HAWTHORNE FINANCIAL 10-K

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 þ No o

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. o

As of March 21, 2002, the aggregate market value of voting stock held by nonaffiliates of the registrant was approximately $126,975,140 (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 21, 2002 was 5,378,974 shares.

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 2002 Annual Meeting of Stockholders.

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 or real estate values in our market may affect our 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, 2001, 90.62% of the Company’s loan portfolio was tied to adjustable rate indices, such as COFI, Prime, CMT, MTA and LIBOR. Out of these adjustable rate loans, approximately 61.73%, or $1.0 billion, have reached their internal interest rate floors. Therefore, these loans have taken on fixed rate characteristics. 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, 2001, 74.17% 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 25.83% 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.

	Sharp decreases in interest rates have historically resulted in increased loan refinancings to fixed rate products. Due to the fact that the Bank is a variable rate lender and offers fixed rate products on a limited basis, this interest rate environment could negatively impact the Company’s ability to grow the balance sheet and leverage off of the existing expense base. This could impede the Company’s ability to improve the overall efficiency ratio.


	•	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 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 to be the only factors 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.

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.

The Company specializes in real estate secured loans throughout Southern California, which are funded predominately with retail deposits and advances from the Federal Home Loan Bank of San Francisco (“FHLB”). As of March 22, 2002, the Bank’s nine full service retail offices, located in Southern California, include the Gardena branch, which opened in March 2002.

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”) concerning reserves required to be maintained against deposits and certain other matters.

The Company’s only operating segment is the Bank. The Bank offers a variety of consumer banking products through its network of nine 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 fifth in terms of deposit market share based on branch information provided to the FDIC as of June 30, 2001. 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.

In the coastal counties of Southern California, the Company specializes in real estate secured loans in the niche markets that it serves, including: (1) permanent loans collateralized by single family residential property, (2) permanent and construction loans secured by multi-family residential and commercial real estate, (3) loans for the construction of individual 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 funds its loans predominantly with retail deposits generated through its full service retail offices and with advances from the FHLB. The Company also offers consumer loans on a referral fee basis through an unaffiliated financial institution. See “Item 1 — Business — Statistical Financial Data — Sources of Funds.”

The Company’s current loan origination activities are governed by established policies and procedures that mitigate the risks inherent to the types of collateral and borrowers financed by the Company. The

Company’s primary competitive advantages, which include (1) an 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), and (2) a strategy of holding in portfolio virtually all new loan originations. 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.

The Company concentrates on marketing its services throughout the coastal counties of 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 also 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. A 475 basis point drop in interest rates impacted the Company’s net interest income during 2001. The resulting interest rate environment produced compression in the net interest margin during the first half of the year due to the immediate repricing of adjustable rate assets and the lag in liability repricing resulting from the six month weighted average maturity of certificates of deposits.

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. Though many of the Bank’s competitors offer customers a larger spectrum of products than the Bank, the Company, as part of its strategic plan, continues to enhance the line of products and services offered to retail customers. During 2001, the Bank introduced internet banking, which was consistent with one aspect of the Company’s strategic plan of building franchise value by expanding the array of products and increasing our presence and market share in the South Bay. The Bank concentrates on providing superior customer service as it continues to enhance the products and services offered to its retail customers.

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 and offers lending products throughout its service area and attained a cross-sell ratio (deposit and loan products per household) of 2.37 at December 31, 2001, compared with 1.78 at December 31, 2000.

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.

General. The Company is a unitary savings and loan 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 savings and loan 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 savings and loan holding company. 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 under and would be subject to the same business activity restrictions. See “— Regulation of the Bank — Qualified Thrift Lender Test.”

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.”

On October 26, 2001, President Bush signed the USA Patriot Act of 2001. Enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. on September 11, 2001, the Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively


	•	due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons;

	•	standards for verifying customer identification at account opening;

	•	rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering;

	•	reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and

	•	filing of suspicious activities reports involving securities by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.

The Company is not able to predict the impact of such law on its financial condition or results of operations at this time.

General. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999 (the “GLB”). The GLB 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, GLB 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.

GLB 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 savings and loan holding company. The Financial Institution Modernization Act grandfathers any company that was a unitary savings and loan holding company on May 4, 1999 (or became a unitary savings and loan 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 savings and loan holding company also must continue to control at least one savings association, or a successor institution, that it controlled on May 4, 1999.

GLB 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

The Company and the Bank do not believe that GLB will have a material adverse effect 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. GLB 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 savings and loan 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 savings and loan 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 GLB, 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. Pursuant to these rules, effective July 1, 2001, 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.

These privacy provisions will affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

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 allowance 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, adjusted quarterly. The current rate is approximately $0.0184 per $100 of assessable 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.

Proposed Legislation. From time to time, new laws are proposed that could have an effect on the financial institutions industry. For example, deposit insurance reform legislation has recently been introduced in the U.S. Senate House of Representatives that would:


	•	merge the BIF and the SAIF;

	•	increase the current deposit insurance coverage limit for insured deposits to $130,000 and index future coverage limits to inflation;

	•	increase deposit insurance coverage limits for municipal deposits;

	•	double deposit insurance coverage limits for individual retirement accounts; and

	•	replace the current fixed 1.25 designated reserve ratio with a reserve range of 1-1.5%, giving the FDIC discretion in determining a level adequate within this range.

While we cannot predict whether such proposals will eventually become law, they could have an effect on the Bank’s operations and the way business is conducted.

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.

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 follows, the Bank’s regulatory capital exceeded all minimum regulatory capital requirements applicable to it as of December 31, 2001.


(1)	Includes the portion of non-residential construction and land development loans that exceed a loan-to-value 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.

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.

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, 2001, 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.

As of December 31, 2001, the Bank is categorized as “well capitalized” under the regulatory framework for Prompt Corrective Action (“PCA”) Rules. There are no conditions or events subsequent to December 31, 2001, that management believes have changed the Bank’s category. The following table compares the Bank’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.

Predatory Lending. The term “predatory lending,” much like the terms “safety and soundness” and “unfair and deceptive practices,” is far-reaching and covers a potentially broad range of behavior. As such, it does not lend itself to a concise or a comprehensive definition. But typically predatory lending involves at least one, and perhaps all three, of the following elements:


	•	making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation (“asset-based lending”);

	•	inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”); and

	•	engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.

On December 14, 2001, the FRB amended its regulations aimed at curbing such lending. Compliance is not mandatory until October 1, 2002. The rule significantly widens the pool of high-cost home-secured loans covered by the Home Ownership and Equity Protection Act of 1994, a federal law that requires extra disclosures and consumer protections to borrowers. The following triggers coverage under the act:


	•	interest rates for first lien mortgage loans in excess of 8 percentage points above comparable Treasury securities;

	•	subordinate-lien loans of 10 percentage points above Treasury securities, and fees such as optional insurance and similar debt protection costs paid in connection with the credit transaction, when combined with points and fees if deemed excessive.

In addition, the regulation bars loan flipping by the same lender or loan servicer within a year. Lenders also will be presumed to have violated the law, which states loans should not be made to individuals unable to repay them unless the lenders document that the borrower has the ability to repay. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid.

The Company does not believe that it will be impacted by these rule changes, as the Bank does not engage in predatory lending practices.

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, 2001, the Bank’s loans-to-one-borrower limit was $27.3 million based upon the 15% of unimpaired capital and surplus measurement. At December 31, 2001, the Bank’s largest relationships consisted of one borrower with outstanding commitments of $18.8 million, which consisted of approximately 5 loans, with $9.5 million secured by commercial real estate in the Bank’s lending area, $8.9 million secured by non-residential collateral and one unsecured commercial loan. All of these loans 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 which 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 association. As of December 31, 2001, the Bank was in compliance with its QTL requirements 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 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.

Effective January 1, 2002, the OTS raised the dollar amount limit in the definition of small business loans from $500,000 to $2.0 million, if used for commercial, corporate, business or agricultural purposes. Furthermore, the rule raises the aggregate level that a thrift can invest directly in community development funds, community centers and economic development initiatives in its communities from the greater of a quarter of 1% percent of total capital, or $100,000, to 1% of total capital, or $250,000.

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, or (ii) 5% of its FHLB advances (borrowings). At December 31, 2001, the Bank had $24.4 million in FHLB stock, which was in compliance with this requirement.

The Gramm-Leach-Bliley Act made significant reforms to the FHLB system, including:


	•	Expanded Membership — (i) expands the uses for, and types of, collateral for advances; (ii) eliminates bias toward QTL lenders; and (iii) removes capital limits on advances using real estate related collateral (e.g., commercial real estate and home equity loans).

	•	New Capital Structure — each FHLB is allowed to establish two classes of stock: Class A is redeemable within six months of notice; and Class B is redeemable within five years notice. Class B is valued at 1.5 times the value of Class A stock. Each FHLB will be required to maintain minimum capital equal to 5% of equity. Each FHLB, including our FHLB of San Francisco, submitted capital plans for review and approval by the Federal Housing Finance Board.

	•	Voluntary Membership — federally chartered savings associations, such as the Bank, are no longer required to be members of the system.

	•	REFCorp Payments — changes the amount paid by the system on debt incurred in connection with the thrift crisis in the late 1980s from a fixed amount to 20% of net earnings after deducting certain expenses.

At this time it is not possible to predict the impact, if any, such changes or capital plans will have on the Bank’s financial condition or results of operation.

Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain a noninterest bearing allowance at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. At December 31, 2001, the Bank was in compliance with these requirements.

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 residence 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.

The Company employed 271 full time equivalent persons at December 31, 2001. A union or collective bargaining group does not represent employees and the Company considers its employee relations to be satisfactory.

The Company’s loan portfolio is almost exclusively secured by real estate, concentrated primarily in the coastal counties of 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 $1.6 billion at December 31, 2000, to $1.7 billion at December 31, 2001, includes increases in single family residential loans of $29.4 million, income property loans of $90.9 million and land loans of $3.3 million.

The table below sets forth the composition of the Company’s loan portfolio as of the dates indicated.


(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.

The table below sets forth the Company’s loan portfolio diversification by size.

The table below sets forth the Company’s net loan portfolio composition, excluding net deferred fees and costs, as of the dates indicated.

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 the coastal counties of Southern California. At December 31, 2001, $918.9 million, or 49.12% of the total gross loan portfolio was secured by single family residential properties with an average loan size of $0.6 million, compared with $888.4 million, or 49.17% of the total gross loan portfolio and an average loan size of $0.5 million, at December 31, 2000.

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.

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 at least half of its new income property loans through existing customer relationships with the remainder through its network of approved brokers. 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 $255.2 million, or 13.64%, and $248.1 million, or 13.26%, respectively, of the Bank’s total gross loan portfolio at December 31, 2001. The average loan size of the income producing properties portfolio was $0.8 million and $3.0 million during 2001 and 2000, respectively. At December 31, 2000, multi-family and commercial real estate loans consisted of $253.0 million, or 14.00%, and $200.4 million, or 11.09% of the Bank’s total gross loan portfolio, respectively.

During 2001, the Bank continued to emphasize its strategic niche as a provider of bridge loans to both apartment owners and income property investors. The Company’s experienced construction management group allows the Bank to manage risk appropriately, while providing a valuable source of funding to investors who want to renovate and upgrade their properties. At December 31, 2001, income property development loans accounted for $227.2 million, or 12.14% of the Bank’s total gross loan portfolio, compared with $203.9 million, or 11.28% of the Bank’s total gross loan portfolio at December 31, 2000.

The Company provides individual home construction financing, primarily to local builders and, to a 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 originated through standing relationships between the Company’s loan officers and local builders, however, the Bank also maintains a small network of mortgage brokers for its loan production.

The Company’s loan commitments generally include provisions 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 commitments cover 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 twelve to twenty-four 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 $159.2 million, or 8.51% of the total gross loan portfolio at December 31, 2001, with an average loan size of $1.6 million,

In 2001, the Company introduced a new construction to permanent loan program for owner-occupied properties. This program provides the Bank with a competitive edge in cross-selling additional loan products to our customers as well as enhancing the Bank’s relationships with these clients.

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 financed land acquisition, site development and home construction.

At December 31, 2001, there were no tract loans, compared with $3.5 million, or 0.19%, of the Bank’s total gross loan portfolio at December 31, 2000. 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.

During 2001, the Bank launched an overdraft protection program for its checking account customers. At December 31, 2001, the outstanding overdraft protection lines totaled $0.4 million. The Bank also offers a consumer lending product which includes 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.

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.

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.


(1)	Includes unfunded commitments of $0.8 million, $0.3 million and $0.4 million at December 31, 2001, 2000 and 1999, respectively.

(2)	Includes unfunded commitments of $0.3 million and $0.5 million at December 31, 2001 and 2000, respectively. There were no unfunded commitments at December 31, 1999.

(3)	Includes unfunded commitments of $1.5 million, $0.9 million and $13.1 million at December 31, 2001, 2000 and 1999, respectively.

(4)	Includes unfunded commitments of $38.4 million, $64.9 million and $40.2 million December 31, 2001, 2000 and 1999, respectively.

(5)	Includes unfunded commitments of $44.9 million, $64.8 million and $72.3 million at December 31, 2001, 2000 and 1999, respectively.

(6)	There were no unfunded commitments at December 31, 2001 and 2000. Includes unfunded commitments of $2.5 million at December 31, 1999

(7)	Includes unfunded commitments of $2.0 million $0.4 million and $4.0 million at December 31, 2001, 2000 and 1999, respectively.

(8)	There were no unfunded commitments at December 31, 2001 and 2000. Includes unfunded commitments of $7.5 million at December 31, 1999.

The table below summarizes the maturities for fixed rate loans and the repricing intervals for adjustable rate loans as of December 31, 2001.

At December 31, 2001, the Bank’s loans-to-one-borrower limit was $27.3 million based upon the 15.0% of unimpaired capital and surplus measurement. At December 31, 2001, the Bank’s largest relationships consisted of one borrower with outstanding commitments of $18.8 million, which consisted of approximately 5 loans, with $9.5 million secured by commercial real estate in the Bank’s lending area, $8.9 million secured by non-residential collateral and one unsecured commercial loan. All of these loans were performing in accordance with their terms.

Approximately 97.8% and 97.4% of the Bank’s loan portfolio were concentrated in Southern California at December 31, 2001 and 2000, respectively.

The table below sets forth, by contractual maturity, the Company’s loan portfolio at December 31, 2001. The table below is based on contractual loan maturities and does not consider amortization and prepayments of loan principal.


(1)	Gross loans receivable includes the principal balance of loans outstanding plus outstanding but unfunded loan commitments, predominantly in connection with construction loans.

The Company has an asset review and classification system to establish specific and general allowances for credit losses and to classify assets and groups of assets. The Company’s problem asset classifications are discussed below.

The Company generally ceases to accrue interest on any loan with respect to which the loan’s contractual payments are more than 90 days delinquent, 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. A nonaccrual loan may be restored to accrual status when delinquent principal and interest payments are brought current, the loan is paying in accordance with its payment terms for a period, typically between three to six months, and future monthly principal and interest payments are expected to be collected.

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.

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).


(1)	The interest income recognized on loans that were on nonaccrual status at December 31, 2001, 2000, 1999, 1998 and 1997 was $0.2 million, $1.7 million, $2.3 million, $3.3 million and $0.9 million, respectively. If these loans had been performing for the entire year, the income recognized would have been $1.8 million, $3.3 million, $4.5 million, $4.9 million and $1.4 million for 2001, 2000, 1999, 1998 and 1997, respectively.

(2)	Excludes nonaccrual.

(3)	Troubled debt restructured loans (“TDRs”) not classified and not on nonaccrual.

(4)	In December 2000, a $5.2 million specific allowance was identified for one nonaccrual commercial loan, whose major tenant filed for Chapter 11 bankruptcy protection. The required allowance was reclassified from general allowance to specific allowance. A 51% controlling interest in this tenant was acquired by a strong investor during 2001. During the third quarter, the tenant ratified a renegotiated lease, which enabled the Bank to revise its internal valuation and consequently, reduce the specific allowance for this loan to $3.0 million.

Nonaccrual loans totaled $20.7 million at December 31, 2001 (or 1.11% of total assets), compared with nonaccrual loans of $31.6 million (or 1.80% of total assets) at December 31, 2000. Included in nonaccrual loans at December 30, 2001, were two single family residential loans with balances of $1.0 million or more representing $5.5 million, or 26.40% of total nonaccrual loans. The average loan to value (“LTV”) for these two loans was 58.10%. Nonaccrual loans also consisted of one income property construction loan with a balance of $11.5 million, or 55.50% of total nonaccrual loans. In December 2000, a $5.2 million specific allowance was identified for one nonaccrual commercial loan, whose major tenant filed for Chapter 11 bankruptcy protection. The required allowance was reclassified from general allowance to specific allowance. A 51% controlling interest in this tenant was acquired by a strong investor during 2001. During the third quarter, the tenant ratified a renegotiated lease, which enabled the Bank to revise its internal valuation and consequently, reduce the specific allowance for this loan to $3.0 million. Other classified loans were $37.3 million at December 31, 2001, compared with $40.6 million at December 31, 2000. Delinquent loans totaled $7.7 million at December 31, 2001, compared with $26.9 million at December 31, 2000.

The table below sets forth information concerning the Company’s gross classified loans, by category, as of December 31, 2001.

In accordance with the SEC Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues,” and the newly released Federal Financial Institutions Examination Council (“FFIEC”) guidelines, management establishes specific allowances for 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. On a quarterly basis, management completes a loan loss allowance analysis that provides for an adequate balance in the allowance for credit losses. Management evaluates the allowance for credit losses in accordance with accounting principles generally accepted in the United States of America (“GAAP”), within the guidance established by SFAS No. 5, “Accounting for Contingencies,” and SFAS No. 114, as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan,” as well as standards established by regulatory Interagency Policy Statements on the Allowance for Loan and Lease Losses (“ALLL”). 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 for impaired loans, in accordance with SFAS No. 114, 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. Other methods can be used to estimate impairment (market price or present value of expected future cash flows discounted at the loan’s original interest rate).

segments and supplemented by periodic additions through provisions for credit losses. In measuring the adequacy of the Company’s GVA, 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) additional analyses to validate the reasonableness of the estimate of credit losses. The GVA level, based on the OTS Examiner Benchmark and review of peer information, is used to establish a range, which supports the reasonableness of the Bank’s GVA balance. The GVA includes an unallocated amount. 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 other general economic and business conditions affecting our key lending areas. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies.”

The table below summarizes the Company’s allowance for credit losses by category for the periods indicated.


(1)	Percent of allowance for credit losses to gross loan commitments, which include the outstanding but undisbursed portion of such commitments. The change in the percentage of allowance to total loans by category is a result of different levels of classified assets within each category.

The table below summarizes the activity of the Company’s allowance for credit losses for the periods indicated.

Real estate acquired in satisfaction of loans is transferred to real estate owned 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 were recorded through a write-down of the asset. Prior to 2000, any subsequent declines in the fair value of the REO after the date of transfer were

The table below summarizes the composition of the Company’s portfolio of real estate owned properties as of the dates indicated.


(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.

The table below summarizes the changes in valuation of the REO portfolio for the periods indicated.

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 2001, 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 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.

At December 31, 2001, the Company operated eight retail-banking locations with three primary product lines; (1) checking and savings accounts, (2) money market accounts, and (3) certificates of deposit. Six 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. In March 2002, the Company opened its ninth retail branch in Gardena, California. At December 31, 2001, the Company’s retail branches carried average deposit balances of $240.3 million and

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.”


(1)	Includes $60.0 million of state deposits placed by the State of California with the Company. See “Note 7 — Deposits” for certificates of deposit with balances > $100,000.

A primary alternate funding source for the Company is a credit line with the FHLB with a maximum advance of up 40% 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 Company is authorized to engage. In granting advances, the FHLB considers a member’s creditworthiness and other relevant factors. At December 31, 2001, the Company had an approved line of credit with the FHLB for a maximum advance of up to 40% of total assets ($749.3 million as of December 31, 2001) based on qualifying collateral. At December 31, 2001, the Company had fourteen FHLB advances outstanding totaling $484.0 million which had a weighted averaged interest rate of 4.27% and a weighted average remaining maturity of 3 years and 4 months.

On December 31, 1997, the Company issued $40.0 million of Senior Notes due 2004 (“Senior Notes”) in a private placement, which included registration rights. Interest on the Senior Notes is payable semi-annually 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 September 2001, the Company authorized up to $5.0 million for the repurchase of shares of its common stock and to retire Senior Notes. This increased the amount previously authorized. The Company announced two 5% repurchase authorizations in March 2000 and July 2000, which authorized an aggregate of approximately 541,000 shares, and an additional 77,000 shares in April 2001. As of December 31, 2001, cumulative repurchases included 555,319 shares at an average price of $11.74. The Company has also repurchased $14.2 million in Senior Notes at an average price of 102.2% of par value.

On March 28, 2001 and November 28, 2001, HFC Capital Trust I (“Trust I”) and HFC Capital Trust II (“Trust II”), respectively, statutory business trusts and wholly owned subsidiaries of the Company, issued $9.0 million of 10.18% fixed rate capital securities (the “Capital Securities I”) and $5.0 million of floating rate capital securities (the “Capital Securities II”), respectively. The Capital Securities, which were issued in separate private placement transactions, represent undivided preferred beneficial interests in the assets of the respective Trusts. The Company is the owner of all the beneficial interests represented by the common securities of Trust I and Trust II (the “Common Securities I” and “Common Securities II”) (together with the “Capital Securities I” and “Capital Securities II” and, collectively the “Trust Securities”). Trust I and Trust II exist for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 10.18% fixed rate and floating rate, respectively, junior subordinated deferrable interest debentures (the “Junior Subordinated Debentures I” and “Junior Subordinated Debentures II”) issued by the Company and engaging in certain other limited activities. Interest on the Capital Securities is payable semi-annually.

The Junior Subordinated Debentures I held by Trust I will mature on June 8, 2031, at which time the Company is obligated to redeem the Capital Securities I. The Capital Securities I are callable, in whole or in part, at par value after ten years. The proceeds were used to repurchase $7.2 million of its Senior Notes at an average price of 101.4% of par value.

The floating rate on the Capital Securities II, with an initial start rate of 5.97%, reprices semi-annually based on the index of six month LIBOR plus a spread of 3.75%, with a cap of 11.00% through December 8, 2006. The Junior Subordinated Debentures II held by Trust II will mature on December 8, 2031, at which time the Company is obligated to redeem the Capital Securities II. The Capital Securities II are callable, in whole or in part, at par value after five years. The proceeds were used to repurchase $4.0 million of its Senior Notes at an average price of 105.0% of par value.

As of December 31, 2001, the Company had eight leased and two wholly owned properties. The leased properties included its corporate headquarters, seven 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, 2001, 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.


(1)	The Torrance branch lease was terminated on December 31, 2001, due to the relocation of the branch.

(2)	The new Torrance branch lease began on November 1, 2001, for the new location.

(3)	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 Bank’s electronic data processing equipment, including personal computers and software, was $0.5 million at December 31, 2001.

At December 31, 2001, 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 — Office Property and Equipment.” The Company believes that all of the above facilities are in good condition and are adequate for the Company’s present operations.

In January 2002, the Court confirmed the settlement of the construction defect case entitled Marine Village Townhomes Homeowners’ Association v. Hawthorne Savings and Loan Association in which the Bank was a defendant. The terms of the settlement are confidential, but the settlement did not have an adverse impact on the Company’s results of operations.

In April 2001, the Superior Court of the State of California, County of Los Angeles granted Plaintiff’s motion to reinstate a construction defect case entitled Stone Water Terrace HOA v. Hawthorne Savings and Loan Association, in which the Bank was named as a defendant. The case had previously been dismissed because Plaintiff failed to take certain actions to prosecute its case. In this action, Plaintiff alleges, under several theories of recovery, that the Bank is 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 project after the developer defaulted. Plaintiff seeks damages in an unspecified amount, plus punitive damages. The Bank denies the allegations in the complaint and has cross-complained against all of the subcontractors for indemnity. Discovery has not commenced, but Plaintiffs have indicated that damages may exceed $800,000. Although the Bank intends to vigorously defend its position in these actions and to seek indemnification from the responsible parties, there can be no assurances that the Company will prevail. 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, although based upon the information developed to date, the Company believes its exposure will not exceed the amounts indicated by Plaintiffs. However, it is probable that the Company will incur substantial legal fees defending this matter.

The Company 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, result of operations or cash flows. 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.

No matters were submitted to a vote of stockholders during the fourth quarter of 2001.

The following table sets forth, as of February 28, 2002, the names and ages of all executive officers of the Company, indicating their positions and principal occupation.

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

The common stock of the Company (“Common Stock”) is traded on the Nasdaq National Market under the symbol “HTHR.” Mellon Investor Services LLC is the Company’s transfer agent and registrar, and is able to respond to inquiries from shareholders on their website: www.melloninvestor.com or through their mailing address: P.O. Box 3315, South Hacksensack, New Jersey, 07606. The following table sets forth the high and low sales prices of the Common Stock as reported by Nasdaq for the periods indicated below.

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.

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.


(1)	Related to the accelerated write-off of prepaid issuance costs and premium due to the repurchase of Senior Notes.

(2)	Related to the accelerated write off of unamortized issuance 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.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.”

In accordance with the SEC Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues,” and the newly released FFIEC guidelines, management establishes specific allowances for 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. On a quarterly basis, management completes a loan loss allowance analysis that provides for an adequate balance in the allowance for credit losses. Management evaluates the allowance for credit losses in accordance with GAAP, within the guidance established by SFAS No. 5, “Accounting for Contingencies,” and SFAS No. 114, as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan,” as well as standards established by regulatory Interagency Policy Statements on the Allowance for Loan and Lease Losses (“ALLL”).

During the fourth quarter of 2001, management enhanced the methodology in determining the allowance for credit losses. The most significant change to the ALLL methodology was related to the qualitative adjustments to the individual loan types, based on the current local and national economic conditions, which was previously included in the unallocated allowance. In addition, adjustments were also made to changes in internal policies and industry conditions. These changes included: development of a risk based pricing matrix, driven by risk factors such as collateral quality, debt coverage ratio (“DCR”), recourse, etc.; implementation of more conservative advance rates for land draws, requiring higher minimum equity contributions, enhanced underwriting of borrower cash flow on SFR construction loans, reduced LTV maximum for land loans; and, with respect to consumer related loans, a small upward adjustment was made due to the relative newness of the overdraft protection product and the lack of seasoning to validate the existing underwriting model.

In accordance with accounting and regulatory issuance, the Company’s methodology is summarized as follows:

The Management separates loans into pools by loan type and risk factor (i.e. loan grade). The grading system is designed to evaluate risk. Loan grading provides management with information regarding actual or potential loan problems and provides a basis for establishing action plans to strengthen credits.

Management segments its portfolio into pools with similar characteristics, based on loan type (collateral driven) and risk factor (loan grade). Currently, the portfolio is segmented into nine categories by collateral type, further stratified by loan grade (Pass grades, Special Mention and Substandard). The general pool categories are: SFR greater than $1.0 million; SFR less than $1.0 million; Multi-family; Commercial Real Estate (permanent); Commercial Other; Commercial Construction; SFR Construction; Land; and, Consumer.

The originating unit is responsible for classifying each new and renewed loan in accordance with the Bank’s Asset Classification System policy. The Bank’s portfolio managers and asset managers, under the direction of their supervisors, are responsible for ensuring that all loans under their responsibility are appropriately graded. The respective managers analyze any and all new information on borrowers, including updated financial statements, payment performance, random inspection of collateral, updated credit reports, and determine if such information affects the loan grade. In addition, the Bank’s internal credit review staff is

The primary factors used in assigning loan grades include: capacity and willingness of borrower/ guarantor to service debt considering current financial data; cash flow of collateral property and ability to service existing debts; alternate source of repayment; trade and bank payment history; effects of current and anticipated market and economic conditions; impact of interest rate fluctuations; collateral value and the borrower’s ability to refinance collateral based on current value; property tax status; payment status; status of insurance and taxes; and, existence of other liens.


	In general, Pass graded assets are well protected by the current net worth and paying capacity of the borrower, or by the value of the asset or underlying collateral. Pass 1 graded assets are of the highest quality and reflect risk similar to that of cash secured assets, with very strong cash flow, underlying credit of “A” or superior quality, LTV ratios of approximately 60% or less. Pass 2 graded assets have minimum risk, exhibit a satisfactory repayment program, are secured by excellent collateral and have LTV ratios of 65% or less; income property loans require “A” or superior quality collateral, must be above minimum debt service coverage requirements or reflect strong cash flow positions. Pass 3 graded assets include average risk with nominal loss potential (satisfactory for their size), are supported by repayment history and/or net worth (reflected by satisfactory financial statements).

	Special Mention, grade 4, assets have potential weaknesses that require close monitoring by management. Assets included in this category include loans that have developed credit weaknesses since origination. This loan grade includes loans that the Bank is unable to properly supervise because of an inadequate control over collateral, an adverse trend in the borrower’s operations, or a highly leveraged position reflected in the borrower’s balance sheet. If either condition has deteriorated to the point that timely repayment is jeopardized, an adverse classification may be required. If the only weakness is credit data or collateral documentation exceptions that are not material to the timely repayment of the asset, it may not necessarily be graded as Special Mention.

	Substandard, grade 5, assets have a well defined weakness, which are characterized by the potential loss to the Bank if the deficiencies are not corrected. Such assets are inadequately protected by the current net worth and paying capacity of the borrower or by the collateral pledged, if any. These assets may be characterized by one, or a combination of the following weaknesses: primary source of repayment is gone or severely impaired and the Bank may have to rely upon the secondary source; but sufficient problems have arisen to cause the Bank to go to abnormal lengths to protect its position in order to maintain a high probability of repayment; the borrower is unable to generate enough cash flow to reduce their debts; deterioration in collateral value or inadequate inspection or verification of value (if collateral is expected to be the source of repayment); and, flaws in documentation leaving the Bank in a subordinated or unsecured position when the collateral is needed for repayment of the loan. The presence of one or more of these factors does not mandate that the asset be adversely classified if, based on the judgment of management, the presence of such factors does not indicate a weakness that jeopardizes the timely liquidation of the asset, or disposition of the collateral at book value.

	Substandard, grade 6, assets display weaknesses described above under grade 5, with the added characteristic that the weaknesses make collection, or liquidation of the asset in full, questionable. These loans are typically on nonaccrual status and may have identifiable loss exposure, such as a high LTV ratio, and collateral that does not appear to be sufficient to provide full collection of principal upon liquidation of the asset. These assets are generally considered impaired under SFAS No. 114 and a specific valuation allowance (“SVA”) may be established.

Management applies adjusted loss rates to pools of loans (“pool rates”). Pool rates are established by examining historical charge-off data for groups of loans and adjusting them for a variety of qualitative factors that could affect future loss rates. Where the Bank has no or nominal actual charge-off data for certain loan types, industry data and management’s judgment is utilized as representative starting loss rates. The following qualitative factors are considered: trends in past due and impaired loans; trends in charge-offs and recoveries;

trends in loan volume and loan terms; changes in credit policies and underwriting; experience and the ability of lending management and staff; external factors including national and local economic trends and conditions, duration of the current business cycle, competition, legal and regulatory requirements, as well as potential events that may affect collectibility of loans; industry conditions; and, concentration of credit risk. Adjustments to loss rates are considered for any qualitative factor deemed appropriate by management and may be upward or downward. Management’s analysis of historical loss data in determining the initial loss rates for various loan pools is summarized as follows:


	For Pass graded pools, management calculated a loss rate based on actual aggregate losses by loan. Management utilized loss rates experienced by peers or industry average data for loan types for which the Bank had no actual losses over the period analyzed.

	Since Special Mention assets reflect greater risk of loss than Pass graded assets, management used 30% of the Substandard loss rate, derived for each loan type, as the Special Mention loss rate. This estimate is representative of loss rates utilized by other institutions, both in terms of their loss experiences and as a reasonable industry standard rate, when loss data is not available.

	For Substandard graded pools, management evaluated loss data over the last three years, calculating the percentage of the aggregate balance of Substandard loans in each pool migrated to loss over this period. For loan types for which the Bank did not experience losses in Substandard pools, management utilized the highest annual loss rate experienced in the last three years for the overall Substandard portfolio. In some cases, where this average did not appear reflective of the level of risk associated with the loan type, management used an industry standard loss rate. In 2002, management may opt to utilize quarterly average outstanding balances in determining loss rates, which may result in slightly different loss rate calculations.

