If the Debenture Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Debenture Trustee and the Corporation shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 6.09 Eligibility of Debenture Trustee. The Debenture Trustee hereunder shall at all times be a Person organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia, or a corporation or other Person permitted to act as trustee by the Commission authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000) and subject to supervision or examination by federal, state, territorial, or District of Columbia authority. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 6.09 the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. The Corporation may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Corporation, serve as Debenture Trustee. In case at any time the Debenture Trustee shall cease to be eligible in accordance with the provisions of this Section 6.09, the Debenture Trustee shall resign immediately in the manner and with the effect specified in Section 6.10. SECTION 6.10 Resignation or Removal of Debenture Trustee. (a) The Debenture Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Corporation and by mailing notice thereof to the holders of the Securities at their addresses as they shall appear on the Security Register. Upon receiving such notice of resignation, the Corporation shall promptly appoint a successor trustee or trustees, in accordance with the provisions of Section 6.09, by written instrument, in duplicate, one copy of which instrument shall be delivered to the resigning Debenture Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment within 60 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Debenture Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Securityholder may, subject to the provisions of Section 5.09, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. (b) In case at any time any of the following shall occur: (1) the Debenture Trustee shall fail to comply with the provisions of Section 6.08 after written request therefor by the Corporation, or by MMCapS(SM) Funding I, Ltd. or by any other Securityholder who has been a bona fide holder of a Security or Securities for at least six months, or 33 40 (2) the Debenture Trustee shall cease to be eligible in accordance with the provisions of Section 6.09 and shall fail to resign after written request therefor by the Corporation, by MMCapS(SM) Funding I, Ltd. or by any other Securityholder who has been a bona fide holder of a Security or Securities for at least six months, or (3) the Debenture Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Debenture Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Debenture Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Corporation may remove the Debenture Trustee and appoint a successor trustee, in accordance with the provisions of Section 6.09, by written instrument, in duplicate, one copy of which instrument shall be delivered to the Debenture Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 5.09, MMCapS(SM) Funding I, Ltd. or any other Securityholder who has been a bona fide holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Debenture Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Debenture Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Securities at the time outstanding may at any time remove the Debenture Trustee and nominate a successor trustee, which shall be deemed appointed as successor trustee unless within 10 days after written notification of such nomination the Corporation objects thereto, or if no successor trustee shall have been so appointed and shall have accepted appointment within 30 days after such removal, in which case the Debenture Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.10 provided, may petition any court of competent jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Debenture Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 6.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 6.11. SECTION 6.11 Acceptance by Successor Debenture Trustee. Any successor trustee appointed as provided in Section 6.10 shall execute, acknowledge and deliver to the Corporation and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the retiring trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Corporation or of the successor trustee, the trustee ceasing to act shall, upon payment of all amounts then due it pursuant to the provisions of Section 6.06, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act and shall duly assign, transfer and deliver to such successor trustee all property 34 41 and money held by such retiring trustee thereunder. Upon request of any such successor trustee, the Corporation shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property or funds held or collected by such trustee to secure any amounts then due it pursuant to the provisions of Section 6.06. No successor trustee shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 6.08 and eligible under the provisions of Section 6.09. Upon acceptance of appointment by a successor trustee as provided in this Section 6.11, the Corporation shall mail notice of the succession of such trustee hereunder to the holders of Securities at their addresses as they shall appear on the Security Register. If the Corporation fails to mail such notice within 10 days after the acceptance of appointment by the successor trustee, the successor trustee shall cause such notice to be mailed at the expense of the Corporation. SECTION 6.12 Succession by Merger, etc. Any Person into which the Debenture Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Debenture Trustee shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Debenture Trustee, shall be the successor of the Debenture Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated but not delivered at the time such successor to the Debenture Trustee shall succeed to the trusts created by this Indenture, any such successor to the Debenture Trustee may adopt the certificate of authentication of any predecessor trustee, and deliver such Securities so authenticated; and in case at that time any of the Securities shall not have been authenticated, any successor to the Debenture Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which the Securities or this Indenture elsewhere provides that the certificate of the Debenture Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Debenture Trustee or authenticate Securities in the name of any predecessor Debenture Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.13 Limitation on Rights of Debenture Trustee as a Creditor. The Debenture Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding any creditor relationship described in Section 311(b) of the Trust Indenture Act. A Debenture Trustee who has resigned or been removed shall be subject to Section 311(a) of the Trust Indenture Act to the extent included therein. SECTION 6.14 Authenticating Agents. 35 42 There may be one or more Authenticating Agents appointed by the Debenture Trustee upon the request of the Corporation with power to act on the Debenture Trustee's behalf and subject to the Debenture Trustee's direction in the authentication and delivery of Securities issued upon exchange or transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Securities; provided, however, that the Debenture Trustee shall have no liability to the Corporation for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Securities. Any such Authenticating Agent shall at all times be a Person organized and doing business under the laws of the United States or of any state or territory thereof or of the District of Columbia authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of at least $5,000,000 and being subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such Person publishes reports of condition at least annually pursuant to law or the requirements of such authority, then for the purposes of this Section 6.14 the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect herein specified in this Section. Any Person into which any Authenticating Agent may be merged, converted or with which it may be consolidated, or any Person resulting from any merger or consolidation to which any Authenticating Agent shall be a party, or any Person succeeding to the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor Person is otherwise eligible under this Section 6.14 without the execution or filing of any paper or any further act on the part of the parties hereto or such Authenticating Agent. Any Authenticating Agent may at any time resign by giving written notice of resignation to the Debenture Trustee and to the Corporation. The Debenture Trustee may at any time terminate the agency of any Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Corporation. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any Authenticating Agent shall cease to be eligible under this Section 6.14, the Debenture Trustee may, and upon the request of the Corporation shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.14, shall give written notice of such appointment to the Corporation and shall mail notice of such appointment to all Securityholders as the names and addresses of such holders appear on the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Corporation, as issuer of the Securities, agrees to pay to any Authenticating Agent from time to time reasonable compensation for its services. Any Authenticating Agent shall have no responsibility or liability for any action taken by it as such in accordance with the directions of the Debenture Trustee. 36 43 ARTICLE VII CONCERNING THE SECURITYHOLDERS SECTION 7.01 Action by Securityholders. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Securities may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action the holders of such specified percentage have joined therein may be evidenced (a) by any instrument (including by way of electronic transmission) or any number of instruments of similar tenor executed by such Securityholders in person or by agent or proxy appointed in writing, or (b) by the record of such holders of Securities voting in favor thereof at any meeting of such Securityholders duly called and held in accordance with the provisions of Article VIII, or (c) by a combination of such instrument or instruments and any such record of such a meeting of such Securityholders. If the Corporation shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action, the Corporation may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action, but the Corporation shall have no obligation to do so. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other action may be given before or after the record date, but only the Securityholders of record at the close of business on the record date shall be deemed to be Securityholders for the purposes of determining whether Securityholders of the requisite proportion of outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action, and for that purpose the outstanding Securities shall be computed as of the record date; provided, however, that no such authorization, agreement or consent by such Securityholders on the record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than six months after the record date. SECTION 7.02 Proof of Execution by Securityholders. Subject to the provisions of Sections 6.01, 6.02 and 8.05, proof of the execution of any instrument by a Securityholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Debenture Trustee or in such manner as shall be satisfactory to the Debenture Trustee. The ownership of Securities shall be proved by the Security Register or by a certificate of the security registrar for the Securities. The Debenture Trustee may require such additional proof of any matter referred to in this Section 7.02 as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06. 37 44 SECTION 7.03 Who Are Deemed Absolute Owners. Prior to due presentment for registration of transfer of any Security, the Corporation, the Debenture Trustee, any Authenticating Agent, any paying agent, any transfer agent and any security registrar for the Securities may deem the person in whose name such Security shall be registered upon the Security Register to be, and may treat him or her as, the absolute owner of such Security (whether or not such Security shall be overdue) for the purpose of receiving payment of or on account of the principal of and premium, if any, and (subject to Section 2.05) interest on such Security and for all other purposes; and neither the Corporation nor the Debenture Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any security registrar for the Securities shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his or her order shall be valid and, to the extent of the sum or sums so paid, effectual to satisfy and discharge the liability for moneys payable upon any such Security. SECTION 7.04 Securities Owned by Corporation Deemed Not Outstanding. In determining whether the holders of the requisite aggregate principal amount of Securities have concurred in any direction, consent or waiver under this Indenture, Securities that are owned by the Corporation or any other obligor on the Securities or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Corporation or any other obligor on the Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, however, that for the purposes of determining whether the Debenture Trustee shall be protected in relying on any such direction, consent or waiver, only Securities which a Responsible Officer of the Debenture Trustee actually knows are so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 7.04 if the pledgee shall establish to the satisfaction of the Debenture Trustee the pledgee's right to vote such Securities and that the pledgee is not the Corporation or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Corporation or any such other obligor. In the case of a dispute as to such right, any decision by the Debenture Trustee taken upon the advice of counsel shall be full protection to the Debenture Trustee. SECTION 7.05 Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the Debenture Trustee, as provided in Section 7.01, of the taking of any action by the holders of the percentage in aggregate principal amount of the Securities specified in this Indenture in connection with such action, any holder of a Security (or any Security issued in whole or in part in exchange or substitution therefor), subject to Section 7.01, the serial number of which is shown by the evidence to be included in the group of Securities the holders of which have consented to such action, may, by filing written notice with the Debenture Trustee at its principal office and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Security (or so far as concerns the principal amount represented by any exchanged or substituted Security). Except as aforesaid, any such action taken by the holder of any Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Security, and of any Security 38 45 issued in exchange or substitution therefor, irrespective of whether or not any notation in regard thereto is made upon such Security or any Security issued in exchange or substitution therefor. ARTICLE VIII MEETINGS OF SECURITYHOLDERS SECTION 8.01 Purposes of Meetings. A meeting of Securityholders may be called at any time and from time to time pursuant to the provisions of this Article VIII for any of the following purposes: (a) to give any notice to the Corporation or to the Debenture Trustee, or to give any directions to the Debenture Trustee, or to consent to the waiving of any Default hereunder and its consequences, or to take any other action authorized to be taken by Securityholders pursuant to any of the provisions of Article V; (b) to remove the Debenture Trustee and nominate a successor trustee pursuant to the provisions of Article VI; (c) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 9.02; or (d) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of such Securities under any other provision of this Indenture or under applicable law. SECTION 8.02 Call of Meetings by Debenture Trustee. The Debenture Trustee may at any time call a meeting of Securityholders to take any action specified in Section 8.01, to be held at such time and at such place in Wilmington, Delaware as the Debenture Trustee shall determine. Notice of every meeting of the Securityholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be mailed to holders of Securities at their addresses as they shall appear on the Security Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. SECTION 8.03 Call of Meetings by Corporation or Securityholders. In case at any time the Corporation, pursuant to a resolution of the Board of Directors, or the holders of at least 20% in aggregate principal amount of the Securities then outstanding, shall have requested the Debenture Trustee to call a meeting of Securityholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Debenture Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Corporation or such Securityholders may determine the time and the place in El Segundo, California for such meeting and may call such meeting to take any action authorized in Section 8.01, by mailing notice thereof as provided in Section 8.02. 39 46 SECTION 8.04 Qualifications for Voting. To be entitled to vote at any meeting of Securityholders, a Person shall be (a) a holder of one or more Securities or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more Securities. The only Persons who shall be entitled to be present or to speak at any meeting of Securityholders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Debenture Trustee and its counsel and any representatives of the Corporation and its counsel. SECTION 8.05 Regulations. Notwithstanding any other provisions of this Indenture, the Debenture Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Securities and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Debenture Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Corporation or by Securityholders as provided in Section 8.03, in which case the Corporation or the Securityholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by majority vote of the meeting. Subject to the provisions of Section 8.04, at any meeting each holder of Securities or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Securities held or represented by him or her; provided, however, that no vote shall be cast or counted at any meeting in respect of any Security challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Securities held by him or instruments in writing as aforesaid duly designating him as the person to vote on behalf of other Securityholders. Any meeting of Securityholders duly called pursuant to the provisions of Section 8.02 or 8.03 may be adjourned from time to time by a majority of those present, and the meeting may be held as so adjourned without further notice. SECTION 8.06 Voting. The vote upon any resolution submitted to any meeting of holders of Securities shall be by written ballots on which shall be subscribed the signatures of such holders or of their representatives by proxy and the serial number or numbers of the Securities held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in triplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Securityholders shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or 40 47 more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 8.02. The record shall show the serial numbers of the Securities voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Corporation and the other to the Debenture Trustee to be preserved by the Debenture Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. ARTICLE IX AMENDMENTS SECTION 9.01 Without Consent of Securityholders. The Corporation and the Debenture Trustee may from time to time and at any time amend this Indenture, without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another Person to the Corporation, or successive successions, and the assumption by the successor Person of the covenants, agreements and obligations of the Corporation pursuant to Article X hereof; (b) to add to the covenants of the Corporation such further covenants, restrictions or conditions for the protection of the Securityholders as the Board of Directors and the Debenture Trustee shall consider to be for the protection of the Securityholders, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions or conditions a Default or an Event of Default permitting the enforcement of all or any of the remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such amendment may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Debenture Trustee upon such default; (c) to provide for the issuance under this Indenture of Securities in coupon form (including Securities registrable as to principal only) and to provide for exchangeability of such Securities with the Securities issued hereunder in fully registered form and to make all appropriate changes for such purpose; (d) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture; or to make such other provisions in regard to matters or questions arising under this Indenture, provided that any such action shall not materially adversely affect the interests of the holders of the Securities; 41 48 (e) to evidence and provide for the acceptance of appointment hereunder by a successor trustee with respect to the Securities; (f) to make provision for transfer procedures, certification, book entry provisions, the form of restricted securities legends, if any, to be placed on Securities, and all other matters required pursuant to Section 2.06 or otherwise necessary, desirable or appropriate in connection with the issuance of Securities to holders of Capital Securities in the event of a distribution of Securities by the Trust following a Dissolution Event, provided that any such action shall not materially adversely affect the interests of the holders of the Securities; (g) to qualify or maintain qualification of this Indenture under the Trust Indenture Act; or (h) to make any change that does not adversely affect the rights of any Securityholder in any material respect. The Debenture Trustee is hereby authorized to join with the Corporation in the execution of any supplemental indenture to effect such amendment, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Debenture Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Debenture Trustee's own rights, duties or immunities under this Indenture or otherwise. Any amendment to this Indenture authorized by the provisions of this Section 9.01 may be executed by the Corporation and the Debenture Trustee without the consent of the holders of any of the Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02 With Consent of Securityholders. With the consent (evidenced as provided in Section 7.01) of the holders of a majority in aggregate principal amount of the Securities at the time outstanding, the Corporation, when authorized by a Board Resolution, and the Debenture Trustee may from time to time and at any time amend this Indenture for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such amendment shall, without the consent of the holders of each Security then outstanding and affected thereby (i) change the Maturity Date of any Security, or reduce the rate or extend the time of payment of interest thereon (except as contemplated by Article XVI), or reduce or increase the aggregate principal amount of the series of which such Security is a part or issue other Securities, or change any prepayment provisions, or make the principal thereof or any interest or premium thereon payable in any coin or currency other than U.S. dollars, or impair or affect the right of any Securityholder to institute suit for payment thereof, or (ii) reduce the aforesaid percentage of Securities, the holders of which are required to consent to any such amendment to the Indenture; provided, however, that if the Securities are held by the Trust, such amendment shall not be effective until the holders of a majority in liquidation amount of Trust Securities shall have consented to such 42 49 amendment; provided, further, that if the consent of the holder of each outstanding Security is required, such amendment shall not be effective until the holder of each outstanding Trust Security shall have consented to such amendment. Upon the request of the Corporation accompanied by a copy of a resolution of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any supplemental indenture effecting such amendment, and upon the filing with the Debenture Trustee of evidence of the consent of Securityholders as aforesaid, the Debenture Trustee shall join with the Corporation in the execution of such supplemental indenture unless such supplemental indenture affects the Debenture Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Debenture Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Corporation and the Debenture Trustee of any supplemental indenture pursuant to the provisions of this Section, the Debenture Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Corporation, setting forth in general terms the substance of such supplemental indenture, to the Securityholders as their names and addresses appear upon the Security Register. Any failure of the Debenture Trustee to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. It shall not be necessary for the consent of the Securityholders under this Section 9.02 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. SECTION 9.03 Compliance with Trust Indenture Act; Effect of Supplemental Indentures. Any supplemental indenture executed pursuant to the provisions of this Article IX shall comply with the Trust Indenture Act. Upon the execution of any supplemental indenture pursuant to the provisions of this Article IX, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitations of rights, obligations, duties and immunities under this Indenture of the Debenture Trustee, the Corporation and the holders of Securities shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. SECTION 9.04 Notation on Securities. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation in form approved by the Debenture Trustee as to any matter provided for in such supplemental indenture. If the Corporation or the Debenture Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Debenture Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may be prepared and executed by 43 50 the Corporation, authenticated by the Debenture Trustee or the Authenticating Agent and delivered in exchange for the Securities then outstanding. SECTION 9.05 Evidence of Compliance of Supplemental Indenture to be Furnished to Debenture Trustee. The Debenture Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article IX. ARTICLE X CONSOLIDATION, MERGER, SALE, CONVEYANCE, TRANSFER AND LEASE SECTION 10.01 Corporation May Consolidate, etc., on Certain Terms. Nothing contained in this Indenture or in any of the Securities shall prevent any consolidation or merger of the Corporation with or into any other Person (whether or not affiliated with the Corporation, as the case may be), or successive consolidations or mergers in which the Corporation or its successor or successors, as the case may be, shall be a party or parties, or shall prevent any sale, conveyance, transfer or lease of the property of the Corporation, or its successor or successors as the case may be, as an entirety, or substantially as an entirety, to any other Person (whether or not affiliated with the Corporation, or its successor or successors, as the case may be) authorized to acquire and operate the same; provided, that (a) the Corporation is the surviving Person, or the Person formed by or surviving any such consolidation or merger (if other than the Corporation) or to which such sale, conveyance, transfer or lease of property is made is a Person organized and existing under the laws of the United States or any State thereof or the District of Columbia, and (b) if the Corporation is not the surviving Person, upon any such consolidation, merger, sale, conveyance, transfer or lease, the due and punctual payment of the principal of (and premium, if any) and interest on the Securities according to their tenor and the due and punctual performance and observance of all the covenants and conditions of this Indenture to be kept or performed by the Corporation shall be expressly assumed by the surviving Person, by supplemental indenture (which shall conform to the provisions of the Trust Indenture Act as then in effect) satisfactory in form to the Debenture Trustee, executed and delivered to the Debenture Trustee by the Person formed by such consolidation, or into which the Corporation shall have been merged, or by the Person which shall have acquired such property, as the case may be, and (c) after giving effect to such consolidation, merger, sale, conveyance, transfer or lease, no Default or Event of Default shall have occurred and be continuing. SECTION 10.02 Successor Person to be Substituted for Corporation. In case of any such consolidation, merger, sale, conveyance, transfer or lease, and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Debenture Trustee and satisfactory in form to the Debenture Trustee, of the obligation of due and punctual payment of the principal of (and premium, if any) and interest on all of the Securities and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed or observed by the Corporation, such successor 44 51 Person shall succeed to and be substituted for the Corporation, with the same effect as if it had been named herein as a party hereto, and the Corporation thereupon shall be relieved of any further liability or obligation hereunder or upon the Securities. Such successor Person thereupon may cause to be signed, and may issue either in its own name or in the name of the Corporation, any or all of the Securities issuable hereunder which theretofore shall not have been signed by the Corporation and delivered to the Debenture Trustee or the Authenticating Agent; and, upon the order of such successor Person instead of the Corporation and subject to all the terms, conditions and limitations in this Indenture prescribed, the Debenture Trustee or the Authenticating Agent shall authenticate and deliver any Securities which previously shall have been signed and delivered by any Officer of the Corporation to the Debenture Trustee or the Authenticating Agent for authentication, and any Securities which such successor Person thereafter shall cause to be signed and delivered to the Debenture Trustee or the Authenticating Agent for that purpose. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Securities had been issued at the date of the execution hereof. SECTION 10.03 Opinion of Counsel to be Given Debenture Trustee. The Debenture Trustee, subject to the provisions of Sections 6.01 and 6.02, may receive an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or lease, and any assumption, permitted or required by the terms of this Article X complies with the provisions of this Article X. ARTICLE XI SATISFACTION AND DISCHARGE OF INDENTURE SECTION 11.01 Discharge of Indenture. When (a) the Corporation shall deliver to the Debenture Trustee for cancellation all Securities theretofore authenticated (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced as provided in Section 2.07) and not theretofore canceled, or (b) all the Securities not theretofore canceled or delivered to the Debenture Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for prepayment within one year under arrangements satisfactory to the Debenture Trustee for the giving of notice of prepayment, and the Corporation shall deposit with the Debenture Trustee, in trust, funds sufficient to pay on the Maturity Date or upon prepayment all of the Securities (other than any Securities which shall have been destroyed, lost or stolen and which shall have been replaced as provided in Section 2.07) not theretofore canceled or delivered to the Debenture Trustee for cancellation, including principal (and premium, if any) and interest (including Compounded Interest and Additional Sums, if any) due or to become due to the Maturity Date or prepayment date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of (or premium, if any) or interest (including Compounded Interest and Additional Sums, if any) on the Securities (1) theretofore repaid to the Corporation in accordance with the provisions of Section 11.04, or (2) paid to any State or to the District of Columbia pursuant to its unclaimed property or similar 45 52 laws, and if, in either case the Corporation shall also pay or cause to be paid all other sums payable hereunder by the Corporation, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.02, 2.06, 2.07, 3.01, 3.02, 3.04, 6.06, 6.10 and 11.04 hereof, which shall survive until such Securities shall mature and be paid. Thereafter, Sections 6.06, 6.10 and 11.04 shall survive, and the Debenture Trustee, on demand of the Corporation accompanied by any Officers' Certificate and an Opinion of Counsel and at the cost and expense of the Corporation, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; the Corporation, however, hereby agrees to reimburse the Debenture Trustee for any costs or expenses thereafter reasonably and properly incurred by the Debenture Trustee in connection with this Indenture or the Securities. SECTION 11.02 Deposited Moneys and U.S. Government Obligations to be Held in Trust by Debenture Trustee. Subject to the provisions of Section 11.04, all moneys and U.S. Government Obligations deposited with the Debenture Trustee pursuant to Sections 11.01 or 11.05 shall be held in trust and applied by it to the payment, either directly or through any paying agent (including the Corporation if acting as its own paying agent), to the holders of the particular Securities for the payment of which such moneys or U.S. Government Obligations have been deposited with the Debenture Trustee, of all sums due and to become due thereon for principal, premium, if any, and interest. The Corporation shall pay and indemnify the Debenture Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Governmental Obligations deposited pursuant to Section 11.05 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the holders of outstanding Securities. SECTION 11.03 Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture all moneys then held by any paying agent of the Securities (other than the Debenture Trustee) shall, upon written demand of the Corporation, be repaid to it or paid to the Debenture Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 11.04 Return of Unclaimed Moneys. Any moneys deposited with or paid to the Debenture Trustee or any paying agent for payment of the principal of (or premium, if any) or interest (including Compounded Interest and Additional Sums, if any) on Securities and not applied but remaining unclaimed by the holders of Securities for two years after the date upon which the principal of (or premium, if any) or interest (including Compounded Interest and Additional Sums, if any) on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Corporation by the Debenture Trustee or such paying agent; and the holder of any of the Securities shall thereafter look only to the Corporation for any payment which such holder may be entitled to collect and all liability of the Debenture Trustee or such paying agent with respect to such moneys shall thereupon cease. 46 53 SECTION 11.05 Defeasance Upon Deposit of Moneys or U.S. Government Obligations. The Corporation shall be deemed to have been Discharged (as defined below) from its obligations with respect to the Securities on the 91st day after the applicable conditions set forth below have been satisfied: (a) the Corporation shall have deposited or caused to be deposited irrevocably with the Debenture Trustee or the Defeasance Agent (as defined below) as trust funds in trust, specifically pledged as security for, and dedicated solely to, the benefit of the holders of the Securities (i) money in an amount, or (ii) U.S. Government Obligations which through the payment of interest and principal in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (iii) a combination of (i) and (ii), sufficient, in the opinion (with respect to (ii) and (iii)) of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Debenture Trustee and the Defeasance Agent, if any, to pay and discharge each installment of principal of and interest on and premium, if any, on the outstanding Securities on the dates such installments of principal and interest (and premium, if any) are due; (b) if the Securities are then listed on any national securities exchange, the Corporation shall have delivered to the Debenture Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that the exercise of the option under this Section 11.05 would not cause such Securities to be delisted from such exchange; (c) no Default or Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit; and (d) the Corporation shall have delivered to the Debenture Trustee and the Defeasance Agent, if any, an Opinion of Counsel to the effect that holders of the Securities will not recognize income, gain or loss for United States federal income tax purposes as a result of the exercise of the option under this Section 11.05 and will be subject to United States federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised. "Discharged" means that the Corporation shall be deemed to have paid and discharged the entire indebtedness represented by, and obligations under, the Securities and to have satisfied all the obligations under this Indenture relating to the Securities (and the Debenture Trustee, at the expense of the Corporation, shall execute proper instruments acknowledging the same), except (1) the rights of holders of Securities to receive, from the trust fund described in clause (a) above, payment of the principal of and the interest and premium, if any, on the Securities when such payments are due; (2) the Corporation's obligations with respect to the Securities under Sections 2.06, 2.07, 5.02 and 11.04; and (3) the rights, powers, trusts, duties and immunities of the Debenture Trustee hereunder. 47 54 "Defeasance Agent" means another financial institution which is eligible to act as Debenture Trustee hereunder and which assumes all of the obligations of the Debenture Trustee necessary to enable the Debenture Trustee to act hereunder. In the event such a Defeasance Agent is appointed pursuant to this Section, the following conditions shall apply: (1) the Debenture Trustee shall have approval rights over the document appointing such Defeasance Agent and the document setting forth such Defeasance Agent's rights and responsibilities; and (2) the Defeasance Agent shall provide verification to the Debenture Trustee acknowledging receipt of sufficient money and/or U.S. Government Obligations to meet the applicable conditions set forth in this Section 11.05. ARTICLE XII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 12.01 Indenture and Securities Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest (including Compounded Interest and Additional Sums, if any) on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Corporation in this Indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, officer or director, as such, past, present or future, of the Corporation or of any successor Person to the Corporation, either directly or through the Corporation or any successor Person to the Corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issuance of the Securities. ARTICLE XIII MISCELLANEOUS PROVISIONS SECTION 13.01 Successors. All of the covenants, stipulations, promises and agreements of the Corporation contained in this Indenture shall also bind the Corporation's successors and assigns whether so expressed or not. SECTION 13.02 Official Acts by Successor Corporation. Any act or proceeding that, by any provision of this Indenture, is authorized or required to be done or performed by any board, committee or officer of the Corporation shall and may be 48 55 done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Corporation. SECTION 13.03 Surrender of Corporation Powers. The Corporation by instrument in writing executed by authority of 2/3 (two-thirds) of its Board of Directors and delivered to the Debenture Trustee may surrender any of the powers reserved to the Corporation hereunder, and thereupon such power so surrendered shall terminate both as to the Corporation, as the case may be, and as to any successor Person. SECTION 13.04 Addresses for Notices, etc. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Debenture Trustee or by the holders of Securities on the Corporation may be given or served by being deposited postage prepaid by first class mail, registered or certified mail, overnight courier service or conformed telecopy addressed (until another address is filed by the Corporation with the Debenture Trustee for the purpose) to Hawthorne Financial Corporation at 2381 Rosecrans Avenue, El Segundo, California 90245, Attention: Karen Abajian. Any notice, direction, request or demand by any Securityholder to or upon the Debenture Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made in writing at the office of Wilmington Trust Company at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890, Attention: Corporate Trust Administration (unless another address is provided by the Debenture Trustee to the Corporation for such purpose). Any notice or communication to a Securityholder shall be mailed by first class mail to his or her address shown on the Security Register kept by the security registrar for the Securities. Notices required to be given to the Debenture Trustee or the Authenticating Agent shall be in writing, personally delivered or mailed first class postage prepaid to each of the foregoing, or at such other address as shall be designated by written notice to the other parties. SECTION 13.05 Governing Law. This Indenture and each Security shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by and construed in accordance with the laws of said State without regard to conflict of law principles thereof. SECTION 13.06 Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Corporation to the Debenture Trustee to take any action under any of the provisions of this Indenture, the Corporation shall furnish to the Debenture Trustee an Officers' Certificate stating that in the opinion of the signers all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Each certificate or opinion provided for in this Indenture and delivered to the Debenture Trustee with respect to compliance with a condition or covenant provided for in this Indenture (except certificates delivered pursuant to Section 3.05) shall include (1) a statement that the Person making such certificate or opinion has read such covenant or condition; (2) a brief 49 56 statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 13.07 Business Days. In any case where the date of payment of principal of (or premium, if any) or interest on the Securities is not a Business Day, the payment of such principal of (or premium, if any) or interest on the Securities will not be made on such date but will be made on the next succeeding Business Day, except if such Business Day is in the next succeeding calendar year, such payment will be made on the immediately preceding Business Day, with the same force and effect as if made on the original date of payment, and no interest shall accrue for the period from and after such date. SECTION 13.08 Trust Indenture Act to Control. If and to the extent that any provision of this Indenture limits, qualifies or conflicts with the duties imposed by Sections 310 to 318, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 13.09 Table of Contents, Headings, etc. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 13.10 Execution in Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. SECTION 13.11 Separability. In case any one or more of the provisions contained in this Indenture or in the Securities shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Indenture or of the Securities, but this Indenture and the Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 13.12 Assignment. The Corporation will have the right at all times to assign any of its respective rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Corporation, provided that, in the event of any such assignment, the Corporation will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures 50 57 to the benefit of the parties thereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto. SECTION 13.13 Acknowledgment of Rights. The Corporation acknowledges that, with respect to any Securities held by the Trust or a trustee of such Trust, if the Property Trustee of such Trust fails to enforce its rights under this Indenture as the holder of the Securities held as the assets of the Trust, any holder of Capital Securities may institute legal proceedings, subject to Section 5.09, directly against the Corporation to enforce such Property Trustee's rights under this Indenture without first instituting any legal proceedings against such Property Trustee or any other person or entity. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Corporation to pay principal of (or premium, if any) or interest on the Securities when due, the Corporation acknowledges that a holder of Capital Securities may directly institute a proceeding for enforcement of payment to such holder of the principal of (or premium, if any) or interest on the Securities having an aggregate principal amount equal to the aggregate liquidation amount of the Capital Securities of such holder on or after the respective due date specified in the Securities. ARTICLE XIV PREPAYMENT OF SECURITIES SECTION 14.01 Special Event Prepayment. If, prior to the Initial Optional Prepayment Date, a Special Event has occurred and is continuing, then, notwithstanding Section 14.02(a) but subject to Section 14.02(c), the Corporation shall have the right, at any time within 90 days following the occurrence of such Special Event, upon (i) not less than 45 days' written notice to the Debenture Trustee and (ii) not less than 30 days nor more than 60 days' written notice to the Securityholders, to prepay the Securities, in whole (but not in part), at the Special Event Prepayment Price. The Special Event Prepayment Price shall be paid prior to 12:00 noon, New York City time, on the date of such prepayment or such earlier time as the Corporation determines, provided that the Corporation shall deposit with the Debenture Trustee an amount sufficient to pay the Special Event Prepayment Price by 10:00 a.m., New York City time, on the date such Special Event Prepayment Price is to be paid. SECTION 14.02 Optional Prepayment by Corporation. (a) Subject to Sections 14.02(b) and (c), the Corporation shall have the right to prepay the Securities, in whole or in part, at any time on or after the Initial Optional Prepayment Date, upon (i) not more than 45 days' written notice to the Debenture Trustee and (ii) not less than 30 days and not more than 60 days' written notice to the Securityholders, at the prepayment prices set forth below plus, in each case, accrued and unpaid interest thereon (including Compounded Interest and Additional Sums, if any) to the applicable date of prepayment (the "Optional Prepayment Price"), if prepaid during the 12-month period beginning June 8th of the years indicated below. 51 58
Year Percentage of Principal ---- ----------------------- 2011 105.090% 2012 104.581% 2013 104.072% 2014 103.563% 2015 103.054% 2016 102.545% 2017 102.036% 2018 101.527% 2019 101.018% 2020 100.509% 2021 and thereafter 100.000%