Management analyzes significant problem assets for specific loss exposure and establishes SVAs as needed. SFAS No. 114 defines loan impairment as the existence of uncertainty concerning collection of all principal and interest per the contractual terms of a loan. Nonaccrual loans and loans which are considered troubled debt restructures are typically impaired and analyzed individually for SVAs. For collateral dependent loans, impairment is typically considered measured by comparing the loan amount to the fair value of collateral (determined via appraisals and/or internal valuations), less costs to sell, with a SVA established for the shortfall amount. Other methods can be used to estimate impairment (market price or present value of expected future cash flows discounted at the loan’s original interest rate). Currently, $3.6 million in SVAs have been established for two loans.

Management performs additional analyses to validate the reasonableness of the estimate of credit losses. The estimated General Valuation Allowance (“GVA”) level, based on the OTS Examiner Benchmark and review of peer information, was used to establish a range between $25.9 million and $27.9 million. The Bank’s GVA balance of $27.0 million falls within this range, which further supports the reasonableness of the Bank’s GVA balance at December 31, 2001.

The GVA includes an unallocated amount. 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 other general economic and business conditions affecting our key lending areas.

Management believes that the provision for credit losses was at an adequate level during 2001 and that the allowance for credit losses of $30.6 million at December 31, 2001, is adequate to absorb the losses that, in the opinion and judgment of management, are known and inherent in the Bank’s loan portfolio.

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. A nonaccrual loan may be restored to accrual status when delinquent principal and interest payments are brought current, the loan is paying in accordance with its payment terms for a period, typically between three to six months, and future monthly principal and interest payments are expected to be collected.

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. 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. 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). Any subsequent declines in the fair value of the REO property after the date of transfer are recorded through a write-down of the asset. 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. Gains and losses from sales of real estate owned properties are reflected in “Income/(loss) from real estate operations, net” in the consolidated statements of income.

Net income for the year ended December 31, 2001, was $17.3 million, or $2.29 per diluted share before extraordinary item and $16.8 million, or $2.23 per diluted share after extraordinary item, an increase of 17.85% over net earnings of $14.3 million, or $1.94 per diluted share, for the same period in 2000. Net income for the year ended December 31, 2001, resulted in a return on average assets (“ROA”) of 0.93% and a return on average equity (“ROE”) of 15.13%, compared with a ROA of 0.85% and a ROE 14.58% for the year ended December 31, 2000. Income before income taxes and extraordinary item increased 19.89%, for the year ended December 31, 2001, to $29.9 million from $25.0 million in 2000.

The extraordinary item, net of tax, of $0.5 million for the year ended December 31, 2001, was due to the acceleration of the amortization of $0.5 million in prepaid offering costs and $0.3 million in premium paid in conjunction with the repurchase of $13.6 million of 1997 12.50% Senior Notes during the year.

The Company’s net interest income before provision for credit losses increased 2.84% to $62.0 million during the year ended December 31, 2001, compared with $60.3 million for the year ended December 31, 2000. The Company’s net interest income was impacted by a 475 basis point drop in interest rates during 2001. The resulting historically low interest rate environment produced compression in the net interest margin during the first half of the year due to the immediate repricing of adjustable rate assets and the lag in liability repricing resulting from the six month weighted average maturity of certificates of deposits. The Company’s yield on average earning assets was 8.20% for the year ended December 31, 2001, compared with 8.94% during the same period in 2000. Contributing to the increase in year over year interest revenues on loans was a $10.9 million, or 34.60%, decrease in nonaccrual loans. The average cost of funds for the Company decreased to 5.21% during the year ended December 31, 2001, compared with 5.81% for the year ended December 31, 2000. The Company’s resulting net interest margin for the year ended December 31, 2001, was 3.45%, compared with 3.62% during the same period in 2000. Although the year over year net interest margin declined, the Company has shown continuous improvement in this area, with the net interest margin increasing to 3.66% during the fourth quarter of 2001, from 3.30% during the first and second quarters of 2001, and 3.49% during the third quarter of 2001. As of December 31, 2001, 90.62% of the Company’s loan portfolio

was tied to adjustable rate indices, such as COFI, Prime, CMT, MTA and LIBOR. Out of these adjustable rate loans, approximately 61.73%, or $1.0 billion, have reached their internal interest rate floors. Therefore, these loans have taken on fixed rate characteristics, while the majority of the Company’s deposits have a six month average life.

Provision for credit losses totaled $3.4 million for the year ended December 31, 2001, compared with $6.0 million for the year ended December 31, 2000. The decrease in the provision for credit losses was due to improvement in asset quality. At December 31, 2001, the ratio of total allowance for credit losses to gross loans was 1.76%, compared with 1.80% at December 31, 2000.

Nonaccrual loans totaled $20.7 million at December 31, 2001 (or 1.11% of total assets), compared with nonaccrual loans of $31.6 million (or 1.80% of total assets) at December 31, 2000. Total classified loans were $58.0 million at December 31, 2001, compared with $72.2 million at December 31, 2000. Delinquent loans totaled $7.7 million at December 31, 2001, compared with $26.9 million at December 31, 2000. The Company had $1.3 million in other real estate owned properties at December 31, 2001, compared with $2.9 million at December 31, 2000.

Noninterest revenues were $5.6 million for the year ended December 31, 2001, compared with noninterest revenues of $8.1 million earned during the same period in 2000. 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 the Bank’s lending and financial services activities in distressed communities.

Total general and administrative expenses (“G&A”) were $34.4 million for the year ended December 31, 2001, compared with $34.3 million of G&A incurred during the same period in 2000. Overall G&A for the year ended December 31, 2001, was consistent with 2000.

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.


(1)	Includes the interest on nonaccrual loans only to the extent that it was paid and recognized as interest income.

(2)	Includes income earned on net deferred loan fees of $2.4 million, $2.6 million and $4.7 million for the years ended December 31, 2001, 2000 and 1999, respectively.

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’s net interest income increased 2.84% to $62.0 million during the year ended December 31, 2001, compared with $60.3 million during the year ended December 31, 2000. Average earning assets increased to $1.8 billion for the year ended December 31, 2001, compared with $1.7 billion for the year ended December 31, 2000. Due to the historically low interest rate environment in 2001, which has continued into 2002, prepayment speeds continue to increase. If this trend continues, it could negatively impact growth in

interest earning assets, which in turn could negatively impact net income and operational efficiency. The yield on interest-earning assets was 8.20% for the year ended December 31, 2001, compared with 8.94% during the same period in 2000. Contributing to the increase in year over year interest revenues on loans was a $10.9 million, or 34.60%, decrease in nonaccrual loans. The steady growth in loans was funded through borrowings from the FHLB. The average cost of interest-bearing liabilities for the Company decreased to 5.21% for the year ended December 31, 2001, compared with 5.81% during the same period in 2000. Expressed as a percentage of interest-earning assets, the Company’s resulting net interest margin was 3.45% for the year ended December 31, 2001, compared with 3.62% during the same period in 2000. Current year earnings were impacted by the 475 basis point drop in interest rates during 2001. The resulting interest rate environment caused compression in the net interest margin during the first half of the year due to the immediate repricing of adjustable rate assets and the lag in liability repricing resulting from the six month weighted average maturity of certificates of deposits.

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, 2001, 90.62% of the Company’s net loan portfolio was adjustable rate, with 84.91% 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 MTA, the Prime Rate, LIBOR, COFI, one year CMT and the one month CMT. As of December 31, 2001, $1.0 billion, or 61.73%, of the Company’s adjustable rate net loan portfolio had reached internal interest rate floors. These loans will take on fixed rate repricing characteristics until sufficient upward interest rate movements will bring the fully indexed rate above their internal interest rate floors.

At December 31, 2001, 68.79% 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 ten months at December 31, 2001. 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 compression in the net interest margin during 2001 was due to the rapid decline in interest rates. Since the majority of the certificate of deposit accounts have repriced at least once to current lower rates, the Company expects that the cost of these accounts will stabilize in 2002. However, small upward interest rate adjustments over an extended period of time could have an adverse impact on the net interest margin due to the fixed rate repricing characteristics of the loan portfolio previously discussed.

As of December 31, 2001, 74.17% 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 25.83% 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 continued decrease in market interest rates has resulted in a gradual decrease in the cost of the Company’s 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), (2) changes in rate (i.e., changes in rate multiplied by old volume) and (3) changes attributable to both rate and volume.


(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 decreased by $1.3 million, or 0.87%, during the year ended December 31, 2001, compared with the same period in 2000. This decrease was primarily attributable to the 239 basis point decrease in the yield on cash and cash equivalents, which averaged 3.97% during 2001, compared with 6.36% in 2000. Average cash and cash equivalents decreased to $81.4 million in 2001, compared with $98.1 million in 2000. Also contributing to the decrease was a 69 basis point decline in the yield on average loans receivable, which averaged 8.44% during 2001, compared with 9.13% in 2000, partially offset by an increase of 9.67% in the average balance of loans outstanding. Average total loans, net of deferred fees, grew to $1.7 billion in 2001, compared with $1.5 billion in 2000.

Interest costs decreased by $3.0 million, or 3.40%, during the year ended December 31, 2001, compared with the same period in 2000. The decrease was primarily attributable to a 60 basis point decrease in the average cost of funds, to 5.21% for the year ended December 31, 2001, from 5.81% for the same period of 2000. The Company’s average interest-bearing liabilities increased to $1.64 billion for the year ended December 31, 2001, compared with $1.53 billion during the same period in 2000, primarily due to increases of $60.9 million and $53.5 million, in the average balance of FHLB advances and average interest-bearing deposits, respectively. Average interest-bearing deposits were $1.19 billion with an average cost of funds of 5.04% during the year ended December 31, 2001, compared with $1.14 billion and a 5.58% average cost of funds during the same period in 2000. The average balance of certificates of deposit (“CDs”) was $892.0 million with an average cost of funds of 5.54%, compared with $891.0 million and a 5.94% average cost of funds during the years ended December 31, 2001 and 2000, respectively. The average balance of money market accounts was $215.2 million with an average cost of funds of 3.94% during the year ended December 31, 2001, compared with $180.8 million and a 4.99% average cost of funds during the same period in 2000. As a percentage of total average deposits, transaction accounts have increased to 27.16% for the year ended December 31, 2001, compared with 23.80% of total average deposits during the same period in 2000. The change in the deposit mix and the decrease in the average cost of funds had a positive impact on the Company’s total interest costs during 2001.

These changes in interest revenues and interest costs produced an increase of $1.7 million, or 2.84%, in the Company’s net interest income for the year ended December 31, 2001, compared with the same period in 2000. Expressed as a percentage of interest-earning assets, the Company’s net interest margin decreased to 3.45% during the year ended December 31, 2001, compared with the net interest margin of 3.62% produced during the same period in 2000. The 475 basis point drop in interest rates during 2001 produced compression in the net interest margin during the first half of the year due to the immediate repricing of adjustable rate assets and the lag in liability repricing resulting from the six month weighted average maturity of certificates of deposits.

Although the year over year net interest margin declined, the Company has shown continuous improvement in this area, with the net interest margin increasing to 3.66% during the fourth quarter of 2001, from 3.30% during the first and second quarters of 2001, and 3.49% during the third quarter of 2001. This quarter over quarter increase is primarily due to experiencing the benefit of the repricing of the certificates of deposits, which have a six month average life. As of December 31, 2001, $1.0 billion, or 61.73%, of the Company’s adjustable rate net loan portfolio had reached contractual floors. These loans will take on fixed rate repricing characteristics until sufficient upward interest rate movements will bring the fully indexed rate above their floors.

Provision for credit losses were $3.4 million and $6.0 million for 2001 and 2000, respectively. The decrease in the provision for credit losses in 2001, was due to improvement in asset quality through the elimination of collateral dependent lending, tightening of other loan attributes (LTV, DSCR, etc.), revision of approval authorities and internal limitations on loan size beginning in January 2001. Nonaccrual loans totaled $20.7 million at December 31, 2001 (or 1.11% of total assets), compared with nonaccrual loans of $31.6 million (or 1.80% of total assets) at December 31, 2000. Other classified loans were $37.3 million at December 31, 2001, compared with $40.6 million at December 31, 2000. Additionally, total classified assets to Bank core capital and general allowance for credit losses was 32.59% in 2001, compared with 45.78% in 2000. Delinquent loans totaled $7.7 million at December 31, 2001, the lowest level of delinquencies in the last twelve years, compared with $26.9 million at December 31, 2000. As a result of the improved asset quality, management reduced the level of provision for credit losses in 2001. At December 31, 2001, the ratio of allowance for credit losses to loans receivable, net of specific allowance, was 1.76%, compared with 1.80% at December 31, 2000.

Although the Company maintains its allowance for credit losses at a level which it considers to be adequate to absorb the losses that, in the opinion and judgment of management, are known and inherent in the Bank’s loan portfolio, there can be no assurance that such losses will not exceed the amounts, thereby adversely affecting future results of operations. The calculation of the adequacy of the allowance for 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, as discussed herein, all of which can change without notice based on market and economic conditions and other factors. See “Item 1 — Business, Allowance for Credit losses” for a more complete discussion of the Company’s allowance for credit losses.

Noninterest revenues were $5.6 million for the year ended December 31, 2001, a decrease of $2.5 million, or 30.44%, from $8.1 million earned in 2000.

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 currently being underwritten will not allow the Company to charge the same level of fees that

were charged in prior years. Noninterest revenues also include deposit fee income for service fees, nonsufficient fund fees and other miscellaneous check and service charges, which increased to $1.4 million for the year ended December 31, 2001, an increase of 33.27% from $1.0 million earned in 2000. This increase in deposit fees was generated from new product offerings and a new fee schedule rolled out in July of 2000.

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.

Net income/(loss) 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.

During the year ended December 31, 2001, the Company sold 5 properties generating net cash proceeds of $3.0 million and net income of $0.1 million, compared with sales of 14 properties generating net cash proceeds of $5.1 million and a net loss of $0.2 million during the year ended December 31, 2000.

The table below details the Company’s general and administrative expenses for the periods indicated.

Total general and administrative expenses were $34.4 million for the year ended December 31, 2001, compared with $34.3 million of G&A incurred during the same period in 2000. G&A for the year ended December 31, 2001, was consistent with 2000. The increase in employee costs was primarily due to an increase of $0.7 million in compensation related expenses as a result of a new formalized employee merit program implemented in 2001. The decrease in professional fees was primarily due to lower legal expenses related to litigation as a result of fewer outstanding legal issues and insurance company reimbursements for legal fees. 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) improved to 44.80% during the fourth quarter from 55.37%, 54.36% and 50.01% during the first, second and third quarters of 2001, respectively, as a result of the combined quarter over quarter improvement in the net interest margin in 2001 and lower G&A costs during the fourth quarter, compared with the earlier quarters of 2001. The resulting efficiency ratio for the year ended December 31, 2001, was 50.89% compared with 50.19% for the year ended December 31, 2000.

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.

During 2001, other non-operating expenses totaled $0.1 million associated with ongoing litigation and/or satisfaction of judgments against the Company, compared with $2.2 million during the same period in 2000. This decrease is primarily attributable to the $2.0 million expense during 2000 associated with ongoing litigation and/or satisfaction of judgments against the Company, including the satisfaction of the judgment in the Takaki vs. Hawthorne Savings and Loan Association matter, and $0.1 million in connection with the early termination of the Irvine office lease.

The Company recorded an income tax provision of $12.6 million, excluding a $0.3 million income tax benefit on the extraordinary item related to the early extinguishment of debt, for the year ended December 31, 2001, compared with $10.7 million during 2000. The Company’s effective tax rate was 42.16% for the year ended December 31, 2001, compared with 42.75% during the same period in 2000. The decrease in the effective tax rate was primarily due to the ability of the Company to utilize tax credits related to lending activity in the Los Angeles Revitalization Zones.

During the year ended December 31, 2001, the Company repurchased $13.6 million of its Senior Notes at an average price of 102.5% of par value. Payment of the premium and recognition of the prepaid offering costs associated with the Senior Notes, resulted in an extraordinary loss of $0.5 million, net of related income taxes of $0.3 million, or approximately $0.06 per diluted share.

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 ROA of 0.85%, and a 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 were higher than long term rates. In turn, adjustable rate assets repriced off of the lower, long term rates while interest-bearing liabilities priced off of the higher short term rates.

Provision 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 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.

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, to a much lesser extent, 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. The $2.5 million decrease in other non-operating expenses was primarily due to fewer legal settlements in 2000 compared with 1999.

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 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, over $1.4 billion in 1999.

The steady growth in loans was funded through deposit growth and borrowings from the FHLB. Interest costs increased by $15.1 million, or 20.45%, during the year ended December 31, 2000, compared with 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 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 interest costs.

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 was the result of the inverted yield curve environment in which short term rates were higher than long term rates. In turn, adjustable rate assets were repriced off of the lower, long term rates while interest-bearing liabilities were priced off of the higher short term rates.

Provision for credit losses were $6.0 million and $12.0 million for 2000 and 1999, respectively. The decrease in the provision for credit losses was due to improvement in asset quality. 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 credit losses 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. At December 31, 2000, the ratio of allowance for credit losses to loans receivable, net of specific allowance, was 1.80%, compared with 1.65% as of December 31, 1999.

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.

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.

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 net income of $0.8 million during the year ended December 31, 1999.

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.

The increase in G&A expenses had a negative impact on the Company’s efficiency ratio. 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 totaled $2.2 million for the year ended December 31, 2000, primarily 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. During 1999, the Company incurred $4.7 million in other non-operating expenses, 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 severance for the former CEO.

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.

The Company’s total assets at December 31, 2001, were $1.86 billion, an increase of $102.8 million, or 5.86%, over December 31, 2000. As of December 31, 2001, asset growth was reflected in all categories of interest-earning assets, with the exception of cash and cash equivalents. Loan receivables, net, reflected the largest growth, increasing by $101.2 million, or 6.29%, over 2000. Due to the historically low interest rate environment in 2001, which has continued into 2002, prepayment speeds continue to increase. If this trend continues, it could negatively impact growth in interest earning assets, which in turn could negatively impact net income and operational efficiency. The growth in loans during 2001 was funded through FHLB advances. FHLB advances increased to $484.0 million at December 31, 2001, from $384.0 million at December 31, 2000, reflecting an increase of 26.04%. Total deposits decreased to $1.20 billion at December 31, 2001, from $1.21 billion at December 31, 2000, reflecting a decrease of 1.25%, which was due to a decrease of $74.3 million in certificates of deposits while transaction accounts increased $59.1 million, or 18.73%, to $374.5 million at December 31, 2001, from $315.4 million at December 31, 2000. As a percentage of total deposits, transaction accounts have increased to 31.21% at December 31, 2001, compared with 25.96% of total deposits at December 31, 2000. Certificates of deposit totaled $825.2 million, or 68.79% of total deposits at December 31, 2001, compared with 74.04% of total deposits, or $899.5 million, at December 31, 2000. The change in the deposit mix had a positive impact on the Company’s total interest costs during 2001. The cross-sell ratio, defined as the number of different types of loan and/or deposit products and services per customer household, increased to 2.37 per household at December 31, 2001, from 1.78 at December 31, 2000.

The Company’s capital consists of common stockholders’ equity, which amounted to $120.4 million, or 6.49%, of the Company’s total assets at December 31, 2001.

Management is committed to maintaining capital at a level sufficient to assure shareholders, customers, and regulators that the Company and its subsidiaries 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.”

As of December 31, 2001, the Bank is categorized as “well capitalized” under the regulatory framework for PCA Rules. There are no conditions or events subsequent to December 31, 2001, that management believes have changed the Bank’s category. The following table compares the Bank’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.

The following table summarizes the regulatory capital requirements under HOLA for the Bank as of December 31, 2001. As indicated in the table below, the Bank’s capital levels exceed all three of the currently applicable minimum HOLA capital requirements.


(1)	Includes the portion of non-residential construction and land development loans that exceed a loan-to-value 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.

Hawthorne Financial Corporation maintained cash and cash equivalents of $2.8 million at December 31, 2001. Hawthorne Financial Corporation is a holding company with no significant business operations outside of the Bank. From time to time, the Company is dependent upon the Bank for dividends in order to make future semi-annual interest payments. The ability of the Bank to provide dividends to Hawthorne Financial Corporation is governed by applicable regulations of the OTS. The Bank received OTS approval to declare a

dividend to the Holding Company in an amount needed to pay the 2001 interest payments on the Senior Notes and the Capital Securities. Based upon these applicable regulations, the Bank’s supervisory rating, and the Bank’s current and projected earnings rate, management fully expects the Bank to maintain the ability to provide dividends to Hawthorne Financial Corporation for the payment of interest on the Company’s long-term debt for the foreseeable future.

In September 2001, the Company authorized up to $5.0 million for the repurchase of shares of its common stock and to retire Senior Notes. This increased the amount previously authorized. The Company announced two 5% repurchase authorizations in March 2000 and July 2000, which authorized an aggregate of approximately 541,000 shares, and an additional 77,000 shares in April 2001. As of March 21, 2002, cumulative repurchases included 555,402 shares at an average price of $11.74. The Company has also repurchase $14.2 million in Senior Notes at an average price of 102.2% of par value.

OTS regulations no longer require a savings association to maintain an average daily balance of liquid assets. In July 2001, the OTS issued a final rule that eliminated the 4% liquidity requirement and replaced it with a general requirement that thrifts maintain sufficient liquidity to ensure safety and soundness. Therefore, OTS regulations no longer require a savings association to maintain a specified average daily balance of liquid assets (including cash, certain time deposits and savings accounts, bankers’ acceptances, certain government obligations, and certain other investments). The Bank maintains an adequate level of liquid assets to ensure safe and sound daily operations.

The Company’s primary funding resources are deposits, principal payments on loans, FHLB advances 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 and operating costs and expenses.

organized subsidiary of the Company) and the Thrift will be merged into the Bank (“Merger”). First Fidelity stockholders will receive $36.60 per share for their stock, in cash, Hawthorne stock, or a combination of the two, at the election of the stockholders, subject to a maximum of approximately 1,266,555 shares of Hawthorne stock in the aggregate to be issued in the transaction. The transaction, which is subject to regulatory approval and approval by the stockholders of Hawthorne and First Fidelity, is anticipated to close during the third quarter of 2002. The Thrift is a California state chartered industrial loan company with assets of $616.8 million as of December 31, 2001, and four branches located in Orange County and San Diego County, California, that specializes in loans secured by income producing real estate. In connection with the Agreement, Hawthorne and certain officers and directors of First Fidelity, in their capacities as shareholders of First Fidelity, entered into Shareholder Agreements pursuant to which such officers and directors agreed to vote the shares of First Fidelity common stock held by them in favor of the Merger.

On January 22, 2002, the Securities and Exchange Commission issued an interpretive release on disclosures related to liquidity and capital resources, including off-balance sheet arrangements. The Company does not have material off-balance sheet arrangements or related party transactions that are not disclosed herein. The Company is not aware of factors that are reasonably likely to adversely affect liquidity trends, other than the risk factors presented herein and in other Company filings. However, the following additional information is provided to assist financial statement users.

Lending Commitments — At December 31, 2001, the Company had commitments to fund the undisbursed portion of existing construction and land loans of $113.5 million and income property and estate loans of $5.3 million. The commitments to fund the undisbursed portion of existing lines of credit, excluding construction and land lines of credit, totaled $18.7 million.

Operating Leases — These leases generally are entered into only for non-strategic investments (e.g., office buildings, warehouses) where the economic profile is favorable. The liquidity impact of outstanding leases is not material to the Company as disclosed herein.

Participation Loans — The Bank enters into agreements with other financial institutions to participate a percentage of ownership interest in selected loan originations of the Bank, in the ordinary course of business. The participation agreements reflect an absolute and outright sale from the Bank to the participant for a percentage ownership interest in the loan originated by the Bank. These agreements are made by the Bank to the participant without recourse, representation, or warranty of any kind, either expressed or implied.

Other Contractual Obligations — The Company does not have material financial guarantees or other contractual commitments that are reasonably likely to adversely affect liquidity. The Federal Home Loan Bank issued a $66.0 million Letter of Credit on June 25, 2001, which matured on January 10, 2002, which is disclosed herein. See “Note 14 — Off-Balance Sheet Activity.”

Related Party Transactions — The Company has related party transactions in the ordinary course of business. The Company also paid a director-related company for recruitment services, which were made under terms that were consistent with the Company’s policies regarding recruitment firms. The Company also granted loans to certain executives, and extended credit in the form of overdraft protection lines, as disclosed herein. The Company does not have any other related party transactions that materially affect the results of operations, cash flow or financial condition. See “Note 16 — Related Parties.”

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, 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)

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, 2001, 90.62% of the Company’s loan portfolio was tied to adjustable rate indices, such as COFI, Prime, CMT, MTA and LIBOR. As of December 31, 2001, $1.0 billion, or 61.73%, of the Company’s adjustable rate net loan portfolio had reached their internal interest rate floors. These loans will take on fixed rate repricing characteristics until sufficient upward interest rate movements will bring the fully indexed rate above their internal interest rate floors.

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, 2001, 74.17% 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 25.83% 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 internal interest rate caps and floors. The benefit of the Bank’s asset sensitive balance sheet will be partially negated by the $1.0 billion in loans that have reached contractual floors that will not immediately reprice upwards. These adjustable loans have taken on fixed rate loan characteristics and will not reprice until rates have increased enough to bring the fully indexed rate above the internal floor rate.

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 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. Normally, 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

With the sharp decline in interest rates during 2001, the rate shock scenarios for a decrease in rates became unpredictable. Many of the current deposit rates and market indices such as LIBOR were below 3%. As a result, a rate shock down of 300 or even 200 basis points was not possible. With concurrence from the OTS, for December 31, 2001, rate shocks were performed for 100, 200 and 300 basis points up, and 100 basis points down.

Since 1995, the Company has been utilizing internal interest rate floors on individual loans held for investment, to mitigate the risk of interest margin compression in a decreasing rate environment. Additionally, on most new income property loans, the Company utilizes internal interest rate caps on individual loans held for investment. 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 internal 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. Due to the 2001 interest rate environment, which has continued into 2002, prepayment speeds continue to increase. If this trend continues, it could negatively impact growth in interest earning assets, which in turn could negatively impact net income and operational efficiency. The Company is also exposed to risks associated with interest rate caps in that interest rates could exceed the maximum rates on such loans, and while the Company’s cost of funds would continue to rise, the interest income derived from these loans would 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, 2001, 68.79% 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 five months at December 31, 2001. 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 Company saw compression in the net interest margin during 2001 due to the rapid decline in interest rates. Now that the majority of the certificate accounts have repriced at least once to current, lower rates, the Company expects that the cost of its certificate accounts will stabilize in the coming months.

The following table sets forth information concerning repricing opportunities for the Company’s interest-earning assets and interest-bearing liabilities as of December 31, 2001. 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 period in which they mature. Such assets and liabilities are classified by the earlier of their maturity or repricing date.


(1)	Excludes noninterest-earning cash balances.

(2)	Balances include $20.7 million of nonaccrual loans, and are gross of deferred fees and costs and allowance for credit losses.

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 IRR 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 produces the largest decline. By agreement with the OTS, the downward rate shock was performed for 100 basis points down only, due to the overall compression of rates. 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, 2001, based on the Company’s internally generated model, it was estimated that the Company’s NPV ratio was 9.77% in the event of a 200 basis point increase in rates, a decrease of 1.31% from basecase of 9.90%. If rates were to decrease by 100 basis points, the Company’s NPV ratio was estimated at 9.92%, an increase of 0.20% from basecase.

Presented below, as of December 31, 2001, 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.

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 internal 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 a rising and a declining rate environment. Based on both the Company’s model and the regulatory model, in accordance with the OTS Guideline’s Interest Rate Sensitivity Measure, the Company falls within the OTS’ minimal risk category.

Information regarding Financial Statements and Supplementary Data appears on pages A-1 through A-34 under the captions “Consolidated Statements of Financial Condition,” “Consolidated Statements of Income,” “Consolidated Statements of Stockholders’ Equity,” “Consolidated Statements of Cash Flows” and “Notes to Consolidated Financial Statements” and is incorporated herein by reference.

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.”

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.

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.

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.


	Independent Auditors’ Report
	Consolidated Financial Statements


	Consolidated Statements of Financial Condition as of December 31, 2001 and 2000.
	Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999.
	Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2001, 2000 and 1999.
	Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.
	Notes to Consolidated Financial Statements for the years ended December 31, 2001, 2000 and 1999.


	Schedules are omitted because they are not applicable or because the required information is provided in the Consolidated Financial Statements, including the Notes thereto.

Exhibits are listed by number corresponding to the Exhibit Table of Item 601 of Regulation S-K.


*	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.

(2)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2000.

(3)	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.

(4)	Incorporated by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 1996.

(5)	Incorporated by reference from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.

(6)	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.

(7)	To be filed within 120 days after the end of the fiscal year ended December 31, 2001.

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.


	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.

We have audited the accompanying consolidated statements of financial condition of Hawthorne Financial Corporation and Subsidiaries (the “Company”) as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. 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 on 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 position of Hawthorne Financial Corporation and Subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

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.

The consolidated financial statements include the accounts of Hawthorne Financial Corporation and its wholly owned subsidiaries, Hawthorne Savings, F.S.B. (“Bank”) and HFC Capital Trust I/II, which are collectively referred to herein as the “Company.” All significant intercompany transactions and balances have been eliminated in consolidation.

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 generated from 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.

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 credit losses, valuation of real estate owned. Other estimates include fair value of stock options and fair values of financial instruments.

In the consolidated statements of financial condition and cash flows, cash and cash equivalents include cash, amounts due from banks and overnight investments. Office of Thrift and Supervision (“OTS”) regulations no longer require a savings association to maintain an average daily balance of liquid assets. In July 2001, the OTS issued a final rule that eliminated the 4% liquidity requirement and replaced it with a general requirement that thrifts maintain sufficient liquidity to ensure safety and soundness.

Loans are generally carried at principal amounts, less net deferred loan fees and costs. Net deferred loan fees and costs include deferred unamortized fees, less direct incremental loan origination costs. The Company defers all loan fees and costs, 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. 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. Loans 90 days or more delinquent, or when collection of interest or principal becomes uncertain, and loans classified substandard for which interest payment reserves were established from loan funds rather than borrower funds, 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, the loan is paying in accordance with its payment terms for a period, typically between three to six months, 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, or the fair value of the collateral if the loan is collateral dependent. All loans on nonaccrual status are considered to be impaired, however, not all impaired loans are on nonaccrual status. To remain on accrual status, payments on impaired loans must be current.

When the measurement of the impaired loan is less than the recorded amount of the loan, an impairment is recognized by recording a provision with a corresponding charge to the allowance for credit losses.

All loans are classified as held-for-investment as the Company has the current intent and ability to hold these loans in their portfolio until maturity.

In accordance with the SEC Staff Accounting Bulletin No. 102, “Selected Loan Loss Allowance Methodology and Documentation Issues,” and the newly released Federal Financial Institutions Examination Council (“FFIEC”) guidelines, management establishes specific allowances for 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. On a quarterly basis, management completes a loan loss allowance analysis that provides for an adequate balance in the allowance for credit losses. Management evaluates the allowance for credit losses in accordance with GAAP, within the guidance established by SFAS No. 5, “Accounting for Contingencies,” and SFAS No. 114, as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan,” as well as standards established by regulatory Interagency Policy Statements on the Allowance for Loan and Lease Losses (“ALLL”). 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 for impaired loans, in accordance with SFAS No. 114, 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. Other methods can be used to estimate impairment (market price or present value of expected future cash flows discounted at the loan’s original interest rate).

The Company maintains an allowance for credit losses, which is not tied to individual loans or properties (General Valuation Allowances, or “GVA”). GVAs 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 GVA, 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) additional analyses to validate the reasonableness of the credit losses. The GVA level, based on the OTS Examiner Benchmark and review of peer information, is used to establish a range, which supports the reasonableness of the Bank’s GVA balance. The GVA includes an unallocated amount. 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 other general economic and business conditions affecting our key lending areas.

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). Any subsequent declines in the fair value of the REO property after the date of transfer are recorded through a write-down of the asset. 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. Gains and losses from sales of real estate owned properties are reflected in “Income/(loss) from real estate operations, net” in the consolidated statements of income.

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:

In connection with the issuance of its 1997 12.50% Senior Notes (“Senior Notes”), the Company capitalized $2.5 million of issuance costs. To date, the Company amortized $0.6 million of its Senior Notes issuance costs, excluding $0.5 million related to the accelerated write-off of prepaid issuance costs due to the

repurchase of Senior Notes, which are being amortized over seven years, the life of the debt, or through the period in which the debt is retired. See “Note 11 — Capital and Debt Offerings.”

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 December 31.

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.

The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure requirements of 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 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.

Long-lived assets and certain identifiable intangibles 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 and identifiable intangibles to be disposed of be reported at the lower of historical cost or fair value, less costs to sell.

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 and interpreted, 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 adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS No. 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.

In September 2000, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.