If the Securities are only partially prepaid pursuant to this Section 14.02, the Securities to be prepaid shall be selected on a pro rata basis not more than 60 days prior to the date fixed for prepayment from the outstanding Securities not previously called for prepayment; provided, however, that with respect to Securityholders that would be required to hold Securities with an aggregate principal amount of less than $100,000 but more than an aggregate principal amount of zero as a result of such pro rata prepayment, the Corporation shall prepay Securities of each such Securityholder so that after such prepayment such Securityholder shall hold Securities either with an aggregate principal amount of at least $100,000 or such Securityholder no longer holds any Securities, and shall use such method (including, without limitation, by lot) as the Corporation shall deem fair and appropriate; provided, further, that any such proration may be made on the basis of the aggregate principal amount of Securities held by each Securityholder and may be made by making such adjustments as the Corporation deems fair and appropriate in order that only Securities in denominations of $1,000 or integral multiples thereof shall be prepaid. The Optional Prepayment Price shall be paid prior to 12:00 noon New York City time, on the date of such prepayment or at such earlier time as the Corporation determines, provided that the Corporation shall deposit with the Debenture Trustee an amount sufficient to pay the Optional Prepayment Price by 10:00 a.m., New York City time, on the date such Optional Prepayment Price is to be paid. (b) Notwithstanding the first sentence of Section 14.02(a), upon the entry of an order for dissolution of the Trust by a court of competent jurisdiction, the Securities thereafter will be subject to optional prepayment, in whole only, but not in part, on or after the Initial Optional Prepayment Date, at the applicable Optional Prepayment Price and otherwise in accordance with this Article XIV. (c) Any prepayment of Securities pursuant to Section 14.01 or Section 14.02 shall be subject to the Corporation obtaining any and all required regulatory approvals. SECTION 14.03 No Sinking Fund. The Securities are not entitled to the benefit of any sinking fund. 52 59 SECTION 14.04 Notice of Prepayment; Selection of Securities. In case the Corporation shall desire to exercise the right to prepay all, or, as the case may be, any part of the Securities in accordance with their terms, it shall fix a date for prepayment and shall mail a notice of such prepayment at least 30 and not more than 60 days' prior to the date fixed for prepayment to the holders of Securities to be so prepaid as a whole or in part at their last addresses as the same appear on the Security Register. Such mailing shall be by first class mail. The notice, if mailed in the manner herein provided, shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Security designated for prepayment as a whole or in part shall not affect the validity of the proceedings for the prepayment of any other Security. Each such notice of prepayment shall specify the CUSIP number of the Securities to be prepaid, the date fixed for prepayment, the Prepayment Price at which the Securities are to be prepaid (or the method by which such Prepayment Price is to be calculated), the place or places of payment where payment will be made upon presentation and surrender of the Securities, that interest accrued to the date fixed for prepayment will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be prepaid will cease to accrue. If less than all the Securities are to be prepaid, the notice of prepayment shall specify the numbers of the Securities to be prepaid. In case any Security is to be prepaid in part only, the notice of prepayment shall state the portion of the principal amount thereof to be prepaid and shall state that on and after the date fixed for prepayment, upon surrender of such Security, a new Security or Securities in principal amount equal to the portion thereof that has not been prepaid will be issued. By 10:00 a.m., New York City time, on the prepayment date specified in the notice of prepayment given as provided in this Section, the Corporation will deposit with the Debenture Trustee or with one or more paying agents an amount of money sufficient to prepay on the prepayment date all the Securities so called for prepayment at the Prepayment Price. SECTION 14.05 Payment of Securities Called for Prepayment. If notice of prepayment has been given as provided in Section 14.04, the Securities or portions of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the Prepayment Price (subject to the rights of holders of Securities at the close of business on a regular record date in respect of an Interest Payment Date occurring on or prior to the prepayment date), and on and after said date (unless the Corporation shall default in the payment of such Securities at the Prepayment Price) interest (including Compounded Interest and Additional Sums, if any) on the Securities or portions of Securities so called for prepayment shall cease to accrue. On presentation and surrender of such Securities at a place of payment specified in said notice, the said Securities or the specified portions thereof shall be paid and prepaid by the Corporation at the applicable Prepayment Price (subject to the rights of holders of Securities on the close of business on a regular record date in respect of an Interest Payment Date occurring on or prior to the prepayment date). 53 60 Upon presentation of any Security prepaid in part only, the Corporation shall execute and the Debenture Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Corporation, a new Security or Securities of authorized denominations, in principal amount equal to the portion of the Security so presented that has not been prepaid. ARTICLE XV SUBORDINATION OF SECURITIES SECTION 15.01 Agreement to Subordinate. The Corporation covenants and agrees, and each holder of Securities issued hereunder likewise covenants and agrees, that the Securities shall be issued subject to the provisions of this Article XV; and each holder of a Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Corporation of the principal of, premium, if any, and interest (including Compounded Interest and Additional Sums, if any) on all Securities issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right of payment to the prior payment in full of all Allocable Amounts then due and payable in respect of Senior Indebtedness, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article XV shall prevent the occurrence of any Default or Event of Default hereunder. SECTION 15.02 Default on Senior Indebtedness. In the event and during the continuation of any default by the Corporation in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness, or in the event that the maturity of any Senior Indebtedness has been accelerated because of a default and such acceleration has not been rescinded or canceled, then, in either case, no payment shall be made by the Corporation with respect to the principal (including prepayment payments) of (or premium, if any) or interest on the Securities (including Compounded Interest and Additional Sums, if any, or any other amounts which may be due on the Securities pursuant to the terms hereof or thereof). In the event of the acceleration of the maturity of the Securities, then no payment shall be made by the Corporation with respect to the principal (including prepayment payments) of (or premium, if any) or interest on the Securities (including Compounded Interest and Additional Sums, if any, or any other amounts which may be due on the Securities pursuant to the terms hereof or thereof) until the holders of all Senior Indebtedness outstanding at the time of such acceleration shall receive payment, in full, of all Allocable Amounts due on or in respect of such Senior Indebtedness (including any amounts due upon acceleration). In the event that, notwithstanding the foregoing, any payment is received by the Debenture Trustee, or any Securityholder, when such payment is prohibited by the preceding paragraphs of this Section 15.02, such payment shall be held in trust for the benefit of, and shall be paid over or delivered by the Debenture Trustee (if the notice required by Section 15.06 has 54 61 been received by the Debenture Trustee) or by any Securityholder, to the holders of Senior Indebtedness or their respective representatives, or to the trustee or trustees under any indenture pursuant to which any of such Senior Indebtedness may have been issued, as their respective interests may appear, but only to the extent of the Allocable Amounts in respect of such Senior Indebtedness and to the extent that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Debenture Trustee in writing within 90 days of such payment of the Allocable Amounts then due and owing on such Senior Indebtedness, and only the Allocable Amounts specified in such notice to the Debenture Trustee shall be paid to the holders of such Senior Indebtedness. SECTION 15.03 Liquidation; Dissolution; Bankruptcy. Upon any payment by the Corporation or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities, to creditors upon any dissolution, winding-up, liquidation or reorganization of the Corporation, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, the holders of all Senior Indebtedness of the Corporation will first be entitled to receive payment in full of Allocable Amounts due on or in respect of such Senior Indebtedness, before any payment is made by the Corporation on account of the principal of (or premium, if any) or interest on the Securities (including Compounded Interest and Additional Sums, if any, or any other amounts which may be due on the Securities pursuant to the terms hereof or thereof); and upon any such dissolution, winding-up, liquidation or reorganization, any payment by the Corporation, or distribution of assets of the Corporation of any kind or character, whether in cash, property or securities, which the Securityholders or the Debenture Trustee would be entitled to receive from the Corporation, except for the provisions of this Article XV, shall be paid by the Corporation or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the Securityholders or by the Debenture Trustee under the Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Corporation (pro rata to such holders on the basis of the respective Allocable Amounts of Senior Indebtedness held by such holders, as calculated by the Corporation) or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all such Allocable Amounts of Senior Indebtedness in full, in money or money's worth, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness, before any payment or distribution is made to the Securityholders or to the Debenture Trustee. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Corporation of any kind or character prohibited by the foregoing, whether in cash, property or securities, shall be received by the Debenture Trustee, or any Securityholder, before the Allocable Amounts of all Senior Indebtedness is paid in full, or provision is made for such payment in money in accordance with its terms, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered by the Debenture Trustee (if the Notice requested by Section 15.06 has been received by the Debenture Trustee) or by any Securityholder, to the holders of such Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any indenture pursuant to which any instruments evidencing such Senior Indebtedness may have been issued, as their respective 55 62 interests may appear, as calculated by the Corporation, for application to the payment of all Allocable Amounts of Senior Indebtedness remaining unpaid to the extent necessary to pay all Allocable Amounts due on or in respect of such Senior Indebtedness in full in money in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the benefit of the holders of such Senior Indebtedness. For purposes of this Article XV, the words "cash, property or securities" shall not be deemed to include shares of stock of the Corporation as reorganized or readjusted, or securities of the Corporation or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article XV with respect to the Securities to the payment of Senior Indebtedness that may at the time be outstanding, provided that (i) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (ii) the rights of the holders of such Senior Indebtedness are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Corporation with, or the merger of the Corporation into, another Person or the liquidation or dissolution of the Corporation following the sale, conveyance, transfer or lease of its property as an entirety, or substantially as an entirety, to another Person upon the terms and conditions provided for in Article X of this Indenture shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 15.03 if such other Person shall, as a part of such consolidation, merger, sale, conveyance, transfer or lease, comply with the conditions stated in Article X of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Debenture Trustee under or pursuant to Section 6.06 of this Indenture. SECTION 15.04 Subrogation. Subject to the payment in full of all Allocable Amounts of Senior Indebtedness, the rights of the Securityholders shall be subrogated to the rights of the holders of such Senior Indebtedness to receive payments or distributions of cash, property or securities of the Corporation, as the case may be, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Securities shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of such Senior Indebtedness of any cash, property or securities to which the Securityholders or the Debenture Trustee would be entitled except for the provisions of this Article XV, and no payment over pursuant to the provisions of this Article XV to or for the benefit of the holders of such Senior Indebtedness by Securityholders or the Debenture Trustee, shall, as between the Corporation, its creditors other than holders of Senior Indebtedness of the Corporation, and the holders of the Securities, be deemed to be a payment by the Corporation to or on account of such Senior Indebtedness. It is understood that the provisions of this Article XV are and are intended solely for the purposes of defining the relative rights of the holders of the Securities, on the one hand, and the holders of such Senior Indebtedness on the other hand. Nothing contained in this Article XV or elsewhere in this Indenture or in the Securities is intended to or shall impair, as between the Corporation, its creditors other than the holders of Senior Indebtedness of the Corporation, and the holders of the Securities, the obligation of the Corporation, which is absolute and unconditional, to pay to the holders of the Securities the principal of (and premium, if any) and interest (including Compounded Interest and Additional 56 63 Sums, if any) on the Securities as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Securities and creditors of the Corporation, as the case may be, other than the holders of Senior Indebtedness of the Corporation, as the case may be, nor shall anything herein or therein prevent the Debenture Trustee or the holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XV of the holders of such Senior Indebtedness in respect of cash, property or securities of the Corporation, as the case may be, received upon the exercise of any such remedy. SECTION 15.05 Debenture Trustee to Effectuate Subordination. Each Securityholder, by such Securityholder's acceptance thereof, authorizes and directs the Debenture Trustee on such Securityholder's behalf to take such action (as the Debenture Trustee, in its discretion, deems necessary or appropriate, upon instruction or otherwise) to effectuate the subordination provided in this Article XV and appoints the Debenture Trustee such Securityholder's attorney-in-fact for any and all such purposes. SECTION 15.06 Notice by the Corporation. The Corporation shall give prompt written notice to a Responsible Officer of the Debenture Trustee of any fact known to the Corporation that would prohibit the making of any payment of monies to or by the Debenture Trustee in respect of the Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture, the Debenture Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Debenture Trustee in respect of the Securities pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Debenture Trustee shall have received written notice thereof from the Corporation or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the Debenture Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled in all respects to assume that no such facts exist; provided, however, that if the Debenture Trustee shall not have received the notice provided for in this Section 15.06 at least two Business Days prior to the date upon which, by the terms hereof, any money may become payable for any purpose (including, without limitation, the payment of the principal of (or premium, if any) or interest (including Compounded Interest and Additional Sums, if any) on any Security), then, anything herein contained to the contrary notwithstanding, the Debenture Trustee shall have full power and authority to receive such money and to apply the same to the purposes for which they were received, and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date. The Debenture Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on a written notice delivered to it by a Person representing himself to be a holder of Senior Indebtedness of the Corporation (or a trustee on behalf of such holder), as the case may be, to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee on behalf of any such holder or holders. In the event that the Debenture Trustee determines in good faith that further evidence is required with respect to the right of any 57 64 Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Debenture Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Debenture Trustee as to the amount of such Senior Indebtedness held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XV, and, if such evidence is not furnished, the Debenture Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. Upon any payment or distribution of assets of the Corporation referred to in this Article XV, the Debenture Trustee, subject to the provisions of Article VI of this Indenture, and the Securityholders shall be entitled to conclusively rely upon any order or decree entered by any court of competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation, reorganization, dissolution, winding-up or similar case or proceeding is pending, or a certificate of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the Debenture Trustee or to the Securityholders, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of Senior Indebtedness and other indebtedness of the Corporation, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XV. SECTION 15.07 Rights of the Debenture Trustee; Holders of Senior Indebtedness. The Debenture Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in this Indenture shall deprive the Debenture Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Corporation, the Debenture Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article XV, and no implied covenants or obligations with respect to the holders of such Senior Indebtedness shall be read into this Indenture against the Debenture Trustee. The Debenture Trustee shall not be deemed to owe any fiduciary duty to the holders of such Senior Indebtedness and, subject to the provisions of Article VI of this Indenture, the Debenture Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Corporation or any other Person money or assets to which any holder of such Senior Indebtedness shall be entitled by virtue of this Article XV or otherwise. Nothing in this Article XV shall apply to claims of, or payments to, the Debenture Trustee under or pursuant to Section 6.06. SECTION 15.08 Subordination May Not Be Impaired. No right of any present or future holder of any Senior Indebtedness of the Corporation to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Corporation, as the case may be, or by any act or 58 65 failure to act, in good faith, by any such holder, or by any noncompliance by the Corporation, as the case may be, with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or otherwise be charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness of the Corporation may, at any time and from time to time, without the consent of or notice to the Debenture Trustee or the Securityholders, without incurring responsibility to the Securityholders and without impairing or releasing the subordination provided in this Article XV or the obligations hereunder of the holders of the Securities to the holders of such Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, such Senior Indebtedness, or otherwise amend or supplement in any manner such Senior Indebtedness or any instrument evidencing the same or any agreement under which such Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (iii) release any Person liable in any manner for the collection of such Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against the Corporation, as the case may be, and any other Person. ARTICLE XVI EXTENSION OF INTEREST PAYMENT PERIOD SECTION 16.01 Extension of Interest Payment Period. So long as no Event of Default has occurred and is continuing, the Corporation shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest by extending the interest payment period of such Securities for a period not exceeding 10 consecutive semi-annual periods, including the first such semi-annual period during such extension period (the "Extended Interest Payment Period"), during which Extended Interest Payment Period no interest shall be due and payable, provided that no Extended Interest Payment Period shall end on a date other than an Interest Payment Date or extend beyond the Maturity Date. To the extent permitted by applicable law, interest, the payment of which has been deferred because of the extension of the interest payment period pursuant to this Section 16.01, will bear interest thereon at the Coupon Rate compounded semi-annually for each semi-annual period during the Extended Interest Payment Period ("Compounded Interest"). At the end of the Extended Interest Payment Period, the Corporation shall pay all interest accrued and unpaid on the Securities, including any Additional Sums and Compounded Interest (together, "Deferred Interest"), that shall be payable to the holders of the Securities in whose names the Securities are registered in the Security Register on the record date immediately preceding the end of the Extended Interest Payment Period. Before the termination of any Extended Interest Payment Period, the Corporation may further defer payments of interest by further extending such Extended Interest Payment Period, provided that such Extended Interest Payment Period, together with all such previous and further extensions within such Extended Interest Payment Period, shall not (i) exceed 10 consecutive semi-annual periods, including the first such semi-annual period during such Extended Interest Payment Period, (ii) end on a date other than an Interest Payment Date or (iii) extend beyond the Maturity Date of the Securities. Upon the termination of any Extended Interest Payment Period and the payment of all amounts then due, 59 66 the Corporation may commence a new Extended Interest Payment Period, subject to the foregoing requirements. No interest shall be due and payable during an Extended Interest Payment Period, except at the end thereof, but the Corporation may prepay at any time all or any portion of the interest accrued during an Extended Interest Payment Period. SECTION 16.02 Notice of Extension. (a) If the Property Trustee is the only holder of the Securities at the time the Corporation elects to commence an Extended Interest Payment Period, the Corporation shall give written notice to the Administrative Trustees, the Property Trustee and the Debenture Trustee of its election to commence such Extended Interest Payment Period at least five Business Days before the earlier of (i) the next succeeding date on which Distributions on the Trust Securities would have been payable, and (ii) the date the Property Trustee is required to give notice of the record date, or the date such Distributions are payable, to any national securities exchange or to holders of the Capital Securities, but in any event at least five Business Days before such record date. (b) If the Property Trustee is not the only holder of the Securities at the time the Corporation elects to commence an Extended Interest Payment Period, the Corporation shall give the holders of the Securities and the Debenture Trustee written notice of its election of such Extended Interest Payment Period at least 10 Business Days before the earlier of (i) the next succeeding Interest Payment Date, and (ii) the date the Debenture Trustee is required to give notice of the record or payment date of such interest payment to any national securities exchange. (c) The semi-annual period in which any notice is given pursuant to paragraphs (a) or (b) of this Section 16.02 shall be counted as one of the 10 semi-annual periods permitted in the maximum Extended Interest Payment Period permitted under Section 16.01. Wilmington Trust Company hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. 60 67 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed by their respective officers thereunto duly authorized, as of the day and year first above written. HAWTHORNE FINANCIAL CORPORATION By: ------------------------------------- Simone F. Lagomarsino President and Chief Executive Officer WILMINGTON TRUST COMPANY, as Debenture Trustee By: ------------------------------------- Name: Title: S-1 68 EXHIBIT A (FORM OF FACE OF SECURITY) THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH HAWTHORNE FINANCIAL CORPORATION (THE "CORPORATION") OR ANY "AFFILIATE" OF THE CORPORATION WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE CORPORATION, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3), (7) OR (8) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE CORPORATION PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO THE CORPORATION, AND (ii) PURSUANT TO CLAUSE (D) TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE REVERSE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEREE TO THE CORPORATION. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. Exhibit A-1 69 THE SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000. ANY ATTEMPTED TRANSFER OF SECURITIES IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PRINCIPAL OF OR INTEREST ON SUCH SECURITIES, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH SECURITIES. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. Exhibit A-2 70 JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE CERTIFICATE HAWTHORNE FINANCIAL CORPORATION $_______________________ 10.18% JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURE DUE JUNE 8, 2031 Hawthorne Financial Corporation, a Delaware corporation (the "Corporation," which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to HFC Capital Trust I or registered assigns, the principal sum of $___________ (_________________________________________ Dollars) on June 8, 2031 (the "Maturity Date"), unless previously prepaid, and to pay interest on the outstanding principal amount hereof from March 28, 2001, or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, semi-annually (subject to deferral as set forth herein) in arrears on June 8th and December 8th of each year, commencing June 8, 2001 at the rate of 10.18% per annum, until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum compounded semi-annually ("Compounded Interest"). The amount of interest payable hereon shall be computed on the basis of a 360-day year of twelve 30- day months. In the event that any date on which the principal of (or premium, if any) or interest on this Security is payable is not a Business Day (as defined in the Indenture), then the payment payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that if such next succeeding Business Day falls in the next succeeding calendar year such payment shall be made on the immediately preceding Business Day with the same force and effect as if made on such date. Pursuant to the Indenture, in certain circumstances the Corporation will be required to pay Additional Sums (as defined in the Indenture) with respect to this Security. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities, as defined in said Indenture) is registered at the close of business on the regular record date for such interest installment, which shall be at the close of business on the 15th day of the month immediately preceding the month in which the relevant Interest Payment Date falls. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the holders on such regular record date and may be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a special record date to be fixed by the Debenture Trustee for the payment of such defaulted interest, notice whereof shall be given to the holders of Securities not less than 10 days prior to such special record date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on Exhibit A-3 71 which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. The principal of (and premium, if any) and interest (including Compounded Interest and Additional Sums, if any) on this Security shall be payable in immediately available funds at the office or agency of the Corporation maintained for that purpose in any coin or currency of the United States of America that at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest shall be made by transfer to an account maintained by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the holder at such address as shall appear in the Security Register. Notwithstanding the foregoing, so long as the holder of this Security is the Property Trustee of HFC Capital Trust I, the payment of the principal of (and premium if any) and interest (including Compounded Interest and Additional Sums, if any) on this Security will be made at such place and to such account as may be designated by such Property Trustee. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Allocable Amounts then due and payable in respect of Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Debenture Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Debenture Trustee his or her attorney-in-fact for any and all such purposes. Each holder hereof, by his or her acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. This Security shall not be entitled to any benefit under the Indenture or be valid or become obligatory for any purpose until the Certificate of Authentication hereon shall have been signed by or on behalf of the Debenture Trustee. The provisions of this Security are continued on the reverse side hereof and such provisions shall for all purposes have the same effect as though fully set forth at this place. Exhibit A-4 72 IN WITNESS WHEREOF, the Corporation has caused this instrument to be duly executed and sealed this ___ day of ________________ ________. HAWTHORNE FINANCIAL CORPORATION By: ------------------------------------- NAME: TITLE: Attest: By: -------------------------- Name: Title: CERTIFICATE OF AUTHENTICATION This is one of the 10.18% Junior Subordinated Deferrable Interest Debentures of Hawthorne Financial Corporation referred to in the within-mentioned Indenture. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Debenture Trustee By: ------------------------------------- Authorized Signatory Dated: ---------------------- Exhibit A-5 73 (FORM OF REVERSE OF SECURITY) This Security is one of the Securities of the Corporation (herein sometimes referred to as the "Securities"), specified in the Indenture, all issued or to be issued under and pursuant to an Indenture, dated as of March 28, 2001 (the "Indenture"), duly executed and delivered between the Corporation and Wilmington Trust Company, as Debenture Trustee (the "Debenture Trustee"), to which Indenture reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Debenture Trustee, the Corporation and the holders of the Securities. The Securities are limited in aggregate principal amount as specified in Section 2.02 of the Indenture. Upon the occurrence and continuation of a Special Event (as defined in the Indenture) prior to June 8, 2011 (the "Initial Optional Prepayment Date"), the Corporation shall have the right, at any time within 90 days following the occurrence of such Special Event, to prepay this Security in whole (but not in part) at the Special Event Prepayment Price. "Special Event Prepayment Price" shall mean, with respect to any prepayment of the Securities following the occurrence and continuation of a Special Event prior to the Initial Optional Prepayment Date, an amount in cash equal to (i) 106.09% of the principal amount of the Securities to be prepaid, if the Special Event occurs prior to June 8, 2011 and (ii) if the Special Event occurs on or after June 8, 2011, the amount of the Optional Prepayment Price (calculated as if the Corporation had prepaid such Securities on such date), plus, in the case of (i) and (ii), any accrued and unpaid interest (including Compounded Interest and Additional Sums, if any) thereon to the date of such prepayment. In addition, the Corporation shall have the right to prepay this Security, in whole or in part, at any time on or after the Initial Optional Prepayment Date (an "Optional Prepayment"), at the prepayment prices set forth below plus, in each case, accrued and unpaid interest thereon (including Compounded Interest and Additional Sums, if any, thereon to the applicable date of prepayment (the "Optional Prepayment Price"), if prepaid during the 12-month period beginning June 8th, of the years indicated below.
Year Percentage of Principal ---- ----------------------- 2011 105.090% 2012 104.581% 2013 104.072% 2014 103.563% 2015 103.054% 2016 102.545% 2017 102.036% 2018 101.527% 2019 101.018% 2020 100.509% 2021 and thereafter 100.000%
The Prepayment Price shall be paid prior to 12:00 noon, New York City time, on the date of such prepayment or at such earlier time as the Corporation determines, provided that the Corporation shall deposit with the Debenture Trustee an amount sufficient to pay the Prepayment Exhibit A-6 74 Price by 10:00 a.m., New York City time, on the date such Prepayment Price is to be paid. Any prepayment pursuant to this paragraph will be made upon not less than 30 days nor more than 60 days' prior written notice. If the Securities are only partially prepaid by the Corporation pursuant to an Optional Prepayment, the particular Securities to be prepaid shall be selected on a pro rata basis from the outstanding Securities not previously called for prepayment; provided, however, that with respect to Securityholders that would be required to hold Securities with an aggregate principal amount of less than $100,000 but more than an aggregate principal amount of zero as a result of such pro rata prepayment, the Corporation shall prepay Securities of each such Securityholder so that after such prepayment such Securityholder shall hold Securities either with an aggregate principal amount of at least $100,000 or such Securityholder no longer holds any Securities and shall use such method (including, without limitation, by lot) as the Corporation shall deem fair and appropriate; provided, further, that any such proration may be made on the basis of the aggregate principal amount of Securities held by each Securityholder thereof and may be made by making such adjustments as the Corporation deems fair and appropriate in order that only Securities in denominations of $1,000 or integral multiples thereof shall be prepaid. In the event of prepayment of this Security in part only, a new Security or Securities for the portion hereof that has not been prepaid will be issued in the name of the holder hereof upon the cancellation hereof. Notwithstanding the foregoing, any prepayment of Securities by the Corporation shall be subject to the receipt of any and all required regulatory approvals. In case an Event of Default (as defined in the Indenture) shall have occurred and be continuing, the principal of all of the Securities may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Corporation and the Debenture Trustee, with the consent of the holders of a majority in aggregate principal amount of the Securities at the time outstanding (as defined in the Indenture), to execute supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of modifying in any manner the rights of the holders of the Securities; provided, however, that no such supplemental indenture shall, without the consent of each holder of Securities then outstanding and affected thereby, (i) change the Maturity Date of any Security, or reduce the rate or extend the time of payment of interest thereon (subject to Article XVI of the Indenture),or reduce or increase the aggregate principal amount of the series of which such Security is a part or issue other Securities, or change any of the prepayment provisions or make the principal thereof or any interest or premium thereon payable in any coin or currency other than U.S. dollars, or impair or affect the right of any holder of Securities to institute suit for payment thereof, or (ii) reduce the aforesaid percentage of Securities the holders of which are required to consent to any such supplemental indenture. The Indenture also contains provisions permitting the holders of a majority in aggregate principal amount of the Securities at the time outstanding affected thereby, on behalf of all of the holders of the Securities, to waive any past default in the performance of any of the covenants contained in the Indenture, or established pursuant to the Indenture, and its consequences, except a default in the Exhibit A-7 75 payment of the principal of or premium, if any, or interest on any of the Securities or a default in respect of any covenant or provision under which the Indenture cannot be modified or amended without the consent of each holder of Securities then outstanding. Any such consent or waiver by the holder of this Security (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Security and of any Security issued in exchange herefor or in place hereof (whether by registration of transfer or otherwise), irrespective of whether or not any notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Corporation, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest (including Compounded Interest Additional Sums, if any) on this Security at the time and place and at the rate and in the money herein prescribed. So long as no Event of Default shall have occurred and be continuing, the Corporation shall have the right, at any time and from time to time during the term of the Securities, to defer payments of interest by extending the interest payment period (an "Extended Interest Payment Period") of such Securities for a period not (i) exceeding 10 consecutive semi-annual periods, including the first such semi-annual period during such extension period, (ii) ending on a date other than an Interest Payment Date or (iii) extending beyond the Maturity Date of the Securities, at the end of which period the Corporation shall pay all interest then accrued and unpaid (together with interest thereon at the rate specified for the Securities to the extent that payment of such interest is enforceable under applicable law). Before the termination of any such Extended Interest Payment Period, the Corporation may further defer payments of interest by further extending such Extended Interest Payment Period, provided that such Extended Interest Payment Period, together with all such previous and further extensions within such Extended Interest Payment Period, (i) shall not exceed 10 consecutive semi- annual periods including the first semi-annual period during such Extended Interest Payment Period, (ii) shall not end on any date other than an Interest Payment Date, and (iii) shall not extend beyond the Maturity Date of the Securities. Upon the termination of any such Extended Interest Payment Period and the payment of all accrued and unpaid interest and any additional amounts then due, the Corporation may commence a new Extended Interest Payment Period, subject to the foregoing requirements. No interest shall be due and payable during an Extended Interest Payment Period, except at the end thereof, but the Corporation may prepay at any time all or any portion of the interest accrued during an Extended Interest Payment Period. The Corporation has agreed that it will not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Corporation's capital stock, (ii) make any payment of principal of or premium, if any, or interest on or repay, repurchase or redeem any debt securities of the Corporation (including Other Debentures) that rank pari passu with or junior in right of payment to the Securities or (iii) make any guarantee payments with respect to any guarantee by the Corporation of the debt securities of any Subsidiary of the Corporation (including Other Guarantees) if such guarantee ranks pari passu with or junior in right of payment to the Securities (other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, Common Stock), (b) any declaration of a dividend in connection with the implementation of a Exhibit A-8 76 stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, as defined in the Indenture, (d) as a result of a reclassification of the Corporation's capital stock or the exchange or conversion of one class or series of the Corporation's capital stock for another class or series of the Corporation's capital stock, (e) the purchase of fractional interests in shares of the Corporation's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged and (f) purchases of Common Stock related to the issuance of Common Stock or rights under any of the Corporation's benefit or compensation plans for its directors, officers or employees or any of the Corporation's dividend reinvestment plans), if at such time (1) there shall have occurred any event of which the Corporation has actual knowledge that (a) is a Default or an Event of Default and (b) in respect of which the Corporation shall not have taken reasonable steps to cure, (2) such Securities are held by the Property Trustee of HFC Capital Trust I and the Corporation shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee or (3) the Corporation shall have given notice of its election to exercise its right to commence an Extended Interest Payment Period and shall not have rescinded such notice, and such Extended Interest Payment Period or any extension thereof shall have commenced and be continuing. Subject to (i) the Corporation having received any required regulatory approvals and (ii) the Administrative Trustees of HFC Capital Trust I having received an opinion of counsel to the effect that such distribution will not cause the holders of Capital Securities to recognize gain or loss for United States federal income tax purposes, the Corporation will have the right at any time to liquidate the Trust and, after satisfaction of liabilities of creditors of the Trust as required by applicable law, to cause the Securities to be distributed to the holders of the Trust Securities in liquidation of the Trust. The Securities are issuable only in registered form without coupons in minimum denominations of $100,000 and multiples of $1,000 in excess thereof. As provided in the Indenture and subject to the transfer restrictions limitations as may be contained herein and therein from time to time, this Security is transferable by the holder hereof on the Security Register of the Corporation, upon surrender of this Security for registration of transfer at the office or agency of the Corporation in Wilmington, Delaware accompanied by a written instrument or instruments of transfer in form satisfactory to the Corporation or the Debenture Trustee duly executed by the holder hereof or his or her attorney duly authorized in writing, and thereupon one or more new Securities of authorized denominations and for the same aggregate principal amount will be issued to the designated transferee or transferees. No service charge will be made for any such registration of transfer, but the Corporation may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. Prior to due presentment for registration of transfer of this Security, the Corporation, the Debenture Trustee, any authenticating agent, any paying agent, any transfer agent and the security registrar may deem and treat the holder hereof as the absolute owner hereof (whether or not this Security shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the security registrar for the Securities) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and (subject to the Indenture) interest due hereon and for all other purposes, and neither the Corporation nor the Exhibit A-9 77 Debenture Trustee nor any authenticating agent nor any paying agent nor any transfer agent nor any security registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or premium, if any, or interest (including Compounded Interest and Additional Sums, if any) on this Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, employee, officer or director, past, present or future, as such, of the Corporation or of any predecessor or successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. All terms used in this Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. Exhibit A-10 EX-4.8 7 a70896ex4-8.txt EXHIBIT 4.8 1 EXHIBIT 4.08 CERTIFICATE OF TRUST OF HFC CAPITAL TRUST I This Certificate of Trust of HFC Capital Trust I (the "Trust"), is being duly executed and filed by the undersigned trustee to form a business trust under the Delaware Business Trust Act (12 Del. C. Section 3801 et seq.) (the "Act"). (a) Name. The name of the business trust formed hereby is HFC Capital Trust I. (b) Delaware Trustee. The name and business address of the trustee of the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square North, 1100 N. Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Trust in accordance with Section 3811 of the Act. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Trustee By: -------------------------------------- Name: Title: EX-4.9 8 a70896ex4-9.txt EXHIBIT 4.9 1 EXHIBIT 4.9 AMENDED AND RESTATED DECLARATION OF TRUST OF HFC CAPITAL TRUST I OF HAWTHORNE FINANCIAL CORPORATION Dated as of March 28, 2001 2 TABLE OF CONTENTS
PAGE ARTICLE I INTERPRETATION AND DEFINITIONS ......................................... 2 SECTION 1.1 Definitions .................................................. 2 ARTICLE II TRUST INDENTURE ACT ................................................... 8 SECTION 2.1 Trust Indenture Act; Application ............................. 8 SECTION 2.2 Lists of Holders of Securities ............................... 8 SECTION 2.3 Reports by the Property Trustee .............................. 9 SECTION 2.4 Periodic Reports to Property Trustee ......................... 9 SECTION 2.5 Evidence of Compliance with Conditions Precedent ............. 9 SECTION 2.6 Events of Default; Waiver .................................... 9 SECTION 2.7 Default; Notice .............................................. 11 ARTICLE III ORGANIZATION ......................................................... 12 SECTION 3.1 Name ......................................................... 12 SECTION 3.2 Office ....................................................... 12 SECTION 3.3 Purpose ...................................................... 12 SECTION 3.4 Authority .................................................... 12 SECTION 3.5 Title to Property of the Trust ............................... 12 SECTION 3.6 Powers and Duties of the Administrative Trustees ............. 13 SECTION 3.7 Prohibition of Actions by the Trust and the Trustees ......... 15 SECTION 3.8 Powers and Duties of the Property Trustee .................... 16 SECTION 3.9 Certain Duties and Responsibilities of the Property Trustee .. 18 SECTION 3.10 Certain Rights of Property Trustee ........................... 20 SECTION 3.11 Delaware Trustee ............................................. 22 SECTION 3.12 Execution of Documents ....................................... 22 SECTION 3.13 Not Responsible for Recitals or Issuance of Securities ....... 23 SECTION 3.14 Duration of Trust ............................................ 23 SECTION 3.15 Mergers ...................................................... 23 ARTICLE IV SPONSOR ............................................................... 25 SECTION 4.1 Sponsor's Purchase of Common Securities ...................... 25 SECTION 4.2 Responsibilities of the Sponsor .............................. 25 SECTION 4.3 Right to Proceed ............................................. 25 SECTION 4.4 Right to Dissolve Trust ...................................... 25 ARTICLE V TRUSTEES ............................................................... 26 SECTION 5.1 Number of Trustees; Appointment of Co-Trustee ................ 26 SECTION 5.2 Delaware Trustee ............................................. 26
i 3 SECTION 5.3 Property Trustee; Eligibility ................................ 27 SECTION 5.4 Certain Qualifications of Administrative Trustees and Delaware Trustee Generally ............................................ 28 SECTION 5.5 Administrative Trustees ...................................... 28 SECTION 5.6 Appointment, Removal and Resignation of Trustees ............. 29 SECTION 5.7 Vacancies Among Trustees ..................................... 30 SECTION 5.8 Effect of Vacancies .......................................... 31 SECTION 5.9 Meetings ..................................................... 31 SECTION 5.10 Delegation of Power .......................................... 31 SECTION 5.11 Merger, Conversion, Consolidation or Succession to Business .. 31 ARTICLE VI DISTRIBUTIONS ......................................................... 32 SECTION 6.1 Distributions ................................................ 32 ARTICLE VII ISSUANCE OF SECURITIES ............................................... 32 SECTION 7.1 General Provisions Regarding Securities ...................... 32 SECTION 7.2 Execution and Authentication ................................. 33 SECTION 7.3 Form and Dating .............................................. 33 SECTION 7.4 Registrar, Paying Agent and Exchange Agent ................... 34 SECTION 7.5 Paying Agent to Hold Money in Trust .......................... 34 SECTION 7.6 Replacement Securities ....................................... 35 SECTION 7.7 Outstanding Capital Securities ............................... 35 SECTION 7.8 Capital Securities in Treasury ............................... 35 SECTION 7.9 Temporary Securities ......................................... 36 SECTION 7.10 Cancellation ................................................. 36 SECTION 7.11 CUSIP Numbers ................................................ 36 ARTICLE VIII DISSOLUTION OF TRUST ................................................ 36 SECTION 8.1 Dissolution of Trust ......................................... 36 ARTICLE IX TRANSFER OF INTERESTS ................................................. 37 SECTION 9.1 Transfer of Securities ....................................... 37 SECTION 9.2 Transfer Procedures and Restrictions ......................... 38 SECTION 9.3 Deemed Security Holders ...................................... 44 ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS ... 44 SECTION 10.1 Liability .................................................... 44 SECTION 10.2 Exculpation .................................................. 44 SECTION 10.3 Fiduciary Duty ............................................... 45 SECTION 10.4 Indemnification .............................................. 46 SECTION 10.5 Outside Businesses ........................................... 48