In July 2001, the FASB issued SFAS No. 141, “Business Combinations,” which requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The adoption of SFAS No. 141 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 establishes new standards for goodwill acquired in a business combination and eliminates amortization of

goodwill and instead sets forth methods to periodically evaluate goodwill for impairment. The provisions of SFAS No. 142 are to be applied starting with fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 will not have a significant impact on the financial position, result of operations, or cash flows of the Company.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which is effective for fiscal years beginning after December 15, 2001. This pronouncement supercedes SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 for the disposal of a segment of a business. The Company is currently evaluating the impact that the adoption of SFAS No. 144 may have on its financial position, result of operations or cash flows.

Certain amounts in the 2000 and 1999 consolidated financial statements have been reclassified to conform with 2001 presentation.

The table below sets forth the Company’s earnings per share calculations for the years ended December 31, 2001, 2000 and 1999. 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 and Note 11.”

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 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.


(1)	Excludes 12,083, 225,327 and 385,000 options outstanding for the year ended December 31, 2001, 2000 and 1999, respectively, for which the exercise price exceeded the average market price of the Company’s common stock during the periods.

(2)	Under the treasury stock 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 repurchased at the average closing stock price for the respective period.

(3)	Excludes 15,000, 160,000 and 330,000 options outstanding at December 31, 2001, 2000 and 1999, respectively, for which the exercise price exceeded the average market price of the Company’s common stock at period-end.

As of December 31, 2001 and 2000, the Company did not have any 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, there was no investment activity in 2001, 2000 and 1999.

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.


(2)	Predominantly loans to finance the construction of income-producing 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.

The table below summarizes the maturities for fixed rate loans and the repricing intervals for adjustable rate loans as of December 31, 2001:

The contractual weighted average interest rates on loans at December 31, 2001 and 2000 were 7.69% and 8.98%, respectively.

(1)

At December 31, 2001 and December 31, 2000, nonaccrual loans included six loans totaling $4.7 million and 10 loans totaling $7.1 million, respectively, in bankruptcy. There were no troubled debt restructured loans (“TDRs”) on nonaccrual status at December 31, 2001, compared with $3.7 million at December 31, 2000. Excludes $4.7 million and $15.1 million of TDRs that were paying in accordance with their modified terms at December 31, 2001 and 2000, respectively.

The interest income recognized on loans that were on nonaccrual status at December 31, 2001, 2000 and 1999, was $0.2 million, $1.7 million and $2.3 million, respectively. If these loans had been performing for the

entire year, the income recognized would have been $1.8 million, $3.3 million and $4.5 million for 2001, 2000 and 1999, 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 operations 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 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.

The table below summarizes the activity within the allowance for credit losses on loans for the periods indicated:

Management believes the level of allowance for 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, 2001.

The recorded investment in loans considered to be impaired under SFAS No. 114 as amended by SFAS No. 118, at December 31 was as follows:

In December 2000, a $5.2 million specific allowance was identified for one impaired nonaccrual commercial loan, whose major tenant filed for Chapter 11 bankruptcy protection. The required allowance was reclassified from general allowance to specific allowance. A 51% controlling interest in this tenant was acquired by a strong investor during 2001. During the third quarter of 2001, the tenant ratified a renegotiated lease, which enabled the Bank to revise its internal valuation and consequently, reduce the specific allowance for this loan to $3.0 million as of December 31, 2001.

The table below reconciles the principal balance of impaired loans and TDRs for the dates indicated:


(1)	TDRs not classified and not on nonaccrual.

(2)	Includes accruing TDRs of $0.2 million at December 31, 2001 and 2000.

At December 31, 2001, the Bank’s loans-to-one-borrower limit was $27.3 million based upon the 15% of unimpaired capital and surplus measurement. At December 31, 2001, the Bank’s largest relationships consisted of one borrower with outstanding commitments of $18.8 million, which consisted of approximately 5 loans, with $9.5 million secured by commercial real estate in the Bank’s lending area, $8.9 million secured by non-residential collateral and one unsecured commercial loan. All of these loans were performing in accordance with their terms.

Approximately 97.8% and 97.4% of the Bank’s loan portfolio were concentrated in Southern California at December 31, 2001 and 2000, respectively.


(1)	The Company held one and five properties as of December 31, 2001 and, 2000, respectively.

The table below summarizes activity in the allowance for losses on real estate owned for the periods indicated:

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.

The Company recognized $2.7 million, $2.8 million and $2.3 million of depreciation and amortization expense for the years ended December 31, 2001, 2000, and 1999, respectively.

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:


(1)	Deposits in excess of $100,000, excluding the $60.0 million of State deposits placed by the State of California with the Company, were 28.00% of total deposits at December 31, 2001, compared to 29.87% of total deposits at December 31, 2000.

The table below summarizes interest expense on deposits, by type of account, for the periods indicated:

The following tables set forth the remaining maturities of the certificates of deposit outstanding for the periods indicated:

A primary alternate funding source for the Company is a credit line with the FHLB with a maximum advance of up to 40% 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 Company is authorized to engage. In granting advances, the FHLB considers a member’s creditworthiness and other relevant factors. At December 31, 2001, the Company had an approved line of credit with the FHLB for a maximum advance of up to 40% of total assets ($749.3 million as of December 31, 2001) based on qualifying collateral. The table below summarizes the balance and rate of FHLB advances for the dates indicated:

The following table sets forth the remaining maturities of FHLB advances as of December 31, 2001:

The following table summarizes information relating to the Company’s FHLB advances for the periods or dates indicated:

The provision for income taxes consist of the following components for the periods indicated:

The table below summarizes the components of the net deferred income tax assets for the dates indicated:

The table below summarizes the differences between the statutory income tax and the Company’s effective tax for the periods indicated:

The Company previously had 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, 2001, the ESOP owned 85,530 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 $0.5 million, $0.4 million and $0.4 million for the years ended December 31, 2001, 2000 and 1999, respectively.

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 salary and bonuses. The Bank does not currently 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 7.52% and 8.30%, respectively, for the years ended December 31, 2001 and 2000. The expense of funding the deferred compensation plan was $0.4 million and $0.1 million, respectively, for the years ended December 31, 2001 and 2000.

On May 21, 2001, the Company merged its two stock option plans (“Option Plans”) into the Hawthorne Financial Corporation 2001 Stock Incentive Plan (“Stock Incentive Plan”), 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, 2001, the Stock Incentive Plan provides for the issuance of 1,018,900 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. As of February 28, 2002, the number of stock options available under the Stock Incentive Plan was 259,400.

Presented below is a summary of the transactions under the stock option plans described above for the periods indicated:

The table below summarizes information about stock options outstanding and exercisable at December 31, 2001:

If compensation costs for the Stock Incentive Plan and Stock Option Plans and had been determined based on the fair value at the grant date for awards in 2001, 2000 and 1999, 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 as follows:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

On December 31, 1997, the Company sold $40.0 million of 12.50% Senior Notes due 2004 (“Senior Notes”) in a private placement (the “1997 Offering”), which included registration rights. Interest on the Senior Notes is payable semi-annually. On or after December 31, 2002, the 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.

capital securities (the “Capital Securities II”), respectively. The Capital Securities, which were issued in separate private placement transactions, represent undivided preferred beneficial interests in the assets of the respective Trusts. The Company is the owner of all the beneficial interests represented by the common securities of Trust I and Trust II (the “Common Securities I” and “Common Securities II”) (together with the “Capital Securities I” and “Capital Securities II” and, collectively the “Trust Securities”). Trust I and Trust II exist for the sole purpose of issuing the Trust Securities and investing the proceeds thereof in 10.18% fixed rate and floating rate, respectively, junior subordinated deferrable interest debentures (the “Junior Subordinated Debentures I” and “Junior Subordinated Debentures II”) issued by the Company and engaging in certain other limited activities. Interest on the Capital Securities is payable semi-annually.

The Junior Subordinated Debentures I held by Trust I will mature on June 8, 2031, at which time the Company is obligated to redeem the Capital Securities I. The Capital Securities I are callable, in whole or in part, at par value after ten years. The proceeds were used to repurchase, in a market transaction, $7.2 million of its Senior Notes at an average price of 101.4% of par value. See “Note 17 — Extraordinary Item.”

The floating rate on the Capital Securities II, with an initial start rate of 5.97%, reprices semi-annually based on the index of six month LIBOR plus a spread of 3.75%, with a cap of 11.00% through December 8, 2006. The Junior Subordinated Debentures II held by Trust II will mature on December 8, 2031, at which time the Company is obligated to redeem the Capital Securities II. The Capital Securities II are callable, in whole or in part, at par value after five years. The proceeds were used to repurchase, in a market transaction, $4.0 million of its Senior Notes at an average price of 105.0% of par value. See “Note 17 — Extraordinary Item.”

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, 2001 and 2000, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2001 and 2000, the Bank is categorized as “well capitalized” under the regulatory framework for Prompt Corrective Action (“PCA”) Rules based on the most recent notification from the OTS. There are no conditions or events subsequent to December 31, 2001, that management believes have changed the Bank’s category. The Bank has agreed to maintain minimum core capital and risk-based capital ratios of 6.5% and 11.0%, respectively. The following table compares the Bank’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.

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.

At December 31, 2001, the Company had commitments to fund the undisbursed portion of existing construction and land loans of $113.5 million and income property and estate loans of $5.3 million. The commitments to fund the undisbursed portion of existing lines of credit, excluding construction and land lines of credit, totaled $18.7 million.

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 common area maintenance expenses (“CAM”), including property taxes, insurance and other items. Current rental commitments for the remaining terms of these noncancelable leases as of December 31, 2001 are as follows:

Lease expense, excluding CAM expenses, for office facilities was $1.9 million, $1.6 million and $1.7 million for the years ended December 31, 2001, 2000 and 1999, respectively.

The Company is a party to credit-related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. The financial instruments include letters of credit. These commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual amounts of the commitments reflect the extent of involvement the Company has in the financial instruments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments.

On January 10, 2002, the FHLB issued two $33.0 million Letters of Credit (LC) to the Company to replace the $66.0 million LC issued on June 25, 2001, which matured on January 9, 2002. The purpose of the LCs is to fulfill the collateral requirements for two $30.0 million deposits placed by the State of California with the Company. The LCs are issued in favor of the State Treasurer of the State of California and will

mature on April 10, 2002 and July 12, 2002. There were no issuance fees associated with these letters of credit; however, a maintenance fee of 15 basis points per annum is paid monthly by the Company.

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.

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, accrued interest receivable and accrued interest payable, 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 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 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 and capital securities are estimated using the rates currently offered on similar instruments with similar terms. The letter of credit has no interest rate associated with it, therefore, the carrying amount approximates the fair value.

Additionally, 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 the 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, 2001 and 2000. 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.

In the ordinary course of business, the Company paid a director-related company for recruitment services. In management’s opinion, the recruitment services were made under terms consistent with the Company’s policies regarding recruitment firms. Recruitment fees paid to the director-related company in 2001, 2000 and 1999, totaled $0.1 million, $0.1 million and $0.2 million, respectively.

In the ordinary course of business, the Company granted loans to certain executive officers and directors and extended credit in the form of overdraft protection lines. 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, 2001, there were no loans granted to executive officers and directors. During the years ended December 31, 2000 and 1999, the Company granted $0.2 million and $0.2 million, respectively, in loans to executive officers and directors. In 2001, as stipulated in the deferred compensation loan agreement, the Company forgave $0.1 million of the $0.2 million loan granted in 2000, thereby reducing the principal balance to $0.1 million at December 31, 2001. During 1999, the $0.2 million loan granted in 1999 was paid in full.

associated with the Senior Notes, resulted in an extraordinary loss of $0.5 million, net of related income taxes of $0.3 million, or approximately $0.06 per diluted share.

On March 20, 2002, Hawthorne Financial Corporation (“Hawthorne”) and its subsidiary, Hawthorne Savings, F.S.B. (the “Bank”), entered into an Agreement and Plan of Reorganization (“Agreement”) with First Fidelity Bancorp, Inc., (“First Fidelity”) and its subsidiary, First Fidelity Investment and Loan Association (“Thrift”), pursuant to which First Fidelity will be merged with the Company (or a newly organized subsidiary of the Company) and the Thrift will be merged into the Bank (“Merger”). First Fidelity stockholders will receive $36.60 per share for their stock, in cash, Hawthorne stock, or a combination of the two, at the election of the stockholders, subject to a maximum of approximately 1,266,555 shares of Hawthorne stock in the aggregate to be issued in the transaction. The transaction, which is subject to regulatory approval and approval by the stockholders of Hawthorne and First Fidelity, is anticipated to close during the third quarter of 2002. The Thrift is a California state chartered industrial loan company with assets of $616.8 million as of December 31, 2001, and four branches located in Orange County and San Diego County, California, that specializes in loans secured by income producing real estate. In connection with the Agreement, Hawthorne and certain officers and directors of First Fidelity, in their capacities as shareholders of First Fidelity, entered into Shareholder Agreements pursuant to which such officers and directors agreed to vote the shares of First Fidelity common stock held by them in favor of the Merger.

A-34 EX-4.15 3 a80073ex4-15.txt EXHIBIT 4.15 EXHIBIT 4.15 HAWTHORNE FINANCIAL CORPORATION as Issuer INDENTURE Dated as of November 28, 2001 WILMINGTON TRUST COMPANY as Trustee FLOATING RATE JUNIOR SUBORDINATED DEBT SECURITIES DUE 2031 ARTICLE I DEFINITIONS Section 1.01 Definitions...............................................................1 ARTICLE II DEBT SECURITIES Section 2.01 Authentication and Dating.................................................8 Section 2.02 Form of Trustee's Certificate of Authentication...........................9 Section 2.03 Form and Denomination of Debt Securities..................................9 Section 2.04 Execution of Debt Securities..............................................9 Section 2.05 Exchange and Registration of Transfer of Debt Securities.................10 Section 2.06 Mutilated, Destroyed, Lost or Stolen Debt Securities.....................13 Section 2.07 Temporary Debt Securities................................................13 Section 2.08 Payment of Interest......................................................14 Section 2.09 Cancellation of Debt Securities Paid, etc................................15 Section 2.10 Computation of Interest..................................................15 Section 2.11 Extension of Interest Payment Period.....................................17 Section 2.12 CUSIP Numbers............................................................18 ARTICLE III PARTICULAR COVENANTS OF THE COMPANY Section 3.01 Payment of Principal, Premium and Interest; Agreed Treatment of the Debt Securities .........................................................18 Section 3.02 Offices for Notices and Payments, etc....................................19 Section 3.03 Appointments to Fill Vacancies in Trustee's Office.......................19 Section 3.04 Provision as to Paying Agent.............................................19 Section 3.05 Certificate to Trustee...................................................20 Section 3.06 Additional Interest......................................................20 Section 3.07 Compliance with Consolidation Provisions.................................21 Section 3.08 Limitation on Dividends..................................................21 Section 3.09 Covenants as to the Trust................................................22 ARTICLE IV LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE Section 4.01 Securityholders' Lists...................................................22 Section 4.02 Preservation and Disclosure of Lists.....................................22

i ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT Section 5.01 Events of Default........................................................24 Section 5.02 Payment of Debt Securities on Default; Suit Therefor.....................25 Section 5.03 Application of Moneys Collected by Trustee...............................27 Section 5.04 Proceedings by Securityholders...........................................27 Section 5.05 Proceedings by Trustee...................................................28 Section 5.06 Remedies Cumulative and Continuing.......................................28 Section 5.07 Direction of Proceedings and Waiver of Defaults by Majority of Securityholders .........................................................28 Section 5.08 Notice of Defaults.......................................................29 Section 5.09 Undertaking to Pay Costs.................................................29 ARTICLE VI CONCERNING THE TRUSTEE Section 6.01 Duties and Responsibilities of Trustee...................................30 Section 6.02 Reliance on Documents, Opinions, etc.....................................31 Section 6.03 No Responsibility for Recitals, etc......................................32 Section 6.04 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debt Securities........................................32 Section 6.05 Moneys to be Held in Trust...............................................32 Section 6.06 Compensation and Expenses of Trustee.....................................32 Section 6.07 Officers' Certificate as Evidence........................................33 Section 6.08 Eligibility of Trustee...................................................33 Section 6.09 Resignation or Removal of Trustee........................................34 Section 6.10 Acceptance by Successor Trustee..........................................35 Section 6.11 Succession by Merger, etc................................................36 Section 6.12 Authenticating Agents....................................................37 ARTICLE VII CONCERNING THE SECURITYHOLDERS Section 7.01 Action by Securityholders................................................38 Section 7.02 Proof of Execution by Securityholders....................................38 Section 7.03 Who Are Deemed Absolute Owners...........................................39 Section 7.04 Debt Securities Owned by Company Deemed Not Outstanding..................39

ii Section 7.05 Revocation of Consents; Future Holders Bound.............................39 ARTICLE VIII SECURITYHOLDERS' MEETINGS Section 8.01 Purposes of Meetings.....................................................40 Section 8.02 Call of Meetings by Trustee..............................................40 Section 8.03 Call of Meetings by Company or Securityholders...........................41 Section 8.04 Qualifications for Voting................................................41 Section 8.05 Regulations..............................................................41 Section 8.06 Voting...................................................................42 Section 8.07 Quorum; Actions..........................................................42 ARTICLE IX SUPPLEMENTAL INDENTURES Section 9.01 Supplemental Indentures without Consent of Securityholders...............43 Section 9.02 Supplemental Indentures with Consent of Securityholders..................44 Section 9.03 Effect of Supplemental Indentures........................................45 Section 9.04 Notation on Debt Securities..............................................45 Section 9.05 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee .................................................................46 ARTICLE X REDEMPTION OF SECURITIES Section 10.01 Optional Redemption......................................................46 Section 10.02 Special Event Redemption.................................................46 Section 10.03 Notice of Redemption; Selection of Debt Securities.......................46 Section 10.04 Payment of Debt Securities Called for Redemption.........................47 ARTICLE XI CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE Section 11.01 Company May Consolidate, etc., on Certain Terms..........................48 Section 11.02 Successor Entity to be Substituted.......................................48 Section 11.03 Opinion of Counsel to be Given to Trustee................................49 ARTICLE XII SATISFACTION AND DISCHARGE OF INDENTURE Section 12.01 Discharge of Indenture...................................................49 Section 12.02 Deposited Moneys to be Held in Trust by Trustee..........................49 Section 12.03 Paying Agent to Repay Moneys Held........................................50

iii Section 12.04 Return of Unclaimed Moneys...............................................50 ARTICLE XIII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 13.01 Indenture and Debt Securities Solely Corporate Obligations...............50 ARTICLE XIV MISCELLANEOUS PROVISIONS Section 14.01 Successors...............................................................51 Section 14.02 Official Acts by Successor Entity........................................51 Section 14.03 Surrender of Company Powers..............................................51 Section 14.04 Addresses for Notices, etc...............................................51 Section 14.05 Governing Law............................................................51 Section 14.06 Evidence of Compliance with Conditions Precedent.........................51 Section 14.07 Non-Business Days........................................................52 Section 14.08 Table of Contents, Headings, etc.........................................52 Section 14.09 Execution in Counterparts................................................52 Section 14.10 Separability.............................................................52 Section 14.11 Assignment...............................................................52 Section 14.12 Acknowledgment of Rights.................................................53 ARTICLE XV SUBORDINATION OF DEBT SECURITIES Section 15.01 Agreement to Subordinate.................................................53 Section 15.02 Default on Senior Indebtedness...........................................54 Section 15.03 Liquidation; Dissolution; Bankruptcy.....................................54 Section 15.04 Subrogation..............................................................55 Section 15.05 Trustee to Effectuate Subordination......................................56 Section 15.06 Notice by the Company....................................................56 Section 15.07 Rights of the Trustee; Holders of Senior Indebtedness....................57 Section 15.08 Subordination May Not Be Impaired........................................57

EXHIBITS EXHIBIT A FORM OF DEBT SECURITY iv THIS INDENTURE, dated as of November 28, 2001, between Hawthorne Financial Corporation, a savings and loan holding company incorporated in Delaware (hereinafter sometimes called the "Company"), and Wilmington Trust Company, a Delaware banking corporation, as trustee (hereinafter sometimes called the "Trustee"), W I T N E S S E T H : WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issuance of its Floating Rate Junior Subordinated Debt Securities due 2031 (the "Debt Securities") under this Indenture and to provide, among other things, for the execution and authentication, delivery and administration thereof, the Company has duly authorized the execution of this Indenture, NOW, THEREFORE, This Indenture Witnesseth: In consideration of the premises, and the purchase of the Debt Securities by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Debt 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 and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.01. 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. "Additional Interest" shall have the meaning set forth in Section 3.06. "Additional Provisions" shall have the meaning set forth in Section 15.01. "Authenticating Agent" means any agent or agents of the Trustee which at the time shall be appointed and acting pursuant to Section 6.12. "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. "Board of Directors" means the board of directors or the executive committee or any other duly authorized designated officers of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company 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 Trustee. "Business Day" means any day other than a Saturday, Sunday or any other day on which banking institutions in Wilmington, Delaware, New York City or El Segundo, California are permitted or required by any applicable law or executive order to close. "Calculation Agent" means the Person identified as "Trustee" in the first paragraph hereof with respect to the Debt Securities and the Institutional Trustee with respect to the Trust Securities. "Capital Securities" means undivided beneficial interests in the assets of the Trust which are designated as "MMCapS(SM)" and rank pari passu with Common Securities issued by the Trust; provided, however, that if an Event of Default (as defined in the Declaration) has occurred and is continuing, the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Capital Securities Guarantee" means the guarantee agreement that the Company will enter into with Wilmington Trust Company or other Persons that operates directly or indirectly for the benefit of holders of Capital Securities of the Trust. "Capital Treatment Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or any rules, guidelines or policies of an applicable regulatory authority for the Company or (b) any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of original issuance of the Debt Securities, there is more than an insubstantial risk that the Company will not, within 90 days of the date of such opinion, be entitled to treat an amount equal to the aggregate Liquidation Amount of the Capital Securities as "Tier 1 Capital" (or its then equivalent if the Company were subject to such capital requirement) applied as if the Company (or its successors) were a bank holding company for purposes of the capital adequacy guidelines of the Federal Reserve (or any successor regulatory authority with jurisdiction over bank holding companies), or any capital adequacy guidelines as then in effect and applicable to the Company, provided, however, that the distribution of the Debt Securities in connection with the liquidation of the Trust by the Company shall not in and of itself constitute a Capital Treatment Event unless such liquidation shall have occurred in connection with a Tax Event or an Investment Company Event. "Certificate" means a certificate signed by any one of the principal executive officer, the principal financial officer or the principal accounting officer of the Company. "Common Securities" means undivided beneficial interests in the assets of the Trust which are designated as "Common Securities" and rank pari passu with Capital Securities 2 issued by the Trust; provided, however, that if an Event of Default (as defined in the Declaration) has occurred and is continuing, the rights of holders of such Common Securities to payment in respect of distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of holders of such Capital Securities. "Company" means Hawthorne Financial Corporation, a savings and loan holding company incorporated in Delaware, and, subject to the provisions of Article XI, shall include its successors and assigns. "Comparable Treasury Issue" means with respect to any Special Redemption Date, the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity which is within a period from three months before to three months after December 8, 2006, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (a) the average of five Reference Treasury Dealer Quotations for such Special Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if the Trustee receives fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations. "Debt Security" or "Debt Securities" has the meaning stated in the first recital of this Indenture. "Debt Security Register" has the meaning specified in Section 2.05. "Declaration" means the Amended and Restated Declaration of Trust of the Trust, as amended or supplemented from time to time. "Default" means any event, act or condition that with notice or lapse of time, or both, would constitute an Event of Default. "Defaulted Interest" has the meaning set forth in Section 2.08. "Deferred Interest" has the meaning set forth in Section 2.11. "Event of Default" means any event specified in Section 5.01, which has continued for the period of time, if any, and after the giving of the notice, if any, therein designated. "Extension Period" has the meaning set forth in Section 2.11. "Federal Reserve" means the Board of Governors of the Federal Reserve System. 3 "Indenture" means this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented, or both. "Institutional Trustee" has the meaning set forth in the Declaration. "Interest Payment Date" means June 8th and December 8th of each year, commencing on June 8, 2002, during the term of this Indenture. "Interest Rate" means a per annum rate of interest, reset semi-annually, equal to LIBOR, as determined on the LIBOR Determination Date immediately preceding each Interest Payment Date, plus 3.75%; provided, that the applicable Interest Rate may not exceed 11.0% through the Interest Payment Date in December, 2006. "Investment Company Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of a change in law or regulation or written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that 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 of 1940, as amended, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the original issuance of the Debt Securities. "LIBOR" means the London Interbank Offered Rate for six-month Eurodollar deposits in Europe as determined by the Calculation Agent according to Section 2.10(b). "LIBOR Banking Day" has the meaning set forth in Section 2.10(b)(1). "LIBOR Business Day" has the meaning set forth in Section 2.10(b)(1). "LIBOR Determination Date" has the meaning set forth in Section 2.10(b). "Liquidation Amount" means the stated amount of $1,000 per Trust Security. "Maturity Date" means December 8, 2031. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the Vice Chairman, the President or any Senior Vice President, and by the Chief Financial Officer, the Treasurer, an Assistant Treasurer, the Controller, an Assistant Controller, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. Each such certificate shall include the statements provided for in Section 14.06 if and to the extent required by the provisions of such Section. "Opinion of Counsel" means an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or may be other counsel reasonably satisfactory to the Trustee. Each such opinion shall include the statements provided for in Section 14.06 if and to the extent required by the provisions of such Section. 4 "OTS" means the Office of Thrift Supervision. The term "outstanding," when used with reference to Debt Securities, subject to the provisions of Section 7.04, means, as of any particular time, all Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent under this Indenture, except (a) Debt Securities theretofore canceled by the Trustee or the Authenticating Agent or delivered to the Trustee for cancellation; (b) Debt Securities, or portions thereof, for the payment or redemption of which moneys in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); provided, that, if such Debt Securities, or portions thereof, are to be redeemed prior to maturity thereof, notice of such redemption shall have been given as provided in Articles Ten and Fourteen or provision satisfactory to the Trustee shall have been made for giving such notice; and (c) Debt Securities paid pursuant to Section 2.06 or in lieu of or in substitution for which other Debt Securities shall have been authenticated and delivered pursuant to the terms of Section 2.06 unless proof satisfactory to the Company and the Trustee is presented that any such Debt Securities are held by bona fide holders in due course. "Person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Debt Security means every previous Debt Security evidencing all or a portion of the same debt as that evidenced by such particular Debt Security; and, for the purposes of this definition, any Debt Security authenticated and delivered under Section 2.06 in lieu of a lost, destroyed or stolen Debt Security shall be deemed to evidence the same debt as the lost, destroyed or stolen Debt Security. "Primary Treasury Dealer" means a primary United States Government securities dealer in New York City. "Principal Office of the Trustee," or other similar term, means the office of the Trustee, at which at any particular time its corporate trust business shall be principally administered, which at all times shall be located within the United States and at the time of the execution of this Indenture shall be Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001. "Quotation Agent" means Salomon Smith Barney Inc. and its successors; provided, however, that if the foregoing shall cease to be a Primary Treasury Dealer, the Company shall substitute therefor another Primary Treasury Dealer. "Redemption Date" has the meaning set forth in Section 10.01. 5 "Redemption Price" means 100% of the principal amount of the Debt Securities being redeemed plus accrued and unpaid interest on such Debt Securities to the Redemption Date or, in the case of a redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Special Redemption Date is on or after December 8, 2006. "Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Special Redemption Date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Special Redemption Date. "Remaining Life" means, with respect to any Debt Security, the period from the Special Redemption Date for such Debt Security to December 8, 2006. "Responsible Officer" means, with respect to the Trustee, any officer within the Principal Office of the Trustee with direct responsibility for the administration of the Indenture, including any vice-president, any assistant vice-president, any secretary, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Principal Trust Office of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Securityholder," "holder of Debt Securities" or other similar terms, means any Person in whose name at the time a particular Debt Security is registered on the Debt Security Register. "Senior Indebtedness" means, with respect to the Company, (i) the principal, premium, if any, and interest in respect of (A) indebtedness of the Company for money borrowed and (B) indebtedness evidenced by securities, debentures, notes, bonds or other similar instruments issued by the Company; (ii) all capital lease obligations of the Company; (iii) all obligations of the Company issued or assumed as the deferred purchase price of property, all conditional sale obligations of the Company and all obligations of the Company under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (iv) all obligations of the Company for the reimbursement of any letter of credit, any banker's acceptance, any security purchase facility, any repurchase agreement or similar arrangement, any interest rate swap, any other hedging arrangement, any obligation under options or any similar credit or other transaction; (v) all obligations of the type referred to in clauses (i) through (iv) above of other Persons for the payment of which the Company is responsible or liable as obligor, guarantor or otherwise; and (vi) all obligations of the type referred to in clauses (i) through (v) above of other Persons secured by any lien on any property or asset of the Company (whether or not such obligation is assumed by the Company), whether incurred on or prior to the date of this Indenture or thereafter incurred, unless, with the prior 6 approval of the OTS if not otherwise generally approved, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior or are pari passu in right of payment to the Debt Securities. "Special Event" means any of a Tax Event, an Investment Company Event or a Capital Treatment Event. "Special Redemption Date" has the meaning set forth in 10.02. "Special Redemption Price" means (1) if the Special Redemption Date is before December 8, 2006, the greater of (a) 100% of the principal amount of the Debt Securities being redeemed pursuant to Section 10.02 or (b) as determined by a Quotation Agent, the sum of the present values of the principal amount payable as part of the Redemption Price with respect to a redemption as of December 8, 2006, together with the present value of interest payments calculated at a fixed per annum rate of interest equal to 9.95% over the Remaining Life of such Debt Securities, discounted to the Special Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 0.50%, plus, in the case of either (a) or (b), accrued and unpaid interest on such Debt Securities to the Special Redemption Date and (2) if the Special Redemption Date is on or after December 8, 2006, the Redemption Price for such Special Redemption Date. "Subsidiary" means, 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 or similar entity, at least a majority of the outstanding partnership or similar interests of which 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" means the receipt by the Company and the Trust of an opinion of 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 (including any private letter ruling, technical advice memorandum, regulatory procedure, notice or announcement (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debt 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 7 on the Debt Securities; (ii) interest payable by the Company on the Debt Securities is not, or within 90 days of the date of such opinion, will not be, deductible by the Company, 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, assessments or other governmental charges. "Treasury Rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the date of calculation, appearing in the most recently published statistical release designated H.15 (519) or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities," for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Special Redemption Date. The Treasury Rate shall be calculated on the third Business Day preceding the Special Redemption Date. "Trust" means HFC Capital Trust II, the Delaware business trust, or any other similar trust created for the purpose of issuing Capital Securities in connection with the issuance of Debt Securities under this Indenture, of which the Company is the sponsor. "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "Trust Securities" means Common Securities and Capital Securities of HFC Capital Trust II. "Trustee" means the Person identified as "Trustee" in the first paragraph hereof, and, subject to the provisions of Article VI hereof, shall also include its successors and assigns as Trustee hereunder. "United States" means the United States of America and the District of Columbia. "U.S. Person" has the meaning given to United States Person as set forth in Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended. ARTICLE II DEBT SECURITIES SECTION 2.01 Authentication and Dating. Upon the execution and delivery of this Indenture, or from time to time thereafter, Debt Securities in an aggregate principal amount not in excess of $5,155,000 may be executed 8 and delivered by the Company to the Trustee for authentication, and the Trustee shall thereupon authenticate and make available for delivery said Debt Securities to or upon the written order of the Company, signed by its Chairman of the Board of Directors, Vice Chairman, President or Chief Financial Officer or one of its Vice Presidents without any further action by the Company hereunder. In authenticating such Debt Securities, and accepting the additional responsibilities under this Indenture in relation to such Debt Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon a copy of any Board Resolution or Board Resolutions relating thereto and, if applicable, an appropriate record of any action taken pursuant to such resolution, in each case certified by the Secretary or an Assistant Secretary of the Company as the case may be. The Trustee shall have the right to decline to authenticate and deliver any Debt Securities under this Section if the Trustee, being advised by counsel, determines that such action may not lawfully be taken or if a Responsible Officer of the Trustee in good faith shall determine that such action would expose the Trustee to personal liability to existing holders. The definitive Debt Securities shall be typed, printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Debt Securities, as evidenced by their execution of such Debt Securities. SECTION 2.02 Form of Trustee's Certificate of Authentication. The Trustee's certificate of authentication on all Debt Securities shall be in substantially the following form: This is one of the Debt Securities referred to in the within-mentioned Indenture. Wilmington Trust Company, not in its individual capacity but solely as trustee By ------------------------------- Authorized Officer SECTION 2.03 Form and Denomination of Debt Securities. The Debt Securities shall be substantially in the form of Exhibit A hereto. The Debt Securities shall be in registered, certificated form without coupons and in minimum denominations of $100,000 and any multiple of $1,000 in excess thereof. The Debt Securities shall be numbered, lettered, or otherwise distinguished in such manner or in accordance with such plans as the officers executing the same may determine with the approval of the Trustee as evidenced by the execution and authentication thereof. SECTION 2.04 Execution of Debt Securities. The Debt Securities shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board of Directors, Vice Chairman, President or Chief Financial Officer or one of its Executive Vice Presidents, Senior Vice 9 Presidents or Vice Presidents, under its corporate seal which may be affixed thereto or printed, engraved or otherwise reproduced thereon, by facsimile or otherwise, and which need not be attested. Only such Debt Securities as shall bear thereon a certificate of authentication substantially in the form herein before recited, executed by the Trustee or the Authenticating Agent by the manual signature of an authorized officer, shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee or the Authenticating Agent upon any Debt Security executed by the Company shall be conclusive evidence that the Debt Security so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Debt Securities shall cease to be such officer before the Debt Securities so signed shall have been authenticated and delivered by the Trustee or the Authenticating Agent, or disposed of by the Company, such Debt Securities nevertheless may be authenticated and delivered or disposed of as though the Person who signed such Debt Securities had not ceased to be such officer of the Company; and any Debt Security may be signed on behalf of the Company by such Persons as, at the actual date of the execution of such Debt Security, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. Every Debt Security shall be dated the date of its authentication. SECTION 2.05 Exchange and Registration of Transfer of Debt Securities. The Company shall cause to be kept, at the office or agency maintained for the purpose of registration of transfer and for exchange as provided in Section 3.02, a register (the "Debt Security Register") for the Debt Securities issued hereunder in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration and transfer of all Debt Securities as in this Article Two provided. Such register shall be in written form or in any other form capable of being converted into written form within a reasonable time. Debt Securities to be exchanged may be surrendered at the Principal Office of the Trustee or at any office or agency to be maintained by the Company for such purpose as provided in Section 3.02, and the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange therefor the Debt Security or Debt Securities which the Securityholder making the exchange shall be entitled to receive. Upon due presentment for registration of transfer of any Debt Security at the Principal Office of the Trustee or at any office or agency of the Company maintained for such purpose as provided in Section 3.02, the Company shall execute, the Company or the Trustee shall register and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in the name of the transferee or transferees a new Debt Security for a like aggregate principal amount. Registration or registration of transfer of any Debt Security by the Trustee or by any agent of the Company appointed pursuant to Section 3.02, and delivery of such Debt Security, shall be deemed to complete the registration or registration of transfer of such Debt Security. 10 All Debt Securities presented for registration of transfer or for exchange or payment shall (if so required by the Company or the Trustee or the Authenticating Agent) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company and either the Trustee or the Authenticating Agent duly executed by, the holder or his attorney duly authorized in writing. No service charge shall be made for any exchange or registration of transfer of Debt Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in connection therewith. The Company or the Trustee shall not be required to exchange or register a transfer of any Debt Security for a period of 15 days next preceding the date of selection of Debt Securities for redemption. Notwithstanding the foregoing, Debt Securities may not be transferred except in compliance with the restricted securities legend set forth below, unless otherwise determined by the Company in accordance with applicable law, which legend shall be placed on each Debt 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 LAWS. 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, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER 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, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "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 (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE 11 HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. 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 THIS SECURITY 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 THIS SECURITY 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. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A PRINCIPAL AMOUNT OF LESS THAN $100,000 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 THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. 12 SECTION 2.06 Mutilated, Destroyed, Lost or Stolen Debt Securities. In case any Debt Security shall become mutilated or be destroyed, lost or stolen, the Company shall execute, and upon its written request the Trustee shall authenticate and deliver, a new Debt Security bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Debt Security, or in lieu of and in substitution for the Debt Security so destroyed, lost or stolen. In every case the applicant for a substituted Debt Security shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company and the Trustee evidence to their satisfaction of the destruction, loss or theft of such Debt Security and of the ownership thereof. The Trustee may authenticate any such substituted Debt Security and deliver the same upon the written request or authorization of any officer of the Company. Upon the issuance of any substituted Debt Security, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Debt Security which has matured or is about to mature or has been called for redemption in full shall become mutilated or be destroyed, lost or stolen, the Company may, instead of issuing a substitute Debt Security, pay or authorize the payment of the same (without surrender thereof except in the case of a mutilated Debt Security) if the applicant for such payment shall furnish to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless and, in case of destruction, loss or theft, evidence satisfactory to the Company and to the Trustee of the destruction, loss or theft of such Security and of the ownership thereof. Every substituted Debt Security issued pursuant to the provisions of this Section 2.06 by virtue of the fact that any such Debt Security is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Debt Security shall be found at any time, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Debt Securities duly issued hereunder. All Debt Securities shall be held and owned upon the express condition that, to the extent permitted by applicable law, the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debt Securities and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments or other securities without their surrender. SECTION 2.07 Temporary Debt Securities. Pending the preparation of definitive Debt Securities, the Company may execute and the Trustee shall authenticate and make available for delivery temporary Debt Securities that are typed, printed or lithographed. Temporary Debt Securities shall be issuable in any authorized denomination, and substantially in the form of the definitive Debt Securities but with such omissions, insertions and variations as may be appropriate for temporary Debt Securities, all as may be determined by the Company. Every such temporary Debt Security shall be executed by the Company and be authenticated by the Trustee upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Debt Securities. Without 13 unreasonable delay the Company will execute and deliver to the Trustee or the Authenticating Agent definitive Debt Securities and thereupon any or all temporary Debt Securities may be surrendered in exchange therefor, at the principal corporate trust office of the Trustee or at any office or agency maintained by the Company for such purpose as provided in Section 3.02, and the Trustee or the Authenticating Agent shall authenticate and make available for delivery in exchange for such temporary Debt Securities a like aggregate principal amount of such definitive Debt Securities. Such exchange shall be made by the Company at its own expense and without any charge therefor except that in case of any such exchange involving a registration of transfer the Company may require payment of a sum sufficient to cover any tax, fee or other governmental charge that may be imposed in relation thereto. Until so exchanged, the temporary Debt Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Debt Securities authenticated and delivered hereunder. SECTION 2.08 Payment of Interest. Each Debt Security will bear interest at the then applicable Interest Rate from and including each Interest Payment Date or, in the case of the first interest period, the original date of issuance of such Debt Security to, but excluding, the next succeeding Interest Payment Date or, in the case of the last interest period, the Redemption Date, Special Redemption Date or Maturity Date, as applicable, on the principal thereof, on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on Deferred Interest and on any overdue installment of interest (including Defaulted Interest), payable (subject to the provisions of Article XII) on each Interest Payment Date commencing on June 8, 2002. Interest and any Deferred Interest on any Debt Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name said Debt Security (or one or more Predecessor Securities) is registered at the close of business on the regular record date for such interest installment, except that interest and any Deferred Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. In the event that any Debt Security or portion thereof is called for redemption and the redemption date is subsequent to a regular record date with respect to any Interest Payment Date and prior to such Interest Payment Date, interest on such Debt Security will be paid upon presentation and surrender of such Debt Security. Any interest on any Debt Security, other than Deferred Interest, 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 registered holder on the relevant regular record date by virtue of having been such holder, and such Defaulted Interest shall be paid by the Company to the Persons in whose names such Debt 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 Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each such Debt Security and the date of the proposed payment, and at the same time the Company shall deposit with the 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 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 Trustee shall fix a special record date for the payment of 14 such Defaulted Interest which shall not be more than fifteen nor less than ten days prior to the date of the proposed payment and not less than ten days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, 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 Debt Security Register, not less than ten days prior to such special record date. Notice of the proposed payment of such Defaulted 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 Debt Securities (or their respective Predecessor Securities) are registered on such special record date and thereafter the Company shall have no further payment obligation in respect of the Defaulted Interest. Any interest scheduled to become payable on an Interest Payment Date occurring during an Extension Period shall not be Defaulted Interest and shall be payable on such other date as may be specified in the terms of such Debt Securities. The term "regular record date" as used in this Section shall mean the fifteenth day prior to an Interest Payment Date whether or not such date is a Business Day. Subject to the foregoing provisions of this Section, each Debt Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Debt Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Debt Security. SECTION 2.09 Cancellation of Debt Securities Paid, etc. All Debt Securities surrendered for the purpose of payment, redemption, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee or any Authenticating Agent, shall be promptly canceled by it, and no Debt Securities shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture. All Debt Securities canceled by any Authenticating Agent shall be delivered to the Trustee. The Trustee shall destroy all canceled Debt Securities unless the Company otherwise directs the Trustee in writing. If the Company shall acquire any of the Debt Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Debt Securities unless and until the same are surrendered to the Trustee for cancellation. SECTION 2.10 Computation of Interest. (a) The amount of interest payable for any interest period will be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period; provided, however, that upon the occurrence of a Special Event Redemption pursuant to Section 10.02 the amounts payable pursuant to this Indenture shall be calculated as set forth in the definition of Special Redemption Price. 15 (b) LIBOR shall be determined by the Calculation Agent in accordance with the following provisions: (1) On the second LIBOR Business Day (provided, that on such day commercial banks are open for business (including dealings in foreign currency deposits) in London (a "LIBOR Banking Day"), and otherwise the next preceding LIBOR Business Day that is also a LIBOR Banking Day) prior to December 15th and June 15th (except, with respect to the first interest payment period, on November 26, 2001), (each such day, a "LIBOR Determination Date"), LIBOR shall equal the rate, as obtained by the Calculation Agent for six-month Eurodollar deposits in Europe which appears on Telerate Page 3750 (as defined in the International Swaps and Derivatives Association, Inc. 1991 Interest Rate and Currency Exchange Definitions) or such other page as may replace such Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date, as reported by Bloomberg Financial Markets Commodities News. "LIBOR Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banking institutions in New York, New York or Wilmington, Delaware, are authorized or obligated by law or executive order to be closed. If such rate is superseded on Telerate Page 3750 by a corrected rate before 12:00 noon (London time) on the same LIBOR Determination Date, the corrected rate as so substituted will be the applicable LIBOR for that LIBOR Determination Date. (2) If, on any LIBOR Determination Date, such rate does not appear on Telerate Page 3750 or such other page as may replace such Page 3750, the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London interbank market for six-month U.S. Dollar deposits in Europe (in an amount determined by the Calculation Agent) by reference to requests for quotations as of approximately 11:00 a.m. (New York time) on the LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal the arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such quotations, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that at least two leading banks in The City of New York (as selected by the Calculation Agent) are quoting on the relevant LIBOR Determination Date for six-month U.S. Dollar deposits in Europe at approximately 11:00 a.m. (New York time) (in an amount determined by the Calculation Agent). As used herein, "Reference Banks" means four major banks in the London interbank market selected by the Calculation Agent. (3) If the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR shall be LIBOR in effect on the previous LIBOR Determination Date (whether or not LIBOR for such period was in fact determined on such LIBOR Determination Date). (c) All percentages resulting from any calculations on the Debt Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being 16 rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (d) On each LIBOR Determination Date, the Calculation Agent shall notify in writing the Company and the Paying Agent of the applicable Interest Rate in effect for the related Interest Payment. The Calculation Agent shall, upon the request of the holder of any Debt Securities, provide the Interest Rate then in effect. All calculations made by the Calculation Agent in the absence of manifest error shall be conclusive for all purposes and binding on the Company and the Holders of the Debt Securities. The Paying Agent shall be entitled to rely on information received from the Calculation Agent or the Company as to the Interest Rate. The Company shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Debt Securities that is included in any payment and reportable for taxable income calculation purposes. SECTION 2.11 Extension of Interest Payment Period. So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time and without causing an Event of Default, to defer payments of interest on the Debt Securities by extending the interest payment period on the Debt Securities at any time and from time to time during the term of the Debt Securities, for up to ten consecutive semi-annual periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). No Extension Period may end on a date other than an Interest Payment Date. During any Extension Period, interest will continue to accrue on the Debt Securities, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at the Interest Rate, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, both to the extent permitted by law. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof. At the end of any such Extension Period the Company shall pay all Deferred Interest then accrued and unpaid on the Debt Securities; provided, however, that no Extension Period may extend beyond the Maturity Date; and provided further, however, that during any such Extension Period, the Company shall be subject to the restrictions set forth in Section 3.08 of this Indenture. Prior to the termination of any Extension Period, the Company may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed ten consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. The Company must give the Trustee notice of its election to begin such Extension Period at least one Business Day prior to the earlier of (i) the next succeeding date on which interest on the Debt Securities would have been payable except for the election to begin such Extension Period or (ii) the date such interest is payable, but in any event not later than the related regular record date. The Trustee shall give notice of the Company's election to begin a new Extension Period to the Securityholders. 17 SECTION 2.12 CUSIP Numbers. The Company in issuing the Debt Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Securityholders; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Debt 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 Debt Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change in the CUSIP numbers. ARTICLE III PARTICULAR COVENANTS OF THE COMPANY SECTION 3.01 Payment of Principal, Premium and Interest; Agreed Treatment of the Debt Securities. (a) The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on the Debt Securities at the place, at the respective times and in the manner provided in this Indenture and the Debt Securities. At the option of the Company, each installment of interest on the Debt Securities may be paid (i) by mailing checks for such interest payable to the order of the holders of Debt Securities entitled thereto as they appear on the Debt Security Register or (ii) by wire transfer to any account with a banking institution located in the United States designated by such Person to the paying agent no later than the related record date. (b) The Company will treat the Debt Securities as indebtedness, and the amounts payable in respect of the principal amount of such Debt Securities as interest, for all U.S. federal income tax purposes. All payments in respect of such Debt Securities will be made free and clear of U.S. withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service Form W8 BEN (or any substitute or successor form) establishing its non-US status for U.S. federal income tax purposes. (c) As of the date of this Indenture, the Company has no intention to exercise its right under Section 2.11 to defer payments of interest on the Debt Securities by commencing an Extension Period. (d) As of the date of this Indenture, the Company believes that the likelihood that it would exercise its right under Section 2.11 to defer payments of interest on the Debt Securities by commencing an Extension Period at any time during which the Debt Securities are outstanding is remote because of the restrictions that would be imposed on the Company's ability to declare or pay dividends or distributions on, or to redeem, purchase or make a liquidation payment with respect to, any of its outstanding equity and on the Company's ability to make any payments of principal of or interest on, or repurchase or redeem, any of its debt securities that rank pari passu in all respects with (or junior in interest to) the Debt Securities. 18 SECTION 3.02 Offices for Notices and Payments, etc. So long as any of the Debt Securities remain outstanding, the Company will maintain in Wilmington, Delaware or in El Segundo, California, an office or agency where the Debt Securities may be presented for payment, an office or agency where the Debt 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 Company in respect of the Debt Securities or of this Indenture may be served. The Company will give to the 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 Company in a notice to the Trustee, or specified as contemplated by Section 2.05, such office or agency for all of the above purposes shall be the Principal Office of the Trustee. In case the Company shall fail to maintain any such office or agency in Wilmington, Delaware or in El Segundo, California, or shall fail to give such notice of the location or of any change in the location thereof, presentations and demands may be made and notices may be served at the Principal Office of the Trustee. In addition to any such office or agency, the Company may from time to time designate one or more offices or agencies outside Wilmington, Delaware or El Segundo, California, where the Debt Securities may be presented for registration of transfer and for exchange in the manner provided in this Indenture, and the Company may from time to time rescind such designation, as the Company may deem desirable or expedient; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain any such office or agency in Wilmington, Delaware or in El Segundo, California, for the purposes above mentioned. The Company will give to the Trustee prompt written notice of any such designation or rescission thereof. SECTION 3.03 Appointments to Fill Vacancies in Trustee's Office. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 6.09, a Trustee, so that there shall at all times be a Trustee hereunder. SECTION 3.04 Provision as to Paying Agent. (a) If the Company shall appoint a paying agent other than the Trustee, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provision 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, if any, on the Debt Securities (whether such sums have been paid to it by the Company or by any other obligor on the Debt Securities) in trust for the benefit of the holders of the Debt Securities; (2) that it will give the Trustee prompt written notice of any failure by the Company (or by any other obligor on the Debt Securities) to make any payment of the principal of and premium, if any, or interest, if any, on the Debt Securities when the same shall be due and payable; and 19 (3) that it will, at any time during the continuance of any Event of Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such paying agent. (b) If the Company 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, if any, on the Debt Securities, set aside, segregate and hold in trust for the benefit of the holders of the Debt Securities a sum sufficient to pay such principal, premium or interest so becoming due and will notify the Trustee in writing of any failure to take such action and of any failure by the Company (or by any other obligor under the Debt Securities) to make any payment of the principal of and premium, if any, or interest, if any, on the Debt Securities when the same shall become due and payable. Whenever the Company shall have one or more paying agents for the Debt Securities, it will, on or prior to each due date of the principal of and premium, if any, or interest, if any, on the Debt Securities, deposit with a paying agent a sum sufficient to pay the principal, premium or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled thereto and (unless such paying agent is the Trustee) the Company shall promptly notify the Trustee in writing of its action or failure to act. (c) Anything in this Section 3.04 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge with respect to the Debt Securities, or for any other reason, pay, or direct any paying agent to pay to the Trustee all sums held in trust by the Company or any such paying agent, such sums to be held by the Trustee upon the same terms and conditions 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 12.03 and 12.04. (e) The Company hereby initially appoints the Trustee to act as paying agent. SECTION 3.05 Certificate to Trustee. The Company will deliver to the Trustee on or before 120 days after the end of each fiscal year, so long as Debt Securities are outstanding hereunder, a Certificate stating that in the course of the performance by the signers of their duties as officers of the Company they would normally have knowledge of any default by the Company 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 and the nature thereof. SECTION 3.06 Additional Interest. If and for so long as the Trust is the holder of all Debt Securities and is required to pay any additional taxes, duties, assessments or other governmental charges as a result of a Tax Event, the Company will pay such additional amounts (the "Additional Interest") on the Debt Securities as shall be required so that the net amounts received and retained by the Trust after paying taxes, duties, assessments or other governmental charges will be equal to the amounts the Trust would have received if no such taxes, duties, assessments or other governmental charges 20 had been imposed. Whenever in this Indenture or the Debt Securities there is a reference in any context to the payment of principal of or interest on the Debt Securities, such mention shall be deemed to include mention of payments of the Additional Interest provided for in this paragraph to the extent that, in such context, Additional Interest is, was or would be payable in respect thereof pursuant to the provisions of this paragraph and express mention of the payment of Additional Interest (if applicable) in any provisions hereof shall not be construed as excluding Additional Interest in those provisions hereof where such express mention is not made, provided, however, that the deferral of the payment of interest during an Extension Period pursuant to Section 2.11 shall not defer the payment of any Additional Interest that may be due and payable. SECTION 3.07 Compliance with Consolidation Provisions. The Company will not, while any of the Debt 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 XI hereof are complied with. SECTION 3.08 Limitation on Dividends. If Debt Securities are initially issued to the Trust or a trustee of such Trust in connection with the issuance of Trust Securities by the Trust (regardless of whether Debt Securities continue to be held by such Trust) and (i) there shall have occurred and be continuing an Event of Default, (ii) the Company shall be in default with respect to its payment of any obligations under the Capital Securities Guarantee or (iii) the Company shall have given notice of its election to defer payments of interest on the Debt Securities by extending the interest payment period as provided herein and such period, or any extension thereof, shall have commenced and be continuing, then the Company may not (A) declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to, any of the Company's capital stock or (B) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Debt Securities (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company (I) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (II) in connection with a dividend reinvestment or stockholder stock purchase plan or (III) in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the occurrence of (i), (ii) or (iii) above, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same 21 stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). SECTION 3.09 Covenants as to the Trust. For so long as such Trust Securities remain outstanding, the Company shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Company under this Indenture that is a U.S. Person may succeed to the Company's ownership of such Common Securities. The Company, as owner of the Common Securities, shall use commercially reasonable efforts to cause the Trust (a) to remain a statutory business trust, except in connection with a distribution of Debt Securities to the holders of Trust Securities in liquidation of the Trust, the redemption of all of the Trust Securities or certain mergers, consolidations or amalgamations, each as permitted by the Declaration, (b) to otherwise continue to be classified as a grantor trust for United States federal income tax purposes and (c) to cause each holder of Trust Securities to be treated as owning an undivided beneficial interest in the Debt Securities. ARTICLE IV LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE SECTION 4.01 Securityholders' Lists. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee: (a) on each regular record date for an Interest Payment Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Securityholders of the Debt Securities as of such record date; and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company 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 under this Section 4.01 so long as the Trustee is in possession thereof by reason of its acting as Debt Security registrar. SECTION 4.02 Preservation and Disclosure of Lists. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Debt 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 Debt Securities registrar (if so acting) hereunder. The 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 Debt Securities (hereinafter referred to as "applicants") apply in writing to the Trustee and furnish to the Trustee reasonable proof that each 22 such applicant has owned a Debt 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 Debt Securities with respect to their rights under this Indenture or under such Debt Securities and is accompanied by a copy of the form of proxy or other communication which such applicants propose to transmit, then the 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 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 Debt Securities whose names and addresses appear in the information preserved at the time by the 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 Trustee shall elect not to afford such applicants access to such information, the Trustee shall, upon the written request of such applicants, mail to each Securityholder of Debt Securities whose name and address appear in the information preserved at the time by the 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 Trustee of the material to be mailed and of payment, or provision for the payment, of the reasonable expenses of mailing, unless within five days after such tender, the Trustee shall mail to such applicants and file with the Securities and Exchange Commission, if permitted or required by applicable law, together with a copy of the material to be mailed, a written statement to the effect that, in the opinion of the Trustee, such mailing would be contrary to the best interests of the holders of all Debt Securities, as the case may be, or would be in violation of applicable law. Such written statement shall specify the basis of such opinion. If said Commission, as permitted or required by applicable law, 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, said 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 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 Trustee shall be relieved of any obligation or duty to such applicants respecting their application. (c) Each and every holder of Debt Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the 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 Debt 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 Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under said subsection (b). 23 ARTICLE V REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS UPON AN EVENT OF DEFAULT SECTION 5.01 Events of Default. The following events shall be "Events of Default" with respect to Debt Securities: (a) the Company defaults in the payment of any interest upon any Debt Security when it becomes due and payable, and continuance of such default for a period of 30 days; for the avoidance of doubt, an extension of any interest payment period by the Company in accordance with Section 2.11 of this Indenture shall not constitute a default under this clause 5.01(a); or (b) the Company defaults in the payment of all or any part of the principal of (or premium, if any, on) any Debt Securities as and when the same shall become due and payable either at maturity, upon redemption, by declaration of acceleration or otherwise; or (c) the Company defaults in the performance of, or breaches, any of its covenants or agreements in Sections 3.06, 3.07, 3.08 and 3.09 of this Indenture (other than a covenant or agreement 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 Company by the Trustee or to the Company and the Trustee by the holders of not less than 25% in aggregate principal amount of the outstanding Debt 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 Company in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or for any substantial part of its property, or orders 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 Company 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 Company 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; or (f) the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence except in connection with (1) the distribution of the Debt Securities to holders of such Trust Securities in liquidation of their 24 interests in the Trust, (2) the redemption of all of the outstanding Trust Securities or (3) certain mergers, consolidations or amalgamations, each as permitted by the Declaration. If an Event of Default occurs and is continuing with respect to the Debt Securities, then, and in each and every such case, unless the principal of the Debt Securities shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Debt Securities then outstanding hereunder, by notice in writing to the Company (and to the Trustee if given by Securityholders), may declare the entire principal of the Debt Securities and the interest accrued thereon, if any, to be due and payable immediately, 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 Debt 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 Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all the Debt Securities and the principal of and premium, if any, on the Debt Securities which shall have become due otherwise than by acceleration (with interest upon such principal and premium, if any, and Deferred Interest, to the extent permitted by law) and such amount as shall be sufficient to cover reasonable compensation to the Trustee and each predecessor Trustee, their respective agents, attorneys and counsel, and all other amounts due to the Trustee pursuant to Section 6.06, if any, and (ii) all Events of Default under this Indenture, other than the non-payment of the principal of or premium, if any, on Debt Securities which shall have become due by acceleration, shall have been cured, waived or otherwise remedied as provided herein -- then and in every such case the holders of a majority in aggregate principal amount of the Debt Securities then outstanding, by written notice to the Company and to the Trustee, may waive all defaults and rescind and annul such declaration and its consequences, but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right consequent thereon. In case the 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 Trustee, then and in every such case the Company, the Trustee and the holders of the Debt Securities shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the Trustee and the holders of the Debt Securities shall continue as though no such proceeding had been taken. SECTION 5.02 Payment of Debt Securities on Default; Suit Therefor. The Company covenants that upon the occurrence of an Event of Default pursuant to clause 5.01(a) or 5.01(b) and upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Debt Securities, the whole amount that then shall have become due and payable on all Debt Securities for principal and premium, if any, or interest, or both, as the case may be, including Deferred Interest accrued on the Debt Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including a reasonable compensation to the Trustee, its agents, attorneys 25 and counsel, and any other amounts due to the Trustee under Section 6.06. In case the Company shall fail forthwith to pay such amounts upon such demand, the 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 Company or any other obligor on such Debt Securities and collect in the manner provided by law out of the property of the Company or any other obligor on such Debt 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 Company or any other obligor on the Debt Securities under Bankruptcy Law, or in case a receiver or trustee shall have been appointed for the property of the Company or such other obligor, or in the case of any other similar judicial proceedings relative to the Company or other obligor upon the Debt Securities, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Debt Securities shall then be due and payable as therein expressed or by declaration of acceleration or otherwise and irrespective of whether the 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 Debt 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 Trustee (including any claim for reasonable compensation to the Trustee and each predecessor Trustee, and their respective agents, attorneys and counsel, and for reimbursement of all other amounts due to the Trustee under Section 6.06) and of the Securityholders allowed in such judicial proceedings relative to the Company or any other obligor on the Debt Securities, or to the creditors or property of the Company or such other obligor, unless prohibited by applicable law and regulations, to vote on behalf of the holders of the Debt 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 Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Securityholders, to pay to the Trustee such amounts as shall be sufficient to cover reasonable compensation to the Trustee, each predecessor Trustee and their respective agents, attorneys and counsel, and all other amounts due to the Trustee under Section 6.06. Nothing herein contained shall be construed to authorize the 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 Debt Securities or the rights of any holder thereof or to authorize the 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 Debt Securities, may be enforced by the Trustee without the possession of any of the Debt Securities, or the production thereof at any trial or other proceeding relative thereto, and any 26 such suit or proceeding instituted by the 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 Debt Securities. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Debt Securities, and it shall not be necessary to make any holders of the Debt Securities parties to any such proceedings. SECTION 5.03 Application of Moneys Collected by Trustee. Any moneys collected by the Trustee shall be applied in the following order, at the date or dates fixed by the Trustee for the distribution of such moneys, upon presentation of the several Debt 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 incurred by, and reasonable fees of, the Trustee, its agents, attorneys and counsel, and of all other amounts due to the Trustee under Section 6.06; Second: To the payment of all Senior Indebtedness of the Company if and to the extent required by Article XV; Third: To the payment of the amounts then due and unpaid upon Debt Securities for principal (and premium, if any), and interest on the Debt Securities, in respect of which or for the benefit of which money has been collected, ratably, without preference or priority of any kind, according to the amounts due on such Debt Securities for principal (and premium, if any) and interest, respectively; and Fourth: The balance, if any, to the Company. SECTION 5.04 Proceedings by Securityholders. No holder of any Debt Security shall have any right to institute any suit, action or proceeding for any remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Debt Securities and unless the holders of not less than 25% in aggregate principal amount of the Debt Securities then outstanding shall have given the Trustee a written request to institute such action, suit or proceeding and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred thereby, and the 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; provided, that no holder of Debt Securities shall have any right to prejudice the rights of any other holder of Debt Securities, obtain priority or preference over any other such holder or enforce any right under this Indenture except in the manner herein provided and for the equal, ratable and common benefit of all holders of Debt Securities. Notwithstanding any other provisions in this Indenture, however, the right of any holder of any Debt Security to receive payment of the principal of, premium, if any, and interest 27 on such Debt Security when due, or to institute suit for the enforcement of any such payment, shall not be impaired or affected without the consent of such holder. For the protection and enforcement of the provisions of this Section, each and every Securityholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 5.05 Proceedings by Trustee. In case of an Event of Default hereunder the 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 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 Trustee by this Indenture or by law. SECTION 5.06 Remedies Cumulative and Continuing. Except as otherwise provided in Section 2.06, all powers and remedies given by this Article V to the 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 Trustee or the holders of the Debt 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 Debt Securities, and no delay or omission of the Trustee or of any holder of any of the Debt 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 Trustee or to the Securityholders may be exercised from time to time, and as often as shall be deemed expedient, by the 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 Debt Securities affected (voting as one class) 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 Trustee, or exercising any trust or power conferred on the Trustee with respect to such Debt Securities; provided, however, that (subject to the provisions of Section 6.01) the Trustee shall have the right to decline to follow any such direction if the Trustee shall determine that the action so directed would be unjustly prejudicial to the holders not taking part in such direction or if the Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if a Responsible Officer of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability. Prior to any declaration accelerating the maturity of the Debt Securities, the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding may on behalf of the holders of all of the Debt Securities waive (or modify any previously granted waiver of) any past default or Event of Default and its consequences, except a default (a) in the payment of principal of, premium, if 28 any, or interest on any of the Debt Securities, (b) in respect of covenants or provisions hereof which cannot be modified or amended without the consent of the holder of each Debt Security affected, or (c) in respect of the covenants contained in Section 3.09; provided, however, that if the Debt Securities are held by the Trust or a trustee of such trust, such waiver or modification to such waiver shall not be effective until the holders of a majority in liquidation preference of Trust Securities of the Trust shall have consented to such waiver or modification to such waiver; provided, further, that if the consent of the holder of each outstanding Debt Security is required, such waiver shall not be effective until each holder of the Trust Securities of the Trust 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 Company, the Trustee and the holders of the Debt 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 Event of 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 Debt Securities and this Indenture be deemed to have been cured and to be not continuing. SECTION 5.08 Notice of Defaults. The Trustee shall, within 90 days after a Responsible Officer of the Trustee shall have actual knowledge or received written notice of the occurrence of a default with respect to the Debt Securities, mail to all Securityholders, as the names and addresses of such holders appear upon the Debt Security Register, notice of all defaults with respect to the Debt Securities known to the Trustee, unless such defaults shall have been cured before the giving of such notice (the term "defaults" for the purpose of this Section 5.08 being hereby defined to be the events specified in subsections (a), (b), (c), (d) and (e) of Section 5.01, not including periods of grace, if any, provided for therein); provided, that, except in the case of default in the payment of the principal of, premium, if any, or interest on any of the Debt Securities, the Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the Trustee in good faith determines that the withholding of such notice is in the interests of the Securityholders. SECTION 5.09 Undertaking to Pay Costs. All parties to this Indenture agree, and each holder of any Debt Security by his 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 Trustee for any action taken or omitted by it as 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 Trustee, to any suit instituted by any Securityholder, or group of Securityholders, holding in the aggregate more than 10% in principal amount of the Debt 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 on any Debt Security against the Company on or after the same shall have become due and payable. 