ii 4 ARTICLE XI ACCOUNTING ............................................................ 49 SECTION 11.1 Fiscal Year .................................................. 49 SECTION 11.2 Certain Accounting Matters ................................... 49 SECTION 11.3 Banking ...................................................... 49 SECTION 11.4 Withholding .................................................. 50 ARTICLE XII AMENDMENTS AND MEETINGS .............................................. 50 SECTION 12.1 Amendments ................................................... 50 SECTION 12.2 Meetings of the Holders; Action by Written Consent ........... 52 ARTICLE XIII REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE ............ 54 SECTION 13.1 Representations and Warranties of Property Trustee ........... 54 SECTION 13.2 Representations and Warranties of Delaware Trustee ........... 54 ARTICLE XIV MISCELLANEOUS ........................................................ 55 SECTION 14.1 Notices ...................................................... 55 SECTION 14.2 Governing Law ................................................ 56 SECTION 14.3 Intention of the Parties ..................................... 57 SECTION 14.4 Headings ..................................................... 57 SECTION 14.5 Successors and Assigns ....................................... 57 SECTION 14.6 Partial Enforceability ....................................... 57 SECTION 14.7 Counterparts ................................................. 57 ANNEX I TERMS OF 10.18% MMCapS(SM) 10.18% COMMON SECURITIES ................................................... I-1 EXHIBIT A-1 FORM OF CAPITAL SECURITY CERTIFICATE ....................................... A1-1 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE ........................................ A2-1 ANNEX II TRANSFEREE LETTER .......................................................... II-1
iii 5 CROSS-REFERENCE TABLE*
Section of Trust Indenture Act of 1939, as Section of amended Declaration - ------------------- ----------------- 310(a) ..................................................... 5.3 310(b) ..................................................... 5.3(c); 5.3(d) 311(a) ..................................................... 2.2(b) 311(b) ..................................................... 2.2(b) 312(a) ..................................................... 2.2(a) 312(b) ..................................................... 2.2(b) 313 ..................................................... 2.3 314(a) ..................................................... 2.4, 2.7(c); 3.6(j) 314(c) ..................................................... 2.5 315(a) ..................................................... 3.6(j); 3.9 315(b) ..................................................... 2.7(a) 315(c) ..................................................... 3.9(a) 315(d) ..................................................... 3.9(b) 316(a) ..................................................... 2.6 316(c) ..................................................... 3.6(e) 317(a) ..................................................... 3.8(e); 3.8(h) 317(b) ..................................................... 3.8(i); 7.5 318 ..................................................... 2.1
- -------------- * This Cross-Reference Table does not constitute part of this Declaration and shall not affect the interpretation of any of its terms or provisions. iv 6 AMENDED AND RESTATED DECLARATION OF TRUST OF HFC CAPITAL TRUST I Dated as of March 28, 2001 AMENDED AND RESTATED DECLARATION OF TRUST ("Declaration") dated and effective as of March 28, 2001, by and among the Trustees (as defined herein), the Sponsor (as defined herein) and the Holders (as defined herein), from time to time, of undivided beneficial interests in the assets of the Trust to be issued pursuant to this Declaration; WHEREAS, the Delaware Trustee (as defined herein) and the Sponsor established HFC Capital Trust I (the "Trust"), a trust created under the Delaware Business Trust Act pursuant to a Declaration of Trust dated as of March 7, 2001 (the "Original Declaration"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on March 12, 2001, for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust, investing the proceeds thereof in certain Debentures of the Debenture Issuer (each as hereinafter defined), and engaging in only those activities necessary, advisable or incidental thereto; and WHEREAS, all of the Trustees (as defined herein) and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration; WHEREAS, all of the Trustees and the Sponsor, by this Declaration, ratify the actions of each Trustee taken prior to the date hereof; NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a business trust under the Business Trust Act and that this Declaration constitute the governing instrument of such business trust, the Trustees declare that all assets contributed to the Trust will be held in trust for the benefit of the holders, from time to time, of the securities representing undivided beneficial interests in the assets of the Trust issued hereunder, subject to the provisions of this Declaration and, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties, intending to be legally bound hereby, amend and restate in its entirety the Original Declaration and agree as follows: 7 ARTICLE I INTERPRETATION AND DEFINITIONS SECTION 1.1 Definitions. Unless the context otherwise requires: (a) capitalized terms used in this Declaration but not defined in the preamble above or elsewhere herein have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Declaration has the same meaning throughout; (c) all references to "the Declaration" or "this Declaration" are to this Amended and Restated Declaration of Trust and each Annex and Exhibit hereto, as modified, supplemented or amended from time to time; (d) all references in this Declaration to Articles and Sections and Annexes and Exhibits are to Articles and Sections of and Annexes and Exhibits to this Declaration unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; (f) a term defined in the Indenture (as defined herein) has the same meaning when used in this Declaration unless otherwise defined in this Declaration or the context otherwise requires; and (g) a reference to the singular includes the plural and vice versa. "Administrative Trustee" has the meaning set forth in Section 5.1. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder. "Agent" means any Paying Agent, Registrar or Exchange Agent. "Authorized Officer" of a Person means any other Person that is authorized to legally bind such former Person. "Business Day" means any day other than a Saturday, a Sunday, or a day on which banking institutions in Wilmington, Delaware, El Segundo, California or New York, New York are authorized or required by law or executive order to remain closed. "Business Trust Act" means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code Section 3801 et seq., as it may be amended from time to time, or any successor legislation. "Capital Securities" has the meaning specified in Section 7.1(a). 2 8 "Capital Securities Guarantee" means the Capital Securities Guarantee Agreement, dated as of the Closing Time, entered into by Hawthorne Financial Corporation with respect to the Capital Securities. "Capital Security Certificate" has the meaning set forth in Section 7.3. "Closing Time" means the "Closing Time" as defined in the Purchase Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. "Commission" means the United States Securities and Exchange Commission as from time to time constituted, or if at any time after the execution of this Declaration such Commission is not existing and performing the duties now assigned to it under applicable federal securities laws, then the body performing such duties at such time. "Common Securities" has the meaning specified in Section 7.1(a). "Common Security Certificate" means a certificate evidencing ownership of Common Securities, substantially in the form attached as Exhibit A-2. "Common Securities Guarantee" means the Common Securities Guarantee Agreement, dated as of the Closing Time, entered into by Hawthorne Financial Corporation, with respect to the Common Securities. "Common Securities Subscription Agreement" means the Common Securities Subscription Agreement, dated as of the Closing Time, between the Trust and Hawthorne Financial Corporation relating to the Common Securities. "Company Indemnified Person" means (a) any Administrative Trustee; (b) any Affiliate of any Administrative Trustee; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrative Trustee; or (d) any officer, employee or agent of the Trust or its Affiliates. "Corporate Trust Office" means the office of the Property Trustee at which the corporate trust business of the Property Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Declaration is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration. "Covered Person" means: (a) any officer, director, shareholder, partner, member, representative, employee or agent of (i) the Trust or (ii) the Trust's Affiliates; and (b) any Holder of Securities. "Debenture Issuer" means Hawthorne Financial Corporation, a Delaware corporation, or any successor entity resulting from any consolidation, amalgamation, merger or other business combination, in its capacity as issuer of the Debentures under the Indenture. 3 9 "Debenture Subscription Agreement" means the Debenture Subscription Agreement, dated as of the Closing Time, between the Debenture Issuer and the Trust in respect of the Debentures. "Debenture Trustee" means Wilmington Trust Company, a Delaware banking corporation, not in its individual capacity but solely as trustee under the Indenture until a successor is appointed thereunder, and thereafter means such successor trustee. "Debentures" means the 10.18% Junior Subordinated Deferrable Interest Debentures due June 8, 2031, of the Debenture Issuer issued pursuant to the Indenture. "Default" means an event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Definitive Capital Securities" has the meaning set forth in Section 7.3. "Delaware Trustee" has the meaning set forth in Section 5.1. "Direct Action" has the meaning set forth in Section 3.8(e). "Distribution" means a distribution payable to Holders in accordance with Section 6.1. "Event of Default" with respect to the Securities means an Event of Default (as defined in the Indenture) that has occurred and is continuing with respect to the Debentures. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Exchange Agent" has the meaning set forth in Section 7.4. "Federal Reserve Board" means the Board of Governors of the Federal Reserve System. "Fiduciary Indemnified Person" has the meaning set forth in Section 10.4(b). "Fiscal Year" has the meaning set forth in Section 11.1. "Holder" means a Person in whose name a Security or Successor Security is registered on the register maintained by or on behalf of the Registrar, such Person being a beneficial owner of the Trust within the meaning of the Business Trust Act. "Indemnified Person" means a Company Indemnified Person or a Fiduciary Indemnified Person. "Indenture" means the Indenture, dated as of the Closing Time, between the Debenture Issuer and the Debenture Trustee, as amended from time to time. 4 10 "Initial Optional Redemption Date" has the meaning set forth in Section 4(b) of Annex I hereto. "Investment Company" means an investment company as defined in the Investment Company Act. "Investment Company Act" means the Investment Company Act of 1940, as amended from time to time, or any successor legislation. "Investment Company Event" has the meaning set forth in Section 4(c) of Annex I hereto. "Legal Action" has the meaning set forth in Section 3.6(g). "Like Amount" has the meaning set forth in Section 3 of Annex I hereto. "List of Holders" has the meaning set forth in Section 2.2(a). "Majority in Liquidation Amount" means, with respect to the Trust Securities, except as otherwise provided in the terms of the Capital Securities or by the Trust Indenture Act, Holders of outstanding Trust Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, excluding the Trust and the Debenture Issuer and any Affiliate thereof, who are the record owners of more than 50% of the aggregate liquidation amount (including the amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to but excluding the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Officers' Certificate" means, with respect to any Person, a certificate signed by an Authorized Officer of such Person. Any Officers' Certificate delivered by the Trust shall be signed by at least one Administrative Trustee. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Declaration shall include: (a) a statement that each officer signing the Certificate has read the covenants or conditions and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of each such officer, such condition or covenant has been complied with. 5 11 "Opinion of Counsel" means a written opinion of counsel, who may be an employee of the Sponsor, and who shall be acceptable to the Property Trustee. "Paying Agent" has the meaning specified in Section 7.4. "Payment Amount" has the meaning specified in Section 6.1. "Placement Agency Agreement" means the Placement Agency Agreement, dated March 21, 2001, by and among the Sponsor, the Trust and the Placement Agent named therein. "Person" means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Property Trustee" has the meaning set forth in Section 5.3(a). "Property Trustee Account" has the meaning set forth in Section 3.8(c)(i). "Quorum" means a majority of the Administrative Trustees or, if there are only two Administrative Trustees, both of them. "Redemption Price" has the meaning set forth in Section 4(a) of Annex I hereto. "Registrar" has the meaning set forth in Section 7.4. "Regulatory Capital Event" has the meaning set forth in Section 4(c) of Annex I hereto. "Related Party" means, with respect to the Sponsor, any direct or indirect wholly owned subsidiary of the Sponsor or any other Person that owns, directly or indirectly, 100% of the outstanding voting securities of the Sponsor. "Responsible Officer" means any officer within the Corporate Trust Office of the Property Trustee with direct responsibility for the administration of this Declaration and also means, with respect to a particular corporate trust matter, any other officer of the Property Trustee to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. "Restricted Capital Security" means a Capital Security required by Section 9.2 to contain a Restricted Securities Legend. "Restricted Definitive Capital Securities" has the meaning set forth in Section 7.3. "Restricted Securities Legend" has the meaning set forth in Section 9.2(c). 6 12 "Rule 3a-5" means Rule 3a-5 under the Investment Company Act, or any successor rule or regulation. "Rule 144" means Rule 144 under the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. "Rule 144A" means Rule 144A under the Securities Act, as such rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission. "Securities" or "Trust Securities" means the Common Securities and the Capital Securities. "Securities Act" means the Securities Act of 1933, as amended from time to time, or any successor legislation. "Securities Guarantees" means the Common Securities Guarantee and the Capital Securities Guarantee. "Special Event" has the meaning set forth in Section 4(c) of Annex I hereto. "Special Event Redemption Price" has the meaning set forth in Section 4(c) of Annex I hereto. "Sponsor" means Hawthorne Financial Corporation, a Delaware corporation, or any successor entity resulting from any merger, consolidation, amalgamation or other business combination, in its capacity as sponsor of the Trust. "Subscription Agreement" means the Subscription Agreement relating to the Capital Securities, dated March 21, 2001, by and among the Trust, the Debenture Issuer and MMCapS(SM) Funding I, Ltd. "Successor Delaware Trustee" has the meaning set forth in Section 5.6(b)(ii). "Successor Entity" has the meaning set forth in Section 3.15(b)(i). "Successor Property Trustee" has the meaning set forth in Section 3.8(f)(ii). "Successor Securities" has the meaning set forth in Section 3.15(b)(i). "Super Majority" has the meaning set forth in Section 2.6(a) (ii). "Tax Event" has the meaning set forth in Section 4(c) of Annex I hereto. "Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Treasury Department, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). 7 13 "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended from time to time, or any successor legislation. "Trust Property" means (a) the Debentures, (b) any cash on deposit in or owing to the Property Trustee Account and (c) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Property Trustee pursuant to this Declaration. "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue as a trustee of the Trust in accordance with the terms hereof, and all other Persons who may from time to time be duly appointed, qualified and serving as Trustees in accordance with the provisions hereof, and references herein to a Trustee or the Trustees shall refer to such Person or Persons solely in their capacity as trustees hereunder. "20% in Liquidation Amount" means, with respect to the Trust Securities, except as otherwise provided in the terms of the Capital Securities or by the Trust Indenture Act, Holders of outstanding Trust Securities voting together as a single class or, as the context may require, Holders of outstanding Capital Securities or Holders of outstanding Common Securities voting separately as a class, excluding the Trust and the Debenture Issuer and any Affiliate thereof, who are the record owners of 20% or more of the aggregate liquidation amount (including the amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to but excluding the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. ARTICLE II TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application. (a) This Declaration is subject to the provisions of the Trust Indenture Act that are required to be part of this Declaration in order for this Declaration to be qualified under the Trust Indenture Act and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a trustee for the purposes of the Trust Indenture Act. (c) If and to the extent that any provision of this Declaration limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. (d) The application of the Trust Indenture Act to this Declaration shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. SECTION 2.2 Lists of Holders of Securities. (a) Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide the Property Trustee, unless the Property Trustee is Registrar for the Securities, (i) 8 14 within 14 days after each record date for payment of Distributions, a list, in such form as the Property Trustee may reasonably require, of the names and addresses of the Holders ("List of Holders") as of such record date, provided, that neither the Sponsor nor the Administrative Trustees on behalf of the Trust shall be obligated to provide such List of Holders at any time that the List of Holders does not differ from the most recent List of Holders given to the Property Trustee by the Sponsor and the Administrative Trustees on behalf of the Trust, and (ii) at any other time, within 30 days of receipt by the Trust of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Property Trustee. The Property Trustee shall preserve, in as current a form as is reasonably practicable, all information contained in Lists of Holders given to it or which it receives in the capacity as Paying Agent (if acting in such capacity), provided, that the Property Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Property Trustee shall comply with its obligations under Sections 311(a), 311(b) and 312(b) of the Trust Indenture Act. SECTION 2.3 Reports by the Property Trustee. Within 60 days after the date hereof, and no later than the anniversary date hereof in each succeeding year, the Property Trustee shall provide to the Holders of the Capital Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Property Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. SECTION 2.4 Periodic Reports to Property Trustee. Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee and the Commission such documents, reports and information as are required by Section 314 (if any) of the Trust Indenture Act and shall provide to the Property Trustee the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5 Evidence of Compliance with Conditions Precedent. Each of the Sponsor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent provided for in this Declaration that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act may be given in the form of an Officers' Certificate. SECTION 2.6 Events of Default; Waiver. (a) The Holders of a Majority in Liquidation Amount of Capital Securities may, by vote, on behalf of the Holders of all of the Capital Securities, waive any past Event of Default in respect of the Capital Securities and its consequences, provided, that if the underlying Event of Default under the Indenture: 9 15 (i) is not waivable under the Indenture, the Event of Default under the Declaration shall also not be waivable; or (ii) requires the consent or vote of greater than a majority in aggregate principal amount of the holders of the Debentures (a "Super Majority") to be waived under the Indenture, the Event of Default under the Declaration may only be waived by the vote of the Holders of at least the proportion in aggregate liquidation amount of the Capital Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. The foregoing provisions of this Section 2.6(a) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Upon such waiver, any such Default shall cease to exist, and any Event of Default with respect to the Capital Securities arising therefrom shall be deemed to have been cured, for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other Default or an Event of Default with respect to the Capital Securities or impair any right consequent thereon. Any waiver by the Holders of the Capital Securities of an Event of Default with respect to the Capital Securities shall also be deemed to constitute a waiver by the Holders of the Common Securities of any such Event of Default with respect to the Common Securities for all purposes of this Declaration without any further act, vote, or consent of the Holders of the Common Securities. (b) The Holders of a Majority in Liquidation Amount of the Common Securities may, by vote, on behalf of the Holders of all of the Common Securities, waive any past Event of Default with respect to the Common Securities and its consequences, provided, that if the underlying Event of Default under the Indenture: (i) is not waivable under the Indenture, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Declaration as provided below in this Section 2.6(b), the Event of Default under the Declaration shall also not be waivable; or (ii) requires the consent or vote of a Super Majority to be waived, except where the Holders of the Common Securities are deemed to have waived such Event of Default under the Declaration as provided below in this Section 2.6(b), the Event of Default under the Declaration may only be waived by the vote of the Holders of at least the proportion in aggregate liquidation amount of the Common Securities that the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding; provided further, each Holder of Common Securities will be deemed to have waived any such Event of Default and all Events of Default with respect to the Common Securities and their consequences if all Events of Default with respect to the Capital Securities have been cured, waived or otherwise eliminated, and until such Events of Default have been so cured, waived or otherwise eliminated, the Property Trustee will be deemed to be acting solely on behalf of the 10 16 Holders of the Capital Securities and only the Holders of the Capital Securities will have the right to direct the Property Trustee in accordance with the terms of the Securities. The foregoing provisions of this Section 2.6(b) shall be in lieu of Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act and such Sections 316(a)(1)(A) and 316(a)(1)(B) of the Trust Indenture Act are hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. Subject to the foregoing provisions of this Section 2.6(b), upon such waiver, any such Default shall cease to exist and any Event of Default with respect to the Common Securities arising therefrom shall be deemed to have been cured for every purpose of this Declaration, but no such waiver shall extend to any subsequent or other Default or Event of Default with respect to the Common Securities or impair any right consequent thereon. (c) A waiver of an Event of Default under the Indenture by the Property Trustee, at the direction of the Holders of the Capital Securities, constitutes a waiver of the corresponding Event of Default under this Declaration. The foregoing provisions of this Section 2.6(c) shall be in lieu of Section 316(a)(1)(B) of the Trust Indenture Act and such Section 316(a)(1)(B) of the Trust Indenture Act is hereby expressly excluded from this Declaration and the Securities, as permitted by the Trust Indenture Act. SECTION 2.7 Default; Notice. (a) The Property Trustee shall, within 90 days after the Property Trustee has knowledge of the occurrence of a Default with respect to the Securities, transmit by mail, first class postage prepaid, to the Holders, notices of all such Defaults, unless such Defaults have been cured before the giving of such notice or previously waived; provided, however, that except in the case of a Default arising from the nonpayment of principal of (or premium, if any) or interest (including Compounded Interest and Additional Sums (as such terms are defined in the Indenture), if any) on any of the Debentures, the Property Trustee shall be protected in withholding such notice if and so long as a Responsible Officer in good faith determines that the withholding of such notice is in the interests of the Holders. (b) The Property Trustee shall not be deemed to have knowledge of any Default or Event of Default except: (i) a Default or Event of Default under Section 5.01(a) (other than the payment or nonpayment of Compounded Interest, Additional Sums and interest on any Other Debentures) or 5.01(b) (other than payment or nonpayment of principal of any Other Debentures) of the Indenture; or (ii) any Default or Event of Default as to which the Property Trustee shall have received written notice or of which a Responsible Officer charged with the administration of the Declaration shall have actual knowledge. (c) Within ten Business Days after the Property Trustee has knowledge of the occurrence of any Event of Default, the Property Trustee shall transmit notice of such Event of Default to the Holders of the Capital Securities, the Administrative Trustees and the Sponsor, unless such Event of Default shall have been cured or waived. The Sponsor and the Administrative Trustees shall file annually with the Property Trustee a certification as to whether 11 17 or not they are in compliance with all the conditions and covenants applicable to them under this Declaration. ARTICLE III ORGANIZATION SECTION 3.1 Name. The Trust is named HFC Capital Trust I as such name may be modified from time to time by the Administrative Trustees following written notice to the Delaware Trustee, the Property Trustee and the Holders. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrative Trustees. SECTION 3.2 Office. The address of the principal office of the Trust is 2381 Rosecrans Avenue, El Segundo, California 90245. On ten Business Days' prior written notice to the Delaware Trustee, the Property Trustee and the Holders of Securities, the Administrative Trustees may designate another principal office. SECTION 3.3 Purpose. The exclusive purposes and functions of the Trust are (a) to issue and sell Securities, (b) use the proceeds from the sale of the Securities to acquire the Debentures, and (c) except as otherwise limited herein, to engage in only those other activities necessary, advisable or incidental thereto, including without limitation, those activities specified in Sections 3.6, 3.8, 3.9, 3.10, 3.11 and/or 3.12. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, mortgage or pledge any of its assets, or otherwise undertake (or permit to be undertaken) any activity that would cause the Trust not to be classified for United States federal income tax purposes as a grantor trust. SECTION 3.4 Authority. Subject to the limitations provided in this Declaration and to the specific duties of the Property Trustee, the Administrative Trustees shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by one or more of the Administrative Trustees in accordance with their powers shall constitute the act of and serve to bind the Trust and an action taken by the Property Trustee on behalf of the Trust in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with the Trustees acting on behalf of the Trust, no Person shall be required to inquire into the authority of the Trustees to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of the Trustees as set forth in this Declaration. SECTION 3.5 Title to Property of the Trust. Except as provided in Section 3.8 with respect to the Debentures and the Property Trustee Account or as otherwise provided in this Declaration, legal title to all assets of 12 18 the Trust shall be vested in the Trust. The Holders shall not have legal title to any part of the assets of the Trust, but shall have an undivided beneficial interest in the assets of the Trust. SECTION 3.6 Powers and Duties of the Administrative Trustees. Subject to Section 5.5, the Administrative Trustees acting individually or together shall have the exclusive right, power, duty and authority, and are hereby authorized and directed, to cause the Trust to engage in the following activities: (a) to execute, enter into and deliver the Common Securities Subscription Agreement and to execute, deliver, issue and sell the Securities in accordance with this Declaration; provided, however, that (i) the Trust may issue no more than one series of Capital Securities and no more than one series of Common Securities, (ii) there shall be no interests in the Trust other than the Securities, and (iii) the issuance of Securities shall be limited to a simultaneous issuance of both Capital Securities and Common Securities at the Closing Time; (b) in connection with the issue and sale of the Capital Securities, at the direction of the Sponsor, to: (i) execute and file any documents prepared by the Sponsor, or take any acts as determined by the Sponsor to be necessary in order to qualify or register all or part of the Capital Securities in any State in which the Sponsor has determined to qualify or register such Capital Securities for sale; (ii) execute, enter into, deliver and perform the Subscription Agreement, the Placement Agency Agreement and letters, instruments, agreements or documents relating to the Capital Securities. (c) to execute, enter into, deliver and perform the Debenture Subscription Agreement, to acquire the Debentures with the proceeds of the sale of the Capital Securities and the Common Securities; provided, however, that the Administrative Trustees shall cause legal title to the Debentures to be held of record in the name of the Property Trustee for the benefit of the Holders; (d) to give the Sponsor and the Property Trustee prompt written notice of the occurrence of a Special Event; (e) to establish a record date with respect to all actions to be taken hereunder that require a record date to be established, including and with respect to, for the purposes of Section 316(c) of the Trust Indenture Act, Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders with respect to such actions and applicable record dates; (f) to take all actions and perform such duties as may be required of the Administrative Trustees pursuant to the terms of the Securities; (g) to the fullest extent permitted by law, to bring or defend, pay, collect, compromise, arbitrate, resort to legal action, or otherwise adjust claims or demands of or against 13 19 the Trust ("Legal Action"), unless pursuant to Section 3.8(e), the Property Trustee has the exclusive power to bring such Legal Action; (h) to employ or otherwise engage employees, agents (who may be designated as officers with titles), managers, contractors, advisors, and consultants and pay reasonable compensation for such services; (i) to cause the Trust to comply with the Trust's obligations under the Trust Indenture Act; (j) to give the certificate required by Section 314(a)(4) of the Trust Indenture Act to the Property Trustee, which certificate may be executed by any Administrative Trustee; (k) to incur expenses that are necessary or incidental to carry out any of the purposes of the Trust; (l) to act as, or appoint another Person to act as, Registrar and Exchange Agent for the Securities or to appoint a Paying Agent for the Securities as provided in Section 7.4 except for such time as such power to appoint a Paying Agent is vested in the Property Trustee; (m) to give prompt written notice to the Property Trustee and to the Holders of any notice received from the Debenture Issuer of its election to defer payments of interest on the Debentures by extending the interest payment period under the Indenture; (n) to take all action that may be necessary or appropriate for the preservation and the continuation of the Trust's valid existence, rights, franchises and privileges as a statutory business trust under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Holders or to enable the Trust to effect the purposes for which the Trust was created; (o) to take any action, not inconsistent with this Declaration or with applicable law, that the Administrative Trustees determine in their discretion to be necessary or desirable in carrying out the activities of the Trust as set out in this Section 3.6, including, but not limited to: (i) causing the Trust not to be deemed to be an Investment Company required to be registered under the Investment Company Act; (ii) causing the Trust to continue to be classified for United States federal income tax purposes as a grantor trust; and (iii) cooperating with the Debenture Issuer to ensure that the Debentures will be treated as indebtedness of the Debenture Issuer for United States federal income tax purposes; (p) to take all action necessary to cause all applicable tax returns and tax information reports that are required to be filed with respect to the Trust to be duly prepared and filed by the Administrative Trustees, on behalf of the Trust; and 14 20 (q) to execute and deliver all documents, agreements, certificates and instruments, exercise all rights and powers, perform all duties and do all things for and on behalf of the Trust in all matters necessary, advisable or incidental to the foregoing or the transactions contemplated thereby. The Administrative Trustees must exercise the powers set forth in this Section 3.6 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and the Administrative Trustees shall not take any action that is inconsistent with the purposes and functions of the Trust set forth in Section 3.3. Subject to this Section 3.6, the Administrative Trustees shall have none of the powers or the authority of the Property Trustee set forth in Section 3.8. Any expenses incurred by the Administrative Trustees pursuant to this Section 3.6 shall be reimbursed by the Debenture Issuer. SECTION 3.7 Prohibition of Actions by the Trust and the Trustees. The Trust shall not, and the Trustees (including the Property Trustee and the Delaware Trustee) shall not, and the Administrative Trustees shall cause the Trust not to, engage in any activity other than as required or authorized by this Declaration. Notwithstanding any provision in this Declaration to the contrary, the Trust shall not: (i) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders pursuant to the terms of this Declaration and of the Securities; (ii) acquire any assets other than as expressly provided herein; (iii) possess Trust Property for other than a Trust purpose or execute any mortgage in respect of, or pledge, any Trust Property; (iv) make any loans or incur any indebtedness other than loans represented by the Debentures; (v) possess any power or otherwise act in such a way as to vary the Trust Property or the terms of the Securities in any way whatsoever; (vi) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; (vii) other than as provided in this Declaration or Annex I hereto, (A) direct the time, method and place of conducting any proceeding with respect to any remedy available to the Debenture Trustee, or exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (B) waive any past default that is waivable under the Indenture, or (C) exercise any right to rescind or annul any declaration that the principal of all the Debentures shall be due and payable; or 15 21 (viii) consent to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required unless the Trust shall have received an opinion of independent tax counsel experienced in such matters to the effect that such amendment, modification or termination will not cause more than an insubstantial risk that the Trust will not be classified as a grantor trust for United States federal income tax purposes. SECTION 3.8 Powers and Duties of the Property Trustee. (a) The legal title to the Debentures shall be owned by and held of record in the name of the Property Trustee in trust for the benefit of the Trust and the Holders. The right, title and interest of the Property Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Property Trustee in accordance with Section 5.6. Such vesting and cessation of title shall be effective whether or not conveyancing documents with regard to the Debentures have been executed and delivered. (b) The Property Trustee shall not transfer its right, title and interest in the Debentures to the Administrative Trustees or to the Delaware Trustee (if the Property Trustee does not also act as Delaware Trustee). (c) The Property Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Property Trustee Account") in the name of and under the exclusive control of the Property Trustee on behalf of the Holders and, upon the receipt of payments of funds made in respect of the Debentures held by the Property Trustee, deposit such funds into the Property Trustee Account and make payments or cause the Paying Agent to make payments to the Holders from the Property Trustee Account in accordance with Section 6.1; funds in the Property Trustee Account shall be held uninvested until disbursed in accordance with this Declaration; and the Property Trustee Account shall be an account that is maintained with a banking institution the rating on whose long-term unsecured indebtedness by a "nationally recognized statistical rating organization," as that term is defined for purposes of Rule 436(g)(2) under the Securities Act, is at least equal to the rating assigned to the Capital Securities, unless the Capital Securities are not rated, in which case the banking institution's long term unsecured indebtedness shall be rated at least investment grade by a "nationally recognized statistical rating organization; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Securities to the extent the Debentures are redeemed or mature; and (iii) upon written notice of distribution issued by the Administrative Trustees in accordance with the terms of the Securities, engage in such 16 22 ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders upon the occurrence of certain events. (d) The Property Trustee shall take all actions and perform such duties as may be specifically required of the Property Trustee pursuant to the terms of this Declaration and the Securities. (e) Subject to Section 3.9(a), the Property Trustee shall take any Legal Action which arises out of or in connection with an Event of Default of which a Responsible Officer has actual knowledge or the Property Trustee's duties and obligations under this Declaration or the Trust Indenture Act; and if the Property Trustee shall have failed to take such Legal Action following a written request from the Holders, the Holders of the Capital Securities may, to the fullest extent permitted by law, take such Legal Action, to the same extent as if such Holders of Capital Securities held an aggregate principal amount of Debentures equal to the aggregate liquidation amount of such Capital Securities, without first proceeding against the Property Trustee or the Trust; provided, however, that if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay the principal of or premium, if any, or interest (including Compounded Interest and Additional Sums, if any) on the Debentures on the date such principal, premium, if any, or interest (including Compounded Interest and Additional Sums, if any) is otherwise payable (or in the case of redemption, on the redemption date), then a Holder of Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or premium, if any, or interest (including Compounded Interest and Additional Sums, if any) on the Debentures having a principal amount equal to the aggregate liquidation amount of the Capital Securities of such Holder (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the Holders of the Common Securities will be subrogated to the rights of such Holder of Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of Capital Securities in such Direct Action. Except as provided in the preceding sentences, the Holders of Capital Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. (f) The Property Trustee shall continue to serve as a Trustee until either: (i) the Trust has been completely liquidated and the proceeds of the liquidation distributed to the Holders pursuant to the terms of the Securities and this Declaration; or (ii) a successor Property Trustee has been appointed and has accepted that appointment in accordance with Section 5.6 (a "Successor Property Trustee"). (g) The Property Trustee shall have the legal power to exercise all of the rights, powers and privileges of a holder of Debentures under the Indenture and, if an Event of Default actually known to a Responsible Officer occurs and is continuing, the Property Trustee shall, for the benefit of Holders, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to the terms of this Declaration and the Securities. 17 23 (h) The Property Trustee shall be authorized to undertake any actions set forth in Section 317(a) of the Trust Indenture Act. (i) For such time as the Property Trustee is the Paying Agent, the Property Trustee may authorize one or more Persons to act as additional Paying Agents and to pay Distributions, redemption payments or liquidation payments on behalf of the Trust with respect to all Securities and any such Paying Agent shall comply with Section 317(b) of the Trust Indenture Act. Any such additional Paying Agent may be removed by the Property Trustee at any time the Property Trustee remains as Paying Agent and a successor Paying Agent or additional Paying Agents may be (but are not required to be) appointed at any time by the Property Trustee while the Property Trustee is acting as Paying Agent. (j) Subject to this Section 3.8, the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 3.6. Notwithstanding anything expressed or implied to the contrary in this Declaration or any Annex or Exhibit hereto, (i) the Property Trustee must exercise the powers set forth in this Section 3.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 3.3, and (ii) the Property Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 3.3. (k) If the Property Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Declaration and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Property Trustee or to such Holder, then and in every such case the Sponsor, the Property Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Property Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 3.9 Certain Duties and Responsibilities of the Property Trustee. (a) The Property Trustee, before the occurrence of any Event of Default (of which, other than in the case of Events of Default under Sections 5.01(a) and 5.01(b) of the Indenture, which the Property Trustee is deemed to have knowledge of as provided in Section 2.7(b) hereof, a Responsible Officer of the Property Trustee has actual knowledge) and after the curing or waiving of all such Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and in the Securities and no implied covenants shall be read into this Declaration against the Property Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) of which a Responsible Officer has actual knowledge, the Property Trustee shall exercise such of the rights and powers vested in it by this Declaration, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) No provision of this Declaration shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: 18 24 (i) prior to the occurrence of an Event of Default (of which, other than in the case of Events of Default under Sections 5.01(a) and 5.01(b) of the Indenture, which the Property Trustee is deemed to have knowledge of as provided in Section 2.7(b) hereof, a Responsible Officer of the Property Trustee has actual knowledge) and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Property Trustee shall be determined solely by the express provisions of this Declaration and in the Securities and the Property Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Declaration and in the Securities, and no implied covenants or obligations shall be read into this Declaration against the Property Trustee; and (B) in the absence of bad faith on the part of the Property Trustee, the Property Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Property Trustee and conforming to the requirements of this Declaration; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Property Trustee, the Property Trustee shall be under a duty to examine the same to determine whether or not on their face they conform to the requirements of this Declaration; (ii) the Property Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (iii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a Majority in Liquidation Amount of the Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Declaration; (iv) no provision of this Declaration shall require the Property Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers; (v) the Property Trustee's sole duty with respect to the custody, safekeeping and physical preservation of the Debentures and the Property Trustee Account shall be to deal with such property in a similar manner as the Property Trustee deals with similar property for its own account, subject 19 25 to the protections and limitations on liability afforded to the Property Trustee under this Declaration and the Trust Indenture Act; (vi) the Property Trustee shall have no duty or liability for or with respect to the value, genuineness, existence or sufficiency of the Debentures or the payment of any taxes or assessments levied thereon or in connection therewith; (vii) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree in writing with the Sponsor. Money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Property Trustee Account maintained by the Property Trustee pursuant to Section 3.8(c)(i) and except to the extent otherwise required by law; and (viii) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees or the Sponsor with their respective duties under this Declaration, nor shall the Property Trustee be liable for any default or misconduct of the Administrative Trustees or the Sponsor. SECTION 3.10 Certain Rights of Property Trustee. (a) Subject to the provisions of Section 3.9: (i) the Property Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Sponsor or the Administrative Trustees contemplated by this Declaration may be sufficiently evidenced by an Officers' Certificate; (iii) whenever in the administration of this Declaration, the Property Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate which, upon receipt of such request, shall be promptly delivered by the Sponsor or the Administrative Trustees; (iv) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or registration thereof; 20 26 (v) the Property Trustee may consult with counsel or other experts of its selection, and the advice or opinion of such counsel and experts with respect to legal matters or advice within the scope of such experts' area of expertise shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion; such counsel may be counsel to the Sponsor or any of its Affiliates, and may include any of its employees; and the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (vi) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Declaration at the request or direction of any Holder, unless such Holder shall have provided to the Property Trustee security and indemnity, reasonably satisfactory to the Property Trustee, against the costs, expenses (including reasonable attorneys' fees and expenses and the expenses of the Property Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Property Trustee; provided, however, that, nothing contained in this Section 3.10(a)(vi) shall be taken to relieve the Property Trustee, upon the occurrence of an Event of Default (of which, other than in the case of Events of Default under Sections 5.01(a) and 5.01(b) of the Indenture, which the Property Trustee is deemed to have knowledge of as provided in Section 2.7(b) hereof, a Responsible Officer of the Property Trustee has actual knowledge), of its obligation to exercise the rights and powers vested in it by this Declaration; (vii) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Property Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, custodians, nominees or attorneys, and the Property Trustee shall not be responsible for any misconduct or negligence on the part of any such agent, custodian, nominee or attorney appointed with due care by it hereunder; (ix) any action taken by the Property Trustee or its agents hereunder shall bind the Trust and the Holders, and the signature of the Property Trustee or its agents alone shall be sufficient and effective to perform any such action and no third party shall be required to inquire as to the authority of the Property Trustee to so act or as to its compliance with any of the terms and 21 27 provisions of this Declaration, both of which shall be conclusively evidenced by the Property Trustee's or its agent's taking such action; (x) whenever in the administration of this Declaration the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Property Trustee (i) may request instructions from the Holders which instructions may only be given by the Holders of the same proportion in liquidation amount of the Securities as would be entitled to direct the Property Trustee under the terms of the Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions; (xi) except as otherwise expressly provided by this Declaration, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration; and (xii) the Property Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence or willful misconduct, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Declaration. (b) No provision of this Declaration shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. SECTION 3.11 Delaware Trustee. Notwithstanding any other provision of this Declaration other than Section 5.