29 ARTICLE VI CONCERNING THE TRUSTEE SECTION 6.01 Duties and Responsibilities of Trustee. With respect to the holders of Debt Securities issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Debt Securities and after the curing or waiving of all Events of Default which may have occurred, with respect to the Debt Securities, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default with respect to the Debt Securities has occurred (which has not been cured or waived) the 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 man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the 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 with respect to Debt Securities and after the curing or waiving of all Events of Default which may have occurred (1) the duties and obligations of the Trustee with respect to Debt Securities shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations with respect to the Debt Securities as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee, and (2) in the absence of bad faith on the part of the Trustee, the 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 Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform on their face to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (c) the 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 Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (d) the Trustee shall not be charged with knowledge of any Default or Event of Default with respect to the Debt Securities unless either (1) a Responsible Officer shall have 30 actual knowledge of such Default or Event of Default or (2) written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on the Debt Securities or by any holder of the Debt Securities, except with respect to an Event of Default pursuant to Sections 5.01(a) or 5.01(b) hereof (other than an Event of Default resulting from the default in the payment of Additional Interest or premium, if any, if the Trustee does not have actual knowledge or written notice that such payment is due and payable), of which the Trustee shall be deemed to have knowledge. None of the provisions contained in this Indenture shall require the 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. SECTION 6.02 Reliance on Documents, Opinions, etc. Except as otherwise provided in Section 6.01: (a) the 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, consent, order, bond, note, debenture or other paper or document believed by it in good faith 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 Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; (c) the 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, suffered or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the 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 Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the 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 Trustee of the obligation, upon the occurrence of an Event of Default with respect to the Debt Securities (that has not been cured or waived) to exercise with respect to Debt Securities such of the rights and powers vested in it by this Indenture, and to use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, 31 request, consent, order, approval, bond, debenture, coupon or other paper or document, unless requested in writing to do so by the holders of not less than a majority in principal amount of the outstanding Debt Securities affected thereby; provided, however, that if the payment within a reasonable time to the 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 Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expense or liability as a condition to so proceeding; and (g) the 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 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. SECTION 6.03 No Responsibility for Recitals, etc. The recitals contained herein and in the Debt Securities (except in the certificate of authentication of the Trustee or the Authenticating Agent) shall be taken as the statements of the Company and the Trustee and the Authenticating Agent assume no responsibility for the correctness of the same. The Trustee and the Authenticating Agent make no representations as to the validity or sufficiency of this Indenture or of the Debt Securities. The Trustee and the Authenticating Agent shall not be accountable for the use or application by the Company of any Debt Securities or the proceeds of any Debt Securities authenticated and delivered by the Trustee or the Authenticating Agent in conformity with the provisions of this Indenture. SECTION 6.04 Trustee, Authenticating Agent, Paying Agents, Transfer Agents or Registrar May Own Debt Securities. The Trustee or any Authenticating Agent or any paying agent or any transfer agent or any Debt Security registrar, in its individual or any other capacity, may become the owner or pledgee of Debt Securities with the same rights it would have if it were not Trustee, Authenticating Agent, paying agent, transfer agent or Debt Security registrar. SECTION 6.05 Moneys to be Held in Trust. Subject to the provisions of Section 12.04, all moneys received by the 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 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 Company. So long as no Event of Default shall have occurred and be continuing, all interest allowed on any such moneys, if any, shall be paid from time to time to the Company upon the written order of the Company, signed by the Chairman of the Board of Directors, the President, the Chief Operating Officer, a Vice President, the Treasurer or an Assistant Treasurer of the Company. SECTION 6.06 Compensation and Expenses of Trustee. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, such compensation as shall be agreed to in writing between the 32 Company and the 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 Company will pay or reimburse the Trustee upon its written request for all documented reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the reasonable expenses and disbursements of its counsel and of all Persons not regularly in its employ) except any such expense, disbursement or advance that arises from its negligence or bad faith. The Company also covenants to indemnify each of the Trustee (including in its individual capacity) and any predecessor Trustee (and its officers, agents, directors and employees) for, and to hold it harmless against, any and all loss, damage, claim, liability or expense including taxes (other than taxes based on the income of the Trustee), except to the extent such loss, damage, claim, liability or expense results from the negligence or bad faith of such indemnitee, 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 or liability in the premises. The obligations of the Company under this Section 6.06 to compensate and indemnify the Trustee and to pay or reimburse the Trustee for documented expenses, disbursements and advances shall constitute additional indebtedness hereunder. Such additional indebtedness shall be secured by a lien prior to that of the Debt Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Debt Securities. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in subsections (d), (e) or (f) of Section 5.01, the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the 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 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 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 be herein specifically prescribed) may, in the absence of negligence or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee, and such certificate, in the absence of negligence or bad faith on the part of the Trustee, shall be full warrant to the Trustee for any action taken or omitted by it under the provisions of this Indenture upon the faith thereof. SECTION 6.08 Eligibility of Trustee. The Trustee hereunder shall at all times be a U.S. Person that is a banking corporation organized and doing business under the laws of the United States of America or any state thereof or of the District of Columbia and authorized under such laws to exercise corporate 33 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, or District of Columbia authority. If such corporation 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 6.08 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 records of condition so published. The Company may not, nor may any Person directly or indirectly controlling, controlled by, or under common control with the Company, serve as Trustee, notwithstanding that such corporation shall be otherwise eligible and qualified under this Article. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.08, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.09. If the Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Indenture. SECTION 6.09 Resignation or Removal of Trustee. (a) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice of such resignation to the Company and by mailing notice thereof, at the Company's expense, to the holders of the Debt Securities at their addresses as they shall appear on the Debt Security Register. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee or trustees by written instrument, in duplicate, executed by order of its Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor Trustee. If no successor Trustee shall have been so appointed and have accepted appointment within 30 days after the mailing of such notice of resignation to the affected Securityholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee, or any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months 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 Trustee shall fail to comply with the provisions of the last paragraph of Section 6.08 after written request therefor by the Company or by any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities for at least six months, 34 (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 6.08 and shall fail to resign after written request therefor by the Company or by any such Securityholder, or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, the Company may remove the Trustee and appoint a successor Trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor Trustee, or, subject to the provisions of Section 5.09, if no successor Trustee shall have been so appointed and have accepted appointment within 30 days of the occurrence of any of (1),(2) or (3) above, any Securityholder who has been a bona fide holder of a Debt Security or Debt Securities 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 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 Trustee and appoint a successor Trustee. (c) Upon prior written notice to the Company and the Trustee, the holders of a majority in aggregate principal amount of the Debt Securities at the time outstanding may at any time remove the Trustee and nominate a successor Trustee, which shall be deemed appointed as successor Trustee unless within ten Business Days after such nomination the Company objects thereto, in which case or in the case of a failure by such holders to nominate a successor Trustee, the Trustee so removed or any Securityholder, upon the terms and conditions and otherwise as in subsection (a) of this Section 6.09 provided, may petition any court of competent jurisdiction for an appointment of a successor. (d) Any resignation or removal of the Trustee and appointment of a successor Trustee pursuant to any of the provisions of this Section 6.09 shall become effective upon acceptance of appointment by the successor Trustee as provided in Section 6.10. SECTION 6.10 Acceptance by Successor Trustee. Any successor Trustee appointed as provided in Section 6.09 shall execute, acknowledge and deliver to the Company 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 with respect to the Debt Securities of its predecessor hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Company or of the successor Trustee, the Trustee ceasing to act shall, upon payment of the 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 and money held by such retiring Trustee thereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments in 35 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. If a successor Trustee is appointed, the Company, the retiring Trustee and the successor Trustee shall execute and deliver an indenture supplemental hereto which shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Debt Securities as to which the predecessor Trustee is not retiring shall continue to be vested in the predecessor Trustee, and shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the Trust hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be Trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee. No successor Trustee shall accept appointment as provided in this Section 6.10 unless at the time of such acceptance such successor Trustee shall be eligible under the provisions of Section 6.08. In no event shall a retiring Trustee be liable for the acts or omissions of any successor Trustee hereunder. Upon acceptance of appointment by a successor Trustee as provided in this Section 6.10, the Company shall mail notice of the succession of such Trustee hereunder to the holders of Debt Securities at their addresses as they shall appear on the Debt Security Register. If the Company fails to mail such notice within ten Business 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 Company. SECTION 6.11 Succession by Merger, etc. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, that such corporation shall be otherwise eligible and qualified under this Article. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture any of the Debt Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee, and deliver such Debt Securities so authenticated; and in case at that time any of the Debt Securities shall not have been authenticated, any successor to the Trustee may authenticate such Debt Securities either in the name of any predecessor hereunder or in the name of the 36 successor Trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Debt Securities or in this Indenture provided that the certificate of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Debt Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. SECTION 6.12 Authenticating Agents. There may be one or more Authenticating Agents appointed by the Trustee upon the request of the Company with power to act on its behalf and subject to its direction in the authentication and delivery of Debt Securities issued upon exchange or registration of transfer thereof as fully to all intents and purposes as though any such Authenticating Agent had been expressly authorized to authenticate and deliver Debt Securities; provided, that the Trustee shall have no liability to the Company for any acts or omissions of the Authenticating Agent with respect to the authentication and delivery of Debt Securities. Any such Authenticating Agent shall at all times be a corporation 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 $50,000,000 and being 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 the requirements of such authority, then for the purposes of this Section 6.12 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. 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 corporation into which any Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any Authenticating Agent shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of any Authenticating Agent, shall be the successor of such Authenticating Agent hereunder, if such successor corporation is otherwise eligible under this Section 6.12 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 Trustee and to the Company. The Trustee may at any time terminate the agency of any Authenticating Agent with respect to the Debt Securities by giving written notice of termination to such Authenticating Agent and to the Company. 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 6.12, the Trustee may, and upon the request of the Company shall, promptly appoint a successor Authenticating Agent eligible under this Section 6.12, shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Debt Securities as the names and addresses of such holders appear on the Debt Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers, duties and responsibilities 37 with respect to the Debt Securities of its predecessor hereunder, with like effect as if originally named as Authenticating Agent herein. The Company 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 Trustee. 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 Debt 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 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 Debt 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 or (d) by any other method the Trustee deems satisfactory. If the Company shall solicit from the Securityholders any request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, the Company may, at its option, as evidenced by an Officers' Certificate, fix in advance a record date for such Debt Securities for the determination of Securityholders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, but the Company 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 or revocation of the same 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 Debt Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other action or revocation of the same, and for that purpose the outstanding Debt 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 Trustee or in 38 such manner as shall be satisfactory to the Trustee. The ownership of Debt Securities shall be proved by the Debt Security Register or by a certificate of the Debt Security registrar. The Trustee may require such additional proof of any matter referred to in this Section as it shall deem necessary. The record of any Securityholders' meeting shall be proved in the manner provided in Section 8.06. SECTION 7.03 Who Are Deemed Absolute Owners. Prior to due presentment for registration of transfer of any Debt Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and any Debt Security registrar may deem the Person in whose name such Debt Security shall be registered upon the Debt Security Register to be, and may treat him as, the absolute owner of such Debt Security (whether or not such Debt Security shall be overdue) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Debt Security and for all other purposes; and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debt Security registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being or upon his 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 Debt Security. SECTION 7.04 Debt Securities Owned by Company Deemed Not Outstanding. In determining whether the holders of the requisite aggregate principal amount of Debt Securities have concurred in any direction, consent or waiver under this Indenture, Debt Securities which are owned by the Company or any other obligor on the Debt Securities or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Debt Securities shall be disregarded and deemed not to be outstanding for the purpose of any such determination; provided, that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent or waiver, only Debt Securities which a Responsible Officer of the Trustee actually knows are so owned shall be so disregarded. Debt 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 Trustee the pledgee's right to vote such Debt Securities and that the pledgee is not the Company or any such other obligor or Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. SECTION 7.05 Revocation of Consents; Future Holders Bound. At any time prior to (but not after) the evidencing to the 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 Debt Securities specified in this Indenture in connection with such action, any holder (in cases where no record date has been set pursuant to Section 7.01) or any holder as of an applicable record date (in cases where a record date has been set pursuant to Section 7.01) of 39 a Debt Security (or any Debt Security issued in whole or in part in exchange or substitution therefor) the serial number of which is shown by the evidence to be included in the Debt Securities the holders of which have consented to such action may, by filing written notice with the Trustee at the Principal Office of the Trustee and upon proof of holding as provided in Section 7.02, revoke such action so far as concerns such Debt Security (or so far as concerns the principal amount represented by any exchanged or substituted Debt Security). Except as aforesaid any such action taken by the holder of any Debt Security shall be conclusive and binding upon such holder and upon all future holders and owners of such Debt Security, and of any Debt Security issued in exchange or substitution therefor or on registration of transfer thereof, irrespective of whether or not any notation in regard thereto is made upon such Debt Security or any Debt Security issued in exchange or substitution therefor. ARTICLE VIII SECURITYHOLDERS' MEETINGS 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 Company or to the Trustee, or to give any directions to the 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 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 Debt Securities under any other provision of this Indenture or under applicable law. SECTION 8.02 Call of Meetings by Trustee. The 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 New York or Wilmington, Delaware, as the 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 Debt Securities affected at their addresses as they shall appear on the Debt Securities Register. Such notice shall be mailed not less than 20 nor more than 180 days prior to the date fixed for the meeting. 40 SECTION 8.03 Call of Meetings by Company or Securityholders. In case at any time the Company pursuant to a Board Resolution, or the holders of at least 10% in aggregate principal amount of the Debt Securities, as the case may be, then outstanding, shall have requested the 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 Trustee shall not have mailed the notice of such meeting within 20 days after receipt of such request, then the Company 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. SECTION 8.04 Qualifications for Voting. To be entitled to vote at any meeting of Securityholders a Person shall (a) be a holder of one or more Debt Securities with respect to which the meeting is being held or (b) a Person appointed by an instrument in writing as proxy by a holder of one or more such Debt 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 Trustee and its counsel and any representatives of the Company and its counsel. SECTION 8.05 Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Securityholders, in regard to proof of the holding of Debt 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 Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Securityholders as provided in Section 8.03, in which case the Company 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 7.04, at any meeting each holder of Debt Securities with respect to which such meeting is being held or proxy therefor shall be entitled to one vote for each $1,000 principal amount of Debt Securities held or represented by him; provided, however, that no vote shall be cast or counted at any meeting in respect of any Debt 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 Debt 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, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. 41 SECTION 8.06 Voting. The vote upon any resolution submitted to any meeting of holders of Debt Securities with respect to which such meeting is being held 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 Debt 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 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 Debt 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 Company and the other to the Trustee to be preserved by the 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. SECTION 8.07 Quorum; Actions. The Persons entitled to vote a majority in outstanding principal amount of the Debt Securities shall constitute a quorum for a meeting of Securityholders; provided, however, that if any action is to be taken at such meeting with respect to a consent, waiver, request, demand, notice, authorization, direction or other action which may be given by the holders of not less than a specified percentage in outstanding principal amount of the Debt Securities, the Persons holding or representing such specified percentage in outstanding principal amount of the Debt Securities will constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Securityholders, be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the permanent chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 8.02, except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the outstanding principal amount of the Debt Securities which shall constitute a quorum. Except as limited by the proviso in the first paragraph of Section 9.02, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the holders of not less than a majority in outstanding principal amount of the Debt Securities; provided, however, that, except 42 as limited by the proviso in the first paragraph of Section 9.02, any resolution with respect to any consent, waiver, request, demand, notice, authorization, direction or other action that this Indenture expressly provides may be given by the holders of not less than a specified percentage in outstanding principal amount of the Debt Securities may be adopted at a meeting or an adjourned meeting duly reconvened and at which a quorum is present as aforesaid only by the affirmative vote of the holders of not less than such specified percentage in outstanding principal amount of the Debt Securities. Any resolution passed or decision taken at any meeting of holders of Debt Securities duly held in accordance with this Section shall be binding on all the Securityholders, whether or not present or represented at the meeting. ARTICLE IX SUPPLEMENTAL INDENTURES SECTION 9.01 Supplemental Indentures without Consent of Securityholders. The Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto, without the consent of the Securityholders, for one or more of the following purposes: (a) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company, pursuant to Article XI hereof; (b) to add to the covenants of the Company such further covenants, restrictions or conditions for the protection of the holders of Debt Securities as the Board of Directors shall consider to be for the protection of the holders of such Debt Securities, 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 several remedies provided in this Indenture as herein set forth; provided, however, that in respect of any such additional covenant, restriction or condition such supplemental indenture 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 Trustee upon such default; (c) 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 adversely affect the interests of the holders of the Debt Securities; (d) to add to, delete from, or revise the terms of Debt Securities, including, without limitation, any terms relating to the issuance, exchange, registration or transfer of Debt Securities, including to provide for transfer procedures and restrictions substantially similar to 43 those applicable to the Capital Securities as required by Section 2.05 (for purposes of assuring that no registration of Debt Securities is required under the Securities Act of 1933, as amended); provided, that any such action shall not adversely affect the interests of the holders of the Debt Securities then outstanding (it being understood, for purposes of this proviso, that transfer restrictions on Debt Securities substantially similar to those that were applicable to Capital Securities shall not be deemed to adversely affect the holders of the Debt Securities); (e) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Debt Securities and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 6.10; (f) to make any change (other than as elsewhere provided in this paragraph) that does not adversely affect the rights of any Securityholder in any material respect; or (g) to provide for the issuance of and establish the form and terms and conditions of the Debt Securities, to establish the form of any certifications required to be furnished pursuant to the terms of this Indenture or the Debt Securities, or to add to the rights of the holders of Debt Securities. The Trustee is hereby authorized to join with the Company in the execution of any such supplemental indenture, 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 Trustee shall not be obligated to, but may in its discretion, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 9.01 may be executed by the Company and the Trustee without the consent of the holders of any of the Debt Securities at the time outstanding, notwithstanding any of the provisions of Section 9.02. SECTION 9.02 Supplemental Indentures with Consent of Securityholders. With the consent (evidenced as provided in Section 7.01) of the holders of not less than a majority in aggregate principal amount of the Debt Securities at the time outstanding affected by such supplemental indenture (voting as a class), the Company, when authorized by a Board Resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto (which shall conform to the provisions of the Trust Indenture Act, then in effect, applicable to indentures qualified thereunder) for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture shall without such consent of the holders of each Debt Security then outstanding and affected thereby (i) extend the fixed maturity of any Debt Security, or reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on redemption thereof or make the principal thereof or any interest or premium thereon payable in any coin or currency other than that provided in the Debt Securities, or impair 44 or affect the right of any Securityholder to institute suit for payment thereof or impair the right of repayment, if any, at the option of the holder, or (ii) reduce the aforesaid percentage of Debt Securities the holders of which are required to consent to any such supplemental indenture; and provided, further, that if the Debt Securities are held by the Trust or a trustee of such trust, such supplemental indenture shall not be effective until the holders of a majority in liquidation preference of Trust Securities shall have consented to such supplemental indenture; provided, further, that if the consent of the Securityholder of each outstanding Debt Security is required, such supplemental indenture shall not be effective until each holder of the Trust Securities shall have consented to such supplemental indenture. Upon the request of the Company accompanied by a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Securityholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Trustee shall transmit by mail, first class postage prepaid, a notice, prepared by the Company, setting forth in general terms the substance of such supplemental indenture, to the Securityholders thereby as their names and addresses appear upon the Debt Security Register. Any failure of the 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 Effect of Supplemental Indentures. 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 Trustee, the Company and the holders of Debt 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 Debt Securities. Debt Securities authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article IX may bear a notation as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Debt Securities so modified as to conform, in the opinion of the Board of Directors of the Company, to any modification of this Indenture contained in any such 45 supplemental indenture may be prepared and executed by the Company, authenticated by the Trustee or the Authenticating Agent and delivered in exchange for the Debt Securities then outstanding. SECTION 9.05 Evidence of Compliance of Supplemental Indenture to be Furnished to Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall, in addition to the documents required by Section 14.06, 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. The Trustee shall receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to this Article IX is authorized or permitted by, and conforms to, the terms of this Article IX and that it is proper for the Trustee under the provisions of this Article IX to join in the execution thereof. ARTICLE X REDEMPTION OF SECURITIES SECTION 10.01 Optional Redemption. At any time the Company shall have the right, subject to the receipt by the Company of prior approval from the OTS, if then required under applicable capital guidelines or policies of the OTS, to redeem the Debt Securities, in whole or in part, on any June 8th or December 8th on or after December 8, 2006 (the "Redemption Date"), at the Redemption Price. SECTION 10.02 Special Event Redemption. If a Special Event shall occur and be continuing, the Company shall have the right, subject to the receipt by the Company of prior approval from the OTS if then required under applicable capital guidelines or policies of the OTS, to redeem the Debt Securities, in whole but not in part, at any time within 90 days following the occurrence of such Special Event (the "Special Redemption Date"), at the Special Redemption Price. SECTION 10.03 Notice of Redemption; Selection of Debt Securities. In case the Company shall desire to exercise the right to redeem all, or, as the case may be, any part of the Debt Securities, it shall fix a date for redemption and shall mail a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Debt Securities so to be redeemed as a whole or in part at their last addresses as the same appear on the Debt 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 Debt Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Debt Security. 46 Each such notice of redemption shall specify the CUSIP number, if any, of the Debt Securities to be redeemed, the date fixed for redemption, the redemption price at which Debt Securities are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Debt Securities, that interest accrued to the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portions thereof to be redeemed will cease to accrue. If less than all the Debt Securities are to be redeemed the notice of redemption shall specify the numbers of the Debt Securities to be redeemed. In case the Debt Securities are to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Debt Security, a new Debt Security or Debt Securities in principal amount equal to the unredeemed portion thereof will be issued. Prior to 10:00 a.m. New York City time on the Redemption Date or the Special Redemption Date specified in the notice of redemption given as provided in this Section, the Company will deposit with the Trustee or with one or more paying agents an amount of money sufficient to redeem on the redemption date all the Debt Securities so called for redemption at the appropriate redemption price, together with accrued interest to the date fixed for redemption. The Company will give the Trustee notice not less than 45 nor more than 60 days prior to the redemption date as to the redemption price at which the Debt Securities are to be redeemed and the aggregate principal amount of Debt Securities to be redeemed and the Trustee shall select, in such manner as in its sole discretion it shall deem appropriate and fair, the Debt Securities or portions thereof (in integral multiples of $1,000) to be redeemed. SECTION 10.04 Payment of Debt Securities Called for Redemption. If notice of redemption has been given as provided in Section 10.03, the Debt Securities or portions of Debt Securities with respect to which such notice has been given shall become due and payable on the Redemption Date or the Special Redemption Date (as the case may be) and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to the date fixed for redemption, and on and after said Redemption Date or the Special Redemption Date (unless the Company shall default in the payment of such Debt Securities at the redemption price, together with interest accrued to said date) interest on the Debt Securities or portions of Debt Securities so called for redemption shall cease to accrue. On presentation and surrender of such Debt Securities at a place of payment specified in said notice, such Debt Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to the Redemption Date or the Special Redemption Date (as the case may be). Upon presentation of any Debt Security redeemed in part only, the Company shall execute and the Trustee shall authenticate and make available for delivery to the holder thereof, at the expense of the Company, a new Debt Security or Debt Securities of authorized denominations in principal amount equal to the unredeemed portion of the Debt Security so presented. 47 ARTICLE XI CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE SECTION 11.01 Company May Consolidate, etc., on Certain Terms. Nothing contained in this Indenture or in the Debt Securities shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company) or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance, transfer or other disposition of the property or capital stock of the Company or its successor or successors as an entirety, or substantially as an entirety, to any other corporation (whether or not affiliated with the Company, or its successor or successors) authorized to acquire and operate the same; provided, however, that the Company hereby covenants and agrees that, upon any such consolidation, merger (where the Company is not the surviving corporation), sale, conveyance, transfer or other disposition, the due and punctual payment of the principal of (and premium, if any) and interest on all of the Debt Securities in accordance with their terms, 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 Company, shall be expressly assumed by supplemental indenture satisfactory in form to the Trustee executed and delivered to the Trustee by the entity formed by such consolidation, or into which the Company shall have been merged, or by the entity which shall have acquired such property or capital stock. SECTION 11.02 Successor Entity to be Substituted. In case of any such consolidation, merger, sale, conveyance, transfer or other disposition and upon the assumption by the successor entity, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Debt 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 Company, such successor entity shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the Company, and thereupon the predecessor entity shall be relieved of any further liability or obligation hereunder or upon the Debt Securities. Such successor entity thereupon may cause to be signed, and may issue either in its own name or in the name of the Company, any or all of the Debt Securities issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee or the Authenticating Agent; and, upon the order of such successor entity instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee or the Authenticating Agent shall authenticate and deliver any Debt Securities which previously shall have been signed and delivered by the officers of the Company, to the Trustee or the Authenticating Agent for authentication, and any Debt Securities which such successor entity thereafter shall cause to be signed and delivered to the Trustee or the Authenticating Agent for that purpose. All the Debt Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Debt Securities theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Debt Securities had been issued at the date of the execution hereof. 48 SECTION 11.03 Opinion of Counsel to be Given to Trustee. The Trustee, subject to the provisions of Sections 6.01 and 6.02, shall receive, in addition to the Opinion of Counsel required by Section 9.05, an Opinion of Counsel as conclusive evidence that any consolidation, merger, sale, conveyance, transfer or other disposition, and any assumption, permitted or required by the terms of this Article XI complies with the provisions of this Article XI. ARTICLE XII SATISFACTION AND DISCHARGE OF INDENTURE SECTION 12.01 Discharge of Indenture. When (a) the Company shall deliver to the Trustee for cancellation all Debt Securities theretofore authenticated (other than any Debt Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.06) and not theretofore canceled, or (b) all the Debt Securities not theretofore canceled or delivered to the 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 redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds, which shall be immediately due and payable, sufficient to pay at maturity or upon redemption all of the Debt Securities (other than any Debt Securities which shall have been destroyed, lost or stolen and which shall have been replaced or paid as provided in Section 2.06) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, but excluding, however, the amount of any moneys for the payment of principal of, and premium, if any, or interest on the Debt Securities (1) theretofore repaid to the Company in accordance with the provisions of Section 12.04, or (2) paid to any state or to the District of Columbia pursuant to its unclaimed property or similar laws, and if in the case of either clause (a) or clause (b) the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect except for the provisions of Sections 2.05, 2.06, 3.01, 3.02, 3.04, 6.06, 6.09 and 12.04 hereof, which shall survive until such Debt Securities shall mature or are redeemed, as the case may be, and are paid. Thereafter, Sections 6.06, 6.09 and 12.04 shall survive, and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with, and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture, the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee in connection with this Indenture or the Debt Securities. SECTION 12.02 Deposited Moneys to be Held in Trust by Trustee. Subject to the provisions of Section 12.04, all moneys deposited with the Trustee pursuant to Section 12.01 shall be held in trust and applied by it to the payment, either directly or 49 through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Debt Securities for the payment of which such moneys have been deposited with the Trustee, of all sums due and to become due thereon for principal, and premium, if any, and interest. SECTION 12.03 Paying Agent to Repay Moneys Held. Upon the satisfaction and discharge of this Indenture, all moneys then held by any paying agent of the Debt Securities (other than the Trustee) shall, upon demand of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such moneys. SECTION 12.04 Return of Unclaimed Moneys. Any moneys deposited with or paid to the Trustee or any paying agent for payment of the principal of, and premium, if any, or interest on Debt Securities and not applied but remaining unclaimed by the holders of Debt Securities for two years after the date upon which the principal of, and premium, if any, or interest on such Debt Securities, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee or such paying agent on written demand; and the holder of any of the Debt Securities shall thereafter look only to the Company for any payment which such holder may be entitled to collect and all liability of the Trustee or such paying agent with respect to such moneys shall thereupon cease. ARTICLE XIII IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS SECTION 13.01 Indenture and Debt Securities Solely Corporate Obligations. No recourse for the payment of the principal of or premium, if any, or interest on any Debt 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 Company in this Indenture or in any supplemental indenture, or in any such Debt Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director, employee or agent, as such, past, present or future, of the Company or of any successor corporation of the Company, either directly or through the Company or any successor corporation of the Company, 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 issue of the Debt Securities. 50 ARTICLE XIV MISCELLANEOUS PROVISIONS SECTION 14.01 Successors. All the covenants, stipulations, promises and agreements of the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not. SECTION 14.02 Official Acts by Successor Entity. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee, officer or other authorized Person of any entity that shall at the time be the lawful successor of the Company. SECTION 14.03 Surrender of Company Powers. The Company by instrument in writing executed by authority of 2/3 (two-thirds) of its Board of Directors and delivered to the Trustee may surrender any of the powers reserved to the Company and thereupon such power so surrendered shall terminate both as to the Company, and as to any permitted successor. SECTION 14.04 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 Trustee or by the Securityholders on the Company may be given or served in writing by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company, with the Trustee for the purpose) to the Company at 2381 Rosecrans Avenue, El Segundo, California 90245, Attention: Eileen Lyon. Any notice, direction, request or demand by any Securityholder or the Company to or upon the 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. SECTION 14.05 Governing Law. This Indenture and each Debt Security shall be deemed to be a contract made under the law of the State of New York, and for all purposes shall be governed by and construed in accordance with the law of said State, without regard to conflict of laws principles thereof. SECTION 14.06 Evidence of Compliance with Conditions Precedent. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the 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 51 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 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 (a) a statement that the person making such certificate or opinion has read such covenant or condition; (b) a brief 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; (c) 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 (d) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. SECTION 14.07 Non-Business Days. In any case where the date of payment of interest on or principal of the Debt Securities is not a Business Day, the payment of such interest on or principal of the Debt Securities need not be made on such date but may be made on the next succeeding Business Day, with the same force and effect as if made on the date of payment and no interest shall accrue for the period from and after such date, except if such Business Day is in the next succeeding calendar year, such payment will be made on the immediately preceding Business Day. SECTION 14.08 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 14.09 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 14.10 Separability. In case any one or more of the provisions contained in this Indenture or in the Debt 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 such Debt Securities, but this Indenture and such Debt Securities shall be construed as if such invalid or illegal or unenforceable provision had never been contained herein or therein. SECTION 14.11 Assignment. The Company will have the right at all times to assign any of its rights or obligations under this Indenture to a direct or indirect wholly owned Subsidiary of the Company, 52 provided, that, in the event of any such assignment, the Company will remain liable for all such obligations. Subject to the foregoing, this Indenture is binding upon and inures to the benefit of the parties hereto and their respective successors and assigns. This Indenture may not otherwise be assigned by the parties thereto. SECTION 14.12 Acknowledgment of Rights. The Company acknowledges that, with respect to any Debt Securities held by the Trust or the Institutional Trustee of the Trust, if the Institutional Trustee of the Trust fails to enforce its rights under this Indenture as the holder of Debt Securities held as the assets of the Trust after the holders of a majority in Liquidation Amount of the Capital Securities of the Trust have so directed in writing such Institutional Trustee, a holder of record of such Capital Securities may to the fullest extent permitted by law institute legal proceedings directly against the Company to enforce such Institutional Trustee's rights under this Indenture without first instituting any legal proceedings against such Institutional Trustee or any other Person. Notwithstanding the foregoing, if an Event of Default has occurred and is continuing and such event is attributable to the failure of the Company to pay interest (or premium, if any) or principal on the Debt Securities on the date such interest (or premium, if any) or principal is otherwise due and payable (or in the case of redemption, on the redemption date), the Company acknowledges that a holder of record of Capital Securities of the Trust may directly institute a proceeding against the Company for enforcement of payment to such holder directly of the principal of (or premium, if any) or interest on the Debt 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 Debt Securities. ARTICLE XV SUBORDINATION OF DEBT SECURITIES SECTION 15.01 Agreement to Subordinate. The Company covenants and agrees, and each holder of Debt Securities issued hereunder and under any supplemental indenture (the "Additional Provisions") by such Securityholder's acceptance thereof likewise covenants and agrees, that all Debt Securities shall be issued subject to the provisions of this Article XV; and each holder of a Debt Security, whether upon original issue or upon transfer or assignment thereof, accepts and agrees to be bound by such provisions. The payment by the Company of the principal of, and premium, if any, and interest on all Debt Securities issued hereunder and under any Additional Provisions shall, to the extent and in the manner hereinafter set forth, be subordinated and junior in right of payment to the prior payment in full of all Senior Indebtedness of the Company, 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. 53 SECTION 15.02 Default on Senior Indebtedness. In the event and during the continuation of any default by the Company in the payment of principal, premium, interest or any other payment due on any Senior Indebtedness of the Company following any applicable grace period, or in the event that the maturity of any Senior Indebtedness of the Company has been accelerated because of a default, and such acceleration has not been rescinded or canceled and such Senior Indebtedness has not been paid in full then, in either case, no payment shall be made by the Company with respect to the principal of, or premium, if any, or interest on the Debt Securities. In the event that, notwithstanding the foregoing, any payment shall be received by the Trustee when such payment is prohibited by the preceding paragraph of this Section 15.02, such payment shall, subject to Section 15.06, be held in trust for the benefit of, and shall be paid over or delivered 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 that the holders of the Senior Indebtedness (or their representative or representatives or a trustee) notify the Trustee in writing within 90 days of such payment of the amounts then due and owing on the Senior Indebtedness and only the amounts specified in such notice to the Trustee shall be paid to the holders of Senior Indebtedness. SECTION 15.03 Liquidation; Dissolution; Bankruptcy. Upon any payment by the Company or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due upon all Senior Indebtedness of the Company shall first be paid in full, or payment thereof provided for in money in accordance with its terms, before any payment is made by the Company, on account of the principal (and premium, if any) or interest on the Debt Securities; and upon any such dissolution or winding-up or liquidation or reorganization, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Securityholders or the Trustee would be entitled to receive from the Company, except for the provisions of this Article XV, shall be paid by the Company, 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 Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness of the Company (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, as calculated by the Company) 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 such 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. In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, 54 prohibited by the foregoing, shall be received by the Trustee before all Senior Indebtedness of the Company 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 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 interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness of the Company, remaining unpaid to the extent necessary to pay 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 Company as reorganized or readjusted, or securities of the Company 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 Debt Securities to the payment of all Senior Indebtedness of the Company, that may at the time be outstanding, provided, that (a) such Senior Indebtedness is assumed by the new corporation, if any, resulting from any such reorganization or readjustment, and (b) 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 Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article IX 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 corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article IX of this Indenture. Nothing in Section 15.02 or in this Section 15.03 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.06 of this Indenture. SECTION 15.04 Subrogation. Subject to the payment in full of all Senior Indebtedness of the Company, 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 Company, applicable to such Senior Indebtedness until the principal of (and premium, if any) and interest on the Debt 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 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 Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness of the Company, and the holders of the Debt Securities be deemed to be a payment or distribution by the Company 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 Debt Securities, on the one hand, and the holders of such Senior Indebtedness, on the other hand. 55 Nothing contained in this Article XV or elsewhere in this Indenture, any Additional Provisions or in the Debt Securities is intended to or shall impair, as between the Company, its creditors other than the holders of Senior Indebtedness of the Company, and the holders of the Debt Securities, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Debt Securities the principal of (and premium, if any) and interest on the Debt 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 Debt Securities and creditors of the Company, other than the holders of Senior Indebtedness of the Company, nor shall anything herein or therein prevent the Trustee or the holder of any Debt 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 Company, received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XV, the 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 made by any court of competent jurisdiction in which such dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidation trustee, agent or other Person making such payment or distribution, delivered to the Trustee or to the Securityholders, for the purposes of ascertaining the Persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, 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 15.05 Trustee to Effectuate Subordination. Each Securityholder by such Securityholder's acceptance thereof authorizes and directs the Trustee on such Securityholder's behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article XV and appoints the Trustee such Securityholder's attorney-in-fact for any and all such purposes. SECTION 15.06 Notice by the Company. The Company shall give prompt written notice to a Responsible Officer of the Trustee at the Principal Office of the Trustee of any fact known to the Company that would prohibit the making of any payment of monies to or by the Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV. Notwithstanding the provisions of this Article XV or any other provision of this Indenture or any Additional Provisions, the 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 Trustee in respect of the Debt Securities pursuant to the provisions of this Article XV, unless and until a Responsible Officer of the Trustee at the Principal Office of the Trustee shall have received written notice thereof from the Company or a holder or holders of Senior Indebtedness or from any trustee therefor; and before the receipt of any such written notice, the 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 Trustee shall not have received the notice provided for in this Section 15.06 at least two Business 56 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 on any Debt Security), then, anything herein contained to the contrary notwithstanding, the 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 Trustee, subject to the provisions of Article VI of this Indenture, shall be entitled to conclusively rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Indebtedness of the Company (or a trustee or representative on behalf of such holder), to establish that such notice has been given by a holder of such Senior Indebtedness or a trustee or representative on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of such Senior Indebtedness to participate in any payment or distribution pursuant to this Article XV, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the 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 Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment. SECTION 15.07 Rights of the Trustee; Holders of Senior Indebtedness. The 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 or any Additional Provisions shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness of the Company, the 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 or any Additional Provisions against the Trustee. The Trustee shall not owe or 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 Trustee shall not be liable to any holder of such Senior Indebtedness if it shall pay over or deliver to Securityholders, the Company 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 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 Company 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 Company, or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company, with the terms, 57 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 Company may, at any time and from time to time, without the consent of or notice to the 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 Debt Securities to the holders of such Senior Indebtedness, do any one or more of the following: (a) 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; (b) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing such Senior Indebtedness; (c) release any Person liable in any manner for the collection of such Senior Indebtedness; and (d) exercise or refrain from exercising any rights against the Company, and any other Person. Wilmington Trust Company, in its capacity as Trustee, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions herein above set forth. 58 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 Lagomarsino President and Chief Executive Officer WILMINGTON TRUST COMPANY, as Trustee By -------------------------------------- Name: Title: 59 EX-4.16 4 a80073ex4-16.txt EXHIBIT 4.16 EXHIBIT 4.16 CERTIFICATE OF TRUST OF HFC CAPITAL TRUST II THIS CERTIFICATE OF TRUST OF HFC CAPITAL TRUST II (the "Trust") is being duly executed and filed by the undersigned on behalf of the Trust to form a business trust under the Delaware Business Trust Act (12 Del C. sections 3801 et seq.) (the "Act"). 1. Name. The name of the business trust being formed is HFC Capital Trust II. 2. Trustee. The name and business address of the trustee of the Trust with a principal place of business in the State of Delaware is as follows: Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, DE 19890 ATTN: Corporate Trust Administration IN WITNESS WHEREOF, the undersigned has executed this Certificate of Trust in accordance with Section 3811(a) of the Act. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as trustee of the Trust By: /s/ Donald G. MacKelcan -------------------------------- Name: Donald G. MacKelcan Title: Vice President EX-4.17 5 a80073ex4-17.txt EXHIBIT 4.17 EXHIBIT 4.17 ================================================================================ AMENDED AND RESTATED DECLARATION OF TRUST HFC CAPITAL TRUST II Dated as of November 28, 2001 ================================================================================ ARTICLE I INTERPRETATION AND DEFINITIONS
Page Section 1.1 Definitions...............................................................2 ARTICLE II ORGANIZATION Section 2.1 Name......................................................................9 Section 2.2 Office....................................................................9 Section 2.3 Purpose..................................................................10 Section 2.4 Authority................................................................10 Section 2.5 Title to Property of the Trust...........................................10 Section 2.6 Powers and Duties of the Trustees and the Administrators.................10 Section 2.7 Prohibition of Actions by the Trust and the Trustees.....................15 Section 2.8 Powers and Duties of the Institutional Trustee...........................16 Section 2.9 Certain Duties and Responsibilities of the Trustees and Administrators...17 Section 2.10 Certain Rights of Institutional Trustee..................................19 Section 2.11 Delaware Trustee.........................................................22 Section 2.12 Execution of Documents...................................................22 Section 2.13 Not Responsible for Recitals or Issuance of Securities...................22 Section 2.14 Duration of Trust........................................................22 Section 2.15 Mergers..................................................................22 ARTICLE III SPONSOR Section 3.1 Sponsor's Purchase of Common Securities..................................24 Section 3.2 Responsibilities of the Sponsor..........................................24 ARTICLE IV TRUSTEES AND ADMINISTRATORS Section 4.1 Number of Trustees.......................................................25 Section 4.2 Delaware Trustee.........................................................25 Section 4.3 Institutional Trustee; Eligibility.......................................25 Section 4.4 Certain Qualifications of the Delaware Trustee Generally.................26 Section 4.5 Administrators...........................................................26
-i- Section 4.6 Initial Delaware Trustee.................................................26 Section 4.7 Appointment, Removal and Resignation of Trustees and Administrators......26 Section 4.8 Vacancies Among Trustees.................................................28 Section 4.9 Effect of Vacancies......................................................28 Section 4.10 Meetings of the Trustees and the Administrators..........................29 Section 4.11 Delegation of Power......................................................29 Section 4.12 Conversion, Consolidation or Succession to Business......................29 ARTICLE V DISTRIBUTIONS Section 5.1 Distributions............................................................30 ARTICLE VI ISSUANCE OF SECURITIES Section 6.1 General Provisions Regarding Securities..................................30 Section 6.2 Paying Agent, Transfer Agent, Calculation Agent and Registrar............31 Section 6.3 Form and Dating..........................................................32 Section 6.4 Mutilated, Destroyed, Lost or Stolen Certificates........................32 Section 6.5 Temporary Securities.....................................................32 Section 6.6 Cancellation.............................................................33 Section 6.7 Rights of Holders; Waivers of Past Defaults..............................33 ARTICLE VII DISSOLUTION AND TERMINATION OF TRUST Section 7.1 Dissolution and Termination of Trust.....................................35 ARTICLE VIII TRANSFER OF INTERESTS Section 8.1 General..................................................................36 Section 8.2 Transfer Procedures and Restrictions.....................................37 Section 8.3 Deemed Security Holders..................................................39 ARTICLE IX LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS Section 9.1 Liability................................................................40 Section 9.2 Exculpation..............................................................40