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of the Trustees described in this Declaration (except as required under the Business Trust Act). Except as set forth in Section 5.2, the Delaware Trustee shall be a Trustee for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Business Trust Act. In the event the Delaware Trustee shall at any time be required to take any action or perform any duty hereunder, the Delaware Trustee shall be entitled to the benefits of Section 3.9(b)(ii) to (viii), inclusive, and Section 3.10. No implied covenants or obligations shall be read into this Declaration against the Delaware Trustee. SECTION 3.12 Execution of Documents. Unless otherwise required by applicable law, each Administrative Trustee, individually, is authorized to execute and deliver on behalf of the Trust any documents, 22 28 agreements, instruments or certificates that the Administrative Trustees have the power and authority to execute pursuant to Section 3.6. SECTION 3.13 Not Responsible for Recitals or Issuance of Securities The recitals contained in this Declaration and the Securities shall be taken as the statements of the Sponsor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the value or condition of the Trust Property or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration or the Securities. SECTION 3.14 Duration of Trust. The Trust, unless earlier dissolved pursuant to the provisions of Article VIII hereof, shall dissolve on June 8, 2036. SECTION 3.15 Mergers. (a) The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to any Person, except as described in Section 3.15(b) and (c) and except with respect to the distribution of Debentures to Holders pursuant to Section 8.1(a)(iii) of this Declaration or Section 3 of Annex I. (b) The Trust may, at the request of the Sponsor, with the consent of the Administrative Trustees or, if there are more than two, a majority of the Administrative Trustees and without the consent of the Holders, the Delaware Trustee or the Property Trustee, merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, a trust organized as such under the laws of any State; provided, that: (i) such successor entity (the "Successor Entity") either: (A) expressly assumes all of the obligations of the Trust under the Securities; or (B) substitutes for the Securities other securities having substantially the same terms as the Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Securities rank in priority with respect to Distributions and payments upon liquidation, redemption and otherwise; (ii) the Sponsor expressly appoints a trustee of the Successor Entity that possesses the same powers and duties as the Property Trustee with respect to the Debentures; (iii) the Successor Securities (excluding any securities substituted for the Common Securities) are listed, quoted or included for trading, or any 23 29 Successor Securities will be listed, quoted or included for trading upon notification of issuance, on any national securities exchange or with any other organization on which the Capital Securities are then listed, quoted or included; (iv) if the Capital Securities or the Debentures are rated, such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Capital Securities (including any Successor Securities) or the Debentures to be downgraded by any nationally recognized statistical rating organization that publishes a rating on the Capital Securities or the Debentures; (v) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders (including the holders of any Successor Securities) in any material respect (other than with respect to any dilution of the interests of such Holders or holders, as the case may be, in the Successor Entity); (vi) the Successor Entity has a purpose substantially identical to that of the Trust; (vii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Sponsor has received an opinion of independent counsel to the Trust experienced in such matters to the effect that: (A) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders (including the holders of any Successor Securities) in any material respect (other than with respect to any dilution of the interests of such Holders or holders, as the case may be, in the Successor Entity); (B) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor the Successor Entity will be required to register as an Investment Company; and (C) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Trust (or the Successor Entity) will continue to be classified as a grantor trust for United States federal income tax purposes; (viii) the Sponsor or any permitted successor or assignee of the Sponsor owns all of the common securities of the Successor Entity and guarantees the obligations of the Successor Entity under the Successor Securities at least to the extent provided by the Securities Guarantees; and 24 30 (ix) there shall have been furnished to the Property Trustee an Officers' Certificate and an Opinion of Counsel, each to the effect that all conditions precedent in this Declaration to such transaction have been satisfied. (c) Notwithstanding Section 3.15(b), the Trust shall not, except with the consent of Holders of 100% in aggregate liquidation amount of the Securities, consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets as an entirety or substantially as an entirety to, any other Person or permit any other Person to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the Successor Entity not to be classified as a grantor trust for United States federal income tax purposes. ARTICLE IV SPONSOR SECTION 4.1 Sponsor's Purchase of Common Securities. At the Closing Time, pursuant to the Common Securities Subscription Agreement, the Sponsor will purchase all of the Common Securities then issued by the Trust, in an amount equal to at least 3% of the total capital of the Trust, at the same time as the Capital Securities are issued and sold. SECTION 4.2 Responsibilities of the Sponsor. In connection with the issue and sale of the Capital Securities, the Sponsor shall have the exclusive right and responsibility to engage in, or direct the Administrative Trustees to engage in, the following activities: (a) to determine the States in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and to do any and all such acts, other than actions which must be taken by the Trust, and advise the Trust of actions it must take, and prepare for execution and filing any documents to be executed and filed by the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States; and (b) to negotiate the terms of, execute, enter into and deliver the Subscription Agreement and the Placement Agency Agreement. SECTION 4.3 Right to Proceed. The Sponsor acknowledges the rights of the Holders of Capital Securities, in the event that a failure of the Trust to make any payments in respect of the Capital Securities is attributable to the failure of the Debenture Issuer to pay the principal of or premium (if any) or interest on the Debentures, to institute a proceeding directly against the Debenture Issuer for enforcement of its payment obligations in respect of the Debentures. SECTION 4.4 Right to Dissolve Trust. 25 31 The Sponsor will have the right at any time to dissolve the Trust and, after satisfaction of liabilities to creditors of the Trust as required by applicable law, to cause the Debentures to be distributed to the Holders in liquidation of the Trust. Such right is subject to the Sponsor's having received (i) an Opinion of Counsel to the effect that such distribution will not cause the Holders of Capital Securities to recognize gain or loss for United States federal income tax purposes and (ii) all required regulatory approvals. ARTICLE V TRUSTEES SECTION 5.1 Number of Trustees; Appointment of Co-Trustee. The number of Trustees initially shall be five (5), and: (a) at any time before the issuance of any Securities, the Sponsor may, by written instrument, increase or decrease the number of Trustees; and (b) after the issuance of any Securities, the number of Trustees may be increased or decreased by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; provided, however, that, the number of Trustees shall in no event be less than two (2); provided further, that (1) one Trustee, in the case of a natural person, shall be a person who is a resident of the State of Delaware or that, if not a natural person, is an entity which has its principal place of business in the State of Delaware (the "Delaware Trustee"); (2) there shall be at least one Trustee who is an employee or officer of, or is affiliated with, the Sponsor (an "Administrative Trustee"); and (3) one Trustee shall be the Property Trustee for so long as this Declaration is required to qualify as an indenture under the Trust Indenture Act, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements. Notwithstanding the above, unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust Property may at the time be located, the Holders of a Majority in Liquidation Amount of the Common Securities acting as a class at a meeting of the Holders of the Common Securities, and the Administrative Trustees shall have power to appoint one or more Persons either to act as a co-trustee, jointly with the Property Trustee, of all or any part of the Trust Property, or to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in such capacity any property, title, right or power deemed necessary or desirable, subject to the provisions of this Declaration. In case an Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make any such appointment of a co-trustee. SECTION 5.2 Delaware Trustee. For so long as required by the Business Trust Act, the Delaware Trustee shall be: (a) a natural person who is a resident of the State of Delaware; or 26 32 (b) if not a natural person, an entity which has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, provided, however, that, if the Property Trustee has its principal place of business in the State of Delaware and otherwise meets the requirements of applicable law, then the Property Trustee shall also be the Delaware Trustee and Section 3.11 shall have no application. The initial Delaware Trustee shall be: Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Telephone: (302) 651-1000 Telecopier: (302) 651-8882 SECTION 5.3 Property Trustee; Eligibility. (a) There shall at all times be one Trustee (the "Property Trustee") which shall act as Property Trustee and which shall: (i) not be an Affiliate of the Sponsor; and (ii) be a corporation organized and doing business under the laws of the United States of America or any State or Territory thereof or of the District of Columbia, or a corporation or Person permitted by the Commission to act as an indenture trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000), and subject to supervision or examination by federal, state, territorial or District of Columbia authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then for the purposes of this Section 5.3(a)(ii), the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Property Trustee shall cease to be eligible to so act under Section 5.3(a), the Property Trustee shall immediately resign in the manner and with the effect set forth in Section 5.6(c). (c) If the Property Trustee has or shall acquire any "conflicting interest" within the meaning of Section 330(b) of the Trust Indenture Act, the Property Trustee and the Holder of the Common Securities (as if it were the obligor referred to in Section 310(b) of the Trust Indenture Act) shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. 27 33 (d) The Capital Securities Guarantee shall be deemed to be specifically described in this Declaration for purposes of clause (i) of the first proviso contained in Section 310 (b) of the Trust Indenture Act. (e) The initial Property Trustee shall be: Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Telephone: (302) 651-1000 Telecopier: (302) 651-8882 SECTION 5.4 Certain Qualifications of Administrative Trustees and Delaware Trustee Generally. Each Administrative Trustee and the Delaware Trustee (unless the Property Trustee also acts as Delaware Trustee) shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more Authorized Officers. SECTION 5.5 Administrative Trustees. The initial Administrative Trustees shall be: Simone F. Lagomarsino Karen Abajian Eileen Lyon c/o Hawthorne Financial Corporation 2381 Rosecrans Avenue El Segundo, California 90245 Telephone: (310) 725-5000 Telecopier: (310) 643-8304 (a) Except as otherwise expressly set forth in this Declaration and except if a meeting of the Administrative Trustees is called with respect to any matter over which the Administrative Trustees have power to act, any power of the Administrative Trustees may be exercised by, or with the consent of, any one such Administrative Trustee. (b) Unless otherwise required by the Business Trust Act or other applicable law, any Administrative Trustee acting alone is authorized to execute on behalf of the Trust any documents which the Administrative Trustees have the power and authority to cause the Trust to execute pursuant to Section 3.6. (c) An Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purposes of signing any documents which the Administrative Trustees have power and authority to cause the Trust to execute pursuant to Section 3.6. 28 34 SECTION 5.6 Appointment, Removal and Resignation of Trustees. (a) Subject to Section 5.6(b) hereof and to Section 6(b) of Annex I hereto, Trustees may be appointed or removed without cause at any time: (i) until the issuance of any Securities, by written instrument executed by the Sponsor; (ii) unless an Event of Default shall have occurred and be continuing after the issuance of any Securities, by vote of the Holders of a Majority in Liquidation Amount of the Common Securities voting as a class at a meeting of the Holders of the Common Securities; and (iii) if an Event of Default shall have occurred and be continuing after the issuance of the Securities, with respect to the Property Trustee or the Delaware Trustee, by vote of Holders of a Majority in Liquidation Amount of the Capital Securities voting as a class at a meeting of Holders of the Capital Securities, and with respect to the Administrative Trustees, in the manner set forth in Section 5.6(a)(ii) hereof. (b) (i) The Trustee that acts as Property Trustee shall not be removed in accordance with Section 5.6(a) until a Successor Property Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Property Trustee and delivered to the removed Property Trustee, the Administrative Trustees and the Sponsor; and (ii) the Trustee that acts as Delaware Trustee shall not be removed in accordance with this Section 5.6(a) until a successor Trustee possessing the qualifications to act as Delaware Trustee under Sections 5.2 and 5.4 (a "Successor Delaware Trustee") has been appointed and has accepted such appointment by written instrument executed by such Successor Delaware Trustee and delivered to the removed Delaware Trustee, the Property Trustee (if the removed Delaware Trustee is not also the Property Trustee), the Administrative Trustees and the Sponsor. (c) A Trustee appointed to office shall hold office until his successor shall have been appointed or until his death, removal or resignation. Any Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing signed by the Trustee and delivered to the other Trustees, the Sponsor and the Trust, which resignation shall take effect upon such delivery or upon such later date as is specified therein; provided, however, that: (i) No such resignation of the Trustee that acts as the Property Trustee shall be effective: (A) until a Successor Property Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Property Trustee and delivered to the Trust, the Sponsor, the Delaware 29 35 Trustee (if the resigning Property Trustee is not also the Delaware Trustee) and the resigning Property Trustee; or (B) until the assets of the Trust have been completely liquidated and the proceeds thereof distributed to the Holders; and (ii) no such resignation of the Trustee that acts as the Delaware Trustee shall be effective until a Successor Delaware Trustee has been appointed and has accepted such appointment by instrument executed by such Successor Delaware Trustee and delivered to the Trust, the Property Trustee (if the resigning Delaware Trustee is not also the Property Trustee), the Sponsor and the resigning Delaware Trustee. (d) The Holders of the Common Securities or, if an Event of Default shall have occurred and be continuing after the issuance of the Securities, the Holders of the Capital Securities shall use their best efforts to promptly appoint a Successor Property Trustee or Successor Delaware Trustee, as the case may be, if the Property Trustee or the Delaware Trustee delivers an instrument of resignation in accordance with this Section 5.6. (e) If no Successor Property Trustee or Successor Delaware Trustee shall have been appointed and accepted appointment as provided in this Section 5.6 within 60 days after delivery of an instrument of resignation or removal, the Property Trustee or Delaware Trustee resigning or being removed, as applicable, may petition any court of competent jurisdiction for appointment of a Successor Property Trustee or Successor Delaware Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Property Trustee or Successor Delaware Trustee, as the case may be. (f) No Property Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Property Trustee or Successor Delaware Trustee, as the case may be. (g) At the time of resignation or removal of the Property Trustee or the Delaware Trustee, the Sponsor shall pay to such Trustee any amounts that may be owed to such Trustee pursuant to Section 10.4. (h) Any successor Delaware Trustee shall file an amendment to the Certificate of Trust with the Secretary of State of the State of Delaware identifying the name and principal place of business of such Successor Delaware Trustee in the State of Delaware. SECTION 5.7 Vacancies Among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 5.1, or if the number of Trustees is increased pursuant to Section 5.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Administrative Trustees or, if there are more than two, a majority of the Administrative Trustees shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 5.6. 30 36 SECTION 5.8 Effect of Vacancies. The death, resignation, retirement, removal, bankruptcy, dissolution, liquidation, incompetence or incapacity to perform the duties of a Trustee shall not operate to dissolve, liquidate or annul the Trust or to terminate this Declaration. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 5.6, the Administrative Trustees in office, regardless of their number, shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Declaration. SECTION 5.9 Meetings. If there is more than one Administrative Trustee, meetings of the Administrative Trustees shall be held from time to time upon the call of any Administrative Trustee. Regular meetings of the Administrative Trustees may be held at a time and place fixed by resolution of the Administrative Trustees. Notice of any in-person meetings of the Administrative Trustees shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before such meeting. Notice of any telephonic meetings of the Administrative Trustees or any committee thereof shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 24 hours before a meeting. Notices shall contain a brief statement of the time, place and anticipated purposes of the meeting. The presence (whether in person or by telephone) of an Administrative Trustee at a meeting shall constitute a waiver of notice of such meeting except where an Administrative Trustee attends a meeting for the express purpose of objecting to the transaction of any activity on the ground that the meeting has not been lawfully called or convened. Unless provided otherwise in this Declaration, any action of the Administrative Trustees may be taken at a meeting by vote of a majority of the Administrative Trustees present (whether in person or by telephone) and eligible to vote with respect to such matter, provided, that a Quorum is present, or without a meeting by the unanimous written consent of the Administrative Trustees. In the event there is only one Administrative Trustee, any and all action of such Administrative Trustee shall be evidenced by a written consent of such Administrative Trustee. SECTION 5.10 Delegation of Power. (a) Any Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 3.6 or making any other governmental filing. (b) The Administrative Trustees shall have power to delegate from time to time to such of their number or to officers of the Trust the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of this Declaration. SECTION 5.11 Merger, Conversion, Consolidation or Succession to Business. 31 37 Any Person into which the Property Trustee or the Delaware Trustee or any Administrative Trustee that is not a natural person, as the case may be, may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Property Trustee or the Delaware Trustee, as the case may be, shall be a party, or any Person succeeding to all or substantially all the corporate trust business of the Property Trustee or the Delaware Trustee, as the case may be, shall be the successor of the Property Trustee or the Delaware Trustee, as the case may be, hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided such Person shall be otherwise qualified and eligible under this Article and provided further that such Person shall file an amendment to the Certificate of Trust with the Delaware Secretary of State as contemplated in Section 5.6(h). ARTICLE VI DISTRIBUTIONS SECTION 6.1 Distributions. Holders shall receive Distributions in accordance with the applicable terms of the relevant Holder's Securities. If and to the extent that the Debenture Issuer makes a payment of interest (including Compounded Interest and Additional Sums), premium and/or principal on the Debentures held by the Property Trustee (the amount of any such payment being a "Payment Amount"), the Property Trustee shall and is directed, to the extent funds are available for that purpose, to make a distribution (a "Distribution") of the Payment Amount to Holders in accordance with the terms of the Securities. ARTICLE VII ISSUANCE OF SECURITIES SECTION 7.1 General Provisions Regarding Securities. (a) The Administrative Trustees shall, on behalf of the Trust, issue one class of MMCapS(SM) representing undivided preferred beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Capital Securities") and one class of common securities representing undivided common beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Common Securities"). The Trust shall issue no securities or other interests in the assets of the Trust other than the Capital Securities and the Common Securities. (b) The consideration received by the Trust for the issuance of the Securities shall constitute a contribution to the capital of the Trust and shall not constitute a loan to the Trust. (c) Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued and, subject to the terms of this Declaration, fully paid and nonassessable undivided beneficial interests in the assets of the Trust and entitled to the 32 38 benefits of this Declaration, and the Holders thereof shall be entitled to the benefits of this Declaration. (d) Every Person, by virtue of having become a Holder in accordance with the terms of this Declaration, shall be deemed to have expressly assented and agreed to the terms of, and shall be bound by, this Declaration. SECTION 7.2 Execution and Authentication. (a) The Securities shall be signed on behalf of the Trust by an Administrative Trustee. In case any Administrative Trustee of the Trust who shall have signed any of the Securities shall cease to be such Administrative Trustee before the Securities so signed shall be delivered by the Trust, such Securities nevertheless may be delivered as though the Person who signed such Securities had not ceased to be such Administrative Trustee; and any Securities may be signed on behalf of the Trust by such persons who, at the actual date of execution of such Security, shall be the Administrative Trustees of the Trust, although at the date of the execution and delivery of this Declaration any such person was not an Administrative Trustee. (b) One Administrative Trustee shall sign the Capital Securities for the Trust by manual or facsimile signature. Unless otherwise determined by an Administrative Trustee on behalf of the Trust, an Administrative Trustee shall sign the Common Securities for the Trust by manual signature. A Capital Security shall not be valid until authenticated by the manual signature of an authorized signatory of the Property Trustee. The signature shall be conclusive evidence that the Capital Security has been authenticated under this Declaration. A Common Security shall be valid upon execution by an Administrative Trustee without any act of the Property Trustee. Upon a written order of the Trust signed by one Administrative Trustee, the Property Trustee shall authenticate the Capital Securities for original issue. The aggregate number of Capital Securities outstanding at any time shall not exceed the number set forth in Annex I hereto except as provided in Section 7.6. The Property Trustee may appoint an authenticating agent acceptable to the Trust to authenticate Capital Securities. An authenticating agent may authenticate Capital Securities whenever the Property Trustee may do so. Each reference in this Declaration to authentication by the Property Trustee includes authentication by such agent. An authenticating agent has the same rights as the Property Trustee hereunder with respect to the Sponsor or an Affiliate. SECTION 7.3 Form and Dating. The Capital Securities shall be evidenced by one or more certificates substantially in the form of Exhibit A-1, and the Common Securities shall be evidenced by one or more certificates substantially in the form of Exhibit A-2. The Property Trustee's certificate of authentication shall be substantially in the form set forth in Exhibit A-1. Certificates representing the Securities may be printed, lithographed or engraved or may be produced in any 33 39 other manner as is reasonably acceptable to an Administrative Trustee, as evidenced by the execution thereof. The Securities may have letters, "CUSIP" or other numbers, notations or other marks of identification or designation and such legends or endorsements required by law, stock exchange rule, agreements to which the Trust is subject, if any, or usage, provided, that any such notation, legend or endorsement is in a form acceptable to the Administrative Trustees, as evidenced by their execution thereof. The Trust at the direction of the Sponsor, shall furnish any such legend not contained in Exhibit A-1 to the Property Trustee in writing. Each Capital Security shall be dated the date of its authentication. The terms and provisions of the Securities set forth in Annex I and the forms of Securities set forth in Exhibits A-1 and A-2 are part of the terms of this Declaration and, to the extent applicable, the Property Trustee and the Sponsor, by their execution and delivery of this Declaration, expressly agree to such terms and provisions and to be bound thereby. Purchasers of Capital Securities will be entitled to receive physical delivery of certificated Capital Securities in the form of individual certificates ("Capital Security Certificate") in definitive, fully registered form ("Definitive Capital Securities") without distribution coupons and with the Restricted Securities Legend set forth in Exhibit A-1 hereto ("Restricted Definitive Capital Securities"). Restricted Definitive Capital Securities will bear the Restricted Securities Legend set forth on Exhibit A-1 unless removed in accordance with Section 9.2. SECTION 7.4 Registrar, Paying Agent and Exchange Agent. The Trust shall maintain in Wilmington, Delaware (i) an office or agency where Capital Securities may be presented for registration of transfer ("Registrar"), (ii) an office or agency where Capital Securities may be presented for payment ("Paying Agent") and (iii) an office or agency where Securities may be presented for exchange ("Exchange Agent"). The Registrar shall keep a register of the Capital Securities and of their transfer. The Trust may appoint the Registrar, the Paying Agent and the Exchange Agent and may appoint one or more co-registrars, one or more additional paying agents and one or more additional Exchange Agents in such other locations as it shall determine. The term "Registrar" includes any additional registrar, the term "Paying Agent" includes any additional paying agent and the term "Exchange Agent" includes any additional Exchange Agent. The Trust may change any Paying Agent, Registrar, co-registrar or Exchange Agent without prior notice to any Holder. The Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Property Trustee, the Administrative Trustees and the Sponsor. The Trust shall notify the Property Trustee of the name and address of any Agent not a party to this Declaration. If the Trust fails to appoint or maintain another entity as Registrar, Paying Agent or Exchange Agent, the Property Trustee shall act as such. The Trust or any of its Affiliates may act as Paying Agent, Registrar, or Exchange Agent. The Trust shall act as Paying Agent, Registrar and Exchange Agent for the Common Securities. The Trust initially appoints the Property Trustee as Registrar, Paying Agent and Exchange Agent for the Capital Securities. SECTION 7.5 Paying Agent to Hold Money in Trust. 34 40 The Trust shall require each Paying Agent other than the Property Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Property Trustee all money held by the Paying Agent for the payment of liquidation amounts or Distributions, and will notify the Property Trustee if there are insufficient funds for such purpose. While any such insufficiency continues, the Property Trustee may require a Paying Agent to pay all money held by it to the Property Trustee. The Trust at any time may require a Paying Agent to pay all money held by it to the Property Trustee and to account for any money disbursed by it. Upon payment over to the Property Trustee, the Paying Agent (if other than the Trust or an Affiliate of the Trust) shall have no further liability for the money. If the Trust or the Sponsor or an Affiliate of the Trust or the Sponsor acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. SECTION 7.6 Replacement Securities. If a Holder claims that a Security owned by it has been lost, destroyed or wrongfully taken or if such Security is mutilated and is surrendered to the Trust or in the case of the Capital Securities to the Property Trustee, an Administrative Trustee shall execute and the Property Trustee shall, upon receipt of written direction from an Administrative Trustee, authenticate and make available for delivery a replacement Security if the Property Trustee's requirements are met. An indemnity bond must be provided by the Holder which, in the judgment of the Property Trustee, is sufficient to protect the Trustees, the Sponsor, the Trust or any authenticating agent from any loss which any of them may suffer if a Security is replaced. The Trust may charge such Holder for its expenses in replacing a Security. SECTION 7.7 Outstanding Capital Securities. The Capital Securities outstanding at any time are all the Capital Securities authenticated by the Property Trustee except for those canceled by it, those delivered to it for cancellation, and those described in this Section as not outstanding. If a Capital Security is replaced, paid or purchased pursuant to Section 7.6 hereof, it ceases to be outstanding unless the Property Trustee receives proof satisfactory to it that the replaced, paid or purchased Capital Security is held by a bona fide purchaser. If Capital Securities are considered paid in accordance with the terms of this Declaration, they cease to be outstanding and Distributions on them shall cease to accumulate. A Capital Security does not cease to be outstanding because one of the Trust, the Sponsor or an Affiliate of the Sponsor holds the Security. SECTION 7.8 Capital Securities in Treasury. In determining whether the Holders of the required amount of Securities have concurred in any direction, waiver or consent, Capital Securities owned by the Trust, the Sponsor or an Affiliate of the Sponsor, as the case may be, shall be disregarded and deemed not to be outstanding, except that for the purposes of determining whether the Property Trustee shall be fully protected in relying on any such direction, waiver or consent, only Securities which the Property Trustee actually knows are so owned shall be so disregarded. 35 41 SECTION 7.9 Temporary Securities. Until Definitive Capital Securities are ready for delivery, the Trust may prepare and, in the case of the Capital Securities, the Property Trustee shall, upon receipt of written direction from an Administrative Trustee, authenticate temporary Securities. Temporary Securities shall be substantially in the form of Definitive Capital Securities but may have variations that the Trust considers appropriate for temporary Securities. Without unreasonable delay, the Trust shall prepare and, in the case of the Capital Securities, the Property Trustee shall, upon receipt of a Corporation Order, authenticate Definitive Capital Securities in exchange for temporary Securities. SECTION 7.10 Cancellation. The Trust at any time may deliver Capital Securities to the Property Trustee for cancellation. The Registrar, Paying Agent and Exchange Agent shall forward to the Property Trustee any Capital Securities surrendered to them for registration of transfer, redemption, exchange or payment. The Property Trustee shall promptly cancel all Capital Securities surrendered for registration of transfer, redemption, exchange, payment, replacement or cancellation and shall dispose of canceled Capital Securities in accordance with its customary procedures unless the Trust otherwise directs. The Trust may not issue new Capital Securities to replace Capital Securities that it has paid or that have been delivered to the Property Trustee for cancellation or that any Holder has exchanged. SECTION 7.11 CUSIP Numbers. The Trust in issuing the Capital Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Property Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders of Capital Securities; provided, that, any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Capital Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Capital Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Sponsor will promptly notify the Property Trustee of any change in the CUSIP numbers. ARTICLE VIII DISSOLUTION OF TRUST SECTION 8.1 Dissolution of Trust. (a) The Trust shall automatically dissolve: (i) upon the bankruptcy of the Sponsor; (ii) upon the filing of a certificate of dissolution or liquidation or its equivalent with respect to the Sponsor; or the revocation of the Sponsor's charter and the expiration of 90 days after the date of revocation without a reinstatement thereof; 36 42 (iii) following the distribution of a Like Amount of the Debentures to the Holders, provided, that the Property Trustee has received written notice from the Sponsor directing the Property Trustee to dissolve the Trust (which direction is optional, and except as otherwise expressly provided below, within the discretion of the Sponsor), and provided further, that such direction and such distribution is conditioned on (a) the receipt by the Sponsor of any and all required regulatory approvals, and (b) the Sponsor's receipt and delivery to the Administrative Trustees of an opinion of independent tax counsel experienced in such matters, which opinion may rely on public or private rulings of the Internal Revenue Service, to the effect that the Holders of the Capital Securities will not recognize any gain or loss for United States federal income tax purposes as a result of the dissolution of the Trust and the distribution of Debentures; (iv) upon the entry of a decree of judicial dissolution of the Trust by a court of competent jurisdiction; (v) when all of the Securities shall have been called for redemption and the amounts necessary for redemption thereof shall have been paid to the Holders in accordance with the terms of the Securities; (vi) upon the redemption or repayment of the Debentures or at such time as no Debentures are outstanding; or (vii) the expiration of the term of the Trust provided in Section 3.14. (b) As soon as is practicable upon completion of winding up of the Trust following the occurrence of an event referred to in Section 8.1(a) and the satisfaction of creditors of the Trust in accordance with applicable law, the Administrative Trustees shall terminate the Trust by filing a certificate of cancellation with the Secretary of State of the State of Delaware in accordance with the Business Trust Act. (c) The provisions of Section 3.9 and Article X shall survive the dissolution and termination of the Trust. ARTICLE IX TRANSFER OF INTERESTS SECTION 9.1 Transfer of Securities. (a) Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration and in accordance with the terms of the Securities. To the fullest extent permitted by law, any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void. (b) Subject to this Article IX, Capital Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration. To the 37 43 fullest extent permitted by law, any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void. (c) For so long as the Securities remain outstanding, the Sponsor agrees (i) not to transfer ownership of the Common Securities of the Trust, provided that any permitted successor of the Sponsor under the Indenture may succeed to the Sponsor's ownership of the Common Securities, (ii) not to cause, as Sponsor of the Trust, or to permit, as Holder of the Common Securities, the dissolution, winding-up or liquidation of the Trust, except as provided in this Declaration and (iii) to use its best efforts to cause the Trust (a) to remain a business trust, except in connection with the distribution of Debentures to the Holders in liquidation of the Trust, the redemption of all of the Securities, or certain mergers, consolidations or amalgamations, each as permitted by this Declaration, and (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes. (d) The Registrar shall provide for the registration of Capital Securities and of the transfer of Capital Securities, which will be effected without charge but only upon payment (with such indemnity as the Registrar may require) in respect of any tax or other governmental charges that may be imposed in relation to it. Upon surrender for registration of transfer of any Capital Securities, an Administrative Trustee shall cause one or more new Capital Securities to be issued in the name of the designated transferee or transferees. Every Capital Security surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Capital Security surrendered for registration of transfer shall be delivered to the Registrar and canceled in accordance with Section 7.10. A transferee of a Capital Security shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Capital Security. By acceptance of a Capital Security or any interest therein, each transferee shall be deemed to have agreed to be bound by this Declaration. SECTION 9.2 Transfer Procedures and Restrictions. (a) General. If Capital Securities are issued upon the transfer, exchange or replacement of Capital Securities bearing the Restricted Securities Legend set forth in Exhibit A-1 hereto, or if a request is made to remove such Restricted Securities Legend on Capital Securities, the Capital Securities so issued shall bear the Restricted Securities Legend, or the Restricted Securities Legend shall not be removed, as the case may be, unless there is delivered to the Trust and the Property Trustee such satisfactory evidence, which shall include an Opinion of Counsel, as may be reasonably required by the Trust and the Property Trustee, that neither the Restricted Securities Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof are made pursuant to an exception from the registration requirements of the Securities Act or, with respect to Restricted Capital Securities, that such Securities are not "restricted" within the meaning of Rule 144. Upon provision of such satisfactory evidence, the Property Trustee, at the written direction of an Administrative Trustee on behalf of the Trust, shall authenticate and deliver Capital Securities that do not bear the legend. 38 44 (b) Transfer and Exchange of Definitive Capital Securities. When Definitive Capital Securities are presented to the Registrar or co-registrar: (x) to register the transfer of such Definitive Capital Securities; or (y) to exchange such Definitive Capital Securities which became mutilated, destroyed, defaced, stolen or lost, for an equal number of Definitive Capital Securities, the Registrar or co-registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Definitive Capital Securities surrendered for registration of transfer or exchange: (i) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Trust and the Registrar or co-registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (ii) in the case of Definitive Capital Securities that are Restricted Definitive Capital Securities: (A) if such Restricted Capital Securities are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, certification(s) from such Holder to that effect; or (B) if such Restricted Capital Securities are being transferred: (i) certification(s) in a form substantially similar to that attached hereto as the form of "Assignment" in Exhibit A-1, and (ii) if the Trust or Registrar so requests, evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the Restricted Securities Legend. (c) Legend. (i) Except as permitted by the following paragraph (ii), each Capital Security Certificate evidencing each Definitive Capital Security and all Capital Securities issued in exchange thereof or substitution thereof shall bear a legend (the "Restricted Securities Legend") in substantially the following form: THIS CAPITAL SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS CAPITAL SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF 39 45 SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS CAPITAL SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH HAWTHORNE FINANCIAL CORPORATION (THE "CORPORATION") OR ANY "AFFILIATE" OF THE CORPORATION WAS THE OWNER OF THIS CAPITAL SECURITY (OR ANY PREDECESSOR OF THIS CAPITAL SECURITY) ONLY (A) TO THE CORPORATION, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS CAPITAL SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3), (7) OR (8) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF HFC CAPITAL TRUST I (THE "TRUST") AND THE CORPORATION PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER 40 46 INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) PURSUANT TO CLAUSE (D) TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX II TO THE DECLARATION. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS CAPITAL SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE CAPITAL SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF CAPITAL SECURITIES IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE CAPITAL SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION 41 47 UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. In all circumstances, each Capital Security Certificate shall bear the following legend: THE CAPITAL SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 (100 CAPITAL SECURITIES) AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF CAPITAL SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 (100 CAPITAL SECURITIES) SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH CAPITAL SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON SUCH CAPITAL SECURITIES, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH CAPITAL SECURITIES. (ii) Upon any sale or transfer of a Restricted Capital Security pursuant to an effective registration statement under the Securities Act or pursuant to Rule 144 the Registrar shall permit the Holder thereof to exchange such Restricted Capital Security for a Definitive Capital Security that does not bear the Restricted Securities Legend and rescind any restriction on the transfer of such Restricted Capital Security. (d) Obligations with Respect to Transfers and Exchanges of Capital Securities. (i) To permit registrations of transfers and exchanges, the Trust shall execute and the Property Trustee shall authenticate Definitive Capital Securities at the Registrar's or co-registrar's request in accordance with the terms of this Declaration. (ii) Registrations of transfers or exchanges will be effected without charge, but only upon payment (with such indemnity as the Trust or the Sponsor may require) in respect of any tax or other governmental charge that may be imposed in relation to it. (iii) The Registrar or co-registrar shall not be required to register the transfer of or exchange of (a) Capital Securities during a period beginning at the opening of business 15 days before the day of mailing of a notice of redemption or any notice of selection of Capital Securities for redemption 42 48 and ending at the close of business on the day of such mailing or (b) any Capital Security so selected for redemption in whole or in part, except the unredeemed portion of any Capital Security being redeemed in part. (iv) Prior to the due presentation for registration of transfer of any Capital Security, the Trust, the Property Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the Person in whose name a Capital Security is registered as the absolute owner of such Capital Security for the purpose of receiving Distributions on such Capital Security and for all other purposes whatsoever, and none of the Trust, the Property Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. (v) All Capital Securities issued upon any registration of transfer or exchange pursuant to the terms of this Declaration shall evidence the same security and shall be entitled to the same benefits under this Declaration as the Capital Securities surrendered upon such registration of transfer or exchange. (e) No Obligation of the Property Trustee. (i) The Property Trustee shall have no responsibility or obligation to any Person with respect to any ownership interest in the Capital Securities or with respect to the delivery to any beneficial owner or other Person of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Capital Securities. All notices and communications to be given to the Holders and all payments to be made to Holders under the Capital Securities shall be given or made only to or upon the order of the registered Holders. (ii) The Property Trustee and the Registrar shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Declaration or under applicable law with respect to any transfer of any interest in any Capital Security other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Declaration, and to examine the same to determine whether or not on their face they substantially comply with the express requirements hereof. (f) Minimum Transfers. Capital Securities may only be transferred in minimum blocks of $100,000 aggregate liquidation amount (100 Capital Securities) and multiples of $1,000 in excess thereof. Any attempted transfer of Capital Securities in a block having an aggregate liquidation amount of less than $100,000 shall be deemed to be voided and of no legal effect whatsoever. Any such purported transferee shall be deemed not to be a Holder of such Capital Securities for any purpose, including, but not limited to, the receipt of Distributions on 43 49 such Capital Securities, and such purported transferee shall be deemed to have no interest whatsoever in such Capital Securities. SECTION 9.3 Deemed Security Holders. The Trustees may treat the Person in whose name any Security shall be registered on the books and records of the Trust as the sole owner and Holder of such Security for purposes of receiving Distributions and for all other purposes whatsoever and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Security on the part of any Person, whether or not the Trust shall have actual or other notice thereof. ARTICLE X LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS SECTION 10.1 Liability. (a) Except as expressly set forth in this Declaration, the Securities Guarantees and the terms of the Securities, the Sponsor shall not be: (i) personally liable for the return of any portion of the capital contributions (or any return thereon) of the Holders which shall be made solely from assets of the Trust; and (ii) required to pay to the Trust or to any Holder any deficit upon dissolution of the Trust or otherwise. (b) The Sponsor shall be liable for all of the debts and obligations of the Trust (other than in respect of the Securities). (c) Pursuant to Section 3803(a) of the Business Trust Act, the Holders shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. SECTION 10.2 Exculpation. (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Trust or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith on behalf of the Trust and in a manner such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Declaration or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's gross negligence (or in the case of the Property Trustee or the Delaware Trustee, negligence) or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Trust and upon such information, opinions, reports or statements presented to 44 50 the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Trust, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders might properly be paid. SECTION 10.3 Fiduciary Duty. (a) To the extent that, at law or in equity, an Indemnified Person has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to any other Covered Person, an Indemnified Person acting under this Declaration shall not be liable to the Trust or to any other Covered Person for its good faith reliance on the provisions of this Declaration. The provisions of this Declaration, to the extent that they restrict the duties and liabilities of an Indemnified Person otherwise existing at law or in equity (other than the duties imposed on the Property Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of such Indemnified Person. (b) Unless otherwise expressly provided herein: (i) whenever a conflict of interest exists or arises between any Covered Person and any Indemnified Person, or (ii) whenever this Declaration or any other agreement contemplated herein or therein provides that an Indemnified Person shall act in a manner that is, or provides terms that are, fair and reasonable to the Trust or any Holder of Securities, the Indemnified Person shall resolve such conflict of interest, take such action or provide such terms, considering in each case the relative interest of each party (including its own interest) to such conflict, agreement, transaction or situation and the benefits and burdens relating to such interests, any customary or accepted industry practices, and any applicable generally accepted accounting practices or principles. In the absence of bad faith by the Indemnified Person, the resolution, action or term so made, taken or provided by the Indemnified Person shall not constitute a breach of this Declaration or any other agreement contemplated herein or of any duty or obligation of the Indemnified Person at law or in equity or otherwise. (c) Whenever in this Declaration an Indemnified Person is permitted or required to make a decision: (i) in its "discretion" or under a grant of similar authority, the Indemnified Person shall be entitled to consider such interests and factors as it desires, including its own interests, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Trust or any other Person; or (ii) in its "good faith" or under another express standard, the Indemnified Person shall act under such express standard and shall not be 45 51 subject to any other or different standard imposed by this Declaration or by applicable law. SECTION 10.4 Indemnification. (a) (i) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Trust) by reason of the fact that he is or was a Company Indemnified Person, against expenses (including attorneys' fees and expenses), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Company Indemnified Person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (ii) The Sponsor shall indemnify, to the full extent permitted by law, any Company Indemnified Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Trust to procure a judgment in its favor by reason of the fact that he is or was a Company Indemnified Person against expenses (including attorneys' fees and expenses) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Trust and except that no such indemnification shall be made in respect of any claim, issue or matter as to which such Company Indemnified Person shall have been adjudged to be liable to the Trust unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper. (iii) To the extent that a Company Indemnified Person shall be successful on the merits or otherwise (including dismissal of an action without prejudice or the settlement of an action without admission of liability) in defense of any action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a), or in defense of any claim, issue or matter therein, he or she shall be indemnified, to the full extent permitted by law, against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith. (iv) Any indemnification under paragraphs (i) and (ii) of this Section 10.4(a) (unless ordered by a court) shall be made by the Sponsor only as authorized in the specific case upon a determination that indemnification of the Company Indemnified Person is 46 52 proper in the circumstances because he or she has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (1) by the Administrative Trustees by a majority vote of a Quorum consisting of such Administrative Trustees who were not parties to such action, suit or proceeding, (2) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion, or (3) by the Common Security Holder of the Trust. (v) Expenses (including attorneys' fees and expenses) incurred by a Company Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 10.4(a) shall be paid by the Sponsor in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Company Indemnified Person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Sponsor as authorized in this Section 10.4(a). Notwithstanding the foregoing, no advance shall be made by the Sponsor if a determination is reasonably and promptly made (i) by the Administrative Trustees by a majority vote of a Quorum of disinterested Administrative Trustees, (ii) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrative Trustees so directs, by independent legal counsel in a written opinion or (iii) by the Common Security Holder of the Trust, that, based upon the facts known to the Administrative Trustees, counsel or the Common Security Holder at the time such determination is made, such Company Indemnified Person acted in bad faith or in a manner that the Common Security Holder did not believe to be in, or believed was opposed to, the best interests of the Trust, or, with respect to any criminal proceeding, that such Company Indemnified Person believed or had reasonable cause to believe his or her conduct was unlawful. In no event shall any advance be made in instances where the Administrative Trustees, independent legal counsel or Common Security Holder reasonably determine that a Company Indemnified Person deliberately breached his or her duty to the Trust or its Common or Capital Security Holders. (vi) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 10.4(a) shall not be deemed exclusive of any other rights to which those seeking indemnification and advancement of expenses may be entitled under any agreement, vote of stockholders or disinterested directors of the Sponsor or Capital Security Holders of the Trust or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. All rights to indemnification under this Section 10.4(a) shall be deemed to be provided by a contract between the Sponsor and each Company Indemnified Person who serves in such capacity at any time while this Section 10.4(a) is in effect. Any repeal or modification of this Section 10.4(a) shall not affect any rights or obligations then existing. (vii) The Sponsor or the Trust may purchase and maintain insurance on behalf of any person who is or was a Company Indemnified Person against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Debenture Issuer would have the power to indemnify him or her against such liability under the provisions of this Section 10.4(a). 47 53 (viii) For purposes of this Section 10.4(a), references to "the Trust" shall include, in addition to the resulting or surviving entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger, so that any person who is or was a director, trustee, officer or employee of such constituent entity, or is or was serving at the request of such constituent entity as a director, trustee, officer, employee or agent of another entity, shall stand in the same position under the provisions of this Section 10.4(a) with respect to the resulting or surviving entity as he or she would have with respect to such constituent entity if its separate existence had continued. (ix) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 10.4(a) shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be a Company Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a Person. (b) The Sponsor agrees to indemnify the (i) Property Trustee, (ii) the Delaware Trustee, (iii) any Affiliate of the Property Trustee or the Delaware Trustee, and (iv) any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Property Trustee or the Delaware Trustee (each of the Persons in (i) through (iv), including the Property Trustee and the Delaware Trustee in their respective individual capacities, being referred to as a "Fiduciary Indemnified Person") for, and to hold each Fiduciary Indemnified Person harmless against, any and all loss, liability, damage, action, suit, claim or expense including taxes (other than taxes based on the income of such Fiduciary Indemnified Person) of any kind and nature whatsoever incurred without negligence or bad faith on the part of such Fiduciary Indemnified Person, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending against or investigating any claim or liability in connection with the exercise or performance of any of the powers or duties of such Fiduciary Indemnified Person hereunder. The obligation to indemnify as set forth in this Section 10.4(b) shall survive the resignation or removal of the Property Trustee or the Delaware Trustee and the satisfaction and discharge of this Declaration. (c) The Sponsor agrees to pay the Property Trustee and the Delaware Trustee, from time to time, such compensation for all services rendered by the Property Trustee and the Delaware Trustee hereunder as may be mutually agreed upon in writing by the Sponsor and the Property Trustee or the Delaware Trustee, as the case may be, and, except as otherwise expressly provided herein, to reimburse the Property Trustee and the Delaware Trustee upon its or their request for all reasonable expenses (including legal fees and expenses), disbursements and advances incurred or made by the Property Trustee or the Delaware Trustee, as the case may be, in accordance with the provisions of this Declaration, except any such expense, disbursement or advance as may be attributable to its or their negligence or bad faith. SECTION 10.5 Outside Businesses. Any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee (subject to Section 5.3(c)) may engage in or possess an interest in other business ventures of any nature or description, independently or with others, similar or dissimilar to the business of the Trust, and the Trust and the Holders shall have no rights by virtue of this 48 54 Declaration in and to such independent ventures or the income or profits derived therefrom, and the pursuit of any such venture, even if competitive with the business of the Trust, shall not be deemed wrongful or improper. No Covered Person, the Sponsor, the Delaware Trustee, or the Property Trustee shall be obligated to present any particular investment or other opportunity to the Trust even if such opportunity is of a character that, if presented to the Trust, could be taken by the Trust, and any Covered Person, the Sponsor, the Delaware Trustee and the Property Trustee shall have the right to take for its own account (individually or as a partner or fiduciary) or to recommend to others any such particular investment or other opportunity. Any Covered Person, the Delaware Trustee and the Property Trustee may engage or be interested in any financial or other transaction with the Sponsor or any Affiliate of the Sponsor, or may act as depositary for, trustee or agent for, or act on any committee or body of holders of, securities or other obligations of the Sponsor or its Affiliates. ARTICLE XI ACCOUNTING SECTION 11.1 Fiscal Year. The fiscal year ("Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code. SECTION 11.2 Certain Accounting Matters. (a) At all times during the existence of the Trust, the Administrative Trustees shall keep, or cause to be kept, full books of account, records and supporting documents, which shall reflect in reasonable detail each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied. The Trust shall use the accrual method of accounting for United States federal income tax purposes. The books of account and the records of the Trust shall be examined by and reported upon as of the end of each Fiscal Year of the Trust by a firm of independent certified public accountants selected by the Administrative Trustees. (b) The Administrative Trustees shall cause to be duly prepared and delivered to each of the Holders any annual United States federal income tax information statement required by the Code, containing such information with regard to the Securities held by each Holder as is required by the Code and the Treasury Regulations. Notwithstanding any right under the Code to deliver any such statement at a later date, the Administrative Trustees shall endeavor to deliver all such information statements within 30 days after the end of each Fiscal Year of the Trust. (c) The Administrative Trustees shall cause to be duly prepared and filed with the appropriate taxing authority, an annual United States federal income tax return, on a Form 1041 or such other form required by United States federal income tax law, and any other annual income tax returns required to be filed by the Administrative Trustees on behalf of the Trust with any state or local taxing authority. SECTION 11.3 Banking. 49 55 The Trust may maintain one or more bank accounts in the name and for the sole benefit of the Trust; provided, however, that all payments of funds in respect of the Debentures held by the Property Trustee shall be made directly to the Property Trustee Account and no other funds of the Trust shall be deposited in the Property Trustee Account. The sole signatories for such accounts shall be designated by the Administrative Trustees; provided, however, that the Property Trustee shall designate the signatories for the Property Trustee Account. SECTION 11.4 Withholding. The Trust and the Administrative Trustees shall comply with all withholding requirements under United States federal, state and local law. The Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding with respect to each Holder, and any representations and forms as shall reasonably be requested by the Trust to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Administrative Trustees shall cause to be filed required forms with applicable jurisdictions and, unless an exemption from withholding is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any authority with respect to Distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution in the amount of the withholding to the Holder. In the event of any claim of excess withholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Trust may reduce subsequent Distributions by the amount of such withholding. ARTICLE XII AMENDMENTS AND MEETINGS SECTION 12.1 Amendments. (a) Except as otherwise provided in this Declaration (including Section 7 of Annex I hereto) or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by: (i) the Sponsor and the Administrative Trustees (or, if there are more than two Administrative Trustees, a majority of the Administrative Trustees); (ii) if the amendment affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee; and (iii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee. (b) No amendment shall be made, and any such purported amendment shall be void and ineffective: 50 56 (i) unless, in the case of any proposed amendment, the Property Trustee shall have first received an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); (ii) unless, in the case of any proposed amendment which affects the rights, powers, duties, obligations or immunities of the Property Trustee, the Property Trustee shall have first received: (A) an Officers' Certificate from each of the Trust and the Sponsor that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities); and (B) an Opinion of Counsel (who may be counsel to the Sponsor or the Trust) that such amendment is permitted by, and conforms to, the terms of this Declaration (including the terms of the Securities) and that all conditions precedent to the execution and delivery of such amendment have been satisfied; provided, however, that the Property Trustee shall not be required to sign any such amendment; and (iii) to the extent the result of such amendment would be to: (A) cause the Trust to fail to continue to be classified for purposes of United States federal income taxation as a grantor trust; (B) reduce or otherwise adversely affect the powers of the Property Trustee in contravention of the Trust Indenture Act; or (C) cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act. (c) At such time after the Trust has issued any Securities that remain outstanding, any amendment that would adversely affect the rights, privileges or preferences of any Holder (other than an amendment pursuant to (g) below) may be effected only with such additional requirements as may be set forth in the terms of such Securities; (d) Section 10.1(c) and this Section 12.1 shall not be amended without the consent of all of the Holders; (e) Article Four shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities; (f) The rights of the Holders of the Common Securities under Article V to increase or decrease the number of, and appoint and remove Trustees shall not be amended without the consent of the Holders of a Majority in Liquidation Amount of the Common Securities; and 51 57 (g) Notwithstanding Section 12.1(c), this Declaration may be amended without the consent of the Holders to: (i) cure any ambiguity, correct or supplement any provision in this Declaration that may be inconsistent with any other provision of this Declaration or to make any other provisions with respect to matters or questions arising under this Declaration which shall not be inconsistent with the other provisions of the Declaration; and (ii) to modify, eliminate or add to any provisions of the Declaration to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Securities are outstanding or to ensure that the Trust will not be required to register as an Investment Company under the Investment Company Act; provided, however, that in each clause above, such action shall not adversely affect in any material respect the interests of the Holders, and any such amendments of this Declaration shall become effective when notice thereof is given to the Holders. SECTION 12.2 Meetings of the Holders; Action by Written Consent. (a) Meetings of the Holders of any class of Securities may be called at any time by the Administrative Trustees (or as provided in the terms of the Securities) to consider and act on any matter on which Holders of such class of Securities are entitled to act under the terms of this Declaration, the terms of the Securities or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading. The Administrative Trustees shall call a meeting of the Holders of such class if directed to do so by the Holders of at least 20% in Liquidation Amount of such class of Securities. Such direction shall be given by delivering to the Administrative Trustees one or more notices in writing stating that the signing Holders wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders calling a meeting shall specify in writing the Capital Security Certificates held by the Holders exercising the right to call a meeting and only those Securities specified shall be counted for purposes of determining whether the required percentage set forth in the second sentence of this paragraph has been met. (b) Except to the extent otherwise provided in the terms of the Securities, the following provisions shall apply to meetings of Holders: (i) notice of any such meeting shall be given to all the Holders having a right to vote thereat at least seven days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders is permitted or required under this Declaration or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading, such vote, consent or approval may be given at a meeting of the Holders; any action that may be taken at a meeting of the Holders may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders owning not less than the minimum amount of 52 58 Securities in liquidation amount that would be necessary to authorize or take such action at a meeting at which all Holders having a right to vote thereon were present and voting; prompt notice of the taking of action without a meeting shall be given to the Holders entitled to vote who have not consented in writing; and the Administrative Trustees may specify that any written ballot submitted to the Security Holder for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Administrative Trustees; (ii) each Holder may authorize any Person to act for it by proxy on all matters in which a Holder is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting; no proxy shall be valid after the expiration of eleven months from the date thereof unless otherwise provided in the proxy; every proxy shall be revocable at the pleasure of the Holder executing it; and, except as otherwise provided herein, all matters relating to the giving, voting or validity of proxies shall be governed by the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder, as if the Trust were a Delaware corporation and the Holders were stockholders of a Delaware corporation; (iii) each meeting of the Holders shall be conducted by the Administrative Trustees or by such other Person that the Administrative Trustees may designate; and (iv) unless the Business Trust Act, this Declaration, the terms of the Securities, the Trust Indenture Act or the listing rules of any stock exchange on which the Capital Securities are then listed or trading, otherwise provides, the Administrative Trustees, in their sole discretion, shall establish all other provisions relating to meetings of Holders, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy or any other matter with respect to the exercise of any such right to vote. 53 59 ARTICLE XIII REPRESENTATIONS OF PROPERTY TRUSTEE AND DELAWARE TRUSTEE SECTION 13.1 Representations and Warranties of Property Trustee. The Trustee that acts as initial Property Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Property Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Property Trustee's acceptance of its appointment as Property Trustee that: (a) the Property Trustee is a Delaware banking corporation, a national banking association or a bank or trust company, duly organized, validly existing and in good standing under the laws of the United States or the State of Delaware as the case may be, with corporate power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) the execution, delivery and performance by the Property Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Property Trustee; and this Declaration has been duly executed and delivered by the Property Trustee and under Delaware law (excluding any securities laws) constitutes a legal, valid and binding obligation of the Property Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) the execution, delivery and performance of this Declaration by the Property Trustee does not conflict with or constitute a breach of the charter or by-laws of the Property Trustee; and (d) no consent, approval or authorization of, or registration with or notice to, any federal or state banking authority governing the trust powers of the Property Trustee is required for the execution, delivery or performance by the Property Trustee of this Declaration. SECTION 13.2 Representations and Warranties of Delaware Trustee. The Trustee that acts as initial Delaware Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Delaware Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Delaware Trustee's acceptance of its appointment as Delaware Trustee that: (a) the Delaware Trustee is a Delaware banking corporation, a national banking association or a bank or trust company, duly organized, validly existing and in good standing under the laws of the United States or the State of Delaware, as the case may be, with corporate 54 60 power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) the execution, delivery and performance by the Delaware Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Delaware Trustee; and this Declaration has been duly executed and delivered by the Delaware Trustee and under Delaware law (excluding any securities laws) constitutes a legal, valid and binding obligation of the Delaware Trustee, enforceable against it in accordance with its terms, subject to applicable bankruptcy, reorganization, moratorium, insolvency, and other similar laws affecting creditors' rights generally and to general principles of equity and the discretion of the court (regardless of whether the enforcement of such remedies is considered in a proceeding in equity or at law); (c) the execution, delivery and performance of this Declaration by the Delaware Trustee does not conflict with or constitute a breach of the charter or by-laws of the Delaware Trustee; and (d) no consent, approval or authorization of, or registration with or notice to, any federal or Delaware banking authority governing the trust powers of the Delaware Trustee is required for the execution, delivery or performance by the Delaware Trustee of this Declaration; and (e) the Delaware Trustee is a natural person who is a resident of the State of Delaware or, if not a natural person, an entity which has its principal place of business in the State of Delaware, and is a Person that satisfies for the Trust Section 3807(a) of the Business Trust Act. ARTICLE XIV MISCELLANEOUS SECTION 14.1 Notices. All notices provided for in this Declaration shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, overnight courier service or confirmed telecopy, as follows: (a) if given to the Trust, in care of the Administrative Trustees at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Property Trustee, the Delaware Trustee and the Holders): HFC Capital Trust I c/o Hawthorne Financial Corporation 2381 Rosecrans Avenue El Segundo, California 90245 Telephone: (310) 725-5000 Telecopier: (310) 643-8304 55 61 (b) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as Delaware Trustee may give notice of to the Holders): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telecopier: (302) 651-8882 Telephone: (302) 651-1000 (c) if given to the Property Trustee, at the Property Trustee's mailing address set forth below (or such other address as the Property Trustee may give notice of to the Holders): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Telephone: (302) 651-1000 Telecopier: (302) 651-8882 (d) if given to the Holder of the Common Securities, at the mailing address of the Sponsor set forth below (or such other address as the Holder of the Common Securities may give notice to the Trust): Hawthorne Financial Corporation 2381 Rosecrans Avenue El Segundo, California 90245 Telephone: (310) 725-5000 Telecopier: (310) 643-8304 (e) if given to any other Holder, at the address set forth on the books and records of the Trust. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 14.2 Governing Law. This Declaration and the rights of the parties hereunder shall be governed by and construed in accordance with the laws of the State of Delaware without regard to conflict of laws principles thereof. 56 62 SECTION 14.3 Intention of the Parties. It is the intention of the parties hereto that the Trust be classified for United States federal income tax purposes as a grantor trust. The provisions of this Declaration shall be interpreted to further this intention of the parties. SECTION 14.4 Headings. Headings contained in this Declaration are inserted for convenience of reference only and do not affect the interpretation of this Declaration or any provision hereof. SECTION 14.5 Successors and Assigns. Whenever in this Declaration any of the parties hereto is named or referred to, the successors and assigns of such party shall be deemed to be included, and all covenants and agreements in this Declaration by the Sponsor and the Trustees shall bind and inure to the benefit of their respective successors and assigns, whether or not so expressed. SECTION 14.6 Partial Enforceability. If any provision of this Declaration, or the application of such provision to any Person or circumstance, shall be held invalid, the remainder of this Declaration, or the application of such provision to Persons or circumstances other than those to which it is held invalid, shall not be affected thereby. SECTION 14.7 Counterparts. This Declaration may contain more than one counterpart of the signature page and this Declaration may be executed by the affixing of the signature of each of the Trustees to one or more of such counterpart signature pages. All of such counterpart signature pages shall be read as though one, and they shall have the same force and effect as though all of the signers had signed a single signature page. 57 63 IN WITNESS WHEREOF, the undersigned has caused these presents to be executed as of the day and year first above written. ----------------------------------------- Simone F. Lagomarsino as Administrative Trustee ----------------------------------------- Karen Abajian as Administrative Trustee ----------------------------------------- Eileen Lyon as Administrative Trustee WILMINGTON TRUST COMPANY, as Delaware Trustee By: ------------------------------------- NAME: TITLE: WILMINGTON TRUST COMPANY, as Property Trustee By: ------------------------------------- NAME: TITLE: HAWTHORNE FINANCIAL CORPORATION, as Sponsor and Debenture Issuer By: ------------------------------------- Simone F. Lagomarsino PRESIDENT AND CHIEF EXECUTIVE OFFICER S-1 64 ANNEX I TERMS OF 10.18% MMCAPS(SM) 10.18% COMMON SECURITIES Pursuant to Section 7.1 of the Amended and Restated Declaration of Trust of HFC Capital Trust I, dated as of March 28, 2001 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Securities are set out below (each capitalized term used but not defined herein has the meaning set forth in the Declaration or, if not defined in such Declaration, as defined in the Indenture (as defined in the Declaration): 1. Designation and Number. (a) Capital Securities. 9,000 MMCapS(SM) of the Trust (the "Capital Securities") with an aggregate liquidation amount with respect to the assets of the Trust of Nine Million Dollars ($9,000,000) and with a liquidation amount with respect to the assets of the Trust of One Thousand Dollars ($1,000) (the "Liquidation Amount") per security, are hereby designated for the purposes of identification only as "10.18% Capital Securities. The certificates evidencing the Capital Securities shall be substantially in the form of Exhibit A-1 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice or to conform to the rules of any exchange or quotation system on or in which the Capital Securities are listed, traded or quoted. (b) Common Securities. 300 Common Securities of the Trust with an aggregate liquidation amount with respect to the assets of the Trust of Three Hundred Thousand Dollars ($300,000) and a liquidation amount with respect to the assets of the Trust of $1,000 per security, are hereby designated for the purposes of identification only as "10.18% Common Securities" (the "Common Securities"). The certificates evidencing the Common Securities shall be substantially in the form of Exhibit A-2 to the Declaration, with such changes and additions thereto or deletions therefrom as may be required by ordinary usage, custom or practice. 2. Distributions. (a) Distributions on each Security will be payable at a fixed rate per annum of 10.18% (the "Coupon Rate") of the Liquidation Amount of $1,000 per Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one semi-annual period will bear additional Distributions thereon compounded semi-annually at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions" as used herein, includes distributions of any and all such interest, if any, payable unless otherwise stated. A Distribution is payable only to the extent that payments are made with respect to the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor. (b) Distributions on the Securities will be cumulative, will accumulate from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from Annex I-1 65 March 28, 2001 and will be payable semi-annually in arrears on June 8th and December 8th of each year, commencing June 8, 2001 (each, a "Distribution Date"), except as otherwise described below. Distributions will be computed on the basis a 360-day year of twelve 30-day months. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 10 consecutive semi-annual periods, including the first such semi-annual period during such period (each an "Extension Period"), during which Extension Period no interest shall be due and payable on the Debentures, provided, that no Extension Period shall end on a date other than an Interest Payment Date for the Debentures or extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Notwithstanding such deferral, Distributions will continue to accumulate with additional Distributions thereon (to the extent permitted by applicable law but not at a rate greater than the rate at which interest is then accruing on the Debentures) at the Coupon Rate compounded semi-annually during any such Extension Period. Prior to the termination of any such Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period, provided, that such extension does not cause such Extension Period, together with all such previous and further extensions within such Extension Period, to exceed 10 consecutive semi-annual periods, including the first semi-annual period during such Extension Period, end on a date other than an Interest Payment Date for the Debentures or extend beyond the Maturity Date of the Debentures. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. (c) Distributions on the Securities will be payable to the Holders thereof as they appear on the books and records of the Trust on the close of business on the 15TH day of the month immediately preceding the month in which the relevant Distribution Date occurs, which Distribution Dates correspond to the Interest Payment Dates for the Debentures. The relevant record dates for the Common Securities shall be the same as the record dates for the Capital Securities. Distributions payable on any Securities that are not punctually paid on any Distribution Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, will cease to be payable to the Holder on the relevant record date, and such defaulted Distribution will instead be payable to the Person in whose name such Securities are registered on the special record date or other specified date determined in accordance with the Indenture. If any date on which Distributions are payable on the Securities is not a Business Day, then payment of the Distributions payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay), except that if such next succeeding Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day with the same force and effect as if made on such date. (d) In the event that there is any money or other property held by or for the Trust that is not accounted for hereunder, such property shall be distributed Pro Rata (as defined herein) among the Holders. 3. Liquidation Distribution Upon Dissolution. Annex I-2 66 In the event of any dissolution of the Trust, the Trust shall be liquidated by the Administrative Trustees as expeditiously as the Administrative Trustees determine to be possible by distributing to the Holders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, a Like Amount (as defined below) of the Debentures, unless such distribution is determined by the Property Trustee not to be practicable, in which event such Holders will be entitled to receive out of the assets of the Trust legally available for distribution to Holders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the aggregate of the Liquidation Amount of $1,000 per Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). "Like Amount" means (i) with respect to a redemption of the Securities, Securities having a Liquidation Amount equal to the principal amount of Debentures to be paid in accordance with their terms and (ii) with respect to a distribution of Debentures upon the liquidation of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Securities of the Holder to whom such Debentures are distributed. If, upon any such liquidation, the Liquidation Distribution can be paid only in part because the Trust has insufficient assets legally available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust with respect to the Securities shall be paid on a Pro Rata basis. 4. Redemption and Distribution. (a) Upon the repayment of the Debentures in whole or in part, at maturity or otherwise (either at the option of the Debenture Issuer or pursuant to a Special Event, as described below), the proceeds from such repayment shall be simultaneously applied by the Property Trustee (subject to the Property Trustee having received written notice no later than 45 days prior to such repayment) to redeem a Like Amount of the Securities at a redemption price equal to (i) in the case of the repayment of the Debentures on the Maturity Date, the Maturity Redemption Price (as defined below), (ii) in the case of the optional prepayment of the Debentures prior to the Initial Optional Redemption Date and upon the occurrence and continuation of a Special Event, the Special Event Redemption Price (as defined below) and (iii) in the case of the optional prepayment of the Debentures on or after the Initial Optional Redemption Date, the Optional Redemption Price (as defined below). The Maturity Redemption Price, the Special Event Redemption Price and the Optional Redemption Price are referred to collectively as the "Redemption Price." Holders will be given not less than 30 nor more than 60 days prior written notice of such redemption. (b) (i) The "Maturity Redemption Price" shall mean an amount equal to 100% of the principal amount of the Debentures, plus any accrued and unpaid interest thereon (including Compounded Interest and Additional Sums, if any) to the Maturity Date thereof. (ii) The Debenture Issuer shall have the right (subject to the conditions in the Indenture) to elect to prepay the Debentures, in whole or in part, at any time on or after June 8, 2001 (the "Initial Optional Redemption Date"), and, simultaneous with such prepayment, to cause a Like Amount of the Securities to be redeemed by the Trust at the Optional Redemption Price on a Pro Rata basis. "Optional Redemption Price" shall mean an amount Annex I-3 67 equal to the applicable redemption price set forth below plus, accumulated and unpaid Distributions thereon, if any, to the date of such redemption if redeemed during the 12-month period beginning June 8th, of the years indicated below:
Percentage of Liquidation Year Amount ----------------------- -------------------- 2011 105.090% 2012 104.581% 2013 104.072% 2014 103.563% 2015 103.054% 2016 102.545% 2017 102.036% 2018 101.527% 2019 101.018% 2020 100.509% 2021 and thereafter 100.00%
(c) If at any time an Investment Company Event, a Regulatory Capital Event or a Tax Event (each as defined below, and each a "Special Event") occurs, the Debenture Issuer shall have the right (subject to the conditions set forth in the Indenture) at any time prior to the Initial Optional Redemption Date, to prepay the Debentures in whole, but not in part, within the 90 days following the occurrence of such Special Event (the "90 Day Period"), and, simultaneous with such prepayment, to cause a Like Amount of the Securities to be redeemed by the Trust at the Special Event Redemption Price on a Pro Rata basis. "Investment Company Event" shall mean the receipt by the Debenture Issuer and the Trust of a written opinion of independent securities counsel experienced in such matters to the effect that as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any rules, guidelines or policies of any applicable regulatory authority for the Debenture Issuer or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of original issuance of the Securities, the Trust is, or within 90 days of the date of such opinion will be, considered an Investment Company that is required to be registered under the Investment Company Act. Annex I-4 68 "Regulatory Capital Event" shall mean the receipt by the Debenture Issuer and the Trust of a written opinion of independent bank regulatory counsel experienced in such matters to the effect that as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any rules, guidelines or policies of an applicable regulatory authority for the Debenture Issuer or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of original issuance of the Securities, the Capital Securities do not constitute, or within 90 days of the date of such opinion will not constitute, Tier 1 Capital (or its then equivalent) if the Debenture Issuer is a bank holding company or if the Debenture Issuer is a savings and loan holding company and is then subject to similar capital adequacy requirements; provided, however, that the distribution of the Debentures in connection with the liquidation of the Trust by the Debenture Issuer shall not in and of itself constitute a Regulatory Capital Event. "Special Event Redemption Price" shall mean, with respect to any redemption of the Securities following a Special Event, an amount in cash equal to (i) 106.09% of the principal amount of the Debentures, if the Special Event occurs prior to June 8, 2011 and (ii) if the Special Event occurs on or after June 8, 2011, the amount of the Optional Redemption Price (calculated as if the Debenture Issuer had prepaid such Debentures on such date), plus, in the case of (i) and (ii), any accrued and unpaid interest thereon (including Compounded Interest and Additional Sums, if any) to the date of such redemption. A "Tax Event" shall occur upon receipt by the Debenture Issuer and the Trust of a written opinion of independent tax counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein, or (b) any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or which pronouncement or decision is announced on or after the date of original issuance of the Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Debentures, (ii) the interest payable by the Debenture Issuer on the Debentures is not, or within 90 days of the date of such opinion will not be, deductible by the Debenture Issuer, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within 90 days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges. (d) In the case of an optional redemption, if fewer than all the outstanding Securities are to be so redeemed, the Common Securities and the Capital Securities shall be redeemed Pro Rata and the Capital Securities to be redeemed will be determined as described in Section 4(g)(ii) below. Upon the entry of an order for the dissolution of the Trust by a court of competent jurisdiction, the Debentures thereafter will be subject to optional redemption, in whole, but not in part, on or after the Initial Optional Redemption Date. (e) On and from the date fixed by the Administrative Trustees for any distribution of Debentures and liquidation of the Trust: (i) the Securities will no longer be deemed to be Annex I-5 69 outstanding and (ii) any certificates representing Securities will be deemed to represent beneficial interests in a Like Amount of Debentures until such certificates are presented to the Debenture Issuer or its agent for transfer or reissue. (f) The Trust may not redeem fewer than all the outstanding Securities unless all accumulated and unpaid Distributions have been paid on all Securities for all semi-annual Distribution periods terminating on or before the date of redemption. (g) The procedure with respect to redemptions or distributions of Securities shall be as follows: (i) Notice of any redemption of, or notice of distribution of Debentures in exchange for, the Securities (a "Redemption/Distribution Notice") will be given by the Trust by mail to each Holder of Securities to be redeemed or exchanged not fewer than 30 nor more than 60 days before the date fixed for redemption or exchange thereof which, in the case of a redemption, will be the date fixed for redemption of the Debentures. For purposes of the calculation of the date of redemption or exchange and the dates on which notices are given pursuant to this Section 4(g)(i), a Redemption/Distribution Notice shall be deemed to be given on the day such notice is first mailed by first-class mail, postage prepaid, to Holders. Each Redemption/Distribution Notice shall be addressed to the Holders at the address of each such Holder appearing in the books and records of the Trust. No defect in the Redemption/Distribution Notice or in the mailing of either thereof with respect to any Holder shall affect the validity of the redemption or exchange proceedings with respect to any other Holder. (ii) In the event that fewer than all the outstanding Securities are to be redeemed, the particular Securities to be redeemed shall be selected on a Pro Rata basis (based upon Liquidation Amounts) not more than 60 nor less than 30 days prior to the date fixed for redemption from the outstanding Securities not previously called for redemption; provided, however, that with respect to Holders that would be required to hold less than 100 but more than zero Securities as a result of such redemption, the Trust shall redeem Securities of each such Holder so that after such redemption such Holder shall hold either 100 Securities or such Holder no longer holds any Securities, and shall use such method (including, without limitation, by lot) as the Trust shall deem fair and appropriate; provided further, that any such redemption may be made on the basis of the aggregate Liquidation Amount of Securities held by each Holder thereof and may be made by making such adjustments as the Trust deems fair and appropriate in order that fractional Securities shall not thereafter remain outstanding. (iii) If Securities are to be redeemed and the Trust gives a Redemption/ Distribution Notice (which notice will be irrevocable), then, with respect to Definitive Capital Securities and Common Securities, provided that the Debenture Issuer has paid the Property Trustee a sufficient amount of cash in connection with the related redemption or maturity of the Debentures, the Property Trustee will irrevocably deposit with the paying agent for the Capital Securities (if other than the Property Trustee) funds sufficient to pay the applicable Redemption Price to the Holders by check mailed to the Annex I-6 70 address of the relevant Holder appearing on the books and records of the Trust on the redemption date, and provided further, that any such payment shall become due only upon surrender by the Holder of the related certificated Capital Securities. If a Redemption/ Distribution Notice shall have been given and funds deposited as required, if applicable, then immediately prior to the close of business on the date of such deposit, or on the redemption date, as applicable, Distributions will cease to accumulate on the Securities so called for redemption and all rights of Holders so called for redemption will cease, except the right of the Holders of such Securities to receive the Redemption Price, but without interest on such Redemption Price, and such Securities shall cease to be outstanding. (iv) Payment of accumulated and unpaid Distributions on the Redemption Date of the Securities will be subject to the rights of Holders at the close of business on a regular record date in respect of a Distribution Date occurring on or prior to such Redemption Date. Neither the Administrative Trustees nor the Trust shall be required to register or cause to be registered the transfer of (i) any Securities beginning at the opening of business 15 days before the day of mailing of a notice of redemption or any notice of selection of Securities for redemption or (ii) any Securities selected for redemption, except the unredeemed portion of any Security being redeemed. If any date fixed for redemption of Securities is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day that is a Business Day (and without any interest or other payment in respect of any such delay). If payment of the Redemption Price with respect to any Securities is improperly withheld or refused and not paid either by the Property Trustee or by the Sponsor as guarantor pursuant to the relevant Securities Guarantee, Distributions on such Securities will continue to accumulate from the original redemption date to the actual date of payment, in which case the actual payment date will be considered the date fixed for redemption for purposes of calculating the Redemption Price. (v) Redemption/Distribution Notices shall be sent by the Property Trustee on behalf of the Trust to the Holders of the Securities. (vi) Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws and banking laws), the Sponsor or any of its subsidiaries may at any time and from time to time purchase outstanding Capital Securities by tender, in the open market or by private agreement. 