-ii- Section 9.3 Fiduciary Duty...........................................................41 Section 9.4 Indemnification..........................................................41 Section 9.5 Outside Businesses.......................................................44 Section 9.6 Compensation; Fee........................................................44 ARTICLE X ACCOUNTING Section 10.1 Fiscal Year..............................................................45 Section 10.2 Certain Accounting Matters...............................................45 Section 10.3 Banking..................................................................46 Section 10.4 Withholding..............................................................46 ARTICLE XI AMENDMENTS AND MEETINGS Section 11.1 Amendments...............................................................46 Section 11.2 Meetings of the Holders of Securities; Action by Written Consent.........48 ARTICLE XII REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND DELAWARE TRUSTEE Section 12.1 Representations and Warranties of Institutional Trustee..................50 Section 12.2 Representations and Warranties of Delaware Trustee.......................51 ARTICLE XIII MISCELLANEOUS Section 13.1 Notices..................................................................52 Section 13.2 Governing Law............................................................53 Section 13.3 Submission to Jurisdiction...............................................53 Section 13.4 Intention of the Parties.................................................54 Section 13.5 Headings.................................................................54 Section 13.6 Successors and Assigns...................................................54 Section 13.7 Partial Enforceability...................................................54 Section 13.8 Counterparts.............................................................54