5. Voting Rights - Capital Securities. (a) Except as provided under Sections 5(b), 6(b) and 7 and as otherwise required by law and the Declaration, the Holders of the Capital Securities will have no voting rights. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee or executing any trust or power conferred on such Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under Section 5.07 of the Annex I-7 71 Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of a Majority in Liquidation Amount of all outstanding Capital Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each Holder of the Capital Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of the Capital Securities except by subsequent vote of such Holders. The Property Trustee shall notify each Holder of Capital Securities of any notice of default with respect to the Debentures. In addition to obtaining the foregoing approvals of such Holders of the Capital Securities, prior to taking any of the foregoing actions, the Trustees shall obtain an opinion of counsel experienced in such matters to the effect that the Trust will continue to be classified as a grantor trust for United States federal income tax purposes after taking any such action into account. If an Event of Default under the Declaration has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or premium, if any, or interest on the Debentures on the due date (or, in the case of redemption, on the redemption date), then a Holder of Capital Securities may institute a proceeding directly against the Debenture Issuer for enforcement of payment to such Holder of the principal of or premium, if any, or interest on a Like Amount of Debentures (a "Direct Action") on or after the respective due date specified in the Debentures. In connection with such Direct Action, the Common Securities Holder will be subrogated to the rights of such Holder of Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of Capital Securities in such Direct Action. Except as provided in the second preceding sentence, or except as set forth in the first sentence of Section 3.8(e) of the Declaration, the Holders of Capital Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. Any approval or direction of Holders of Capital Securities may be given at a separate meeting of Holders of Capital Securities convened for such purpose, at a meeting of all of the Holders of Securities in the Trust or pursuant to written consent. The Property Trustee will cause a notice of any meeting at which Holders of Capital Securities are entitled to vote to be mailed to each Holder of record of Capital Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought and (iii) instructions for the delivery of proxies or consent. No vote or consent of the Holders of the Capital Securities will be required for the Trust to redeem and cancel Capital Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. Notwithstanding that Holders of Capital Securities are entitled to vote or consent under any of the circumstances described above, any of the Capital Securities that are owned by the Sponsor or any Affiliate of the Sponsor shall not be entitled to vote or consent and shall, for purposes of such vote or consent, be treated as if they were not outstanding. Annex I-8 72 6. Voting Rights - Common Securities. (a) Except as provided under Sections 6(b), 6(c), and 7 or as otherwise required by law and the Declaration, the Holders of the Common Securities will have no voting rights. (b) Unless a Debenture Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by the Holder of the Common Securities. If a Debenture Event of Default has occurred and is continuing, the Property Trustee and the Delaware Trustee may be removed at such time by the Holders of a Majority in Liquidation Amount of the outstanding Capital Securities. In no event will the Holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrative Trustees, which voting rights are vested exclusively in the Sponsor as the Holder of the Common Securities. No resignation or removal of a Trustee and no appointment of a successor trustee shall be effective until the acceptance of appointment by the successor trustee in accordance with the provisions of the Declaration. (c) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on such Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under Section 5.07 of the Indenture, (iii) exercise any right to rescind or annul a declaration of acceleration of the maturity of the principal of the Debentures or (iv) consent to any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of a Majority in Liquidation Amount of all outstanding Common Securities; provided, however, that where a consent under the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior approval of each Holder of the Common Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Holders of the Common Securities except by subsequent vote of such Holders. The Property Trustee shall notify each Holder of Common Securities of any notice of default with respect to the Debentures. In addition to obtaining the foregoing approvals of such Holders of the Common Securities, prior to taking any of the foregoing actions, the Trustees shall obtain an opinion of counsel experienced in such matters to the effect that the Trust will continue to be classified as a grantor trust for United States federal income tax purposes after taking any such action into account. If an Event of Default under the Declaration has occurred and is continuing and such event is attributable to the failure of the Debenture Issuer to pay principal of or premium, if any, or interest on the Debentures on the due date (or in the case of redemption, on the redemption date), then a Holder of Common Securities may institute a Direct Action directly against the Debenture Issuer for enforcement of payment to such Holder of the principal of or premium, if any, or interest on a Like Amount of Debentures on or after the respective due date specified in the Debentures. In connection with such Direct Action, the rights of the Common Securities Holder will be subordinated to the rights of Holders of Capital Securities in respect of any payment from the Debenture Issuer in such Direct Action. Except as provided in the second preceding sentence, the Holders of Common Securities will not be able to exercise directly any other remedy available to the holders of the Debentures. Annex I-9 73 Any approval or direction of Holders of Common Securities may be given at a separate meeting of Holders of Common Securities convened for such purpose, at a meeting of all of the Holders of Securities in the Trust or pursuant to written consent. The Administrative Trustees will cause a notice of any meeting at which Holders of Common Securities are entitled to vote, or of any matter upon which action by written consent of such Holders is to be taken, to be mailed to each Holder of record of Common Securities. Each such notice will include a statement setting forth (i) the date of such meeting or the date by which such action is to be taken, (ii) a description of any resolution proposed for adoption at such meeting on which such Holders are entitled to vote or of such matter upon which written consent is sought, and (iii) instructions for the delivery of proxies or consents. No vote or consent of the Holders of the Common Securities will be required for the Trust to redeem and cancel Common Securities or to distribute the Debentures in accordance with the Declaration and the terms of the Securities. 7. Amendments to Declaration. In addition to the requirements set out in Section 12.1 of the Declaration, the Declaration may be amended from time to time by the Sponsor, the Property Trustee and the Administrative Trustees without the consent of the Holders to (i) cure any ambiguity, correct or supplement any provisions in the Declaration that may be inconsistent with any other provisions, or make any other provisions with respect to matters or questions arising under the Declaration which shall not be inconsistent with the other provisions of the Declaration or (ii) modify, eliminate or add to any provisions of the Declaration to such extent as shall be necessary to ensure that the Trust will be classified for United States federal income tax purposes as a grantor trust at all times that any Securities are outstanding or to ensure that the Trust will not be required to register as an Investment Company under the Investment Company Act; provided, however, that in each case, such action shall not adversely affect in any material respect the interests of any Holder, and any such amendments of the Declaration shall become effective when notice thereof is given to the Holders. The Declaration may also be amended by the Trustees and the Sponsor with (i) the consent of Holders representing a Majority in Liquidation Amount of all outstanding Securities, and (ii) receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not affect the Trust's status as a grantor trust for United States federal income tax purposes or the Trust's exemption from status as an Investment Company under the Investment Company Act; provided, however, that, without the consent of each Holder of Securities, the Declaration may not be amended to (i) change the amount or timing of any Distribution on, or the payment required to be made in respect of, the Securities as of a specified date, increase the number or aggregate Liquidation Amount of the Securities or change of any of the redemption provisions or (ii) restrict the right of a Holder of Securities to institute suit for the enforcement of any such payment on or after such date. 8. Pro Rata. A reference in these terms of the Securities to any payment, distribution or treatment as being "Pro Rata" shall mean pro rata to each Holder according to the aggregate Liquidation Amount of the Securities held by such Holder in relation to the aggregate Annex I-10 74 Liquidation Amount of all Securities outstanding unless, in relation to a payment, an Event of Default under the Declaration has occurred and is continuing, in which case any funds available to make such payment shall be paid first to each Holder of the Capital Securities pro rata according to the aggregate Liquidation Amount of Capital Securities held by such Holder relative to the aggregate Liquidation Amount of all Capital Securities outstanding and then, only after satisfaction of all amounts owed to the Holders of the Capital Securities, to each Holder of Common Securities pro rata according to the aggregate Liquidation Amount of Common Securities held by such Holder relative to the aggregate Liquidation Amount of all Common Securities outstanding. 9. Ranking. The Capital Securities rank pari passu with the Common Securities and payment thereon shall be made Pro Rata with the Common Securities, except that, if an Event of Default under the Declaration occurs and is continuing, no payments in respect of Distributions on, or payments upon liquidation, redemption or otherwise with respect to, the Common Securities shall be made until the Holders of the Capital Securities shall be paid in full the Distributions, Redemption Price, Liquidation Distribution and any other payments to which they are entitled at such time. 10. Acceptance of Capital Securities Guarantee, Common Securities Guarantee, Indenture and Debentures. Each Holder of Capital Securities and Common Securities, by the acceptance thereof, agrees to the provisions of the Capital Securities Guarantee, the Common Securities Guarantee, the Indenture and the Debentures, as applicable, including the subordination provisions therein. 11. No Preemptive Rights. Neither the issuance of Capital Securities, nor the issuance of Common Securities is subject to preemptive or other similar rights. The Holders shall have no preemptive or similar rights to subscribe for any additional securities. 12. Miscellaneous. These terms constitute a part of the Declaration. The Sponsor will provide a copy of the Declaration, the Capital Securities Guarantee or the Common Securities Guarantee, as applicable, and the Indenture (including any supplemental indenture) to a Holder without charge upon written request to the Trust at its principal place of business. Annex I-11 75 EXHIBIT A-1 FORM OF CAPITAL SECURITY CERTIFICATE [FORM OF FACE OF SECURITY] THIS CAPITAL SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS CAPITAL SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS CAPITAL SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE DATE HEREOF AND THE LAST DATE ON WHICH HAWTHORNE FINANCIAL CORPORATION (THE "CORPORATION") OR ANY "AFFILIATE" OF THE CORPORATION WAS THE OWNER OF THIS CAPITAL SECURITY (OR ANY PREDECESSOR OF THIS CAPITAL SECURITY) ONLY (A) TO THE CORPORATION, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS CAPITAL SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3), (7) OR (8) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF HFC CAPITAL TRUST I (THE "TRUST") AND THE CORPORATION PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) PURSUANT TO CLAUSE (D) TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX II TO Exhibit A-1-1 76 THE DECLARATION. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS CAPITAL SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE CAPITAL SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF CAPITAL SECURITIES IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE CAPITAL SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THE CAPITAL SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 (100 CAPITAL SECURITIES) AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF CAPITAL SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 (100 CAPITAL SECURITIES) SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH CAPITAL SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON SUCH CAPITAL SECURITIES, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH CAPITAL SECURITIES. Exhibit A-1-2 77 Certificate Number: [_________________] Aggregate Liquidation Amount: $_____________ CUSIP Number: [__________] Certificate Evidencing Capital Securities of HFC Capital Trust I 10.18% MMCapS(SM) (liquidation amount $1,000 per Capital Security) HFC Capital Trust I, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that MMCapS(SM) FUNDING I, LTD. (the "Holder") is the registered owner of $___________ in aggregate liquidation amount of the Capital Securities of the Trust representing undivided preferred beneficial interests in the assets of the Trust designated the 10.18% MMCapS(SM) (liquidation amount $1,000 per Capital Security) (the "Capital Securities"). The Capital Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust, dated as of March 28, 2001, as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Capital Securities as set forth in Annex I to the Declaration. Capitalized terms used but not defined herein shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration, the Capital Securities Guarantee and the Indenture (including any supplemental indenture) to a Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder and to the benefits of the Capital Securities Guarantee to the extent provided therein. By acceptance hereof, the Holder agrees, for United States federal income tax purposes, to treat the Debentures as indebtedness and the Capital Securities as evidence of indirect beneficial ownership in the Debentures. Exhibit A-1-3 78 IN WITNESS WHEREOF, the Trust has executed this certificate this ___th day of _______, 2001. HFC CAPITAL TRUST I By: ------------------------------------- Administrative Trustee PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 10.18% MMCapS(SM) of HFC Capital Trust I referred to in the within-mentioned Declaration. Dated: , ---------------- ---- WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Property Trustee By: ------------------------------------- Authorized Signatory Exhibit A-1-4 79 [FORM OF REVERSE OF SECURITY] Distributions on each Capital Security will be payable at a fixed rate per annum of 10.18% (the "Coupon Rate") of the liquidation amount of $1,000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the Coupon Rate (to the extent permitted by applicable law). The term "Distribution," as used herein, includes such cash distributions and any and all such interest, if any, payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor. Distributions on the Capital Securities will be cumulative, will accumulate from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from March 28, 2001 and will be payable semi-annually in arrears on June 8th and December 8th of each year, commencing June 8, 2001 (each, a "Distribution Date"), except as otherwise described below. Distributions will be computed on the basis of a 360-day year of twelve 30-day months. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 10 consecutive semi-annual calendar periods, including the first such semi-annual period during such extension period (each an "Extension Period"), provided, that no Extension Period shall end on a date other than an Interest Payment Date for the Debentures or extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Notwithstanding such deferral, semi-annual Distributions will continue to accumulate with interest thereon (to the extent permitted by applicable law, but not at a rate exceeding the rate of interest then accruing on the Debentures) at the Coupon Rate compounded semi-annually during any such Extension Period. Prior to the termination of any Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided, that such Extension Period, together with all such previous and further extensions within such Extension Period, may not (i) exceed 10 consecutive semi-annual periods, including the first semi-annual period during such Extension Period, (ii) end on a date other than an Interest Payment Date for the Debentures or (iii) extend beyond the Maturity Date of the Debentures. Payments of accumulated Distributions will be payable to Holders as they appear on the books and records of the Trust on the record date immediately preceding the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. Exhibit A-1-5 80 Subject to receipt by the Sponsor of any and all required regulatory approvals and to certain other conditions set forth in the Declaration and the Indenture, the Property Trustee may, at the direction of the Sponsor, at any time dissolve the Trust and after satisfaction of liabilities to creditors of the Trust as provided by applicable law, cause the Debentures to be distributed to the Holders of the Securities in liquidation of the Trust or, simultaneously with any redemption of the Debentures, cause a Like Amount of the Securities to be redeemed by the Trust. The Capital Securities shall be redeemable as provided in the Declaration. Exhibit A-1-6 81 The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN CON - as tenants in common TEN ENT - as tenants in the entireties JT TEN - as joint tenants with right of survival UNIF GIFT MIN ACT - under Uniform Gift to Minors Act and not as tenants Additional abbreviations may also be used though not in the above list. ---------- ASSIGNMENT ---------- FOR VALUE RECEIVED, the undersigned hereby assigns and transfers this Capital Security Certificate to: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Assignee's social security or tax identification number) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Address and zip code of assignee) and irrevocably appoints - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date: ----------------- Signature: ------------------------------------------------------- Exhibit A-1-7 82 (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee: ----------------------------------------------------------- - ----------------------------- Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. Exhibit A-1-8 83 In connection with any transfer of any of the Capital Securities evidenced by this Certificate, the undersigned confirms that such Capital Securities are being: CHECK ONE BOX BELOW (1) Y exchanged for the undersigned's own account without transfer; or (2) Y transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933, as amended; or (3) Y transferred to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3), (7) or (8) of Rule 501 under the Securities Act of 1933 that is acquiring the Capital Securities for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act of 1933, as amended; or (4) Y transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933, as amended; or (5) Y transferred pursuant to an effective registration statement. Unless one of the boxes is checked, the Registrar will refuse to register any of the Capital Securities evidenced by this Certificate in the name of any Person other than the Holder hereof; provided, however, that if box (3) or (4) is checked, the Registrar may require, prior to registering any such transfer of the Capital Securities, such legal opinions, certifications and other information as the Trust has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, as amended, such as the exemption provided by Rule 144 under such Act; provided further, that (i) if box (2) is checked, by acceptance of this Certificate, the transferee shall be deemed to have certified that it is a "qualified institutional buyer" (as defined in Rule 144A) ("QIB") acquiring the Capital Securities for its own account or for the account of another QIB over which it exercises sole investment discretion and that it is aware that the Holder is relying upon the exemption from registration afforded by Rule 144A in respect of the Holder's transfer of Capital Securities to it or (ii) if box (3) is checked, the transferee must also provide to the Registrar a Transferee Letter of Representation in the form attached to the Declaration, provided further, that after the date that a registration statement has been filed and so long as such registration statement continues to be effective, only then may the Registrar permit transfers for which box (5) has been checked. ------------------------------------- Signature Exhibit A-1-9 84 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS COMMON SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. Exhibit A-2-1 85 This Certificate is not transferable except in compliance with Section 9.1(c) of the Declaration. Certificate Evidencing Common Securities of HFC Capital Trust I 10.18% Common Securities (liquidation amount $1,000 per Common Security) HFC Capital Trust I, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that Hawthorne Financial Corporation (the "Holder") is the registered owner of ____ common securities of the Trust representing undivided beneficial interests in the assets of the Trust designated the 10.18% Common Securities (liquidation amount $1,000 per Common Security) (the "Common Securities"). Subject to the terms of Section 9.1(c) of the Declaration (as defined below), the Common Securities are not transferable. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of the Trust dated as of March 28, 2001 as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration. Capitalized terms used but not defined herein shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration, the Common Securities Guarantee and the Indenture (including any supplemental indenture) to a Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder and to the benefits of the Common Securities Guarantee to the extent provided therein. By acceptance hereof, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of indirect beneficial ownership in the Debentures. IN WITNESS WHEREOF, the Trust has executed this certificate this ___th day of ___________, 2001. HFC CAPITAL TRUST I By: ------------------------------------- Administrative Trustee Exhibit A-2-2 86 [FORM OF REVERSE OF SECURITY] Distributions on each Common Security will be payable at a rate of 10.18% per annum (the "Coupon Rate") of the liquidation amount of $1000 per Common Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the Coupon Rate (to the extent permitted by applicable law). The term "Distributions," as used herein, includes such cash distributions and any and all such interest, if any, payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor. Distributions on the Common Securities will be cumulative, will accrue from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from March 28, 2001 and will be payable semi-annually in arrears on June 8th and December 8th of each year, commencing June 8, 2001 (each, a "Distribution Date"), except as otherwise described below. Distributions will be computed on the basis of a 360-day year of twelve 30-day months. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 10 consecutive calendar semi-annual periods, including the first such semi-annual period during such extension period (each an "Extension Period"), provided, that no Extension Period shall end on a date other than an Interest Payment Date for the Debentures or extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Notwithstanding such deferral, semi-annual Distributions will continue to accumulate with interest thereon (to the extent permitted by applicable law, but not at a rate exceeding the rate of interest then accruing on the Debentures) at the Coupon Rate compounded semi-annually during any such Extension Period. Prior to the termination of any Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided, that such Extension Period, together with all such previous and further extensions within such Extension Period, may not (i) exceed 10 consecutive semi-annual periods, including the first semi-annual period during such Extension Period, (ii) end on a date other than an Interest Payment Date for the Debentures or (iii) extend beyond the Maturity Date of the Debentures. Payments of accrued Distributions will be payable to Holders as they appear on the books and records of the Trust on the record date immediately preceding the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. Subject to the receipt by the Sponsor of any and all required regulatory approvals and to certain other conditions set forth in the Declaration and the Indenture, the Property Trustee may, at the direction of the Sponsor, at any time dissolve the Trust and cause the Debentures to be distributed to the Holders of the Securities in liquidation of the Trust or, simultaneously with any redemption of the Debentures, cause a Like Amount of the Securities to be redeemed by the Trust. The Common Securities shall be redeemable as provided in the Declaration. Exhibit A-2-3 87 Under certain circumstances, the rights of the holders of the Common Securities shall be subordinate to the rights of the holders of the Capital Securities, as provided in the Declaration. Exhibit A-2-4 88 ANNEX II TRANSFEREE LETTER OF REPRESENTATION HFC Capital Trust I c/o Hawthorne Financial Corporation 2381 Rosecrans Avenue El Segundo, California 90245 Ladies and Gentlemen: In connection with the proposed transfer to us of 10.18% MMCapS(SM) (the "capital securities") of HFC Capital Trust I (the "Trust"), we confirm that: 1. We understand that the capital securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or other applicable securities laws, and may not be offered, sold or otherwise transferred except as permitted in the following sentence. We agree on our behalf and on behalf of any investor account for which we are purchasing capital securities to offer, sell or otherwise transfer such capital securities prior to the date which is two years after the later of the date of original issue thereof and the last date on which Hawthorne Financial Corporation (the "Corporation") or any "affiliate" of the Corporation was the owner of such capital securities (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the Corporation, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) so long as the capital securities are eligible for resale pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a "qualified institutional buyer" (a "QIB") as defined in Rule 144A under the Securities Act that purchases for its own account or for the account of a QIB to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) to an institutional "accredited investor" (an "Institutional Accredited Investor") within the meaning of subparagraph (a)(1), (2), (7) or (8) of Rule 501 under the Securities Act that is acquiring the capital securities for its own account or for the account of such an Institutional Accredited Investor for investment purposes and not with a view to, or for offer and sale in connection with, any distribution in violation of the Securities Act or (e) pursuant to any other available exemption from the registration requirements under the Securities Act, subject to the right of the Trust and the Corporation prior to any such offer, sale or transfer (i) pursuant to clause (d) or (e) above to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to each of them and (ii) pursuant to clause (d) above to require that the transferor deliver to the Trust a letter from the transferee substantially similar to this letter. 2. We are an Institutional Accredited Investor purchasing for our own account or for the account of such an Institutional Accredited Investor for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act or any other applicable securities laws and we have such knowledge and experience in financial Annex II-1 89 and business matters as to be capable of evaluating the merits and risks of our investment in the capital securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment for an indefinite period. 3. We are acquiring the capital securities purchased by us for our own account or for one or more accounts as to each of which we exercise sole investment discretion. 4. You and the Corporation are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. 5. We are (1) not an employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or a plan to which Section 4975 of the Internal Revenue Code of 1986 ("Code") is applicable, a trustee or other person acting on behalf of such employee benefit plan or plan, or any other person or entity using the assets of any employee benefit plan or plan to finance such purchase, or (2) such purchase will not result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code for which there is no applicable statutory or administrative exemption. We make this representation to the trustees of the Trust, Hawthorne Financial Corporation and MMCapS(SM) Funding I, Ltd. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Very truly yours, - ------------------------------- Name of Purchaser: By: Date: The capital securities will be registered in the name of the beneficial owner as follows: Name: Address: Taxpayer ID Number: Annex II-2 EX-4.10 9 a70896ex4-10.txt EXHIBIT 4.10 1 EXHIBIT 4.10 CAPITAL SECURITY CERTIFICATE THIS CAPITAL SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS CAPITAL SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS CAPITAL SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSU-ANCE DATE HEREOF AND THE LAST DATE ON WHICH HAWTHORNE FINANCIAL CORPORATION (THE "CORPORATION") OR ANY "AFFILIATE" OF THE CORPORATION WAS THE OWNER OF THIS CAPITAL SECURITY (OR ANY PREDECESSOR OF THIS CAPITAL SECURITY) ONLY (A) TO THE CORPORATION, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) SO LONG AS THIS CAPITAL SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1), (2), (3), (7) OR (8) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS CAPITAL SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (E) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT, SUBJECT TO THE RIGHT OF HFC CAPITAL TRUST I (THE "TRUST") AND THE CORPORATION PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) PURSUANT TO CLAUSE (D) TO REQUIRE THAT THE TRANSFEROR DELIVER TO THE TRUST A LETTER FROM THE TRANSFEREE SUBSTANTIALLY IN THE FORM OF ANNEX B TO THE DECLARATION. SUCH HOLDER FURTHER AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS CAPITAL SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THE HOLDER OF THIS CAPITAL SECURITY BY ITS ACCEPTANCE HEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE 2 BENEFIT, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE") (EACH A "PLAN"), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE "PLAN ASSETS" BY REASON OF ANY PLAN'S INVESTMENT IN THE ENTITY AND NO PERSON INVESTING "PLAN ASSETS" OF ANY PLAN MAY ACQUIRE OR HOLD THE CAPITAL SECURITIES OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF CAPITAL SECURITIES IS NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THE CAPITAL SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN WITHIN THE MEANING OF SECTION 3(3) OF ERISA, OR A PLAN TO WHICH SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF AN EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE ASSETS OF ANY EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. THE CAPITAL SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 (100 CAPITAL SECURITIES) AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF CAPITAL SECURITIES IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 (100 CAPITAL SECURITIES) SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH CAPITAL SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON SUCH CAPITAL SECURITIES, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH CAPITAL SECURITIES. -2- 3 Certificate Number: #1 Aggregate Liquidation Amount: $9,000,000 Certificate Evidencing Capital Securities of HFC CAPITAL TRUST I 10.18% MMCapSSM (liquidation amount $1,000 per Capital Security) HFC Capital Trust I, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that The Chase Manhattan Bank, as trustee under the indenture dated as of March 28, 2001 among MMCapSSM Funding I, Ltd., MMCapSSM Funding I, Inc. and The Chase Manhattan Bank (the "Holder") is the registered owner of $9,000,000 in aggregate liquidation amount of Capital Securities of the Trust representing undivided preferred beneficial interests in the assets of the Trust designated the 10.18% MMCapSSM (liquidation amount $1,000 per Capital Security) (the "Capital Securities"). The Capital Securities are transfer-able on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer. The designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities represented hereby are issued and shall in all respects be subject to the provisions of the Amended and Restated Declaration of Trust, dated as of March 28, 2001, as the same may be amended from time to time (the "Declaration"), including the designation of the terms of the Capital Securities as set forth in Annex I to the Declaration. Capitalized terms used but not defined herein shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration, the Capital Securities Guarantee and the Indenture (including any supplemental indenture) to a Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder and to the benefits of the Capital Securities Guarantee to the extent provided therein. By acceptance hereof, the Holder agrees, for United States federal income tax purposes, to treat the Debentures as indebtedness and the Capital Securities as evidence of indirect beneficial ownership in the Debentures. -3- 4 IN WITNESS WHEREOF, the Trust has executed this certificate this 28th day of March, 2001. HFC CAPITAL TRUST I By:___________________________ Administrative Trustee PROPERTY TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 10.18% Capital Securities of HFC Capital Trust I referred to in the within-mentioned Declaration. Dated: March 28, 2001 WILMINGTON TRUST COMPANY, not in its individual capacity but solely as Property Trustee By: ________________________________ Authorized Signatory -4- 5 Distributions on each Capital Security will be payable at a fixed rate per annum of 10.18% (the "Coupon Rate") of the liquidation amount of $1000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Property Trustee. Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the Coupon Rate (to the extent permitted by applicable law). The term "Distribution," as used herein, includes such cash distributions and any and all such interest, if any, payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Property Trustee and to the extent the Property Trustee has funds legally available therefor. Distributions on the Capital Securities will be cumulative, will accumulate from the most recent date to which Distributions have been paid or, if no Distributions have been paid, from March 28, 2001 and will be payable semi-annually in arrears, on June 8th and December 8th of each year, commencing June 8, 2001 (each, a "Distribution Date"), except as otherwise described below. Distributions will be computed on the basis of a 360-day year of twelve 30-day months. As long as no Event of Default has occurred and is continuing under the Indenture, the Debenture Issuer has the right under the Indenture to defer payments of interest by extending the interest payment period at any time and from time to time on the Debentures for a period not exceeding 10 consecutive semi-annual calendar periods, including the first such semi-annual period during such extension period (each an "Extension Period"), provided that no Extension Period shall end on a date other than an Interest Payment Date for the Debentures or extend beyond the Maturity Date of the Debentures. As a consequence of such deferral, Distributions will also be deferred. Notwithstanding such deferral, semi-annual Distributions will continue to accumulate with interest thereon (to the extent permitted by applicable law, but not at a rate exceeding the rate of interest then accruing on the Debentures) at the Coupon Rate compounded semi-annually during any such Extension Period. Prior to the termination of any Extension Period, the Debenture Issuer may further defer payments of interest by further extending such Extension Period; provided that such Extension Period, together with all such previous and further extensions within such Extension Period, may not (i) exceed 10 consecutive semi-annual periods, including the first semi-annual period during such Extension Period, (ii) end on a date other than an Interest Payment Date for the Debentures or (iii) extend beyond the Maturity Date of the Debentures. Payments of accumulated Distributions will be payable to Holders as they appear on the books and records of the Trust on the record date immediately preceding the end of the Extension Period. Upon the termination of any Extension Period and the payment of all amounts then due, the Debenture Issuer may commence a new Extension Period, subject to the above requirements. Subject to receipt by the Sponsor of any and all required regulatory approvals and to certain other conditions set forth in the Declaration and the Indenture, the Property Trustee may, at the direction of the Sponsor, at any time dissolve the Trust and after satisfaction of liabilities to creditors of the Trust as provided by applicable law, cause the Debentures to be distributed to the Holders of the Securities in liquidation of the Trust or, simultaneously with any redemption of the Debentures, cause a Like Amount of the Securities to be redeemed by the Trust. The Capital Securities shall be redeemable as provided in the Declaration. -5- 6 The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN CON - as tenants in common TEN ENT - as tenants in the entireties JT TEN - as joint tenants with right of survival UNIF GIFT MIN ACT - under Uniform Gift to Minors Act and not as tenants Additional abbreviations may also be used though not in the above list. -6- 7 ASSIGNMENT FOR VALUE RECEIVED, the undersigned hereby assigns and transfers this Capital Security Certificate to: _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (Assignee's social security or tax identification number) _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ (Address and zip code of assignee) and irrevocably appoints ______________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date:_______________________________ Signature:___________________________________________________ (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee:___________________________________________________________ ___________________________ Signature must be guaranteed by an "eligible guarantor institution" that is a bank, stockbroker, savings and loan association or credit union meeting the requirements of the Registrar, which requirements include membership or participation in the Securities Transfer Agents Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. -7- 8 In connection with any transfer of any of the Capital Securities evidenced by this Certificate, the undersigned confirms that such Capital Securities are being: CHECK ONE BOX BELOW (1) [] exchanged for the undersigned's own account with-out transfer; or (2) [] transferred pursuant to and in compliance with Rule 144A under the Securities Act of 1933, as amended; or (3) [] transferred to an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3), (7) or (8) of Rule 501 under the Securities Act of 1933 that is acquiring the Capital Securities for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act of 1933, as amended; or (4) [] transferred pursuant to another available exemption from the registration requirements of the Securities Act of 1933, as amended; or (5) [] transferred pursuant to an effective registration statement. Unless one of the boxes is checked, the Registrar will refuse to register any of the Capital Securities evidenced by this Certificate in the name of any Person other than the Holder hereof; provided, however, that if box (3) or (4) is checked, the Registrar may require, prior to registering any such transfer of the Capital Securities, such legal opinions, certifications and other information as the Trust has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, as amended, such as the exemption provided by Rule 144 under such Act; provided, further, that (i) if box (2) is checked, by acceptance of this Certificate, the transferee shall be deemed to have certified that it is a "qualified institutional buyer" (as defined in Rule 144A) ("QIB") acquiring the Capital Securities for its own account or for the account of another QIB over which it exercises sole investment discretion and that it is aware that the Holder is relying upon the exemption from registration afforded by Rule 144A in respect of the Holder's transfer of Capital Securities to it or (ii) if box (3) is checked, the transferee must also provide to the Registrar a Transferee Letter of Representation in the form attached to the Declaration; provided, further, that after the date that a registration statement has been filed and so long as such registration statement continues to be effective, only then may the Registrar permit transfers for which box (5) has been checked. Signature __________________________________ -8- EX-4.11 10 a70896ex4-11.txt EXHIBIT 4.11 1 EXHIBIT 4.11 COMMON SECURITIES SUBSCRIPTION AGREEMENT COMMON SECURITIES SUBSCRIPTION AGREEMENT, dated as of March 28, 2001 (this "Agreement"), between HFC Capital Trust I, a statutory business trust created under the laws of the State of Delaware (the "Trust"), and Hawthorne Financial Corporation, a Delaware corporation (the "Buyer"), relating to the Trust's 10.18% Common Securities (liquidation amount of $1,000 per security) representing undivided beneficial interests in the assets of the Trust (the "Common Securities"). Capitalized terms used herein and not otherwise defined herein have the respective meanings ascribed thereto in the Subscription Agreement (as defined below). WHEREAS, the Buyer, the Trust and the Purchaser named therein have entered into a Capital Securities Subscription Agreement, dated March 21, 2001 (the "Subscription Agreement"), in connection with the issuance and sale of 10.18% MMCapS(SM) (liquidation amount of $1,000 per security), by the Trust; and WHEREAS, the Buyer, as sponsor of the Trust, desires to purchase from the Trust, and the Trust desires to sell to the Buyer, all of the Common Securities. NOW, THEREFORE, in consideration of the foregoing premises and the conditions and agreements hereinafter set forth, the parties hereto agree as follows: 1. The Buyer hereby subscribes for and offers to purchase from the Trust, and the Trust hereby accepts such offer and agrees to issue and sell to the Buyer, contemporaneous with the Closing Time, 300 Common Securities with an aggregate liquidation amount with respect to the assets of the Trust of Three Hundred Thousand Dollars ($300,000) in consideration of the payment on or before the date hereof of Three Hundred Thousand ($300,000) in immediately available funds. 2. The Trust represents and warrants that, upon execution and delivery of the Common Securities to the Buyer, the Common Securities will be duly authorized, validly issued, fully paid and nonassessable and entitled to the benefits and subject to the terms of the Amended and Restated Declaration of Trust, dated as of March 28, 2001, by and among the Buyer, as sponsor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee, and Simone F. Lagomarsino, Karen Abajian, and Eileen Lyon, as Administrative Trustees, and the holders from time to time of undivided beneficial interests in the assets of the Trust. 3. This Agreement shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by, and construed in accordance with, the laws of the State of New York without regard to conflict of law principles. 4. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 2 IN WITNESS WHEREOF, the parties hereto have caused this Common Securities Subscription Agreement to be duly executed as of the date first written above. HFC CAPITAL TRUST I By: ------------------------------------- Simone F. Lagomarsino Administrative Trustee By: ------------------------------------- Karen Abajian Administrative Trustee By: ------------------------------------- Eileen Lyon Administrative Trustee HAWTHORNE FINANCIAL CORPORATION By: ------------------------------------- Simone F. Lagomarsino President and Chief Executive Officer 2 EX-4.12 11 a70896ex4-12.txt EXHIBIT 4.12 1 EXHIBIT 4.12 ======================================== CAPITAL SECURITIES GUARANTEE AGREEMENT HAWTHORNE FINANCIAL CORPORATION Dated as of March 28, 2001 ======================================== 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS AND INTERPRETATION ...................................................... 1 SECTION 1.1. Definitions and Interpretation ........................................ 1 ARTICLE II TRUST INDENTURE ACT ................................................................ 5 SECTION 2.1. Trust Indenture Act; Application ...................................... 5 SECTION 2.2. Lists of Holders of Securities ........................................ 5 SECTION 2.3. Reports by the Capital Securities Guarantee Trustee ................... 5 SECTION 2.4. Periodic Reports ...................................................... 6 SECTION 2.5. Evidence of Compliance with Conditions Precedent ...................... 6 SECTION 2.6. Waiver of Events of Default ........................................... 6 SECTION 2.7. Notice of Events of Default ........................................... 6 SECTION 2.8. Conflicting Interests ................................................. 7 ARTICLE III POWERS, DUTIES AND RIGHTS OF CAPITAL SECURITIES GUARANTEE TRUSTEE ............................................................................... 7 SECTION 3.1. Powers and Duties of the Capital Securities Guarantee Trustee.......... 7 SECTION 3.2. Certain Rights of Capital Securities Guarantee Trustee ................ 9 SECTION 3.3. Not Responsible for Recitals or Issuance of Capital Securities Guarantee ................................................. 11 ARTICLE IV CAPITAL SECURITIES GUARANTEE TRUSTEE ............................................... 11 SECTION 4.1. Capital Securities Guarantee Trustee; Eligibility ..................... 11 SECTION 4.2. Appointment, Removal and Resignation of Capital Securities Guarantee Trustee .................................................... 11 ARTICLE V GUARANTEE ........................................................................... 12 SECTION 5.1. Guarantee ............................................................. 12 SECTION 5.2. Waiver of Notice and Demand ........................................... 12 SECTION 5.3. Obligations Not Affected .............................................. 13 SECTION 5.4. Rights of Holders ..................................................... 13 SECTION 5.5. Guarantee of Payment .................................................. 14 SECTION 5.6. Subrogation ........................................................... 14 SECTION 5.7. Independent Obligations ............................................... 14 ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION .......................................... 14 SECTION 6.1. Limitation of Transactions ............................................ 14 SECTION 6.2. Ranking ............................................................... 15
i 3 ARTICLE VII TERMINATION ....................................................................... 16 SECTION 7.1. Termination ........................................................... 16 ARTICLE VIII INDEMNIFICATION .................................................................. 16 SECTION 8.1. Exculpation ........................................................... 16 SECTION 8.2. Compensation and Indemnification ...................................... 16 ARTICLE IX MISCELLANEOUS ...................................................................... 17 SECTION 9.1. Successors and Assigns ................................................ 17 SECTION 9.2. Amendments ............................................................ 17 SECTION 9.3. Notices ............................................................... 17 SECTION 9.4. Benefit ............................................................... 18 SECTION 9.5. Governing Law ......................................................... 19
ii 4 CROSS REFERENCE TABLE*
Section of Trust Section of Indenture Act of Guarantee 1939, as amended Agreement ---------------- ------------------- 310(a) ....................................................... 4.1(a) 310(b) ....................................................... 2.8, 4.1(c) 310(c) ....................................................... N/A 311(a) ....................................................... 2.2(b) 311(b) ....................................................... 2.2(b) 311(c) ....................................................... N/A 312(a) ....................................................... 2.2(a) 312(b) ....................................................... 2.2(b) 312(c) ....................................................... N/A 313 ....................................................... 2.3 314(a) ....................................................... 2.4 314(b) ....................................................... N/A 314(c) ....................................................... 2.5 314(d) ....................................................... N/A 314(e) ....................................................... 1.1, 2.5, 3.2 314(f) ....................................................... 2.1, 3.2 315(a) ....................................................... 3.1(d), 3.2(a) 315(b) ....................................................... 2.7 315(c) ....................................................... 3.1(c) 315(d) ....................................................... 3.1(d), 3.2(a), 8.1 315(e) ....................................................... N/A 316(a) ....................................................... 1.1, 2.6, 5.4 316(b) ....................................................... 5.3, 5.4 316(c) ....................................................... 9.2 317(a) ....................................................... N/A 317(b) ....................................................... N/A 318(a) ....................................................... 2.1(a) 318(b) ....................................................... 2.1(b) 318(c) ....................................................... 2.1(b)
- -------- * This Cross-Reference Table does not constitute part of this Guarantee Agreement and shall not affect the interpretation of any of its terms or provisions. iii 5 CAPITAL SECURITIES GUARANTEE AGREEMENT This CAPITAL SECURITIES GUARANTEE AGREEMENT (the "Capital Securities Guarantee"), dated as of March 28, 2001 is executed and delivered by Hawthorne Financial Corporation, a Delaware corporation (the "Guarantor"), and Wilmington Trust Company, a Delaware banking corporation, as trustee (the "Capital Securities Guarantee Trustee" or "Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Capital Securities (as defined herein) of HFC Capital Trust I, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of March 28, 2001, by and among the trustees of the Issuer named therein, the Guarantor, as sponsor, and the Holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer (i) is issuing on the date hereof 9,000 capital securities, having an aggregate liquidation amount of $9,000,000, such capital securities being designated the 10.18% MMCapS(SM) (collectively, the "Capital Securities"). WHEREAS, as incentive for the Holders to purchase the Capital Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Capital Securities Guarantee, to pay the Guarantee Payments (as defined herein) to the Holders of the Capital Securities, and the Guarantor agrees to make certain other payments on the terms and conditions set forth herein. WHEREAS, the Guarantor is also executing and delivering the Common Securities Guarantee Agreement, dated as of March 28, 2001 (the "Common Securities Guarantee"), for the benefit of the holders of the Common Securities (as defined herein), the terms of which provide that if an Event of Default (as defined in the Declaration) has occurred and is continuing, the rights of holders of the Common Securities to receive Guarantee Payments under the Common Securities Guarantee are subordinated, to the extent and in the manner set forth in the Common Securities Guarantee, to the rights of Holders of the Capital Securities to receive Guarantee Payments under this Capital Securities Guarantee. NOW, THEREFORE, in consideration of the purchase by each Holder of Capital Securities, which purchase the Guarantor hereby acknowledges shall benefit the Guarantor, the Guarantor executes and delivers this Capital Securities Guarantee for the benefit of such Holders. ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1. Definitions and Interpretation In this Capital Securities Guarantee, unless the context otherwise requires: (a) capitalized terms used in this Capital Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; 6 (b) terms defined in the Declaration as in effect at the date of execution of this Capital Securities Guarantee have the same meaning when used in this Capital Securities Guarantee unless otherwise defined in this Capital Securities Guarantee; (c) a term defined anywhere in this Capital Securities Guarantee has the same meaning throughout; (d) all references to "the Capital Securities Guarantee" or "this Capital Securities Guarantee" are to this Capital Securities Guarantee as modified, supplemented or amended from time to time; (e) all references in this Capital Securities Guarantee to Articles and Sections are to Articles and Sections of this Capital Securities Guarantee, unless otherwise specified; (f) a term defined in the Trust Indenture Act has the same meaning when used in this Capital Securities Guarantee, unless otherwise defined in this Capital Securities Guarantee, or unless the context otherwise requires; and (g) a reference to the singular includes the plural and vice versa. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act of 1933, as amended, or any successor rule thereunder. "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in Wilmington, Delaware, El Segundo, California or New York, New York are authorized or required by law or executive order to remain closed. "Capital Securities Guarantee Trustee" shall mean Wilmington Trust Company, as Trustee under the Capital Securities Guarantee, until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Capital Securities Guarantee and thereafter means each such Successor Capital Securities Guarantee Trustee. "Common Securities" shall mean the securities representing common undivided beneficial interests in the assets of the Issuer. "Corporate Trust Office" shall mean the office of the Capital Securities Guarantee Trustee at which the corporate trust business of the Capital Securities Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Agreement is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust Administration. "Covered Person" shall mean any Holder or beneficial owner of Capital Securities. "Debentures" shall mean the series of subordinated debt securities of the Guarantor designated the 10.18% Junior Subordinated Deferrable Interest Debentures due June 8, 2031, held by the Property Trustee (as defined in the Declaration) of the Issuer. 2 7 "Event of Default" shall mean a default by the Guarantor on any of its payment or other obligations under this Capital Securities Guarantee; provided, however, that, except with respect to default in respect of any Guarantee Payment, no default by the Guarantor hereunder shall constitute an Event of Default unless the Guarantor shall have received written notice of the default and shall not have cured such default within 60 days after receipt thereof. "Guarantee Payments" shall mean the following payments or distributions, without duplication, with respect to the Capital Securities, to the extent not paid or made by or on behalf of the Issuer: (i) any accumulated and unpaid Distributions (as defined in the Declaration) that are required to be paid on such Capital Securities, to the extent the Issuer has funds legally available therefor at such time, (ii) the redemption price, including all accumulated and unpaid Distributions to the date of redemption (the "Redemption Price"), to the extent the Issuer has funds legally available therefor at such time, with respect to any Capital Securities called for redemption, and (iii) upon a voluntary or involuntary dissolution, winding up or liquidation of the Issuer (other than in connection with the distribution of Debentures to the Holders in exchange for Capital Securities or in connection with the redemption of the Capital Securities, in each case as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accumulated and unpaid Distributions on the Capital Securities to the date of payment, to the extent the Issuer has funds legally available therefor at such time, and (b) the amount of assets of the Issuer remaining available for distribution to the Holders after satisfaction of liabilities to creditors of the Issuer as required by applicable law (in either case, the "Liquidation Distribution"). If an Event of Default has occurred and is continuing, no Guarantee Payments under the Common Securities Guarantee with respect to the Common Securities or any guarantee payment under the Common Securities Guarantee or any Other Common Securities Guarantee shall be made until the Holders of the Capital Securities shall be paid in full the Guarantee Payments to which they are entitled under this Capital Securities Guarantee. "Holder" shall mean any holder, as registered on the books and records of the Issuer, of any Capital Securities; provided, however, that, in determining whether the holders of the requisite percentage of Capital Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any Person actually known to a Responsible Officer of the Capital Securities Guarantee Trustee to be an Affiliate of the Guarantor. "Indemnified Person" shall mean the Capital Securities Guarantee Trustee (including in its individual capacity), any Affiliate of the Capital Securities Guarantee Trustee, or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Capital Securities Guarantee Trustee. "Indenture" shall mean the Indenture, dated as of March 28, 2001, between Hawthorne Financial Corporation, as issuer of Debentures (the "Debenture Issuer"), and Wilmington Trust Company, as trustee, pursuant to which the Debentures are to be issued to the Property Trustee of the Issuer. "Majority in Liquidation Amount of the Capital Securities" shall mean, except as provided by the Trust Indenture Act, a vote by Holder(s) of the Capital Securities, voting 3 8 separately as a class, of more than 50% of the aggregate liquidation amount (including the amount that would be paid on redemption, liquidation or otherwise, plus accumulated and unpaid Distributions to but excluding the date upon which the voting percentages are determined) of all outstanding Capital Securities, excluding Capital Securities held by the Guarantor, the Issuer or any Affiliate thereof. "Officers' Certificate" shall mean, with respect to any Person, a certificate signed by the Chairman, the Chief Executive Officer, the President, an Executive or Senior Vice President, a Vice President, the Chief Financial Officer and the Secretary or an Assistant Secretary. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Capital Securities Guarantee shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenants or conditions and the definitions relating thereto; (b) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (c) a statement as to whether or not, in the opinion of each such officer, such condition or covenant has been complied with. "Other Common Securities Guarantees" shall have the same meaning as "Other Guarantees" in the Common Securities Guarantee. "Other Debentures" shall mean all junior subordinated debentures, other than the Debentures, issued by the Guarantor, from time to time, and sold to trusts other than the Issuer to be established by the Guarantor (if any), in each case similar to the Issuer. "Other Guarantees" shall mean all guarantees, other than this Capital Securities Guarantee, to be issued by the Guarantor with respect to capital securities (if any) similar to the Capital Securities, issued by trusts other than the Issuer to be established by the Guarantor (if any), in each case similar to the Issuer. "Person" shall mean a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Responsible Officer" shall mean, with respect to a Person, any officer with direct responsibility for the administration of any matters relating to this Capital Securities Guarantee. "Successor Capital Securities Guarantee Trustee" shall mean a successor Capital Securities Guarantee Trustee possessing the qualifications to act as Capital Securities Guarantee Trustee under Section 4.1. "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as amended. 4 9 "Trust Securities" shall mean the Common Securities and the Capital Securities, collectively. ARTICLE II TRUST INDENTURE ACT SECTION 2.1. Trust Indenture Act; Application (a) This Capital Securities Guarantee is subject to the provisions of the Trust Indenture Act that are required to be part of this Capital Securities Guarantee and shall, to the extent applicable, be governed by such provisions. (b) If and to the extent that any provision of this Capital Securities Guarantee limits, qualifies or conflicts with the duties imposed by Section 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. If any provision of this Capital Securities Guarantee modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the modified or excluded provision of the Trust Indenture Act shall be deemed to apply to this Capital Securities Guarantee as so modified or excluded, as the case may be. SECTION 2.2. Lists of Holders of Securities (a) The Guarantor shall provide the Capital Securities Guarantee Trustee (unless the Capital Securities Guarantee Trustee is otherwise the registrar of the Capital Securities) with a list, in such form as the Capital Securities Guarantee Trustee may reasonably require, of the names and addresses of the Holders of the Capital Securities ("List of Holders") (i) as of the record date, within fourteen (14) days after such record date for payment of Distributions (as defined in the Declaration), and (ii) at any other time within 30 days of receipt by the Guarantor of a written request for a List of Holders as of a date no more than 14 days before such List of Holders is given to the Capital Securities Guarantee Trustee; provided, however, that the Guarantor shall not be obligated to provide such List of Holders at any time the List of Holders does not differ from the most recent List of Holders given to the Capital Securities Guarantee Trustee by the Guarantor. The Capital Securities Guarantee Trustee may destroy any List of Holders previously given to it upon receipt of a new List of Holders. (b) The Capital Securities Guarantee Trustee shall comply with its obligations under Sections 31l(a), 31l(b) and Section 312(b) of the Trust Indenture Act. SECTION 2.3. Reports by the Capital Securities Guarantee Trustee Within 60 days after the date hereof, and no later than the anniversary date hereof in each succeeding year, the Capital Securities Guarantee Trustee shall provide to the Holders of the Capital Securities such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Capital Securities Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. 5 10 SECTION 2.4. Periodic Reports The Guarantor shall provide to the Capital Securities Guarantee Trustee such documents, reports and information as are required by Section 314 (if any) and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. Delivery of such reports, information and documents to the Capital Securities Guarantee Trustee is for informational purposes, only and the Capital Securities Guarantee Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Guarantor's compliance with any of its covenants hereunder (as to which the Capital Securities Guarantee Trustee is entitled to rely exclusively on Officers' Certificates). SECTION 2.5. Evidence of Compliance with Conditions Precedent The Guarantor shall provide to the Capital Securities Guarantee Trustee such evidence of compliance with the conditions precedent, if any, provided for in this Capital Securities Guarantee that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6. Waiver of Events of Default The Holders of a Majority in Liquidation Amount of the Capital Securities may, by vote, on behalf of the Holders of all of the Capital Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Capital Securities Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 2.7. Notice of Events of Default (a) The Capital Securities Guarantee Trustee shall, within 10 Business Days after the Capital Securities Guarantee Trustee has knowledge of the occurrence of an Event of Default with respect to this Capital Securities Guarantee, transmit by mail, first class postage prepaid, to all Holders of the Capital Securities, notices of all such Events of Default, unless such Events of Default have been cured before the giving of such notice; provided, however, that, except in the case of an Event of Default arising from the non-payment of any Guarantee Payment, the Capital Securities Guarantee Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Capital Securities Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Capital Securities. (b) The Capital Securities Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Capital Securities Guarantee Trustee shall have received written notice, or a Responsible Officer of the Capital Securities Guarantee Trustee charged with the administration of the Declaration shall have actual knowledge, of such Event of Default. 6 11 SECTION 2.8. Conflicting Interests The Declaration shall be deemed to be specifically described in this Capital Securities Guarantee for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE III POWERS, DUTIES AND RIGHTS OF CAPITAL SECURITIES GUARANTEE TRUSTEE SECTION 3.1. Powers and Duties of the Capital Securities Guarantee Trustee (a) This Capital Securities Guarantee shall be held by the Capital Securities Guarantee Trustee for the benefit of the Holders of the Capital Securities, and the Capital Securities Guarantee Trustee shall not transfer this Capital Securities Guarantee to any Person except a Holder of the Capital Securities exercising his or her rights pursuant to Section 5.4(b) or to a Successor Capital Securities Guarantee Trustee on acceptance by such Successor Capital Securities Guarantee Trustee of its appointment to act as Successor Capital Securities Guarantee Trustee. The right, title and interest of the Capital Securities Guarantee Trustee shall automatically vest in any Successor Capital Securities Guarantee Trustee, and such vesting and succession of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Capital Securities Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Capital Securities Guarantee Trustee has occurred and is continuing, the Capital Securities Guarantee Trustee shall enforce this Capital Securities Guarantee for the benefit of the Holders of the Capital Securities. (c) The Capital Securities Guarantee Trustee, before the occurrence of any Event of Default (of which, other than a default in respect of any Guarantee Payment, a Responsible Officer of the Property Trustee has actual knowledge) and after the curing of all such Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Capital Securities Guarantee, and no implied covenants or obligations shall be read into this Capital Securities Guarantee against the Capital Securities Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6) and is actually known to a Responsible Officer of the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee shall exercise such of the rights and powers vested in it by this Capital Securities Guarantee, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Capital Securities Guarantee shall be construed to relieve the Capital Securities Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: 7 12 (i) prior to the occurrence of any Event of Default (of which, other than a default in respect of any Guarantee Payment, a Responsible Officer of the Property Trustee has actual knowledge) and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Capital Securities Guarantee Trustee shall be determined solely by the express provisions of this Capital Securities Guarantee, and the Capital Securities Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Capital Securities Guarantee, and no implied covenants or obligations shall be read into this Capital Securities Guarantee against the Capital Securities Guarantee Trustee; and (B) in the absence of bad faith on the part of the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Capital Securities Guarantee Trustee and conforming to the requirements of this Capital Securities Guarantee; provided, however, that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Capital Securities Guarantee Trustee, the Capital Securities Guarantee Trustee shall be under a duty to examine the same to determine whether or not on their face they conform to the requirements of this Capital Securities Guarantee; (ii) the Capital Securities Guarantee Trustee shall not be liable for any errors of judgment made in good faith by a Responsible Officer of the Capital Securities Guarantee Trustee, unless it shall be proved that the Capital Securities Guarantee Trustee or such Responsible Officer was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Capital Securities Guarantee Trustee shall not be liable with respect to any actions taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a Majority in Liquidation Amount of the Capital Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Capital Securities Guarantee Trustee, or exercising any trust or power conferred upon the Capital Securities Guarantee Trustee under this Capital Securities Guarantee; and (iv) no provision of this Capital Securities Guarantee shall require the Capital Securities Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Capital Securities Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Capital Securities Guarantee or indemnity, reasonably satisfactory to the Capital Securities Guarantee Trustee, against such risk or liability is not reasonably assured to it. 8 13 SECTION 3.2. Certain Rights of Capital Securities Guarantee Trustee (a) Subject to the provisions of Section 3.1: (i) the Capital Securities Guarantee Trustee may conclusively rely, and shall be fully protected in acting or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties; (ii) any direction or act of the Guarantor contemplated by this Capital Securities Guarantee may be sufficiently evidenced by an Officers' Certificate; (iii) whenever, in the administration of this Capital Securities Guarantee, the Capital Securities Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the Capital Securities Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and conclusively rely upon an Officers' Certificate, which, upon receipt of such request, shall be promptly delivered by the Guarantor; (iv) the Capital Securities Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument or other document (or any rerecording, refiling or registration thereof); (v) the Capital Securities Guarantee Trustee may consult with counsel of its selection, and the advice or opinion of such counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with such advice or opinion; and such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees; and the Capital Securities Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Capital Securities Guarantee from any court of competent jurisdiction; (vi) the Capital Securities Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Capital Securities Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Capital Securities Guarantee Trustee such security and indemnity, reasonably satisfactory to the Capital Securities Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the Capital Securities Guarantee Trustee's agents, nominees or custodians) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Capital Securities Guarantee Trustee, provided, however, that nothing contained in this Section 3.2(a)(vi) shall be taken to relieve the Capital Securities Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Capital Securities Guarantee; 9 14 (vii) the Capital Securities Guarantee Trustee shall have no obligation to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Capital Securities Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (viii) the Capital Securities Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, nominees, custodians or attorneys, and the Capital Securities Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any such person appointed with due care by it hereunder; (ix) any action taken by the Capital Securities Guarantee Trustee or its agents hereunder shall bind the Holders of the Capital Securities, and the signature of the Capital Securities Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action; and no third party shall be required to inquire as to the authority of the Capital Securities Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Capital Securities Guarantee, both of which shall be conclusively evidenced by the Capital Securities Guarantee Trustee's or its agent's taking such action; (x) whenever in the administration of this Capital Securities Guarantee the Capital Securities Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Capital Securities Guarantee Trustee (i) may request instructions from the Holders of a Majority in Liquidation Amount of the Capital Securities, (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received, and (iii) shall be protected in conclusively relying on or acting in accordance with such instructions; and (xi) the Capital Securities Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith, without negligence, and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Capital Securities Guarantee. (b) No provision of this Capital Securities Guarantee shall be deemed to impose any duty or obligation on the Capital Securities Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Capital Securities Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Capital Securities Guarantee Trustee shall be construed to be a duty. 10 15 SECTION 3.3. Not Responsible for Recitals or Issuance of Capital Securities Guarantee The recitals contained in this Capital Securities Guarantee shall be taken as the statements of the Guarantor, and the Capital Securities Guarantee Trustee does not assume any responsibility for their correctness. The Capital Securities Guarantee Trustee makes no representation as to the validity or sufficiency of this Capital Securities Guarantee. ARTICLE IV CAPITAL SECURITIES GUARANTEE TRUSTEE SECTION 4.1. Capital Securities Guarantee Trustee; Eligibility (a) There shall at all times be a Capital Securities Guarantee Trustee that shall (i) not be an Affiliate of the Guarantor; and (ii) be a corporation or other Person organized and doing business under the laws of the United States of America or any state or territory thereof or of the District of Columbia, or a corporation or other Person permitted by the Securities and Exchange Commission to act as an indenture trustee under the Trust Indenture Act, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000), and subject to supervision or examination by federal, state, territorial or District of Columbia authority; it being understood that if such corporation or other Person publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority referred to above, then, for the purposes of this Section 4.1(a)(ii) to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Capital Securities Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Capital Securities Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Capital Securities Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Capital Securities Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.2. Appointment, Removal and Resignation of Capital Securities Guarantee Trustee (a) Subject to Section 4.2(b), the Capital Securities Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during an Event of Default. 11 16 (b) The Capital Securities Guarantee Trustee shall not be removed in accordance with Section 4.2(a) until a Successor Capital Securities Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Capital Securities Guarantee Trustee and delivered to the Guarantor. (c) The Capital Securities Guarantee Trustee shall hold office until a Successor Capital Securities Guarantee Trustee shall have been appointed, subject to Section 4.1, or until its removal or resignation. The Capital Securities Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Capital Securities Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Capital Securities Guarantee Trustee has been appointed, subject to Section 4.1, and has accepted such appointment by instrument in writing executed by such Successor Capital Securities Guarantee Trustee and delivered to the Guarantor and the resigning Capital Securities Guarantee Trustee. (d) If no Successor Capital Securities Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 60 days after delivery of an instrument of removal or resignation, the Capital Securities Guarantee Trustee resigning or being removed may petition any court of competent jurisdiction for appointment of a Successor Capital Securities Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Capital Securities Guarantee Trustee. (e) No Capital Securities Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Capital Securities Guarantee Trustee. (f) Upon termination of this Capital Securities Guarantee or removal or resignation of the Capital Securities Guarantee Trustee pursuant to this Section 4.2, the Guarantor shall pay to the Capital Securities Guarantee Trustee all amounts due to the Capital Securities Guarantee Trustee accrued to the date of such termination, removal or resignation. ARTICLE V GUARANTEE SECTION 5.1. Guarantee The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim that the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 5.2. Waiver of Notice and Demand The Guarantor hereby waives notice of acceptance of this Capital Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right 12 17 to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3. Obligations Not Affected The obligations, covenants, agreements and duties of the Guarantor under this Capital Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Capital Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Capital Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Capital Securities; (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Capital Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Capital Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor; it being the intent of this Section 5.3 that the obligations of the Guarantor with respect to the Guarantee Payments shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4. Rights of Holders (a) The Holders of a Majority in Liquidation Amount of the Capital Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Capital Securities Guarantee Trustee in respect of this Capital Securities 13 18 Guarantee or exercising any trust or power conferred upon the Capital Securities Guarantee Trustee under this Capital Securities Guarantee. (b) If the Capital Securities Guarantee Trustee fails to enforce this Capital Securities Guarantee, any Holder of the Capital Securities may institute a legal proceeding directly against the Guarantor to enforce the Capital Securities Guarantee Trustee's rights under this Capital Securities Guarantee, without first instituting a legal proceeding against the Issuer, the Capital Securities Guarantee Trustee or any other person or entity. Notwithstanding the rights of the Capital Securities Guarantee Trustee to enforce this Guarantee Agreement, if the Guarantor has failed to make a Guarantee Payment, any Holder of the Capital Securities may directly institute a proceeding against the Guarantor for enforcement of this Capital Securities Guarantee for such payment, without first instituting a legal proceeding against the Issuer, the Capital Securities Guarantee Trustee or any other person or entity. The Guarantor waives any right or remedy to require that any action be brought first against the Issuer or any other person or entity before proceeding directly against the Guarantor. SECTION 5.5. Guarantee of Payment This Capital Securities Guarantee creates a guarantee of payment and not of collection. SECTION 5.6. Subrogation The Guarantor shall be subrogated to all (if any) rights of the Holders of Capital Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Capital Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any right that it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Capital Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this Capital Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7. Independent Obligations The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Capital Securities, and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Capital Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3 hereof. ARTICLE VI LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 6.1. Limitation of Transactions 14 19 So long as any Capital Securities remain outstanding, the Guarantor shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Guarantor's capital stock, (ii) make any payment of principal of, or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Guarantor (including Other Debentures) that rank pari passu with or junior in right of payment to the Debentures or (iii) make any guarantee payments with respect to any guarantee by the Guarantor of the debt securities of any subsidiary of the Guarantor (including Other Guarantees) if such guarantee ranks pari passu with or junior in right of payment to the Debentures (other than (a) dividends or distributions in shares of, or options, warrants, rights to subscribe for or purchase shares of, common stock of the Guarantor, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under this Capital Securities Guarantee, (d) as a result of a reclassification of the Guarantor's capital stock or the exchange or the conversion of one class or series of the Guarantor's capital stock for another class or series of the Guarantor's capital stock, (e) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of common stock related to the issuance of common stock or rights under any of the Guarantor's benefit or compensation plans for its directors, officers or employees or any of the Guarantor's dividend reinvestment plans) if at such time (l) there shall have occurred any event of which the Guarantor has actual knowledge that (A) is a Default or Event of Default (each as defined in the Indenture) and (B) in respect of which the Guarantor shall not have taken reasonable steps to cure, (2) the Debentures are held by the Property Trustee, the Guarantor shall be in default with respect to its payment of any obligations under this Capital Securities Guarantee or (3) the Guarantor shall have given notice of its election of the exercise of its right to commence an Extended Interest Payment Period as provided in the Indenture and shall not have rescinded such notice, and such Extended Interest Payment Period, or an extension thereof, shall have commenced and be continuing. SECTION 6.2. Ranking This Capital Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to all Allocable Amounts (as defined in the Indenture) in respect of Senior Indebtedness (as defined in the Indenture), to the same extent and in the same manner that the Debentures are subordinated to Senior Indebtedness pursuant to the Indenture, it being understood that the terms of Article XV of the Indenture shall apply to the obligations of the Guarantor under this Capital Securities Guarantee as if such Article XV were set forth herein in full, (ii) pari passu with the most senior preferred or preference stock now or hereafter issued by the Guarantor and with any Other Guarantee and, except to the extent set forth therein, the Common Securities Guarantee, any Other Common Securities Guarantee, and any guarantee now or hereafter entered into by the Guarantor in respect of any preferred or preference stock of any Affiliate of the Guarantor, and (iii) senior to the Guarantor's common stock. 15 20 ARTICLE VII TERMINATION SECTION 7.1. Termination This Capital Securities Guarantee shall terminate and be of no further force and effect upon (i) full payment of the Redemption Price of all Capital Securities, (ii) dissolution, winding up or liquidation of the Issuer, immediately following the full payment of the amounts payable in accordance with the Declaration, or (iii) the distribution of all of the Debentures to the Holders of the Trust Securities. Notwithstanding the foregoing, this Capital Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of Capital Securities must restore payment of any sums paid under the Capital Securities or under this Capital Securities Guarantee. ARTICLE VIII INDEMNIFICATION SECTION 8.1. Exculpation (a) No Indemnified Person shall be liable, responsible or accountable in damages or otherwise to the Guarantor or any Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted by such Indemnified Person in good faith in accordance with this Capital Securities Guarantee and in a manner that such Indemnified Person reasonably believed to be within the scope of the authority conferred on such Indemnified Person by this Capital Securities Guarantee or by law, except that an Indemnified Person shall be liable for any such loss, damage or claim incurred by reason of such Indemnified Person's negligence or willful misconduct with respect to such acts or omissions. (b) An Indemnified Person shall be fully protected in relying in good faith upon the records of the Guarantor and upon such information, opinions, reports or statements presented to the Guarantor by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Guarantor, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, profits, losses, or any other facts pertinent to the existence and amount of assets from which Distributions to Holders of Capital Securities might properly be paid. SECTION 8.2. Compensation and Indemnification The Guarantor agrees to pay to the Capital Securities Guarantee Trustee such compensation for its services as shall be mutually agreed upon by the Guarantor and the Capital Securities Guarantee Trustee. The Guarantor shall reimburse the Capital Securities Guarantee Trustee upon request for all reasonable out-of-pocket expenses incurred by it, including the reasonable compensation and expenses of the Capital Securities Guarantee Trustee's agents and counsel, except any expense as may be attributable to the negligence or bad faith of the Capital Securities Guarantee Trustee. 16 21 The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, action, suit, claim or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses (including reasonable legal fees and expenses) of defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The provisions of this Section 8.2 shall survive the termination of this Capital Securities Guarantee and shall survive the resignation or removal of the Capital Securities Guarantee Trustee. ARTICLE IX MISCELLANEOUS SECTION 9.1. Successors and Assigns All guarantees and agreements contained in this Capital Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Capital Securities then outstanding. SECTION 9.2. Amendments Except with respect to any changes that do not materially adversely affect the rights of Holders of the Capital Securities (in which case no consent of such Holders will be required), this Capital Securities Guarantee may only be amended with the prior approval of the Holders of a Majority in Liquidation Amount of the Capital Securities. The provisions of Section 12.2 of the Declaration with respect to meetings of Holders of the Trust Securities apply to the giving of such approval. This Capital Securities Guarantee may not be amended, and no amendment hereof that affects the Capital Securities Guarantee Trustee's rights, duties or immunities hereunder or otherwise, shall be effective, unless such amendment is executed by the Capital Securities Guarantee Trustee (which shall have no obligation to execute any such amendment, but may do so in its sole discretion). SECTION 9.3. Notices All notices provided for in this Capital Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by first class mail, as follows: (a) If given to the Issuer, in care of the Administrative Trustee at the Issuer's mailing address set forth below (or such other address as the Issuer may give notice of to the Capital Securities Guarantee Trustee and the Holders of the Capital Securities): 17 22 HFC Capital Trust I c/o Hawthorne Financial Corporation 2381 Rosecrans Avenue El Segundo, California 90245 Telephone: (310) 725-5000 Telecopier: (310) 643-8304 If given to the Capital Securities Guarantee Trustee, at the Capital Securities Guarantee Trustee's mailing address set forth below (or such other address as the Capital Securities Guarantee Trustee may give notice of to the Holders of the Capital Securities): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telephone: (302) 651-1000 Telecopier: (302) 651-8882 (b) If given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Capital Securities Guarantee Trustee and the Holders of the Capital Securities): Hawthorne Financial Corporation 2381 Rosecrans Avenue El Segundo, California 90245 Telephone: (310) 725-5000 Telecopier: (310) 643-8304 (c) If given to any Holder of the Capital Securities, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 9.4. Benefit This Capital Securities Guarantee is solely for the benefit of the Holders of the Capital Securities and, subject to Section 3.1(a), is not separately transferable from the Capital Securities. 18 23 SECTION 9.5. Governing Law THIS CAPITAL SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. 19 24 This Capital Securities Guarantee is executed as of the day and year first above written. HAWTHORNE FINANCIAL CORPORATION, as Guarantor By: ------------------------------------- Simone F. Lagomarsino President and Chief Executive Officer WILMINGTON TRUST COMPANY, as Capital Securities Guarantee Trustee By: ------------------------------------- NAME: TITLE: S-1 EX-4.13 12 a70896ex4-13.txt EXHIBIT 4.13 1 EXHIBIT 4.13 ======================================= COMMON SECURITIES GUARANTEE AGREEMENT HAWTHORNE FINANCIAL CORPORATION Dated as of March 28, 2001 ======================================= 2 TABLE OF CONTENTS
Page ARTICLE I DEFINITIONS AND INTERPRETATION ............................. 1 SECTION 1.1. Definitions and Interpretation ............... 1 ARTICLE II GUARANTEE ................................................. 3 SECTION 2.1. Guarantee .................................... 3 SECTION 2.2. Waiver of Notice and Demand .................. 3 SECTION 2.3. Obligations Not Affected ..................... 3 SECTION 2.4. Rights of Holders ............................ 4 SECTION 2.5. Guarantee of Payment ......................... 4 SECTION 2.6. Subrogation .................................. 4 SECTION 2.7. Independent Obligations ...................... 4 ARTICLE III LIMITATION OF TRANSACTIONS; SUBORDINATION ................ 5 SECTION 3.1. Limitation of Transactions ................... 5 SECTION 3.2. Ranking ...................................... 5 ARTICLE IV TERMINATION ............................................... 6 SECTION 4.1. Termination .................................. 6 ARTICLE V MISCELLANEOUS .............................................. 6 SECTION 5.1. Successors and Assigns ....................... 6 SECTION 5.2. Amendments ................................... 6 SECTION 5.3. Notices ...................................... 6 SECTION 5.4. Benefit ...................................... 7 SECTION 5.5. Governing Law ................................ 7