-iii- ANNEXES AND EXHIBITS ANNEX I Terms of Floating Rate MMCapS(SM) EXHIBIT A-1 Form of Capital Securities Certificate EXHIBIT A-2 Form of Common Security Certificate EXHIBIT B Form of Transferee Certificate to be Executed by Transferees Other than QIBs EXHIBIT C Form of Transferee Certificate to be Executed for QIBs

iv AMENDED AND RESTATED DECLARATION OF TRUST OF HFC Capital Trust II November 28, 2001 AMENDED AND RESTATED DECLARATION OF TRUST (this "Declaration") dated and effective as of November 28, 2001, by the Trustees (as defined herein), the Administrators (as defined herein), the Sponsor (as defined herein) and the holders, from time to time, of undivided beneficial interests in the assets of the Trust (as defined herein) to be issued pursuant to this Declaration; WHEREAS, certain of the Trustees, the Administrators and the Sponsor established HFC Capital Trust II (the "Trust"), a statutory business trust under the Business Trust Act (as defined herein) pursuant to a Declaration of Trust dated as of October 12, 2001 (the "Original Declaration"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on November 9, 2001, for the sole purpose of issuing and selling certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in certain debentures of the Debenture Issuer (as defined herein) in connection with the MM Community Funding II, Ltd transaction; WHEREAS, as of the date hereof, no interests in the assets of the Trust have been issued; and WHEREAS, all of the Trustees, the Administrators and the Sponsor, by this Declaration, amend and restate each and every term and provision of the Original Declaration; NOW, THEREFORE, it being the intention of the parties hereto to continue the Trust as a statutory business trust under the Business Trust Act and that this Declaration constitutes the governing instrument of such statutory 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: 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 or, if not defined in this Section 1.1 or elsewhere herein, in the Indenture; (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 Declaration 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 (as defined herein) has the same meaning when used in this Declaration unless otherwise defined in this Declaration or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Additional Interest" has the meaning set forth in Section 3.06 of the Indenture. "Administrative Action" has the meaning set forth in paragraph 4(a) of Annex I. "Administrators" means each of Simone Lagomarsino, Karen Abajian and Eileen Lyon, solely in such Person's capacity as Administrator of the Trust created and continued hereunder and not in such Person's individual capacity, or such Administrator's successor in interest in such capacity, or any successor appointed as herein provided. "Affiliate" has the same meaning as given to that term in Rule 405 of the Securities Act or any successor rule thereunder. "Authorized Officer" of a Person means any Person that is authorized to bind such Person. 2 "Bankruptcy Event" means, with respect to any Person: (a) a court having jurisdiction in the premises enters a decree or order for relief in respect of such Person in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appoints a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar official of such Person or for any substantial part of its property, or orders the winding-up or liquidation of its affairs, and such decree, appointment or order remains unstayed and in effect for a period of 90 consecutive days; or (b) such Person commences a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, consents to the entry of an order for relief in an involuntary case under any such law, or consents to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official of such Person of any substantial part of its property, or makes any general assignment for the benefit of creditors, or fails generally to pay its debts as they become due. "Business Day" means any day other than Saturday, Sunday or any other day on which banking institutions in Wilmington, Delaware, New York City or El Segundo, California are permitted or required by any applicable law or executive order to close. "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. "Calculation Agent" has the meaning set forth in Section 1.01 of the Indenture. "Capital Securities" has the meaning set forth in Section 6.1(a). "Capital Security Certificate" means a definitive Certificate representing a Capital Security substantially in the form of Exhibit A-1. "Capital Treatment Event" has the meaning set forth in paragraph 4(a) of Annex I. "Certificate" means any certificate evidencing Securities. "Certificate of Trust" means the certificate of trust filed with the Secretary of State of the State of Delaware with respect to the Trust, as amended and restated from time to time. "Closing Date" has the meaning set forth in the Placement Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor legislation. "Commission" means the Securities and Exchange Commission. "Common Securities" has the meaning set forth in Section 6.1(a). 3 "Common Security Certificate" means a definitive Certificate registered in the name of the Holder representing a Common Security substantially in the form of Exhibit A-2. "Company Indemnified Person" means (a) any Administrator; (b) any Affiliate of any Administrator; (c) any officers, directors, shareholders, members, partners, employees, representatives or agents of any Administrator; or (d) any officer, employee or agent of the Trust or its Affiliates. "Comparable Treasury Issue" has the meaning set forth in paragraph 4(a) of Annex I. "Comparable Treasury Price" has the meaning set forth in paragraph 4(a) of Annex I. "Corporate Trust Office" means the office of the Institutional Trustee at which the corporate trust business of the Institutional Trustee shall, at any particular time, be principally administered, which office shall at all times be located in the United States and 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. "Coupon Rate" has the meaning set forth in paragraph 2(a) of Annex I. "Covered Person" means: (a) any Administrator, 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 savings and loan holding company incorporated in Delaware, in its capacity as issuer of the Debentures under the Indenture. "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 Floating Rate Junior Subordinated Debt Securities due 2031 to be issued by the Debenture Issuer under the Indenture. "Deferred Interest" means any interest on the Debentures that would have been overdue and unpaid for more than one Distribution Payment Date but for the imposition of an Extension Period, and the interest that shall accrue (to the extent that the payment of such interest is legally enforceable) on such interest at the Coupon Rate in effect for each such Extension Period, compounded semi-annually from the date on which such Deferred Interest would otherwise have been due and payable until paid or made available for payment. 4 "Definitive Capital Securities" means any Capital Securities in definitive form issued by the Trust. "Delaware Trustee" has the meaning set forth in Section 4.2. "Direct Action" has the meaning set forth in Section 2.8(e). "Distribution" means a distribution payable to Holders of Securities in accordance with Section 5.1. "Distribution Payment Date" has the meaning set forth in paragraph 2(b) of Annex I. "Event of Default" means the occurrence of an Indenture Event of Default. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor legislation. "Extension Period" has the meaning set forth in paragraph 2(b) of Annex I. "Federal Reserve" means the Board of Governors of the Federal Reserve System. "Fiduciary Indemnified Person" shall mean each of the Institutional Trustee (including in its individual capacity), the Delaware Trustee (including in its individual capacity), any Affiliate of the Institutional Trustee or the Delaware Trustee, and any officers, directors, shareholders, members, partners, employees, representatives, custodians, nominees or agents of the Institutional Trustee and the Delaware Trustee. "Fiscal Year" has the meaning set forth in Section 10.1. "Guarantee" means the guarantee agreement to be dated as of November 28, 2001, of the Sponsor in respect of the Capital Securities. "Holder" means a Person in whose name a Certificate representing a Security is registered on the register maintained by or on behalf of the Registrar, such Person being a beneficial owner 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 November 28, 2001 among the Debenture Issuer and the Debenture Trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued. "Indenture Event of Default" means an "Event of Default" as defined in the Indenture. 5 "Institutional Trustee" means the Trustee meeting the eligibility requirements set forth in Section 4.3. "Interest" means any interest due on the Debentures, including any Deferred Interest and Defaulted Interest (as each such term is defined in the Indenture). "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 paragraph 4(a) of Annex I. "Legal Action" has the meaning set forth in Section 2.8(e). "LIBOR Banking Day" has the meaning set forth in paragraph 2(b)(1) of Annex I. "LIBOR Business Day" has the meaning set forth in paragraph 2(b)(1) of Annex I. "LIBOR Determination Date" has the meaning set forth in paragraph 2(b)(1) of Annex I. "Liquidation" has the meaning set forth in paragraph 3 of Annex I. "Liquidation Distribution" has the meaning set forth in paragraph 3 of Annex I. "Majority in liquidation amount of the Securities" means Holder(s) of outstanding 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, who are the record owners of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "OTS" has the meaning set forth in paragraph 3 of Annex I. "Officers' Certificates" means, with respect to any Person, a certificate signed by two Authorized Officers of such Person. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for it in this Declaration shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; 6 (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' 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, in the opinion of each such officer, such condition or covenant has been complied with. "Paying Agent" has the meaning specified in Section 6.2. "Payment Amount" has the meaning set forth in Section 5.1. "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. "Placement Agreement" means the Placement Agreement relating to the offering and sale of Capital Securities. "PORTAL" has the meaning set forth in Section 2.6(a)(i). "Primary Treasury Dealer" has the meaning set forth in paragraph 4(a) of Annex I. "Property Account" has the meaning set forth in Section 2.8(c). "Pro Rata" has the meaning set forth in paragraph 8 of Annex I. "QIB" means a "qualified institutional buyer" as defined under Rule 144A. "Quorum" means a majority of the Administrators or, if there are only two Administrators, both of them. "Quotation Agent" has the meaning set forth in paragraph 4(a) of Annex I. "Redemption/Distribution Notice" has the meaning set forth in paragraph 4(e) of Annex I. "Redemption Price" has the meaning set forth in paragraph 4(a) of Annex I. "Registrar" has the meaning set forth in Section 6.2. "Reference Treasury Dealer" has the meaning set forth in paragraph 4(a) of Annex I. 7 "Reference Treasury Dealer Quotations" has the meaning set forth in paragraph 4(a) of Annex I. "Relevant Trustee" has the meaning set forth in Section 4.7(a). "Remaining Life" has the meaning set forth in paragraph 4(a) of Annex I. "Responsible Officer" means, with respect to the Institutional Trustee, any officer within the Corporate Trust Office of the Institutional Trustee with direct responsibility for the administration of this Declaration, including any vice-president, any assistant vice-president, any assistant secretary, the treasurer, any assistant treasurer, any trust officer or other officer of the Corporate Trust Office of the Institutional Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Restricted Securities Legend" has the meaning set forth in Section 8.2(c). "Rule 144A" means Rule 144A under the Securities Act. "Rule 3a-5" means Rule 3a-5 under the Investment Company Act. "Rule 3a-7" means Rule 3a-7 under the Investment Company Act. "Securities" means the Common Securities and the Capital Securities. "Securities Act" means the Securities Act of 1933, as amended. "Sponsor" means Hawthorne Financial Corporation, a savings and loan holding company that is a U.S. Person incorporated in Delaware, or any successor entity in a merger, consolidation or amalgamation that is a U.S. Person, in its capacity as sponsor of the Trust. "Successor Delaware Trustee" has the meaning set forth in Section 4.7(a). "Successor Entity" has the meaning set forth in Section 2.15(b). "Successor Institutional Trustee" has the meaning set forth in Section 4.7(a). "Successor Securities" has the meaning set forth in Section 2.15(b). "Super Majority" has the meaning set forth in paragraph 5(b) of Annex I. "Tax Event" has the meaning set forth in paragraph 4(a) of Annex I. "10% in liquidation amount of the Securities" means Holder(s) of outstanding Securities voting together as a single class or, as the context may require, Holders of outstanding 8 Capital Securities or Holders of outstanding Common Securities voting separately as a class, who are the record owners of 10% or more of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to the date upon which the voting percentages are determined) of all outstanding Securities of the relevant class. "Transfer Agent" has the meaning set forth in Section 6.2. "Treasury Rate" has the meaning set forth in paragraph 4(a) of Annex I. "Treasury Regulations" means the income tax regulations, including temporary and proposed regulations, promulgated under the Code by the United States Treasury, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended. "Trustee" or "Trustees" means each Person who has signed this Declaration as a trustee, so long as such Person shall continue in office 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. "Trust Property" means (a) the Debentures, (b) any cash on deposit in, or owing to, the Property 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 Institutional Trustee pursuant to the trusts of this Declaration. "U.S. Person" means a United States Person as defined a Section 7701(a)(30) of the Code. ARTICLE II ORGANIZATION Section 2.1 Name. The Trust is named "HFC Capital Trust II," as such name may be modified from time to time by the Administrators following written notice to the Institutional Trustee and the Holders of the Securities. The Trust's activities may be conducted under the name of the Trust or any other name deemed advisable by the Administrators. Section 2.2 Office. The address of the principal office of the Trust, which shall be in a State of the United States or the District of Columbia, is 2381 Rosecrans Avenue, El Segundo, California 90245. On ten Business Days written notice to the Institutional Trustee and the Holders of the Securities, the Administrators may designate another principal office, which shall be in a State of the United States or the District of Columbia. 9 Section 2.3 Purpose. The exclusive purposes and functions of the Trust are (a) to issue and sell the Securities representing undivided beneficial interests in the assets of the Trust, (b) to invest the gross proceeds from such sale to acquire the Debentures and (c) except as otherwise limited herein, to engage in only those other activities incidental thereto that are deemed necessary or advisable by the Institutional Trustee, including, without limitation, those activities specified in this Declaration. The Trust shall not borrow money, issue debt or reinvest proceeds derived from investments, 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 2.4 Authority. Except as specifically provided in this Declaration, the Institutional Trustee shall have exclusive and complete authority to carry out the purposes of the Trust. An action taken by a Trustee on behalf of the Trust and 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. The Administrators shall have only those ministerial duties set forth herein with respect to accomplishing the purposes of the Trust and are not intended to be trustees or fiduciaries with respect to the Trust or the Holders. The Institutional Trustee shall have the right, but shall not be obligated except as provided in Section 2.6, to perform those duties assigned to the Administrators. Section 2.5 Title to Property of the Trust. Except as provided in Section 2.8 with respect to the Debentures and the Property Account or as otherwise provided in this Declaration, legal title to all assets of 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 2.6 Powers and Duties of the Trustees and the Administrators. (a) The Trustees and the Administrators shall conduct the affairs of the Trust in accordance with the terms of this Declaration. Subject to the limitations set forth in paragraph (b) of this Section, and in accordance with the following provisions (i) and (ii), the Administrators and, at the direction of the Administrators, the Trustees, shall have the authority to enter into all transactions and agreements determined by the Administrators to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees or the Administrators, as the case may be, under this Declaration, and to perform all acts in furtherance thereof, including without limitation, the following: (i) Each Administrator shall have the power, duty and authority, and is hereby authorized, to act on behalf of the Trust with respect to the following matters: (A) the issuance and sale of the Securities; 10 (B) to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, such agreements as may be necessary or desirable in connection with the purposes and function of the Trust, including agreements with the Paying Agent, a debenture subscription agreement between the Trust and the Sponsor and a common securities subscription agreement between the Trust and the Sponsor; (C) ensuring compliance with the Securities Act, applicable state securities or blue sky laws; (D) if and at such time determined by the Sponsor at the request of the Holders, assisting in the designation of the Capital Securities for trading in the Private Offering, Resales and Trading through the Automatic Linkages ("PORTAL") system if available; (E) the sending of notices (other than notices of default) and other information regarding the Securities and the Debentures to the Holders in accordance with this Declaration, including notice 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; (F) the appointment of a Paying Agent, Transfer Agent and Registrar in accordance with this Declaration; (G) execution and delivery of the Securities in accordance with this Declaration; (H) execution and delivery of closing certificates, pursuant to the Placement Agreement and the application for a taxpayer identification number; (I) unless otherwise determined by the Holders of a Majority in liquidation amount of the Securities or as otherwise required by the Business Trust Act, to execute on behalf of the Trust (either acting alone or together with any or all of the Administrators) any documents that the Administrators have the power to execute pursuant to this Declaration; (J) the taking of any action incidental to the foregoing as the Sponsor or an Administrator may from time to time determine is necessary or advisable to give effect to the terms of this Declaration for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder); (K) to establish a record date with respect to all actions to be taken hereunder that require a record date be established, including Distributions, voting rights, redemptions and exchanges, and to issue relevant notices to the Holders of 11 Capital Securities and Holders of Common Securities as to such actions and applicable record dates; (L) to duly prepare and file on behalf of the Trust all applicable tax returns and tax information reports that are required to be filed with respect to the Trust; (M) to negotiate the terms of, and the execution and delivery of, the Placement Agreement providing for the sale of the Capital Securities; (N) to employ or otherwise engage employees, agents (who may be designated as officers with titles), managers, contractors, advisors, attorneys and consultants and pay reasonable compensation for such services; (O) to incur expenses that are necessary or incidental to carry out any of the purposes of the Trust; (P) to give the certificate required by Section 314(a)(4) of the Trust Indenture Act to the Institutional Trustee, which certificate may be executed by an Administrator; and (Q) 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 each jurisdiction (other than the State of Delaware) in which such existence is necessary to protect the limited liability of the Holders of the Capital Securities or to enable the Trust to effect the purposes for which the Trust was created. (ii) As among the Trustees and the Administrators, the Institutional Trustee shall have the power, duty and authority, and is hereby authorized, to act on behalf of the Trust with respect to the following matters: (A) the establishment of the Property Account; (B) the receipt of the Debentures; (C) the collection of interest, principal and any other payments made in respect of the Debentures in the Property Account; (D) the distribution through the Paying Agent of amounts owed to the Holders in respect of the Securities; (E) the exercise of all of the rights, powers and privileges of a holder of the Debentures; 12 (F) the sending of notices of default and other information regarding the Securities and the Debentures to the Holders in accordance with this Declaration; (G) the distribution of the Trust Property in accordance with the terms of this Declaration; (H) to the extent provided in this Declaration, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (I) after any Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)) (provided, that such Event of Default is not by or with respect to the Institutional Trustee), the taking of any action incidental to the foregoing as the Institutional Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Declaration and protect and conserve the Trust Property for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder); (J) 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 to protect the limited liability of the Holders of the Capital Securities or to enable the Trust to effect the purposes for which the Trust was created; and (K) to undertake any actions set forth in Section 317(a) of the Trust Indenture Act. (iii) The Institutional Trustee shall have the power and authority, and is hereby authorized, to act on behalf of the Trust with respect to any of the duties, liabilities, powers or the authority of the Administrators set forth in Section 2.6(a)(i)(E) and (F) herein but shall not have a duty to do any such act unless specifically requested to do so in writing by the Sponsor, and shall then be fully protected in acting pursuant to such written request; and in the event of a conflict between the action of the Administrators and the action of the Institutional Trustee, the action of the Institutional Trustee shall prevail. (b) So long as this Declaration remains in effect, the Trust (or the Trustees or Administrators acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, neither the Trustees nor the Administrators may cause the Trust to (i) acquire any investments or engage in any activities not authorized by this Declaration, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Holders, except as expressly provided herein, (iii) take any action that would cause (or in the 13 case of the Institutional Trustee, to the actual knowledge of a Responsible Officer would cause) the Trust to fail or cease to qualify as a "grantor trust" for United States federal income tax purposes, (iv) incur any indebtedness for borrowed money or issue any other debt or (v) take or consent to any action that would result in the placement of a lien on any of the Trust Property. The Institutional Trustee shall, at the sole cost and expense of the Trust subject to reimbursement under Section 9.6(b), defend all claims and demands of all Persons at any time claiming any lien on any of the Trust Property adverse to the interest of the Trust or the Holders in their capacity as Holders. (c) In connection with the issuance and sale of the Capital Securities, the Sponsor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Sponsor in furtherance of the following prior to the date of this Declaration are hereby ratified and confirmed in all respects): (i) the taking of any action necessary to obtain an exemption from the Securities Act; (ii) the determination of the States in which to take appropriate action to qualify or register for sale all or part of the Capital Securities and the determination of any and all such acts, other than actions which must be taken by or on behalf of the Trust, and the advisement of and direction to the Trustees of actions they must take on behalf of the Trust, and the preparation for execution and filing of any documents to be executed and filed by the Trust or on behalf of the Trust, as the Sponsor deems necessary or advisable in order to comply with the applicable laws of any such States in connection with the sale of the Capital Securities; and (iii) the taking of any other actions necessary or desirable to carry out any of the foregoing activities. (d) Notwithstanding anything herein to the contrary, the Administrators, the Institutional Trustee and the Holders of a Majority in liquidation amount of the Common Securities are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that (i) the Trust will not be deemed to be an "investment company" required to be registered under the Investment Company Act (in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer), and (ii) the Trust will not fail to be classified as a grantor trust for United States federal income tax purposes(in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer) and (iii) the Trust will not take any action inconsistent with the treatment of the Debentures as indebtedness of the Debenture Issuer for United States federal income tax purposes (in the case of the Institutional Trustee, to the actual knowledge of a Responsible Officer). In this connection, the Institutional Trustee, the Administrators and the Holders of a Majority in liquidation amount of the Common Securities are authorized to take any action, not inconsistent with applicable laws or this Declaration, as amended from time to time, that each of the Institutional Trustee, the Administrators and such Holders determine in their discretion to be necessary or desirable for such purposes, even if such action adversely affects the interests of the Holders of the Capital Securities. 14 (e) All expenses incurred by the Administrators or the Trustees pursuant to this Section 2.6 shall be reimbursed by the Sponsor, and the Trustees shall have no obligations with respect to such expenses. (f) The assets of the Trust shall consist of the Trust Property. (g) Legal title to all Trust Property shall be vested at all times in the Institutional Trustee (in its capacity as such) and shall be held and administered by the Institutional Trustee for the benefit of the Trust in accordance with this Declaration. (h) If the Institutional 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 Institutional Trustee or to such Holder, then and in every such case the Sponsor, the Institutional 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 Institutional Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 2.7 Prohibition of Actions by the Trust and the Trustees. The Trust shall not, and the Institutional Trustee and the Administrators shall not, and the Administrators shall cause the Trust not to, engage in any activity other than as required or authorized by this Declaration. In particular, the Trust shall not, and the Institutional Trustee and the Administrators shall not cause the Trust to: (a) invest any proceeds received by the Trust from holding the Debentures, but shall distribute all such proceeds to Holders of the Securities pursuant to the terms of this Declaration and of the Securities; (b) acquire any assets other than as expressly provided herein; (c) possess Trust Property for other than a Trust purpose; (d) make any loans or incur any indebtedness other than loans represented by the Debentures; (e) possess any power or otherwise act in such a way as to vary the Trust Property or the terms of the Securities; (f) issue any securities or other evidences of beneficial ownership of, or beneficial interest in, the Trust other than the Securities; or (g) other than as provided in this Declaration (including Annex I), (i) direct the time, method and place of exercising any trust or power conferred upon the Debenture Trustee with respect to the Debentures, (ii) waive any past default that is waivable under the Indenture, (iii) exercise any right to rescind or annul any declaration that the principal of all the 15 Debentures shall be due and payable, or (iv) 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 a written opinion of counsel experienced in such matters to the effect that such amendment, modification or termination will not cause the Trust to cease to be classified as a grantor trust for United States federal income tax purposes. Section 2.8 Powers and Duties of the Institutional Trustee. (a) The legal title to the Debentures shall be owned by and held of record in the name of the Institutional Trustee in trust for the benefit of the Trust. The right, title and interest of the Institutional Trustee to the Debentures shall vest automatically in each Person who may hereafter be appointed as Institutional Trustee in accordance with Section 4.7. 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 Institutional Trustee shall not transfer its right, title and interest in the Debentures to the Administrators or to the Delaware Trustee. (c) The Institutional Trustee shall: (i) establish and maintain a segregated non-interest bearing trust account (the "Property Account") in the United States (as defined in Treasury Regulations section 301.7701-7), in the name of and under the exclusive control of the Institutional Trustee, and maintained in the Institutional Trustee's trust department, on behalf of the Holders of the Securities and, upon the receipt of payments of funds made in respect of the Debentures held by the Institutional Trustee, deposit such funds into the Property Account and make payments to the Holders of the Capital Securities and Holders of the Common Securities from the Property Account in accordance with Section 5.1. Funds in the Property Account shall be held uninvested until disbursed in accordance with this Declaration; (ii) engage in such ministerial activities as shall be necessary or appropriate to effect the redemption of the Capital Securities and the Common Securities to the extent the Debentures are redeemed or mature; and (iii) upon written notice of distribution issued by the Administrators in accordance with the terms of the Securities, engage in such ministerial activities as shall be necessary or appropriate to effect the distribution of the Debentures to Holders of Securities upon the occurrence of certain circumstances pursuant to the terms of the Securities. (d) The Institutional Trustee shall take all actions and perform such duties as may be specifically required of the Institutional Trustee pursuant to the terms of the Securities. 16 (e) The Institutional Trustee may bring or defend, pay, collect, compromise, arbitrate, resort to legal action with respect to, or otherwise adjust claims or demands of or against, the Trust (a "Legal Action") which arise out of or in connection with an Event of Default of which a Responsible Officer of the Institutional Trustee has actual knowledge or the Institutional Trustee's duties and obligations under this Declaration or the Trust Indenture Act; 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 interest or principal on the Debentures on the date such interest or principal is otherwise payable (or in the case of redemption, on the redemption date), then a Holder of the Capital Securities may directly institute a proceeding for enforcement of payment to such Holder of the principal of or interest 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 rights of the Holders of the Common Securities will be subrogated to the rights of such Holder of the Capital Securities to the extent of any payment made by the Debenture Issuer to such Holder of the Capital Securities in such Direct Action; provided, however, that a Holder of the Capital Securities may exercise such right of subrogation only so long as an Event of Default with respect to the Capital Securities has occurred and is continuing. (f) The Institutional 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 of the Securities pursuant to the terms of the Securities and this Declaration (including Annex I); or (ii) a Successor Institutional Trustee has been appointed and has accepted that appointment in accordance with Section 4.7. (g) The Institutional Trustee shall have the legal power to exercise all of the rights, powers and privileges of a Holder of the Debentures under the Indenture and, if an Event of Default occurs and is continuing, the Institutional Trustee may, for the benefit of Holders of the Securities, enforce its rights as holder of the Debentures subject to the rights of the Holders pursuant to this Declaration (including Annex I) and the terms of the Securities. The Institutional Trustee must exercise the powers set forth in this Section 2.8 in a manner that is consistent with the purposes and functions of the Trust set out in Section 2.3, and the Institutional Trustee shall not take any action that is inconsistent with the purposes and functions of the Trust set out in Section 2.3. Section 2.9 Certain Duties and Responsibilities of the Trustees and Administrators. (a) The Institutional Trustee, before the occurrence of any Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)) and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Declaration and no implied covenants shall be read 17 into this Declaration against the Institutional Trustee. In case an Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)), has occurred (that has not been cured or waived pursuant to Section 6.7), the Institutional 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) The duties and responsibilities of the Trustees and the Administrators shall be as provided by this Declaration and, in the case of the Institutional Trustee, by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Declaration shall require any Trustee or Administrator to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity satisfactory to it against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Declaration relating to the conduct or affecting the liability of or affording protection to the Trustees or Administrators shall be subject to the provisions of this Article. Nothing in this Declaration shall be construed to release a Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct. Nothing in this Declaration shall be construed to release an Administrator from liability for its own gross negligent action, its own gross negligent failure to act, or its own willful misconduct. To the extent that, at law or in equity, a Trustee or an Administrator has duties and liabilities relating to the Trust or to the Holders, such Trustee or Administrator shall not be liable to the Trust or to any Holder for such Trustee's or Administrator's 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 the Administrators or the Trustees otherwise existing at law or in equity, are agreed by the Sponsor and the Holders to replace such other duties and liabilities of the Administrators or the Trustees. (c) All payments made by the Institutional Trustee or a Paying Agent in respect of the Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Institutional Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Holder, by its acceptance of a Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees and the Administrators are not personally liable to it for any amount distributable in respect of any Security or for any other liability in respect of any Security. This Section 2.9(c) does not limit the liability of the Trustees expressly set forth elsewhere in this Declaration or, in the case of the Institutional Trustee, in the Trust Indenture Act. (d) No provision of this Declaration shall be construed to relieve the Institutional Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct with respect to matters that are within the authority of the Institutional Trustee under this Declaration, except that: 18 (i) the Institutional Trustee shall not be liable for any error or judgment made in good faith by an Authorized Officer of the Institutional Trustee, unless it shall be proved that the Institutional Trustee was negligent in ascertaining the pertinent facts; (ii) the Institutional 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 not less than a Majority in liquidation amount of the Capital Securities or the Common Securities, as applicable, relating to the time, method and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under this Declaration; (iii) the Institutional Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Property Account shall be to deal with such property in a similar manner as the Institutional Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Institutional Trustee under this Declaration and the Trust Indenture Act; (iv) the Institutional 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; and money held by the Institutional Trustee need not be segregated from other funds held by it except in relation to the Property Account maintained by the Institutional Trustee pursuant to Section 2.8(c)(i) and except to the extent otherwise required by law; and (v) the Institutional Trustee shall not be responsible for monitoring the compliance by the Administrators or the Sponsor with their respective duties under this Declaration, nor shall the Institutional Trustee be liable for any default or misconduct of the Administrators or the Sponsor. Section 2.10 Certain Rights of Institutional Trustee. Subject to the provisions of Section 2.9: (a) the Institutional Trustee may conclusively rely and shall fully be protected in acting or refraining from acting in good faith upon any resolution, written opinion of counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, appraisal, 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; (b) if (i) in performing its duties under this Declaration, the Institutional Trustee is required to decide between alternative courses of action, (ii) in construing any of the provisions of this Declaration, the Institutional Trustee finds the same ambiguous or inconsistent with any other provisions contained herein, or (iii) the Institutional Trustee is unsure of the application of any provision of this Declaration, then, except as to any matter as to which the Holders of Capital Securities are entitled to vote under the terms of this Declaration, the 19 Institutional Trustee may deliver a notice to the Sponsor requesting the Sponsor's opinion as to the course of action to be taken and the Institutional Trustee shall take such action, or refrain from taking such action, as the Institutional Trustee in its sole discretion shall deem advisable and in the best interests of the Holders, in which event the Institutional Trustee shall have no liability except for its own negligence or willful misconduct; (c) any direction or act of the Sponsor or the Administrators contemplated by this Declaration shall be sufficiently evidenced by an Officers' Certificate; (d) whenever in the administration of this Declaration, the Institutional Trustee shall deem it desirable that a matter be proved or established before undertaking, suffering or omitting any action hereunder, the Institutional 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 Administrators; (e) the Institutional 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 reregistration thereof; (f) the Institutional Trustee may consult with counsel of its selection (which counsel may be counsel to the Sponsor or any of its Affiliates) and the advice of such counsel 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 reliance thereon and in accordance with such advice; the Institutional Trustee shall have the right at any time to seek instructions concerning the administration of this Declaration from any court of competent jurisdiction; (g) the Institutional 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 of the Holders pursuant to this Declaration, unless such Holders shall have offered to the Institutional Trustee security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; provided, that nothing contained in this Section 2.10(g) shall be taken to relieve the Institutional Trustee, upon the occurrence of an Event of Default (of which the Institutional Trustee has knowledge (as provided in Section 2.10(m) hereof)) that has not been cured or waived, of its obligation to exercise the rights and powers vested in it by this Declaration; (h) the Institutional 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, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Holders, but the Institutional Trustee may make such further inquiry or investigation into such facts or matters as it may see fit; 20 (i) the Institutional Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys and the Institutional Trustee shall not be responsible for any misconduct or negligence on the part of, or for the supervision of, any such agent or attorney appointed with due care by it hereunder; (j) whenever in the administration of this Declaration the Institutional Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Institutional Trustee (i) may request instructions from the Holders of the Common Securities and the Capital Securities, which instructions may be given only by the Holders of the same proportion in liquidation amount of the Common Securities and the Capital Securities as would be entitled to direct the Institutional Trustee under the terms of the Common Securities and the Capital 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 fully protected in acting in accordance with such instructions; (k) except as otherwise expressly provided in this Declaration, the Institutional Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Declaration; (l) when the Institutional Trustee incurs expenses or renders services in connection with a Bankruptcy Event, such expenses (including the fees and expenses of its counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy law or law relating to creditors rights generally; (m) the Institutional Trustee shall not be charged with knowledge of an Event of Default unless a Responsible Officer of the Institutional Trustee has actual knowledge of such event or the Institutional Trustee receives written notice of such event from any Holder, except with respect to an Event of Default pursuant to Sections 5.01(a) or 5.01(b) of the Indenture (other than an Event of Default resulting from the default in the payment of Additional Interest or premium, if any, if the Institutional Trustee does not have actual knowledge or written notice that such payment is due and payable), of which the Institutional Trustee shall be deemed to have knowledge; (n) any action taken by the Institutional Trustee or its agents hereunder shall bind the Trust and the Holders of the Securities, and the signature of the Institutional 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 Institutional Trustee to so act or as to its compliance with any of the terms and provisions of this Declaration, both of which shall be conclusively evidenced by the Institutional Trustee's or its agent's taking such action; and (o) no provision of this Declaration shall be deemed to impose any duty or obligation on the Institutional 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 Institutional Trustee shall be unqualified or incompetent in accordance with applicable 21 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 Institutional Trustee shall be construed to be a duty. Section 2.11 Delaware Trustee. Notwithstanding any other provision of this Declaration other than Section 4.2, the Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities of any of the Trustees or the Administrators described in this Declaration (except as may be required under the Business Trust Act). Except as set forth in Section 4.2, 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. Section 2.12 Execution of Documents. Unless otherwise determined in writing by the Institutional Trustee, and except as otherwise required by the Business Trust Act, the Institutional Trustee, or any one or more of the Administrators, as the case may be, is authorized to execute and deliver on behalf of the Trust any documents, agreements, instruments or certificates that the Trustees or the Administrators, as the case may be, have the power and authority to execute pursuant to Section 2.6. Section 2.13 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 property of the Trust or any part thereof. The Trustees make no representations as to the validity or sufficiency of this Declaration, the Debentures or the Securities. Section 2.14 Duration of Trust. The Trust, unless dissolved pursuant to the provisions of Article VII hereof, shall have existence for thirty-five (35) years from the Closing Date. Section 2.15 Mergers. (a) The Trust may not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any corporation or other Person, except as described in this Section 2.15(b) and (c) and except with respect to the distribution of Debentures to Holders of Securities pursuant to Section 7.1(a)(iv) of the Declaration or Section 4 of Annex I. (b) The Trust may, with the consent of the Administrators (which consent will not be unreasonably withheld) and without the consent of the Institutional Trustee, the Delaware Trustee or the Holders of the Capital 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 a trust organized as such under the laws of any State; provided, that: (i) if the Trust is not the survivor, such successor entity (the "Successor Entity") either: 22 (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 that the Successor Securities rank the same as the Securities rank with respect to Distributions and payments upon Liquidation, redemption and otherwise; (ii) the Sponsor expressly appoints, as the holder of the Debentures, a trustee of the Successor Entity that possesses the same powers and duties as the Institutional Trustee; (iii) the Capital Securities or any Successor Securities (excluding any securities substituted for the Common Securities) are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or with another organization on which the Capital Securities are then listed or quoted, if any; (iv) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Capital Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, if the Capital Securities are then rated; (v) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Securities (including any Successor Securities) in any material respect (other than with respect to any dilution of such Holders' interests in the Successor Entity as a result of such merger, consolidation, amalgamation or replacement); (vi) such 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 Trust has received a written opinion of a nationally recognized 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 of the Securities (including any Successor Securities) in any material respect (other than with respect to any dilution of the Holders' interest 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 23 (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 guarantees the obligations of such Successor Entity under the Successor Securities to the same extent provided by the Guarantee, the Debentures and this Declaration; and (ix) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Institutional Trustee shall have received an Officers' Certificate of the Administrators and an opinion of counsel, each to the effect that all conditions precedent of this paragraph (b) to such transaction have been satisfied. (c) Notwithstanding Section 2.15(b), the Trust shall not, except with the consent of Holders of 100% in 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 Successor Entity to be classified as other than a grantor trust for United States federal income tax purposes. ARTICLE III SPONSOR Section 3.1 Sponsor's Purchase of Common Securities. On the Closing Date, the Sponsor will purchase all of the Common Securities issued by the Trust, in an amount at least equal to 3% of the capital of the Trust, at the same time as the Capital Securities are sold. Section 3.2 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 Administrators to engage in, the following activities: (a) to determine the States in which to take appropriate action to qualify or register for sale of 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; (b) to prepare for filing and request the Administrators to cause the filing by the Trust, as may be appropriate, of an application to the PORTAL system, for listing or quotation upon notice of issuance of any Capital Securities, as requested by the Holders of not less than a Majority in liquidation amount of the Capital Securities; and 24 (c) to negotiate the terms of and/or execute and deliver on behalf of the Trust, the Placement Agreement and other related agreements providing for the sale of the Capital Securities. ARTICLE IV TRUSTEES AND ADMINISTRATORS Section 4.1 Number of Trustees. The number of Trustees initially shall be two, 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 Holder of a Majority in liquidation amount of the Common Securities voting as a class at a meeting of the Holder of the Common Securities; provided, however, that there shall be a Delaware Trustee if required by Section 4.2; and there shall always be one Trustee who shall be the Institutional Trustee, and such Trustee may also serve as Delaware Trustee if it meets the applicable requirements, in which case Section 2.11 shall have no application to such entity in its capacity as Institutional Trustee. Section 4.2 Delaware Trustee. If required by the Business Trust Act, one Trustee (the "Delaware Trustee") shall be: (a) a natural person who is a resident of the State of Delaware; or (b) if not a natural person, an entity which is organized under the laws of the United States or any State thereof or the District of Columbia, has its principal place of business in the State of Delaware, and otherwise meets the requirements of applicable law, including Section 3807 of the Business Trust Act. Section 4.3 Institutional Trustee; Eligibility. There shall at all times be one Trustee which shall act as Institutional Trustee which shall: (i) not be an Affiliate of the Sponsor; (ii) not offer or provide credit or credit enhancement to the Trust; and (iii) be a banking corporation organized and doing business under the laws of the United States of America or any State thereof or of the District of Columbia and 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 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 25 Section 4.3(a)(iii), 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 Institutional Trustee shall cease to be eligible to so act under Section 4.3(a), the Institutional Trustee shall immediately resign in the manner and with the effect set forth in Section 4.7(a). (c) If the Institutional Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Institutional Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to this Declaration. (d) The initial Institutional Trustee shall be Wilmington Trust Company. Section 4.4 Certain Qualifications of the Delaware Trustee Generally. The Delaware Trustee shall be a U.S. Person and 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 4.5 Administrators. Each Administrator shall be a U.S. Person. There shall at all times be at least one Administrator. Except where a requirement for action by a specific number of Administrators is expressly set forth in this Declaration and except with respect to any action the taking of which is the subject of a meeting of the Administrators, any action required or permitted to be taken by the Administrators may be taken by, and any power of the Administrators may be exercised by, or with the consent of, any one such Administrator acting alone. Section 4.6 Initial Delaware Trustee. The initial Delaware Trustee shall be Wilmington Trust Company. Section 4.7 Appointment, Removal and Resignation of Trustees and Administrators. (a) No resignation or removal of any Trustee (the "Relevant Trustee") and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of this Section 4.7. Subject to the immediately preceding paragraph, a Relevant Trustee may resign at any time by giving written notice thereof to the Holders of the Securities and by appointing a successor Relevant Trustee. Upon the resignation of the Institutional Trustee, the Institutional Trustee shall appoint a successor by requesting from at least three Persons meeting the eligibility requirements, its expenses and charges to serve as the successor Institutional Trustee on a form provided by the Administrators, and selecting the Person who agrees to the lowest expense and charges (the "Successor Institutional Trustee"). If the instrument of acceptance by the successor 26 Relevant Trustee required by Section 4.7 shall not have been delivered to the Relevant Trustee within 60 days after the giving of such notice of resignation or delivery of the instrument of removal, the Relevant Trustee may petition, at the expense of the Trust, any federal, State or District of Columbia court of competent jurisdiction for the appointment of a successor Relevant Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Relevant Trustee. The Institutional Trustee shall have no liability for the selection of such successor pursuant to this Section 4.7. Unless an Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by an act of the Holder of a Majority in liquidation amount of the Common Securities. If any Trustee shall be so removed, the Holders of the Common Securities, by act of the Holders of a Majority in liquidation amount of the Common Securities then outstanding delivered to the Relevant Trustee, shall promptly appoint a successor Relevant Trustee, and such successor Trustee shall comply with the applicable requirements of this Section 4.7. If an Event of Default shall have occurred and be continuing, the Institutional Trustee or the Delaware Trustee, or both of them, may be removed by the act of the Holders of a Majority in liquidation amount of the Capital Securities, delivered to the Relevant Trustee (in its individual capacity and on behalf of the Trust). If any Trustee shall be so removed, the Holders of Capital Securities, by act of the Holders of a Majority in liquidation amount of the Capital Securities then outstanding delivered to the Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees, and such successor Trustee shall comply with the applicable requirements of this Section 4.7. If no successor Relevant Trustee shall have been so appointed by the Holders of a Majority in liquidation amount of the Capital Securities and accepted appointment in the manner required by this Section 4.7, within 30 days after delivery of an instrument of removal, the Relevant Trustee or any Holder who has been a Holder of the Securities for at least six months may, on behalf of himself and all others similarly situated, petition any federal, State or District of Columbia court of competent jurisdiction for the appointment of a successor Relevant Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a successor Relevant Trustee or Trustees. The Institutional Trustee shall give notice of each resignation and each removal of a Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 4.7(b) and shall give notice to the Sponsor. Each notice shall include the name of the successor Relevant Trustee and the address of its Corporate Trust Office if it is the Institutional Trustee. Notwithstanding the foregoing or any other provision of this Declaration, in the event a Delaware Trustee who is a natural person dies or is adjudged by a court to have become incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by the Institutional Trustee following the procedures in this Section 4.7 (with the successor being a Person who satisfies the eligibility requirement for a Delaware Trustee set forth in this Declaration) (the "Successor Delaware Trustee"). (b) In case of the appointment hereunder of a successor Relevant Trustee, the retiring Relevant Trustee and each successor Relevant Trustee with respect to the Securities shall 27 execute and deliver an amendment hereto wherein each successor Relevant Trustee shall accept such appointment and which (a) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Relevant Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Securities and the Trust and (b) shall add to or change any of the provisions of this Declaration as shall be necessary to provide for or facilitate the administration of the Trust by more than one Relevant Trustee, it being understood that nothing herein or in such amendment shall constitute such Relevant Trustees co-trustees and upon the execution and delivery of such amendment the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee; but, on request of the Trust or any successor Relevant Trustee such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Relevant Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Securities and the Trust subject to the payment of all unpaid fees, expenses and indemnities of such retiring Relevant Trustee. (c) No Institutional Trustee or Delaware Trustee shall be liable for the acts or omissions to act of any Successor Institutional Trustee or Successor Delaware Trustee, as the case may be. (d) The Holders of the Capital Securities will have no right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Holders of the Common Securities. (e) Any successor Delaware Trustee shall file an amendment to the Certificate of Trust with the Delaware Secretary of State identifying the name and principal place of business of such Delaware Trustee in the State of Delaware. Section 4.8 Vacancies Among Trustees. If a Trustee ceases to hold office for any reason and the number of Trustees is not reduced pursuant to Section 4.1, or if the number of Trustees is increased pursuant to Section 4.1, a vacancy shall occur. A resolution certifying the existence of such vacancy by the Trustees or, if there are more than two, a majority of the Trustees shall be conclusive evidence of the existence of such vacancy. The vacancy shall be filled with a Trustee appointed in accordance with Section 4.7. Section 4.9 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, terminate or annul the Trust or terminate this Declaration. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled by the appointment of a Trustee in accordance with Section 4.7, the Institutional Trustee shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration. 