i 3 COMMON SECURITIES GUARANTEE AGREEMENT This COMMON SECURITIES GUARANTEE AGREEMENT (the "Common Securities Guarantee"), dated as of March 28, 2001, is executed and delivered by Hawthorne Financial Corporation, a Delaware corporation (the "Guarantor"), for the benefit of the Holders (as defined herein) from time to time of the Common Securities (as defined herein) of HFC Capital Trust I, a Delaware business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of March 28, 2001, by and among the Trustees of the Issuer named therein, the Guarantor, as sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing on the date hereof 300 common securities having an aggregate liquidation amount of Three Hundred Thousand Dollars ($300,000), to meet the capital requirements of the Trust; such common securities being designated the 10.18% Common Securities (the "Common Securities"). WHEREAS, as incentive for the Holders to purchase the Common Securities, the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth in this Common Securities Guarantee, to pay the Guarantee Payments (as defined herein) to the Holders of the Common Securities and to make certain other payments on the terms and conditions set forth herein; and WHEREAS, the Guarantor is also executing and delivering the Capital Securities Guarantee Agreement, dated as of March 28, 2001 (the "Capital Securities Guarantee"), for the benefit of the holders of the Capital Securities (as defined in the Declaration); it being understood that if an Event of Default (as defined in the Declaration) has occurred and is continuing, the rights of Holders of the Common Securities to receive Guarantee Payments under this Common Securities Guarantee are subordinated, to the extent and in the manner set forth herein, to the rights of holders of Capital Securities (as defined in the Declaration) to receive Guarantee Payments under the Capital Securities Guarantee. NOW, THEREFORE, in consideration of the purchase by each Holder of the Common Securities, which purchase the Guarantor hereby acknowledges shall benefit the Guarantor, the Guarantor executes and delivers this Common Securities Guarantee for the benefit of the Holders. ARTICLE I DEFINITIONS AND INTERPRETATION SECTION 1.1. Definitions and Interpretation In this Common Securities Guarantee, unless the context otherwise requires: 1 4 (a) capitalized terms used in this Common Securities Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) terms defined in the Declaration as in effect at the date of execution of this Common Securities Guarantee have the same meaning when used in this Common Securities Guarantee unless otherwise defined in this Common Securities Guarantee; (c) a term defined anywhere in this Common Securities Guarantee has the same meaning throughout; (d) all references to "the Common Securities Guarantee" or "this Common Securities Guarantee" are references to this Common Securities Guarantee, as modified, supplemented or amended from time to time; (e) all references in this Common Securities Guarantee to Articles and Sections are references to Articles and Sections of this Common Securities Guarantee unless otherwise specified; (f) a term defined in the Trust Indenture Act has the same meaning as in the Trust Indenture Act unless otherwise defined in this Common Securities Guarantee; and (g) a reference to the singular includes the plural and vice versa. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Common Securities, to the extent not paid or made by or on behalf of the Issuer: (i) any accumulated and unpaid Distributions (as defined in the Declaration) that are required to be paid on such Common Securities, to the extent the Issuer has funds legally available therefor at such time, (ii) the redemption price, including all accumulated and unpaid Distributions to the date of redemption (the "Redemption Price"), to the extent the Issuer has funds legally available therefor at such time, with respect to any Common Securities called for redemption, and (iii) upon a voluntary or involuntary dissolution, winding-up or liquidation of the Issuer (other than in connection with the distribution of Debentures (as defined in the Declaration) to the Holders in exchange for Common Securities or in connection with the redemption of the Common Securities, in each case as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accumulated and unpaid Distributions on the Common Securities to the date of payment, to the extent the Issuer has funds legally available therefor at such time, and (b) the amount of assets of the Issuer remaining available for distribution to the Holders after satisfaction of liabilities to creditors of the Issuer as required by applicable law (in either case, the "Liquidation Distribution"). If an Event of Default under the Declaration or the Capital Securities Guarantee has occurred and is continuing, no Guarantee Payments with respect to the Common Securities shall be made until holders of Capital Securities shall be paid in full the Guarantee Payments to which they are entitled under the Capital Securities Guarantee. "Holder" means any holder, as registered on the books and records of the Issuer, of any Common Securities. 2 5 "Other Guarantees" means all guarantees, other than this Common Securities Guarantee, to be issued by the Guarantor with respect to common securities (if any) similar to the Common Securities issued by trusts other than the Issuer to be established by the Guarantor (if any), in each case similar to the Issuer. ARTICLE II GUARANTEE SECTION 2.1. Guarantee The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim which the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 2.2. Waiver of Notice and Demand The Guarantor hereby waives notice of acceptance of this Common Securities Guarantee and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 2.3. Obligations Not Affected The obligations, covenants, agreements and duties of the Guarantor under this Common Securities Guarantee shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Common Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Common Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Common Securities; (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Common Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, 3 6 reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Common Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor; it being the intent of this Section 2.3 that the obligations of the Guarantor with respect to the Guarantee Payments shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 2.4. Rights of Holders The Guarantor expressly acknowledges that any Holder of the Common Securities may institute a legal proceeding directly against the Guarantor to enforce its rights under this Common Securities Guarantee, without first instituting a legal proceeding against the Issuer or any other Person. SECTION 2.5. Guarantee of Payment This Common Securities Guarantee creates a guarantee of payment and not of collection. SECTION 2.6. Subrogation The Guarantor shall be subrogated to all (if any) rights of the Holders of the Common Securities against the Issuer in respect of any amounts paid to such Holders by the Guarantor under this Common Securities Guarantee; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Common Securities Guarantee, if, at the time of any such payment, any amounts are due and unpaid under this Common Securities Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 2.7. Independent Obligations The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Common Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee 4 7 Payments pursuant to the terms of this Common Securities Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 2.3 hereof. ARTICLE III LIMITATION OF TRANSACTIONS; SUBORDINATION SECTION 3.1. Limitation of Transactions So long as any Common Securities remain outstanding, the Guarantor will not (i) declare or pay any dividends or distribution on, or redeem, purchase, acquire or make a liquidation payment with respect to any of the Guarantor's capital stock, (ii) make any payment of principal of, or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Guarantor (including Other Debentures, as defined in the Indenture) that rank pari passu with or junior in right of payment to the Debentures or (iii) make any guarantee payments with respect to any guarantee by the Guarantor of the debt securities of any subsidiary of the Guarantor (including Other Guarantees, as defined in the Indenture) if such guarantee ranks pari passu with or junior in right of payment to the Debentures (other than (a) dividends or distributions in shares of, or options, warrants or rights to subscribe for or purchase shares of, common stock of the Guarantor, (b) any declaration of a dividend in connection with the implementation of a stockholders' rights plan, or the issuance of stock under any such plan in the future, or the redemption or repurchase of any such rights pursuant thereto, (c) payments under the Capital Securities Guarantee, (d) as a result of a reclassification of the Guarantor's capital stock or the exchange or the conversion of one class or series of the Guarantor's capital stock for another class or series of the Guarantor's capital stock, (e) the purchase of fractional interests in shares of the Guarantor's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, and (f) purchases of common stock related to the issuance of common stock or rights under any of the Guarantor's benefit or compensation plans for its directors, officers or employees or any of the Guarantor's dividend reinvestment plans) if at such time (1) there shall have occurred any event of which the Guarantor has actual knowledge that (A) is, or with the giving of notice or the lapse of time, or both, would be, an Event of Default and (B) in respect of which the Guarantor shall not have taken reasonable steps to cure, (2) such Debentures are held by the Property Trustee, the Guarantor shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee or (3) the Guarantor shall have given notice of its election of the exercise of its right to commence an Extended Interest Payment Period as provided in the Indenture and shall not have rescinded such notice, and such Extended Interest Payment Period, or an extension thereof, shall have commenced and be continuing. SECTION 3.2. Ranking This Common Securities Guarantee will constitute an unsecured obligation of the Guarantor and will rank (i) subordinate and junior in right of payment to all Allocable Amounts (as defined in the Indenture) in respect of Senior Indebtedness (as defined in the Indenture), to the same extent and in the same manner that the Debentures 5 8 are subordinated to the Senior Indebtedness pursuant to the Indenture, it being understood that the terms of Article XV of the Indenture shall apply to the obligations of the Guarantor under this Common Securities Guarantee as if such Article XV were set forth herein in full, (ii) pari passu with the most senior preferred or preference stock now or hereafter issued by the Guarantor and with any Other Guarantee and, except as set forth herein or therein, the Capital Securities Guarantee and any guarantee now or hereafter entered into by the Guarantor in respect of any preferred or preference stock of any Affiliate of the Guarantor and (iii) senior to the Guarantor's common stock. ARTICLE IV TERMINATION SECTION 4.1. Termination This Common Securities Guarantee shall terminate and be of no further force or effect upon (i) full payment of the Redemption Price of all Common Securities, (ii) the dissolution, winding-up or liquidation of the Issuer, immediately following the full payment of the amounts payable in accordance with the Declaration, or (iii) the distribution of all of the Debentures to the Holders of the Trust Securities (as defined in the Declaration). Notwithstanding the foregoing, this Common Securities Guarantee will continue to be effective or will be reinstated, as the case may be, if at any time any Holder of the Common Securities must restore payment of any sums paid under the Common Securities or under this Common Securities Guarantee. ARTICLE V MISCELLANEOUS SECTION 5.1. Successors and Assigns All guarantees and agreements contained in this Common Securities Guarantee shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Common Securities then outstanding. SECTION 5.2. Amendments Except with respect to any changes which do not adversely affect in any material respect the rights of the Holders (in which case no consent of the Holders will be required), this Common Securities Guarantee may only be amended with the prior approval of the Holders of a majority in liquidation amount of all the outstanding Common Securities. The provisions of Section 12.2 of the Declaration with respect to meetings of Holders of the Trust Securities apply to the giving of such approval. SECTION 5.3. Notices 6 9 All notices provided for in this Common Securities Guarantee shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail, as follows: (a) if given to the Issuer, in care of the Administrative Trustee at the Issuer's mailing address set forth below (or such other address as the Issuer may give notice of to the Holders of the Common Securities): HFC Capital Trust I c/o Hawthorne Financial Corporation 2381 Rosecrans Avenue El Segundo, California 90245 Telephone: (310) 725-5000 Telecopier: (310) 643-8304 (b) if given to the Guarantor, at the Guarantor's mailing address set forth below (or such other address as the Guarantor may give notice of to the Holders of the Common Securities): Hawthorne Financial Corporation 2381 Rosecrans Avenue El Segundo, California 90245 Telephone: (310) 725-5000 Telecopier: (310) 643-8304 (c) if given to any Holder of the Common Securities, at the address set forth on the books and records of the Issuer. All such notices shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. SECTION 5.4. Benefit This Common Securities Guarantee is solely for the benefit of the Holders of the Common Securities and is not separately transferrable from the Common Securities. SECTION 5.5. Governing Law THIS COMMON SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES THEREOF. 7 10 This Common Securities Guarantee is executed as of the day and year first above written. HAWTHORNE FINANCIAL CORPORATION, As Guarantor By: ------------------------------------- Simone F. Lagomarsino President and Chief Executive Officer S-1 EX-4.14 13 a70896ex4-14.txt EXHIBIT 4.14 1 EXHIBIT 4.14 DEBENTURE SUBSCRIPTION AGREEMENT DEBENTURE SUBSCRIPTION AGREEMENT, dated as of March 28, 2001 (this "Agreement"), between Hawthorne Financial Corporation, a Delaware corporation (the "Company"), and HFC Capital Trust I, a statutory business trust created under the laws of the State of Delaware (the "Trust"), relating to the 10.18% Junior Subordinated Deferrable Interest Debentures due June 8, 2031, (the "Junior Subordinated Debentures"), issuable pursuant to an Indenture, dated as of March 28, 2001 (the "Indenture"), between the Company and Wilmington Trust Company, as Debenture Trustee. Capitalized terms used herein and not otherwise defined herein have the respective meanings ascribed thereto in the Subscription Agreement (as defined below). WHEREAS, the Company, the Trust and the Purchaser named therein have entered into a Capital Securities Subscription Agreement, dated March 21, 2001 (the "Subscription Agreement"), in connection with the issuance and sale of 10.18% MMCapS(SM) (liquidation amount of $1,000 per security) (the "Capital Securities") by the Trust; and WHEREAS, the Company and the Trust have entered into a Common Securities Subscription Agreement, dated March 28, 2001, in connection with the issuance and sale of 10.18% Common Securities (liquidation amount of $1,000 per security) (the "Common Securities") by the Trust; and WHEREAS, in connection with the Subscription Agreement and the Common Securities Subscription Agreement and the issuance and sale of the Capital Securities and Common Securities pursuant thereto, the Trust desires to purchase from the Company, and the Company desires to sell to the Trust, all of the Junior Subordinated Debentures. NOW, THEREFORE, in consideration of the foregoing premises and the conditions and agreements hereinafter set forth, the parties hereto agree as follows: 1. The Trust hereby offers to purchase from the Company, and the Company hereby accepts such offer and agrees to issue and sell to the Trust, contemporaneous with the Closing Time, Nine Million Three Hundred Thousand Dollars ($9,300,000) aggregate principal amount of Junior Subordinated Debentures, in consideration of the payment on or before the date hereof of Nine Million Three Hundred Thousand Dollars ($9,300,000) in immediately available funds. 2. The Company represents and warrants that the Junior Subordinated Debentures have been duly authorized and executed by the Company, and, when duly authenticated and delivered to the Trust in accordance with the terms hereof, will constitute the valid and binding obligations of the Company entitled to the benefits of the Indenture, enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting 2 creditors' rights generally or by general principles of equity (regardless of whether considered in a proceeding in equity or at law). 2 3 3. This Agreement shall be deemed to be a contract made under the laws of the State of New York, and for all purposes shall be governed by, and construed in accordance with, the laws of the State of New York without regard to conflict of law principles. 4. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Debenture Subscription Agreement to be duly executed as of the date first written above. HAWTHORNE FINANCIAL CORPORATION By: ------------------------------------- Simone F. Lagomarsino President and Chief Executive Officer HFC CAPITAL TRUST I By: ------------------------------------- Simone F. Lagomarsino Administrative Trustee By: ------------------------------------- Karen Abajian Administrative Trustee By: ------------------------------------- Eileen Lyon Administrative Trustee 3 EX-10.6 14 a70896ex10-6.txt EXHIBIT 10.6 1 EXHIBIT 10.06 HAWTHORNE SAVINGS, F.S.B. DEFERRED COMPENSATION PLAN Effective As of October 1, 2000 2 TABLE OF CONTENTS Page Article I. Purpose........................................................1 1.1 Establishment of the Plan......................................1 1.2 Purpose of the Plan............................................1 Article II. Definitions....................................................1 2.1 Definitions....................................................1 Article III. Administration ...............................................2 3.1 Committee......................................................2 3.2 Authority of the Committee.....................................2 3.3 Authority of Board.............................................2 3.4 Liability of Board and Committee Members.......................2 Article IV. Participants...................................................3 4.1 Participants...................................................3 Article V. Deferrals......................................................3 5.1 Deferrals......................................................3 5.2 Election of Form and Time of Payment...........................4 5.3 Modification of Prior Election: Acceleration of Payment Date ..................................4 5.4 Modification of Prior Election: Deferral of Payment Date or Change in Form of Payment..........5 Article VI. Deferral Accounts..............................................5 6.1 Accounts.......................................................5 6.2 Credits and Adjustments........................................5 Article VII. General Provisions.............................................6 7.1 Unfunded Obligation............................................6 7.2 Informal Funding Vehicles to Facilitate Payment................6 7.3 Status of Participants.........................................6 7.4 Beneficiary....................................................6 7.5 Incapacity of Participant or Beneficiary.......................7 7.6 Nonassignment..................................................7 7.7 No Right to Continued Employment...............................7 7.8 Tax Withholding................................................7 7.9 Claims Procedure...............................................7 7.10 Amendment, Suspension and Termination of Plan..................8 7.11 Applicable Law.................................................8 i 3 HAWTHORNE SAVINGS, F.S.B. DEFERRED COMPENSATION PLAN ARTICLE I. PURPOSE 1.1 Establishment of the Plan. Effective as of October 1, 2000, Hawthorne Savings, F.S.B. (the "Company") hereby establishes the Hawthorne Savings, F.S.B. Deferred Compensation Plan (the "Plan"), as set forth herein. 1.2 Purpose of the Plan. The purpose of the Plan is to permit a select group of management or highly compensated employees of the Company to defer payment of a portion of their current compensation. The Plan is unfunded and is intended to be exempt from the participation, vesting, funding, and fiduciary requirements set forth in Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ARTICLE II. DEFINITIONS 2.1 Definitions. The following definitions are in addition to any other definitions set forth elsewhere in the Plan. Whenever used in the Plan, capitalized terms shall have the meanings set forth below unless otherwise required by the context in which they are used: (a) "Cash Incentive Compensation" means all forms of cash compensation other than base salary and sign-on bonuses. (b) "Code" means the Internal Revenue Code of 1986, as amended. (c) "Deferral Account" means the account established pursuant to Article VI to reflect a Participant's deferred compensation and adjustments thereto. (d) "Participant" means any officer of the Company who meets the eligibility requirements of the Plan, as set forth in Article IV, and includes, where appropriate to the context, any former officer who is entitled to benefits under this Plan. (e) "Plan Year" means the calendar year, except that the initial Plan Year shall commence on October 1, 2000, and end on December 31, 2000. (f) "Unforeseeable Emergency" means a severe financial hardship to a Participant resulting from a sudden and unexpected illness or accident of the Participant or the Participant's dependent (as defined in Section 152(a) of the Code), loss of the Participant's property due to casualty or similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Participant. 4 (g) "Valuation Date" means the last day of each calendar month and any other date designated as such by the Committee. ARTICLE III. ADMINISTRATION 3.1 Committee. The Plan shall be administered by the Compensation Committee (the "Committee") of the Company's board of directors (the "Board"), which shall consist of not fewer than two members of the Board. The Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee. 3.2 Authority of the Committee. The Committee shall have absolute authority in its discretion, to the maximum extent permissible by law, subject to and not inconsistent with the express provisions of the Plan, to interpret and administer the Plan and to make all determinations thereunder, including determinations as to eligibility and as to the amount and timing of benefit payments. In exercising its authority, subject only to applicable legal limitations, the Committee shall be under no obligation or duty to treat similarly situated Participants in the same manner, and any action taken by the Committee with respect to one Participant shall in no way obligate the Committee to take the same or similar action with respect to any other Participant. The Committee may adopt such rules as it deems necessary or advisable in order to carry out the purpose of the Plan. All questions of interpretation, administration and application of the Plan shall be determined by a majority of the members of the Committee then in office, except that the Committee may authorize any one or more of its members, or any officer of the Company, to execute and deliver documents on behalf of the Committee. Any interpretation or determination made by the Committee shall be conclusive and binding upon any person having or claiming any interest under the Plan and, in the event of judicial review, shall be entitled to the maximum deference allowable by law. 3.3 Authority of Board. Notwithstanding the foregoing, if the Board does not appoint a Committee, the Board shall have all of the authority of and fulfill all of the functions of the Committee hereunder. If the Board does appoint a Committee, the Board may still reserve certain authority and responsibility to itself with respect to the Plan. To the extent necessary to be consistent with the provisions of this Section 3.3, any reference in the Plan to a decision, determination or action of the Committee shall be read and understood as referring to a decision, determination or action of the Board. 3.4 Liability of Board and Committee Members. Except as otherwise required by law, no member of the Board or Committee shall be liable for anything whatsoever in connection with the administration of the Plan other than such member's own willful misconduct. In the performance of its functions with respect to the Plan, the Board and Committee shall be entitled to rely upon information and advice furnished by the Company's officers, accountants, legal counsel and any other party the Board and Committee deems necessary, and no member of the Board or Committee shall be liable for any action taken or not taken in reliance upon any such advice. 2 5 ARTICLE IV. PARTICIPANTS 4.1 Participants. Each officer of the Company having the title of senior vice-president or a more senior title (a "Participant") shall automatically be eligible to participate in the Plan. ARTICLE V. DEFERRALS 5.1 Deferrals. A Participant may elect to defer receipt of a portion of his or her base salary and Cash Incentive Compensation (collectively, "Compensation") for the Plan Year. An election to defer Compensation shall be made in writing prior to the first day of the Plan Year to which it applies, except that with respect to the first Plan Year in which an officer becomes eligible to participate in the Plan, the election must be made no later than thirty (30) days after the date on which the officer is first notified by the Committee of his or her eligibility to participate in the Plan. All deferral elections shall be subject to the following rules: a. An election may defer a whole percentage of the Participant's base salary, and/or a whole percentage of the Participant's Cash Incentive Compensation (which percentages need not be the same). Moreover, a deferral election with respect to Cash Incentive Compensation may specify that the Cash Incentive Compensation to be deferred for the Plan Year (i) shall not exceed a stated dollar amount and/or (ii) shall not be less than a stated minimum dollar amount (but not more than one hundred percent (100%) of the Cash Incentive Compensation). Amounts deferred from a Participant's base salary shall reduce the Participant's base salary in equal installments for each pay period during the Plan Year (or portion thereof) to which the election applies. Amounts deferred from a Participant's Cash Incentive Compensation shall reduce the Participant's Cash Incentive Compensation for the Plan Year on the date such Cash Incentive Compensation would otherwise be paid to the Participant (which, in the case of discretionary annual cash bonuses, is generally within forty five (45) days following the end of the Plan Year). b. An election shall be irrevocable with respect to all Compensation payable for services performed by the Participant during the Plan Year following the date on which the election is received by the Committee, except that a Participant may terminate an election to defer Compensation if the Committee determines that the termination is necessary as a result of an Unforeseeable Emergency. c. While an election to defer Compensation shall relate solely to the Plan Year for which it is made, nonetheless, unless the Participant files a new election form on a timely basis for a subsequent Plan Year, a Participant's election form in effect for a Plan Year shall automatically renew and become applicable to the next following Plan Year. 3 6 5.2 Election of Form and Time of Payment. (a) At the time that a Participant makes a deferral election pursuant to Section 5.1 the Participant shall also designate on the Participant's deferral election form (i) the form in which the deferred amount for such Plan Year (and earnings thereon) is to be paid by the Company; and (ii) the time at which the deferred amount for such Plan Year (and earnings thereon) is to be paid by the Company. (b) The available forms of payment under the Plan are: (i) a single lump sum payment; (ii) annual installments over a period of five (5) years; and (iii) annual installments over ten (10) years. (c) A Participant may designate (i) that payment is to be made upon the Participant's attainment of a particular age; (ii) that payment is to be made upon the Participant's termination of employment for any reason; or (iii) that payment is to be made upon the Participant's attainment of a particular age, but not prior to the Participant's termination of employment. Subject to paragraphs (d) and (e), payment shall be made (or, in the case of an installments, commence) in accordance with the Participant's election, as soon as practicable following the date designated by the Participant. (d) Notwithstanding any election made by a Participant pursuant to this Section 5.2, in the event that a Participant's employment terminates prior to the Participant's attainment of age sixty (60), the Participant's entire Deferral Account balance shall be paid in a single lump sum as soon as practicable following the Participant's termination of employment. (e) Notwithstanding the foregoing, in the event that the Committee determines that payment of an amount at the time elected by the Participant would result in all or a portion thereof not being deductible for federal income tax purposes, pursuant to Section 162(m) of the Code, the Committee, in its sole discretion, may defer the payment (or a portion thereof) until the earliest year in which the payment (or the portion) is fully deductible. (f) Any election of a specified payment form or date pursuant to this Section 5.2 shall be subject to any restrictions that the Committee may, in its sole discretion, choose to establish in order to limit the number of different payment forms or dates that a Participant may have in effect at one time. (g) Except as otherwise provided in Sections 5.3 and 5.4, all elections of forms and times of payment are irrevocable thirty (30) days after they are made. 5.3 Modification of Prior Election: Acceleration of Payment Date. (a) In the event of an Unforeseeable Emergency, the Committee, in its sole discretion, may allow a Participant to accelerate payment hereunder and receive an amount which, under the original election form filed by the Participant, would not be payable until a future date, but only to the extent necessary to prevent severe financial hardship. Such action shall be taken only if the Participant submits an application describing the circumstances which the Participant believes justify the payment and the amount necessary to prevent severe financial hardship, together with such supporting evidence as the Committee may reasonably require. 4 7 Payment may not be made under this paragraph (a) to the extent that the Participant's hardship is or may be relieved (i) through reimbursement or compensation by insurance or otherwise; (ii) by liquidation of the Participant's assets, to the extent that this would not in itself cause severe financial hardship; or (iii) by the termination of the Participant's election to defer the payment of compensation hereunder. (b) A Participant may at any time change a prior election and elect to accelerate payment hereunder by giving prior written notice thereof to the Committee; provided, however, that any such election change shall result in a reduction in the Participant's Deferral Account by ten percent (10%) of the amount with respect to which the election change is being made, determined as of the date of the election change. 5.4 Modification of Prior Election: Deferral of Payment Date or Change in Form of Payment. A Participant may at any time change a prior election and elect to (i) delay the date on which payment is to be made (or, in the case of installments, commence) or (ii) change the form in which payment is to be made, by giving prior written notice thereof to the Committee; provided, however, that any such election change shall not be effective unless it is made no less than one year prior to the date on which payment would otherwise have been made (or commenced), absent the election change. ARTICLE VI. DEFERRAL ACCOUNTS 6.1 Accounts. The Committee shall establish and maintain a Deferral Account in the name of each Participant to record the deferred compensation payable to the Participant hereunder, and shall, if applicable, establish and maintain subaccounts for each deferral election of each Participant that could cause a payment to be made at a different time or form from other payments of deferrals elected by the same Participant. A Participant's Deferral Account shall be for bookkeeping purposes only and shall not be deemed to create a fund or trust for the benefit of any Participant. A Participant's Deferral Account shall be fully and immediately vested. 6.2 Credits and Adjustments. Each Participant's Deferral Account shall periodically be adjusted as follows: (a) Amounts deferred by a Participant pursuant to Article V shall be credited to the Participant's Deferral Account as of the dates as of which they are applied to reduce the Participant's current Compensation. (b) As of each Valuation Date, a Participant's Deferral Account balance shall be credited with interest at a rate equal to the interest rate on 10-year Treasury notes, as in effect on the last date of the calendar year quarter immediately preceding the calendar year quarter in which occurs such Valuation Date, plus two and one-half percent (2.5%). (c) As of the date of any distribution to a Participant, a Participant's Deferral Account shall be reduced by the amount of the distribution and, if applicable, by the amount of any penalty imposed pursuant to Section 5.3(b). 5 8 (d) Payment of Deferred Amounts. A Participant's Deferral Account shall be paid by the Company to the Participant in accordance with the Participant's deferral elections, but subject to the provisions of Section 5.2. If such payment is to be made in the form of a lump sum, it shall be in an amount equal to the balance of the Deferral Account (or the subaccount) being paid, determined as of the Valuation Date coincident with or immediately preceding the payment date. If the payment is to be made in the form of installments, the amount of each installment payment shall be equal to the quotient determined by dividing (i) the value of the portion of the Deferral Account (or the subaccount) to which the installment payment election applies, determined as of the Valuation Date coincident with or immediately preceding the date the payment is to be made, by (ii) the number of years over which the installment payments are to be made, less the number of years in which prior payments attributable to such installment payment election have been made. ARTICLE VII. GENERAL PROVISIONS 7.1 Unfunded Obligation. Deferred amounts to be paid to Participants pursuant to the Plan shall constitute unfunded obligations of the Company. The Deferral Accounts provided by the Plan are for accounting purposes only and shall not be funded by a trust or by any segregated assets. 7.2 Informal Funding Vehicles to Facilitate Payment. The Company may, but need not, arrange for the purchase of insurance contracts or other assets and may, but need not, establish a so-called "rabbi trust" or other informal funding vehicle to facilitate the payment of benefits and to discharge the liability of the Company under the Plan. The making of any such investments and/or the creation or maintenance of memorandum accounts or a rabbi trust or other informal funding vehicles shall not, however, be deemed to create a trust or a fiduciary relationship between the Committee or the Company and a Participant or otherwise confer on any Participant or his or her creditors a vested or beneficial interest in any assets of the Company whatsoever. Participants have no claim against the Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the Plan. 7.3 Status of Participants. Each Participant shall be a general unsecured creditor of the Company with respect to amounts payable hereunder, the Plan constituting a mere promise by the Company to make benefit payments in the future. 7.4 Beneficiary. For purposes hereof a "Beneficiary" shall mean the person or persons to whom payments are to be paid pursuant to the terms of the Plan in the event of a Participant's death. A Participant may designate a Beneficiary on a form provided by the Committee, executed by the Participant, and delivered to the Committee; provided, however, that if a married Participant designates a Beneficiary other than the Participant's spouse, the designation shall be valid only if consented to, in a notarized writing, by the Participant's spouse. Subject to the foregoing, a Participant may change a Beneficiary designation at any time. Subject to the property rights of any prior spouse, if no Beneficiary is designated, if the designation is ineffective, or if the Beneficiary dies before the balance of the Account is paid, the 6 9 balance shall be paid to the Participant's surviving spouse, or if there is no surviving spouse, to the Participant's estate. 7.5 Incapacity of Participant or Beneficiary. Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of age until the date on which the Committee receives a written notice, in a form and manner acceptable to the Committee, that such person is incompetent or a minor, for whom a guardian or other person legally vested with the care of his person or estate has been appointed; provided, however, that if the Committee finds that any person to whom a benefit is payable under the Plan is unable to care for his or her affairs because of incompetency, or because he or she is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent, a brother or sister, or to any person or institution considered by the Committee to have incurred expense for such person or otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under the Plan. If a guardian of the estate of any person receiving or claiming benefits under the Plan is appointed by a court of competent jurisdiction, benefit payments may be made to such guardian provided that proper proof of appointment and continuing qualification is furnished in a form and manner acceptable to the Committee. In the event a person claiming or receiving benefits under the Plan is a minor, payment may be made to the custodian of an account for such person under the Uniform Gifts to Minors Act. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor under the Plan. 7.6 Nonassignment. The right of a Participant to the payment of any amounts under the Plan may not be assigned, transferred, pledged or encumbered nor shall such right or other interests be subject to attachment, garnishment, execution, or other legal process. 7.7 No Right to Continued Employment. Nothing in the Plan shall be construed to confer upon any Participant any right to continued employment with the Company, nor shall the Plan interfere in any way with the right of the Company to terminate the employment of any Participant at any time without assigning any reason therefor. 7.8 Tax Withholding. Appropriate taxes shall be withheld from cash payments made to Participants pursuant to the Plan. To the extent tax withholding is payable in connection with the Participant's deferral of income, rather than in connection with the payment of deferred amounts, such withholding may be made from other wages and salary currently payable to the Participant, or, as determined by the Committee, the amount of the deferral elected by the Participant may be reduced in order to satisfy required tax withholding for employment taxes and any other taxes. 7.9 Claims Procedure. (a) If a claim for benefits is denied, the Committee shall furnish to the claimant within ninety (90) days after its receipt of the claim (or within one hundred eighty (180) days after such receipt if special circumstances require an extension of time) a written notice which (i) specifies the reasons for the denial; (ii) refers to the pertinent provisions of the Plan on which the denial is based; (iii) describes any additional material or information necessary for the 7 10 perfection of the claim and explains why such material or information is necessary; and (iv) explains the claims review procedures. (b) Upon the written request of the claimant submitted within sixty (60) days after his or her receipt of such written notice, the Committee shall afford the claimant a full and fair review of the decision deny the claim and, if so requested, permit the claimant to review any documents which are pertinent to the claim, permit the claimant to submit issues and comments in writing and afford the claimant an opportunity to meet with appropriate representatives of the Committee as a part of the review procedure. Within sixty (60) days after its receipt of a request for review (or within one hundred twenty (120) days after such receipt if special circumstances, such as the need to hold a hearing, require an extension of time) the Committee shall notify the claimant in writing of its decision and the reasons for its decision and shall refer the claimant to the provisions of the Plan which form the basis for its decision. 7.10 Amendment, Suspension and Termination of Plan. The Company may from time to time amend, suspend or terminate the Plan, in whole or in part. Without limiting the foregoing, any amendment, suspension, or termination of the Plan may, without the consent of any Participant, (i) affect a Participant's ability to make future deferrals; and (ii) on a prospective basis, affect the rate at which interest is credited to a Participant's existing Deferral Account under Section 6.2. Notwithstanding the foregoing, no amendment, suspension or termination of the Plan may, without the consent of the affected Participant, impair the right of a Participant to receive his or her existing Deferral Account balance in accordance with the terms of the Plan prior to the effective date of such amendment, suspension or termination; provided, however, that upon a termination of the Plan, the Company may provide for the accelerated distribution of Deferral Account balances. 7.11 Applicable Law. To the extent not preempted by federal law, the Plan shall be construed and governed in accordance with the internal laws of the State of California. IN WITNESS WHEREOF, the Company has caused this Plan to be executed this the 5th day of October, 2000. HAWTHORNE SAVINGS, F.S.B. By: /S/ Simone Lagomarsino ---------------------- 8 EX-10.7 15 a70896ex10-7.txt EXHIBIT 10.7 1 EXHIBIT 10.7 DEFERRED COMPENSATION LOAN AGREEMENT This Agreement is entered into between Hawthorne Financial Corporation (the "Company") and Karen Abajian ("Executive") as of July 12, 2000. RECITALS A. Executive is currently employed as the Company's Executive Vice President and Chief Financial Officer. B. Prior to her employment with the Company, Executive was a participant in a deferred compensation plan at Imperial Bank ("Imperial"). C. As a result of Executive's resignation from Imperial, Executive (1) was required to recognize $417,705.64 in deferred compensation and (2) lost the opportunity to receive a corporate matching contribution of $40,832.65 from Imperial. D. As a material inducement to Executive to become employed by the Company, the Company agreed to reimburse Executive for additional income and employment tax liabilities she would recognize as a result of the accelerated deferred compensation and to pay Executive the amount of the matching contribution which she did not receive, provided that Executive continues to be employed by the Company. E. The Company proposes to loan Executive the amount necessary to cover the lost matching contribution and Executive's state and federal income tax liabilities with respect to the early recognition of deferred compensation and the matching contribution. F. Executive, together with her spouse, is a resident of the state of California and is currently subject to taxation at the top marginal rates for California and federal income tax purposes. NOW, THEREFORE, the parties agree as follows: 1. Loan for Lost Matching Contribution and Tax Liabilities. The Company shall make a loan (the "Loan") to Executive in the principal amount of $227,627.43, with interest at the "applicable Federal rate" (as defined in Section 1274(d) of the Internal Revenue Code) compounded semiannually, to cover Executive's lost matching contribution from Imperial and Executive's state and federal tax liabilities with respect to the early recognition of deferred compensation and the matching contribution, on the terms and conditions set forth in this Agreement. 2. Maturity of Loan. The remaining balance of the Loan, principal and interest, shall become immediately due and payable on the earliest of (a) the date Executive resigns her employment with the Company, (b) the date Executive's employment is terminated for "cause" as defined herein, or (c) the third anniversary of the date hereof. The Company shall be deemed to have terminated the employment of Executive "for cause" if, but only if, such termination (x) shall result from (i) Executive's continued and 1 2 willful failure or refusal to substantially perform her duties in accordance with the terms of the Agreement, (ii) any act or omission by Executive constituting gross negligence or willful misconduct that is materially injurious to the Company, or (iii) Executive's commission of a felony or a serious misdemeanor or any act or omission involving dishonesty, disloyalty or fraud with respect to the Company, its customers or suppliers and (y) shall have been approved by 66.66% of the Board of Directors of the Company. No termination shall be considered to result from Executive's continued and willful failure or refusal to substantially perform her duties in accordance with the terms of the Agreement, unless Executive first shall have received written notice from the Company specifying the acts or omissions alleged to constitute such failure or refusal and such failure or refusal continues after Executive shall have had reasonable opportunity to correct the same. 3. Loan Forgiveness a. One-third (1/3) of the original principal amount of the Loan and all interest then accrued on the Loan shall be forgiven and cancelled, automatically and without action on the part of the Company or its Board of Directors, on each of April 3, 2001, April 3, 2002 and April 3, 2003, provided that Executive remains employed by the Company through that date. b. The full remaining balance of the Loan, principal and interest, shall, automatically and without action on the part of the Company or its Board of Directors, be forgiven and cancelled upon the occurrence of any of the following events: i. Company's termination of Executive for any reason other than for "cause" as defined herein, or ii. Executive's death or disability. The term "disability" shall mean a medically determinable physical or mental incapacity of Executive rendering her incapable of reporting to work or unable to perform the essential functions of her job for a period expected to continue for at least twelve (12) consecutive months or result in death, as established to the reasonable satisfaction of the Company's Board of Directors. 4. Tax Gross-Up Payment. a. For each year that all or a portion of the Loan is forgiven or an additional payment is made under this subsection 4a, the Company shall pay to Executive an additional payment (a "Gross-Up Payment") in an amount equal to the federal and state income and employment taxes due as a result of such forgiveness and cancellation. Each Gross-Up Payment shall be made in two installments. The first installment shall be in the amount of federal and state income and employment taxes required to be withheld from Executive at the time of the Loan forgiveness and/or Gross-Up Payment, and shall be paid to the applicable withholding tax collection agencies within the time periods prescribed by law. The second installment shall be paid to Executive on or before the later of (i) April 1 of the calendar year following the calendar year in which the applicable forgiveness or payment occurs or (ii) thirty (30) days following the date 2 3 on which the tax return information for such calendar year is provided to the Company as set forth in subsection c below. The second installment for the last year in which a Gross-Up Payment is made with respect to Loan forgiveness shall be adjusted to take into account the future tax effects of such Gross-Up Payment, and no Gross-Up Payment shall be made for any subsequent year. b. The Company shall have the right to deduct or otherwise effect withholding from the Gross-Up Payment, or from any other compensation payable to Executive, of any income or employment tax or other amount required by federal or state tax laws to be withheld with respect to forgiveness of the Loan or the making of the Gross-Up Payment. c. The amount of the state and federal income taxes to be included in the Gross-Up Payment shall be calculated by Executive's tax return preparer for each of the years in question, subject to review and approval by the Company. The Company shall provide to Executive and her tax return preparer a pro forma Form W-2 for each such year indicating what executive's income and withholding amounts would have been if no Loan forgiveness income or Gross-Up Payment income had been reported on Form W-2 for such year. Executive shall provide the Company a copy of each income tax return on which any Loan forgiveness income, Gross-Up Payment income and/or state income tax deduction attributable to Loan forgiveness or Gross-Up Payment is reflected. Additionally, Executive shall provide the Company her tax return preparer's written calculation of what her tax liability would be on each such income tax return if no Loan forgiveness income, Gross-Up Payment income or state income tax deduction attributable to Loan forgiveness or Gross-Up Payment were reflected. For each year, the income tax portion of the Gross-Up Payment shall be the difference between the amounts calculated under the two preceding sentences. The amount of employment taxes included in the Gross-Up Payment shall be calculated as the Medicare tax rate (currently 1.45%) multiplied by the amount of any Loan forgiveness income and Gross-Up Payment income. If, as a result of Executive being audited or filing an amended tax return, Executive's state or federal income tax liability for any year covered by this provision is altered, Executive shall notify the Company of the same and shall have her tax return preparer recalculate the Gross-Up Payment for such year. If any such calculation indicates that the Company previously made an excess Gross-Up Payment, Executive shall promptly repay to the Company the amount of such excess, together with interest at the rate then applicable to refunds from such taxing authority. 5. At Will Employment. Nothing herein shall be deemed to waive the Company's policy that Executive's employment is AT WILL and can be terminated at the option of either the Company or Executive in their sole and absolute discretion, for any or no reason whatsoever, with or without cause, and no representations, warranties or assurances have been made concerning the length of such employment by the Company. 3 4 6. General. a. Assignment. i. This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by Executive's legal representatives. ii. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. iii. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. b. Headings. The subject headings of the paragraphs and subparagraphs of this Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. c. Severability. It is agreed that if any term, covenant, provision, paragraph or condition of this Agreement shall be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not invalidate the whole Agreement, but it shall be construed as if it did not contain the invalid, illegal or unenforceable part, and the rights and obligations of the parties shall be construed and enforced accordingly. d. Entire Agreement. The parties hereto agree that this Agreement supersedes all existing agreements between the Company and Executive relating to the subject matter hereof, whether oral, written, expressed or implied, and contains the entire understanding and agreement between the parties on such subject. e. Amendment and Waiver. This Agreement may be amended, modified or supplemented only by a writing executed by each of the parties. Either party may in writing waive any provision of this Agreement to the extent such provision is for the benefit of the waiving party. No waiver by either party of a breach of any provision of this Agreement shall be construed as a waiver of any subsequent or different breach, and no forbearance by a party to seek a remedy for noncompliance or breach by the other party shall be construed as a waiver of any right or remedy with respect to such noncompliance or breach. f. Choice of Law. This Agreement and the performance hereunder shall be construed in accordance with and under and pursuant to the internal substantive laws of the State of California applicable to agreements fully executed and performed entirely in such state. 4 5 g. Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) three (3) days after having been sent by first class mail, return receipt requested, postage prepaid, (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written or oral verification of receipt, or (e) upon confirmed delivery by electronic mail. Until changed upon giving notice as provided herein, notices shall be sent to: If to the Company: Hawthorne Savings, F.S.B. 2381 Rosecrans Avenue El Segundo, CA 90245 Attention: Simone Lagomarsino, Chief Executive Officer Fax: (310) 725-5831 Email: simonel@hawthornesavings.com If to Executive: Karen Abajian 7717 Agnew Avenue Los Angeles, CA 90045 h. Attorneys' Fees. In the event of any dispute regarding the enforcement or interpretation of this Agreement, the party prevailing in such dispute shall be entitled to recover from the other party hereto all costs of such dispute, including reasonable attorneys' fees. IN WITNESS WHEREOF, Executive and, pursuant to the authorization from its Board of Directors, the Company have executed this Agreement as of the day and year first above written. EXECUTIVE HAWTHORNE FINANCIAL CORPORATION By: - ------------------------ ------------------------------------- KAREN ABAJIAN Name and Title: 5 EX-21.1 16 a70896ex21-1.txt EXHIBIT 21.1 1 EXHIBIT 21.1 EXHIBIT 21.1 -- SUBSIDIARIES OF REGISTRANT Hawthorne Savings, F.S.B., a federally chartered savings association -- 100% HFC Capital Trust I, a Delaware business trust -- 100% EX-23.1 17 a70896ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements of Hawthorne Financial Corporation on Form S-8 Nos. 33-74800, 333-23587, 333-59879 and 333-59875 of our report dated February 9, 2001 (March 28, 2001 as to Note 17) 2001 appearing in this Annual Report on Form 10-K of Hawthorne Financial Corporation for the year ended December 31, 2000. /s/ DELOITTE & TOUCHE LLP March 30, 2001 Los Angeles, California -----END PRIVACY-ENHANCED MESSAGE-----