28 Section 4.10 Meetings of the Trustees and the Administrators. Meetings of the Trustees or the Administrators shall be held from time to time upon the call of any Trustee or Administrator, as applicable. Regular meetings of the Trustees and the Administrators, respectively, may be in person in the United States or by telephone, at a place (if applicable) and time fixed by resolution of the Trustees or the Administrators, as applicable. Notice of any in-person meetings of the Trustees or the Administrators shall be hand delivered or otherwise delivered in writing (including by facsimile, with a hard copy by overnight courier) not less than 48 hours before such meeting. Notice of any telephonic meetings of the Trustees or the Administrators 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 a Trustee or an Administrator, as the case may be, at a meeting shall constitute a waiver of notice of such meeting except where a Trustee or an Administrator, as the case may be, 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 Trustees or the Administrators, as the case may be, may be taken at a meeting by vote of a majority of the Trustees or the Administrators present (whether in person or by telephone) and eligible to vote with respect to such matter; provided, that, in the case of the Administrators, a Quorum is present, or without a meeting by the unanimous written consent of the Trustees or the Administrators, as the case may be. Meetings of the Trustees and the Administrators together shall be held from time to time upon the call of any Trustee or Administrator. Section 4.11 Delegation of Power. (a) Any Trustee or any Administrator, as the case may be, may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 that is a U.S. Person his or her power for the purpose of executing any documents, instruments or other writings contemplated in Section 2.6; and (b) the Trustees shall have power to delegate from time to time to such of their number or to any officer of the Trust that is a U.S. Person, the doing of such things and the execution of such instruments or other writings either in the name of the Trust or the names of the Trustees or otherwise as the Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. Section 4.12 Conversion, Consolidation or Succession to Business. Any Person into which the Institutional Trustee or the Delaware Trustee, as the case may be, may be merged or converted or with which either may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Institutional 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 Institutional Trustee or the Delaware Trustee, as the case may be, shall be the successor of the Institutional 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, 29 provided, further, that such Person shall file an amendment to the Certificate of Trust with the Delaware Secretary of State as contemplated in Section 4.7(e). ARTICLE V DISTRIBUTIONS Section 5.1 Distributions. Holders shall receive Distributions in accordance with the applicable terms of the relevant Holder's Securities. Distributions shall be made on the Capital Securities and the Common Securities in accordance with the preferences set forth in their respective terms. If and to the extent that the Debenture Issuer makes a payment of interest (including any Additional Interest or Deferred Interest) and/or principal on the Debentures held by the Institutional Trustee (the amount of any such payment being a "Payment Amount"), the Institutional Trustee shall and is directed, to the extent funds are available in the Property Account for that purpose, to make a distribution (a "Distribution") of the Payment Amount to Holders. ARTICLE VI ISSUANCE OF SECURITIES Section 6.1 General Provisions Regarding Securities. (a) The Administrators shall on behalf of the Trust issue one series of capital securities, evidenced by a certificate substantially in the form of Exhibit A-1, representing undivided beneficial interests in the assets of the Trust having such terms as are set forth in Annex I (the "Capital Securities") and one series of common securities, evidenced by a certificate substantially in the form of Exhibit A-2, representing undivided 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. The Capital Securities rank pari passu and payment thereon shall be made Pro Rata with the Common Securities except that, where an Event of Default has occurred and is continuing, the rights of Holders of the Common Securities to payment in respect of Distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights to payment of the Holders of the Capital Securities. (b) The Certificates shall be signed on behalf of the Trust by one or more Administrators. Such signature shall be the facsimile or manual signature of any Administrator. In case any Administrator of the Trust who shall have signed any of the Securities shall cease to be such Administrator before the Certificates so signed shall be delivered by the Trust, such Certificates nevertheless may be delivered as though the person who signed such Certificates had not ceased to be such Administrator; and any Certificate may be signed on behalf of the Trust by such person who, at the actual date of execution of such Security, shall be an Administrator of the Trust, although at the date of the execution and delivery of the Declaration any such person was not such an Administrator. A Capital Security shall not be valid until authenticated by the 30 manual signature of an Authorized Officer of the Institutional Trustee. Such signature shall be conclusive evidence that the Capital Security has been authenticated under this Declaration. Upon written order of the Trust signed by one Administrator, the Institutional Trustee shall authenticate the Capital Securities for original issue. The Institutional Trustee may appoint an authenticating agent that is a U.S. Person acceptable to the Trust to authenticate the Capital Securities. A Common Security need not be so authenticated and shall be valid upon execution by one or more Administrators. (c) 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. (d) Upon issuance of the Securities as provided in this Declaration, the Securities so issued shall be deemed to be validly issued, fully paid and non-assessable, and each Holder thereof shall be entitled to the benefits provided by this Declaration. (e) 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 and the Guarantee. Section 6.2 Paying Agent, Transfer Agent, Calculation Agent and Registrar. The Trust shall maintain in Wilmington, Delaware, an office or agency where the Securities may be presented for payment (the "Paying Agent"), and an office or agency where Securities may be presented for registration of transfer or exchange (the "Transfer Agent"). The Trust shall keep or cause to be kept at such office or agency a register for the purpose of registering Securities and transfers and exchanges of Securities, such register to be held by a registrar (the "Registrar"). The Administrators may appoint the Paying Agent, the Registrar and the Transfer Agent, and may appoint one or more additional Paying Agents or one or more co-Registrars, or one or more co-Transfer Agents in such other locations as it shall determine. The term "Paying Agent" includes any additional paying agent, the term "Registrar" includes any additional registrar or co-Registrar and the term "Transfer Agent" includes any additional transfer agent. The Administrators may change any Paying Agent, Transfer Agent or Registrar at any time without prior notice to any Holder. The Administrators shall notify the Institutional Trustee of the name and address of any Paying Agent, Transfer Agent and Registrar not a party to this Declaration. The Administrators hereby initially appoint the Institutional Trustee to act as Paying Agent, Transfer Agent and Registrar for the Capital Securities and the Common Securities at its Corporate Trust Office. The Institutional Trustee or any of its Affiliates in the United States may act as Paying Agent, Transfer Agent or Registrar. The Trust shall also appoint a Calculation Agent, which shall determine the Coupon Rate in accordance with the terms of the Securities. The Trust initially appoints the Institutional Trustee, in its individual capacity and not as Institutional Trustee, as Calculation Agent. 31 Section 6.3 Form and Dating. The Capital Securities and the Institutional Trustee's certificate of authentication thereon shall be substantially in the form of Exhibit A-1, and the Common Securities shall be substantially in the form of Exhibit A-2, each of which is hereby incorporated in and expressly made a part of this Declaration. Certificates may be typed, printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrators, as conclusively evidenced by their execution thereof. The Securities may have letters, 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 Sponsor). The Trust at the direction of the Sponsor shall furnish any such legend not contained in Exhibit A-1 to the Institutional 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 Institutional Trustee, the Delaware Trustee, the Administrators and the Sponsor, by their execution and delivery of this Declaration, expressly agree to such terms and provisions and to be bound thereby. Capital Securities will be issued only in blocks having a stated liquidation amount of not less than $100,000. The Capital Securities are being offered and sold by the Trust pursuant to the Placement Agreement in definitive form, registered in the name of the Holder thereof, without coupons and with the Restricted Securities Legend. Section 6.4 Mutilated, Destroyed, Lost or Stolen Certificates. If: (a) any mutilated Certificates should be surrendered to the Registrar, or if the Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Certificate; and (b) there shall be delivered to the Registrar, the Administrators and the Institutional Trustee such security or indemnity as may be required by them to keep each of them harmless; then, in the absence of notice that such Certificate shall have been acquired by a bona fide purchaser, an Administrator on behalf of the Trust shall execute (and in the case of a Capital Security Certificate, the Institutional Trustee shall authenticate) and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Certificate, a new Certificate of like denomination. In connection with the issuance of any new Certificate under this Section 6.4, the Registrar or the Administrators may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Certificate issued pursuant to this Section shall constitute conclusive evidence of an ownership interest in the relevant Securities, as if originally issued, whether or not the lost, stolen or destroyed Certificate shall be found at any time. Section 6.5 Temporary Securities. Until definitive Securities are ready for delivery, the Administrators may prepare and, in the case of the Capital Securities, the Institutional Trustee shall authenticate, temporary Securities. Temporary Securities shall be substantially in form of definitive Securities but may have variations that the Administrators consider 32 appropriate for temporary Securities. Without unreasonable delay, the Administrators shall prepare and, in the case of the Capital Securities, the Institutional Trustee shall authenticate definitive Securities in exchange for temporary Securities. Section 6.6 Cancellation. The Administrators at any time may deliver Securities to the Institutional Trustee for cancellation. The Registrar shall forward to the Institutional Trustee any Securities surrendered to it for registration of transfer, redemption or payment. The Institutional Trustee shall promptly cancel all Securities surrendered for registration of transfer, payment, replacement or cancellation and shall dispose of such canceled Securities as the Administrators direct. The Administrators may not issue new Securities to replace Securities that have been paid or that have been delivered to the Institutional Trustee for cancellation. Section 6.7 Rights of Holders; Waivers of Past Defaults. (a) The legal title to the Trust Property is vested exclusively in the Institutional Trustee (in its capacity as such) in accordance with Section 2.5, and the Holders shall not have any right or title therein other than the undivided beneficial interest in the assets of the Trust conferred by their Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Securities shall be personal property giving only the rights specifically set forth therein and in this Declaration. The Securities shall have no, and the issuance of the Securities shall not be subject to, preemptive or other similar rights and when issued and delivered to Holders against payment of the purchase price therefor, the Securities will be fully paid and nonassessable by the Trust. (b) For so long as any Capital Securities remain outstanding, if, upon an Indenture Event of Default, the Debenture Trustee fails or the holders of not less than 25% in principal amount of the outstanding Debentures fail to declare the principal of all of the Debentures to be immediately due and payable, the Holders of not less than a Majority in liquidation amount of the Capital Securities then outstanding shall have the right to make such declaration by a notice in writing to the Institutional Trustee, the Sponsor and the Debenture Trustee. At any time after a declaration of acceleration with respect to the Debentures has been made and before a judgment or decree for payment of the money due has been obtained by the Debenture Trustee as provided in the Indenture, if the Institutional Trustee subject to the provisions hereof fails to annul any such declaration and waive such default, the Holders of not less than a Majority in liquidation amount of the Capital Securities, by written notice to the Institutional Trustee, the Sponsor and the Debenture Trustee, may rescind and annul such declaration and its consequences if: (i) the Sponsor has paid or deposited with the Debenture Trustee a sum sufficient to pay (A) all overdue installments of interest on all of the Debentures, (B) any accrued Deferred Interest on all of the Debentures, 33 (C) the principal of (and premium, if any, on) any Debentures that have become due otherwise than by such declaration of acceleration and interest and Deferred Interest thereon at the rate borne by the Debentures, and (D) all sums paid or advanced by the Debenture Trustee under the Indenture and the reasonable compensation, documented expenses, disbursements and advances of the Debenture Trustee and the Institutional Trustee, their agents and counsel; and (ii) all Events of Default with respect to the Debentures, other than the non-payment of the principal of the Debentures that has become due solely by such acceleration, have been cured or waived as provided in Section 5.07 of the Indenture. The Holders of not less than a Majority in liquidation amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past default or Event of Default, except a default or Event of Default in the payment of principal or interest (unless such default or Event of Default has been cured and a sum sufficient to pay all matured installments of interest and principal due otherwise than by acceleration has been deposited with the Debenture Trustee) or a default or Event of Default in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Debenture. No such rescission shall affect any subsequent default or impair any right consequent thereon. Upon receipt by the Institutional Trustee of written notice declaring such an acceleration, or rescission and annulment thereof by Holders of any part of the Capital Securities, a record date shall be established for determining Holders of outstanding Capital Securities entitled to join in such notice, which record date shall be at the close of business on the day the Institutional Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that, unless such declaration of acceleration, or rescission and annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day that is 90 days after such record date, such notice of declaration of acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such 90-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice that has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 6.7. (c) Except as otherwise provided in paragraphs (a) and (b) of this Section 6.7, the Holders of not less than a Majority in liquidation amount of the Capital Securities may, on behalf of the Holders of all the Capital Securities, waive any past default or Event of Default and its consequences. Upon such waiver, any such default or Event of Default shall cease to exist, and any default or Event of Default arising therefrom shall be deemed to have been cured, for 34 every purpose of this Declaration, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. ARTICLE VII DISSOLUTION AND TERMINATION OF TRUST Section 7.1 Dissolution and Termination of Trust. (a) The Trust shall dissolve on the first to occur of: (i) unless earlier dissolved, on December 8, 2036, the expiration of the term of the Trust; (ii) a Bankruptcy Event with respect to the Sponsor, the Trust or the Debenture Issuer; (iii) (other than in connection with a merger, consolidation or similar transaction not prohibited by the Indenture, this Declaration or the Guarantee, as the case may be) the filing of a certificate of dissolution or its equivalent with respect to the Sponsor or upon the revocation of the charter of the Sponsor and the expiration of 90 days after the date of revocation without a reinstatement thereof; (iv) the distribution of the Debentures to the Holders of the Securities, upon exercise of the right of the Holders of all of the outstanding Common Securities to dissolve the Trust as provided in Annex I hereto; (v) the entry of a decree of judicial dissolution of any Holder of the Common Securities, the Sponsor, the Trust or the Debenture Issuer; (vi) 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; or (vii) before the issuance of any Securities, with the consent of all of the Trustees and the Sponsor. (b) As soon as is practicable after the occurrence of an event referred to in Section 7.1(a), and after satisfaction of liabilities to creditors of the Trust as required by applicable law, including Section 3808 of the Business Trust Act, and subject to the terms set forth in Annex I, the Institutional Trustee shall terminate the Trust by filing a certificate of cancellation with the Secretary of State of the State of Delaware. (c) The provisions of Section 2.9 and Article IX shall survive the termination of the Trust. 35 ARTICLE VIII TRANSFER OF INTERESTS Section 8.1 General. (a) Where Capital Securities are presented to the Registrar or a co-registrar with a request to register a transfer or to exchange them for an equal number of Capital Securities represented by different certificates, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met. To permit registrations of transfer and exchanges, the Trust shall issue and the Institutional Trustee shall authenticate Capital Securities at the Registrar's request. (b) Upon issuance of the Common Securities, the Sponsor shall acquire and retain beneficial and record ownership of the Common Securities and for so long as the Securities remain outstanding, the Sponsor shall maintain 100% ownership of the Common Securities; provided, however, that any permitted successor of the Sponsor under the Indenture that is a U.S. Person may succeed to the Sponsor's ownership of the Common Securities. (c) Capital Securities may only be transferred, in whole or in part, in accordance with the terms and conditions set forth in this Declaration and in the terms of the Capital Securities. To the fullest extent permitted by applicable law, any transfer or purported transfer of any Security not made in accordance with this Declaration shall be null and void and will be deemed to be of no legal effect whatsoever and any such 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 transferee shall be deemed to have no interest whatsoever in such Capital Securities. (d) The Registrar shall provide for the registration of Securities and of transfers of 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 Securities, the Registrar shall cause one or more new Securities to be issued in the name of the designated transferee or transferees. Any Security 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 Security surrendered upon such registration of transfer or exchange. Every Security surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form similar to Exhibits B and C satisfactory to the Registrar duly executed by the Holder or such Holder's attorney duly authorized in writing. Each Security surrendered for registration of transfer shall be canceled by the Institutional Trustee pursuant to Section 6.6. A transferee of a Security shall be entitled to the rights and subject to the obligations of a Holder hereunder upon the receipt by such transferee of a Security. By acceptance of a Security, each transferee shall be deemed to have agreed to be bound by this Declaration. (e) Neither the Trust nor the Registrar shall be required (i) to issue, register the transfer of, or exchange any Securities during a period beginning at the opening of business 36 15 days before the day of any selection of Securities for redemption and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of the Securities to be redeemed, or (ii) to register the transfer or exchange of any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. Section 8.2 Transfer Procedures and Restrictions. (a) General. (i) The Capital Securities shall bear the Restricted Securities Legend (as defined below), which shall not be removed unless there is delivered to the Trust such satisfactory evidence, which may include an opinion of counsel licensed to practice law in the State of New York, as may be reasonably required by the Trust, that neither the legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of the Securities Act or that such Securities are not "restricted" within the meaning of Rule 144 under the Securities Act. Upon provision of such satisfactory evidence, the Institutional Trustee, at the written direction of the Trust, shall authenticate and deliver Capital Securities that do not bear the Restricted Securities Legend. (b) Transfer and Exchange of Capital Securities. When Capital Securities are presented to the Registrar (x) to register the transfer of such Capital Securities, or (y) to exchange such Capital Securities for an equal number of Capital Securities of another number, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Capital Securities surrendered for registration of transfer or exchange shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Trust and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing and (i) if such Capital Securities are being transferred to a QIB, accompanied by a certificate of the transferee substantially in the form set forth as Exhibit C hereto or (ii) if such Capital Securities are being transferred otherwise than to a QIB, accompanied by a certificate of the transferee substantially in the form set forth as Exhibit B hereto. (c) Legend. Except as permitted by Section 8.2(a), each Capital Security shall bear a legend (the "Restricted Securities Legend") in substantially the following form: 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 LAWS. 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, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE DEBENTURE ISSUER OR THE TRUST, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER 37 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, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "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 (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE DEBENTURE ISSUER'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE AMENDED AND RESTATED DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE DEBENTURE ISSUER OR THE TRUST. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. 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 THIS SECURITY 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 THIS SECURITY 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 38 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH THERE IS NO APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE AMENDED AND RESTATED DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 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 THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. (d) 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 such Capital Securities, and such purported transferee shall be deemed to have no interest whatsoever in such Capital Securities. Section 8.3 Deemed Security Holders. The Trust, the Administrators, the Trustees, the Paying Agent, the Transfer Agent or the Registrar may treat the Person in whose name any Certificate shall be registered on the books and records of the Trust as the sole holder of such Certificate and of the Securities represented by such Certificate 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 Certificate or in the Securities represented by such Certificate on the part of any Person, whether or not the Trust, the Administrators, the Trustees, the Paying Agent, the Transfer Agent or the Registrar shall have actual or other notice thereof. 39 ARTICLE IX LIMITATION OF LIABILITY OF HOLDERS OF SECURITIES, TRUSTEES OR OTHERS Section 9.1 Liability. (a) Except as expressly set forth in this Declaration, the Guarantee 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 of the Securities which shall be made solely from assets of the Trust; and (ii) required to pay to the Trust or to any Holder of the Securities any deficit upon dissolution of the Trust or otherwise. (b) The Holder of the Common Securities shall be liable for all of the debts and obligations of the Trust (other than with respect to the Securities) to the extent not satisfied out of the Trust's assets. (c) Pursuant to Section 3803(a) of the Business Trust Act, the Holders of the Securities 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; except as otherwise specifically set forth herein. Section 9.2 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 (other than an Administrator) 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 and except that an Administrator shall be liable for any such loss, damage or claim incurred by reason of such Administrator's gross 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 the Trust by any Person as to matters the Indemnified Person reasonably believes are within such other Person's professional or expert competence and, if selected by such Indemnified Person, has been selected by such Indemnified Person 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 of Securities might properly be paid. 40 Section 9.3 Fiduciary Duty. 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 Institutional Trustee under the Trust Indenture Act), are agreed by the parties hereto to replace such other duties and liabilities of the Indemnified Person. (a) 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 subject to any other or different standard imposed by this Declaration or by applicable law. Section 9.4 Indemnification. (a) (i) The Sponsor shall indemnify, to the full extent permitted by law, any 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 an 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 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 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 an 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 41 claim, issue or matter as to which such 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 an 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 9.4(a), or in defense of any claim, issue or matter therein, he shall be indemnified, to the full extent permitted by law, against expenses (including attorneys' fees and expenses) actually and reasonably incurred by him in connection therewith. (iv) Any indemnification of an Administrator under paragraphs (i) and (ii) of this Section 9.4(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 Indemnified Person is proper in the circumstances because he has met the applicable standard of conduct set forth in paragraphs (i) and (ii). Such determination shall be made (A) by the Administrators by a majority vote of a Quorum consisting of such Administrators who were not parties to such action, suit or proceeding, (B) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion, or (C) by the Common Security Holder of the Trust. (v) To the fullest extent permitted by law, expenses (including attorneys' fees and expenses) incurred by an Indemnified Person in defending a civil, criminal, administrative or investigative action, suit or proceeding referred to in paragraphs (i) and (ii) of this Section 9.4(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 Indemnified Person to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Sponsor as authorized in this Section 9.4(a). Notwithstanding the foregoing, no advance shall be made by the Sponsor if a determination is reasonably and promptly made (1) in the case of a Company Indemnified Person (A) by the Administrators by a majority vote of a Quorum of disinterested Administrators, (B) if such a Quorum is not obtainable, or, even if obtainable, if a Quorum of disinterested Administrators so directs, by independent legal counsel in a written opinion or (C) by the Common Security Holder of the Trust, that, based upon the facts known to the Administrators, counsel or the Common Security Holder at the time such determination is made, such Indemnified Person acted in bad faith or in a manner that such Person did not believe to be in or not opposed to the best interests of the Trust, or, with respect to any criminal proceeding, that such Indemnified Person believed or had reasonable cause to believe his conduct was unlawful, or (2) in the 42 case of a Fiduciary Indemnified Person, by independent legal counsel in a written opinion that, based upon the facts known to the counsel at the time such determination is made, such Indemnified Person acted in bad faith or in a manner that such Indemnified Person either believed to be opposed to or did not believe to be in the best interests of the Trust, or, with respect to any criminal proceeding, that such Indemnified Person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made (i) to a Company Indemnified Person in instances where the Administrators, independent legal counsel or the Common Security Holder reasonably determine that such Person deliberately breached his duty to the Trust or its Common or Capital Security Holders or (ii) to a Fiduciary Indemnified Person in instances where independent legal counsel promptly and reasonably determines in a written opinion that such Person deliberately breached his duty to the Trust or its Common or Capital Security Holders. (b) The Sponsor shall indemnify, to the fullest extent permitted by applicable law, each Indemnified Person from and against any and all loss, damage, liability, tax (other than taxes based on the income of such Indemnified Person), penalty, expense or claim of any kind or nature whatsoever incurred by such Indemnified Person arising out of or in connection with or by reason of the creation, administration or termination of the Trust, or 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 authority conferred on such Indemnified Person by this Declaration, except that no Indemnified Person shall be entitled to be indemnified in respect of any loss, damage, liability, tax, penalty, expense or claim incurred by such Indemnified Person by reason of negligence or willful misconduct with respect to such acts or omissions. (c) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Section 9.4 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 9.4 shall be deemed to be provided by a contract between the Sponsor and each Indemnified Person who serves in such capacity at any time while this Section 9.4 is in effect. Any repeal or modification of this Section 9.4 shall not affect any rights or obligations then existing. (d) The Sponsor or the Trust may purchase and maintain insurance on behalf of any Person who is or was an Indemnified Person against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Sponsor would have the power to indemnify him against such liability under the provisions of this Section 9.4. (e) For purposes of this Section 9.4, 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, 43 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 9.4 with respect to the resulting or surviving entity as he would have with respect to such constituent entity if its separate existence had continued. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section 9.4 shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be an Indemnified Person and shall inure to the benefit of the heirs, executors and administrators of such a Person. The provisions of this Section shall survive the termination of this Declaration or the earlier resignation or removal of the Institutional Trustee. The obligations of the Sponsor under this Section 9.4 to compensate and indemnify the Trustees and to pay or reimburse the Trustees 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 Trustees as such, except funds held in trust for the benefit of the holders of particular Capital Securities, provided, that the Sponsor is the holder of the Common Securities. Section 9.5 Outside Businesses. Any Covered Person, the Sponsor, the Delaware Trustee and the Institutional Trustee (subject to Section 4.3(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 of Securities shall have no rights by virtue of this 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. None of any Covered Person, the Sponsor, the Delaware Trustee or the Institutional 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 Institutional 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 Institutional 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. Section 9.6 Compensation; Fee. The Sponsor agrees: (a) to pay to the Trustees from time to time such compensation for all services rendered by them hereunder as the parties shall agree in writing from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and 44 (b) except as otherwise expressly provided herein, to reimburse the Trustees upon request for all reasonable documented expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Declaration (including the reasonable compensation and the expenses and disbursements of their respective agents and counsel), except any such expense, disbursement or advance attributable to their negligence or willful misconduct. The provisions of this Section 9.6 shall survive the dissolution of the Trust and the termination of this Declaration and the removal or resignation of any Trustee. ARTICLE X ACCOUNTING Section 10.1 Fiscal Year. The fiscal year (the "Fiscal Year") of the Trust shall be the calendar year, or such other year as is required by the Code. Section 10.2 Certain Accounting Matters. (a) At all times during the existence of the Trust, the Administrators shall keep, or cause to be kept at the principal office of the Trust in the United States, as defined for purposes of Treasury regulations section 301.7701-7, 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. (b) The Administrators shall either (i) cause each Form 10K and Form 10Q prepared by the Sponsor and filed with the Commission in accordance with the Securities Exchange Act of 1934 to be delivered to each Holder of Securities, within 90 days after the filing of each Form 10K and within 30 days after the filing of each Form 10Q or (ii) cause to be prepared at the principal office of the Trust in the United States, as defined for purposes of Treasury regulations section 301.7701-7, and delivered to each of the Holders of Securities, within 90 days after the end of each Fiscal Year of the Trust, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss. (c) The Administrators shall cause to be duly prepared and delivered to each of the Holders of Securities Form 1099 or such other 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 Administrators shall endeavor to deliver all such statements within 30 days after the end of each Fiscal Year of the Trust. 45 (d) The Administrators shall cause to be duly prepared in the United States, as defined for purposes of Treasury regulations section 301.7701-7, and filed 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 Administrators on behalf of the Trust with any state or local taxing authority. (e) So long as the only Holder of the Capital Securities is MM Community Funding II, Ltd, the Administrators will cause the Sponsor's reports on Form H-b(11) to be delivered to the Holder promptly following their filing with the OTS. Section 10.3 Banking. The Trust shall maintain one or more bank accounts in the United States, as defined for purposes of Treasury regulations section 301.7701-7, 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 Institutional Trustee shall be made directly to the Property Account and no other funds of the Trust shall be deposited in the Property Account. The sole signatories for such accounts (including the Property Account) shall be designated by the Institutional Trustee. Section 10.4 Withholding. The Institutional Trustee or any Paying Agent and the Administrators shall comply with all withholding requirements under United States federal, state and local law. The Institutional Trustee or any Paying Agent shall request, and each Holder shall provide to the Institutional Trustee or any Paying Agent, such forms or certificates as are necessary to establish an exemption from withholding with respect to the Holder, and any representations and forms as shall reasonably be requested by the Institutional Trustee or any Paying Agent to assist it in determining the extent of, and in fulfilling, its withholding obligations. The Administrators shall file 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 Institutional Trustee or any Paying Agent 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 to the Holder in the amount of the withholding. In the event of any claimed overwithholding, 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 Institutional Trustee or any Paying Agent may reduce subsequent Distributions by the amount of such withholding. ARTICLE XI AMENDMENTS AND MEETINGS Section 11.1 Amendments. (a) Except as otherwise provided in this Declaration or by any applicable terms of the Securities, this Declaration may only be amended by a written instrument approved and executed by (i) the Institutional Trustee, 46 (ii) if the amendment affects the rights, powers, duties, obligations or immunities of the Delaware Trustee, the Delaware Trustee, (iii) if the amendment affects the rights, powers, duties, obligations or immunities of the Administrators, the Administrators, and (iv) the Holders of a Majority in liquidation amount of the Common Securities. (b) Notwithstanding any other provision of this Article XI, no amendment shall be made, and any such purported amendment shall be void and ineffective: (i) unless the Institutional 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; or (ii) if the result of such amendment would be to (A) cause the Trust to cease 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 Institutional Trustee in contravention of the Trust Indenture Act; (C) cause the Trust to be deemed to be an Investment Company required to be registered under the Investment Company Act; or (D) cause the Debenture Issuer to be unable to treat an amount equal to the Liquidation Amount of the Debentures as "Tier 1 Capital" or its then equivalent in the guidelines or regulations issued by the OTS; provided that, the Debenture Issuer shall have become, or pursuant to law or regulation will become within 180 days, subject to capital requirements. (c) Except as provided in Section 11.1(d), (e) or (g), no amendment shall be made, and any such purported amendment shall be void and ineffective unless the Holders of a Majority in liquidation amount of the Capital Securities shall have consented to such amendment. 47 (d) In addition to and notwithstanding any other provision in this Declaration, without the consent of each affected Holder, this Declaration may not be amended to (i) change the amount or timing of any Distribution on the Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Securities as of a specified date or (ii) restrict the right of a Holder to institute suit for the enforcement of any such payment on or after such date. (e) Sections 9.1(b) and 9.1(c) and this Section 11.1 shall not be amended without the consent of all of the Holders of the Securities. (f) The rights of the Holders of the Capital Securities and Common Securities, as applicable, under Article IV 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 Capital Securities or Common Securities, as applicable. (g) This Declaration may be amended by the Institutional Trustee and the Holder of a Majority in liquidation amount of the Common Securities without the consent of the Holders of the Capital Securities to: (i) cure any ambiguity; (ii) correct or supplement any provision in this Declaration that may be defective or inconsistent with any other provision of this Declaration; (iii) add to the covenants, restrictions or obligations of the Sponsor; (iv) modify, eliminate or add to any provision of this Declaration to such extent as may be necessary or desirable, including, without limitation, to ensure that the Trust will be classified for United States federal income tax purposes at all times as a grantor trust and will not be required to register as an Investment Company under the Investment Company Act (including without limitation to conform to any change in Rule 3a-5, Rule 3a-7 or any other applicable rule under the Investment Company Act or written change in interpretation or application thereof by any legislative body, court, government agency or regulatory authority) which amendment does not have a material adverse effect on the right, preferences or privileges of the Holders of Securities; provided, however, that no such modification, elimination or addition referred to in clauses (i), (ii), (iii) or (iv) shall adversely affect the powers, preferences or rights of Holders of Capital Securities. Section 11.2 Meetings of the Holders of Securities; Action by Written Consent. (a) Meetings of the Holders of any class of Securities may be called at any time by the Administrators (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 48 Declaration, the terms of the Securities or the rules of any stock exchange on which the Capital Securities are listed or admitted for trading, if any. The Administrators shall call a meeting of the Holders of such class if directed to do so by the Holders of not less than 10% in liquidation amount of such class of Securities. Such direction shall be given by delivering to the Administrators one or more calls in a writing stating that the signing Holders of the Securities wish to call a meeting and indicating the general or specific purpose for which the meeting is to be called. Any Holders of the Securities calling a meeting shall specify in writing the Certificates held by the Holders of the Securities exercising the right to call a meeting and only those Securities represented by such Certificates 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 of the Securities: (i) notice of any such meeting shall be given to all the Holders of the Securities having a right to vote thereat at least 7 days and not more than 60 days before the date of such meeting. Whenever a vote, consent or approval of the Holders of the Securities 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, if any, such vote, consent or approval may be given at a meeting of the Holders of the Securities. Any action that may be taken at a meeting of the Holders of the Securities may be taken without a meeting if a consent in writing setting forth the action so taken is signed by the Holders of the Securities owning not less than the minimum amount of Securities that would be necessary to authorize or take such action at a meeting at which all Holders of the Securities 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 of the Securities entitled to vote who have not consented in writing. The Administrators may specify that any written ballot submitted to the Holders of the Securities for the purpose of taking any action without a meeting shall be returned to the Trust within the time specified by the Administrators; (ii) each Holder of a Security may authorize any Person to act for it by proxy on all matters in which a Holder of Securities 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 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Holder of the Securities executing it. 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 of the Securities were stockholders of a Delaware corporation; each meeting of the Holders of the Securities shall be conducted by the Administrators or by such other Person that the Administrators may designate; and (iii) 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 49 Securities are then listed for trading, if any, otherwise provides, the Administrators, in their sole discretion, shall establish all other provisions relating to meetings of Holders of Securities, including notice of the time, place or purpose of any meeting at which any matter is to be voted on by any Holders of the Securities, 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; provided, however, that each meeting shall be conducted in the United States (as that term is defined in Treasury regulations section 301.7701-7). ARTICLE XII REPRESENTATIONS OF INSTITUTIONAL TRUSTEE AND DELAWARE TRUSTEE Section 12.1 Representations and Warranties of Institutional Trustee. The Trustee that acts as initial Institutional Trustee represents and warrants to the Trust and to the Sponsor at the date of this Declaration, and each Successor Institutional Trustee represents and warrants to the Trust and the Sponsor at the time of the Successor Institutional Trustee's acceptance of its appointment as Institutional Trustee, that: (a) the Institutional Trustee is a banking corporation with trust powers, duly organized, validly existing and in good standing under the laws of the State of Delaware with trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (b) the Institutional Trustee has a combined capital and surplus of at least fifty million U.S. dollars ($50,000,000); (c) the Institutional Trustee is not an affiliate of the Sponsor, nor does the Institutional Trustee offer or provide credit or credit enhancement to the Trust; (d) the execution, delivery and performance by the Institutional Trustee of this Declaration has been duly authorized by all necessary corporate action on the part of the Institutional Trustee. This Declaration has been duly executed and delivered by the Institutional Trustee, and under Delaware law (excluding any securities laws) constitutes a legal, valid and binding obligation of the Institutional 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 considered in a proceeding in equity or at law); (e) the execution, delivery and performance of this Declaration by the Institutional Trustee does not conflict with or constitute a breach of the charter or by-laws of the Institutional Trustee; and 50 (f) no consent, approval or authorization of, or registration with or notice to, any state or federal banking authority governing the trust powers of the Institutional Trustee is required for the execution, delivery or performance by the Institutional Trustee of this Declaration. Section 12.2 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) if it is not a natural person, the Delaware Trustee is duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) if it is not a natural person, 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. 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 considered in a proceeding in equity or at law); (c) if it is not a natural person, 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; (d) it has trust power and authority to execute and deliver, and to carry out and perform its obligations under the terms of, this Declaration; (e) no consent, approval or authorization of, or registration with or notice to, any state or federal 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 (f) the Delaware Trustee is a natural person who is a resident of the State of Delaware or, if not a natural person, it is an entity which has its principal place of business in the State of Delaware and, in either case, a Person that satisfies for the Trust the requirements of Section 3807 of the Business Trust Act. 51 ARTICLE XIII MISCELLANEOUS Section 13.1 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 (which telecopy shall be followed by notice delivered or mailed by first class mail) or mailed by first class mail, as follows: (a) if given to the Trust, in care of the Administrators at the Trust's mailing address set forth below (or such other address as the Trust may give notice of to the Holders of the Securities): HFC Capital Trust II 2381 Rosecrans Avenue Attention: Eileen Lyon Telecopy: 310-643-8304 Telephone: 310-725-1878 (b) if given to the Delaware Trustee, at the mailing address set forth below (or such other address as the Delaware Trustee may give notice of to the Holders of the Securities): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telecopy: (302) 651-8882 Telephone: (302) 651-1000 (c) if given to the Institutional Trustee, at the Institutional Trustee's mailing address set forth below (or such other address as the Institutional Trustee may give notice of to the Holders of the Securities): Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Attention: Corporate Trust Administration Telecopy: (302) 651-8882 Telephone: (302) 651-1000 (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 of to the Trust): 52 Hawthorne Financial Corporation 2381 Rosecrans Avenue Attention: Eileen Lyon Telecopy: 310-643-8304 Telephone: 310-725-1878 (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 13.2 Governing Law. This Declaration and the rights and obligations of the parties hereunder shall be governed by and interpreted in accordance with the law of the State of Delaware and all rights, obligations and remedies shall be governed by such laws without regard to the principles of conflict of laws of the State of Delaware or any other jurisdiction that would call for the application of the law of any jurisdiction other than the State of Delaware. Section 13.3 Submission to Jurisdiction. Each of the parties hereto agrees that any suit, action or proceeding arising out of or based upon this Declaration, or the transactions contemplated hereby, may be instituted in any of the courts of the State of New York and the United State District Courts, in each case located in the Borough of Manhattan, City and State of New York, and further agrees to submit to the jurisdiction of any competent court in the place of its corporate domicile in respect of actions brought against it as a defendant. In addition, each such party irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of such suit, action or proceeding brought in any such court and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum and irrevocably waives any right to which it may be entitled on account of its place of corporate domicile. Each such party hereby irrevocably waives any and all right to trial by jury in any legal proceeding arising out of or relating to this Declaration or the transactions contemplated hereby. Each such party agrees that final judgment in any proceedings brought in such a court shall be conclusive and binding upon it and may be enforced in any court to the jurisdiction of which it is subject by a suit upon such judgment. Each of the Sponsor and the Holder of the Common Securities irrevocably consents to the service of process on it in any such suit, action or proceeding in any such court by the mailing thereof by registered or certified mail, postage prepaid, to it at its address given in or pursuant to Section 13.1 hereof. 53 To the extent permitted by law, nothing herein contained shall preclude any party from effecting service of process in any lawful manner or from bringing any suit, action or proceeding in respect of this Declaration in any other state, country or place. Section 13.4 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 13.5 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 13.6 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 13.7 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 13.8 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 and Administrators to any 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. 54 IN WITNESS WHEREOF, the undersigned have caused these presents to be executed as of the day and year first above written. WILMINGTON TRUST COMPANY, as Delaware Trustee By: -------------------------------------- Name: Title WILMINGTON TRUST COMPANY, as Institutional Trustee By: -------------------------------------- Name: Title: Hawthorne Financial Corporation as Sponsor By: -------------------------------------- Simone Lagomarsino President and Chief Executive Officer By: -------------------------------------- Simone Lagomarsino Administrator By: -------------------------------------- Karen Abajian Administrator By: -------------------------------------- Eileen Lyon Administrator 55 ANNEX I TERMS OF FLOATING RATE MMCapS(SM) FLOATING RATE COMMON SECURITIES Pursuant to Section 6.1 of the Amended and Restated Declaration of Trust, dated as of November 28, 2001 (as amended from time to time, the "Declaration"), the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities and the Common Securities are set out below (each capitalized term used but not defined herein has the meaning set forth in the Declaration): 1. Designation and Number. (a) Capital Securities. 5,000 Capital Securities of HFC Capital Trust II (the "Trust"), with an aggregate stated liquidation amount with respect to the assets of the Trust of Five Million Dollars ($5,000,000) and a stated liquidation amount with respect to the assets of the Trust of $1,000 per Capital Security, are hereby designated for the purposes of identification only as the "Floating Rate MMCapS(SM)" (the "Capital Securities"). The Capital Security 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 stock exchange on which the Capital Securities are listed, if any. (b) Common Securities. 155 Common Securities of the Trust (the "Common Securities") will be evidenced by Common Security Certificates 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. In the absence of an Event of Default, the Common Securities will have an aggregate stated liquidation amount with respect to the assets of the Trust of One Hundred Fifty-Five Thousand Dollars ($155,000) and a stated liquidation amount with respect to the assets of the Trust of $1,000 per Common Security. 2. Distributions. (a) Distributions payable on each Security will be payable at a variable per annum rate of interest, reset semi-annually, equal to LIBOR (as defined in the Declaration) plus 3.75% (the "Coupon Rate") of the stated liquidation amount of $1,000 per Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee; provided, that the applicable Coupon Rate may not exceed 11.0% through the Interest Payment Date in December, 2006. Except as set forth below in respect of an Extension Period, Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the applicable Coupon Rate for each such semi-annual period (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions and any such compounded distributions payable unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds A-I-1 available in the Property Account therefor. The amount of Distributions payable for any period will be computed for any full semi-annual period on the basis of a 360-day year and the actual number of days elapsed in the relevant period. (b) LIBOR shall be determined by the Calculation Agent in accordance with the following provisions: (1) On the second LIBOR Business Day (provided that on such day commercial banks are open for business (including dealings in foreign currency deposits) in London (a "LIBOR Banking Day"), and otherwise the next preceding LIBOR Business Day that is also a LIBOR Banking Day) prior to December 15th and June 15th (except, with respect to the first interest payment period, on November 26, 2001), (each such day, a "LIBOR Determination Date"), LIBOR shall equal the rate, as obtained by the Calculation Agent for six-month Eurodollar deposits in Europe which appears on Telerate Page 3750 (as defined in the International Swaps and Derivatives Association, Inc. 1991 Interest Rate and Currency Exchange Definitions) or such other page as may replace such Page 3750, as of 11:00 a.m. (London time) on such LIBOR Determination Date, as reported by Bloomberg Financial Markets Commodities News. "LIBOR Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banking institutions in New York, New York or Wilmington, Delaware, are authorized or obligated by law or executive order to be closed. If such rate is superseded on Telerate Page 3750 by a corrected rate before 12:00 noon (London time) on the same LIBOR Determination Date, the corrected rate as so substituted will be the applicable LIBOR for that LIBOR Determination Date. (2) If, on any LIBOR Determination Date, such rate does not appear on Telerate Page 3750 or such other page as may replace such Page 3750, the Calculation Agent shall determine the arithmetic mean of the offered quotations of the Reference Banks (as defined below) to leading banks in the London interbank market for six-month U.S. Dollar deposits in Europe (in an amount determined by the Calculation Agent) by reference to requests for quotations as of approximately 11:00 a.m. (New York time) on the LIBOR Determination Date made by the Calculation Agent to the Reference Banks. If, on any LIBOR Determination Date, at least two of the Reference Banks provide such quotations, LIBOR shall equal the arithmetic mean of such quotations. If, on any LIBOR Determination Date, only one or none of the Reference Banks provide such quotations, LIBOR shall be deemed to be the arithmetic mean of the offered quotations that at least two leading banks in The City of New York (as selected by the Calculation Agent) are quoting on the relevant LIBOR Determination Date for six-month U.S. Dollar deposits in Europe at approximately 11:00 a.m. (New York time) (in an amount determined by the Calculation Agent). As used herein, "Reference Banks" means four major banks in the London interbank market selected by the Calculation Agent. A-I-2 (3) If the Calculation Agent is required but is unable to determine a rate in accordance with at least one of the procedures provided above, LIBOR shall be LIBOR in effect on the previous LIBOR Determination Date (whether or not LIBOR for such period was in fact determined on such LIBOR Determination Date). (c) All percentages resulting from any calculations on the Debt Securities will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upward (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all dollar amounts used in or resulting from such calculation will be rounded to the nearest cent (with one-half cent being rounded upward). (d) On each LIBOR Determination Date, the Calculation Agent shall notify, in writing, the Company and the Paying Agent of the applicable Coupon Rate in effect for the related interest payment period. The Calculation Agent shall, upon the request of the holder of any Debt Securities, provide the Coupon Rate then in effect. All calculations made by the Calculation Agent in the absence of manifest error shall be conclusive for all purposes and binding on the Company and the Holders of the Debt Securities. The Paying Agent shall be entitled to rely on information received from the Calculation Agent or the Company as to the Coupon Rate. The Company shall, from time to time, provide any necessary information to the Paying Agent relating to any original issue discount and interest on the Debt Securities that is included in any payment and reportable for taxable income calculation purposes. (e) Distributions on the Securities will be cumulative, will accrue from the date of original issuance, and will be payable, subject to extension of distribution payment periods as described herein, semi-annually in arrears on June 8th and December 8th of each year, commencing on June 8, 2002 (each, a "Distribution Payment Date"). The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 10 consecutive semi-annual periods (each, an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable) although such interest would continue to accrue on the Debentures, and interest will accrue on such Deferred Interest at an annual rate equal to the Coupon Rate in effect for each such Extension Period, compounded semi-annually to the extent permitted by law. No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period the Debenture Issuer shall pay all Deferred Interest; provided, however, that no Extension Period may extend beyond the Maturity Date and provided, further, that, during any such Extension Period, the Debenture Issuer may 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 Debenture Issuer's capital stock or (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Debenture Issuer that rank pari passu in all respects with or junior in interest to the Debentures (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Debenture Issuer (A) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (B) in connection with a dividend reinvestment or stockholder stock purchase plan or (C) in connection with the issuance of capital stock of the Debenture Issuer (or A-I-3 securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Debenture Issuer's capital stock (or any capital stock of a subsidiary of the Debenture Issuer) for any class or series of the Debenture Issuer's capital stock or of any class or series of the Debenture Issuer's indebtedness for any class or series of the Debenture Issuer's capital stock, (c) the purchase of fractional interests in shares of the Debenture Issuer's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Deferred Interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, or, if such date is not a Distribution Payment Date, on the immediately following Distribution Payment Date, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. (f) Distributions on the Securities will be payable to the Holders thereof as they appear on the books and records of the Registrar on the relevant record dates. The relevant record dates shall be selected by the Administrators, which dates shall be 15 days before the relevant payment dates. Distributions payable on any Securities that are not punctually paid on any Distribution Payment Date, as a result of the Debenture Issuer having failed to make a payment under the Debentures, as the case may be, when due (taking into account any Extension Period), will cease to be payable to the Person in whose name such Securities are registered 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 Distribution 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 Business Day is in the next succeeding A-I-4 calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such payment date. (g) 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 of the Securities. 3. Liquidation Distribution Upon Dissolution. In the event of the voluntary or involuntary liquidation, dissolution, winding-up or termination of the Trust (each, a "Liquidation") other than in connection with a redemption of the Debentures, the Holders of the Securities will be entitled to receive out of the assets of the Trust available for distribution to Holders of the Securities, after satisfaction of liabilities to creditors of the Trust (to the extent not satisfied by the Debenture Issuer), distributions equal to the aggregate of the stated liquidation amount of $1,000 per Security plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"), unless in connection with such Liquidation, the Debentures in an aggregate stated principal amount equal to the aggregate stated liquidation amount of such Securities, with an interest rate equal to the Coupon Rate of, and bearing accrued and unpaid interest in an amount equal to the accrued and unpaid Distributions on, and having the same record date as, such Securities, after paying or making reasonable provision to pay all claims and obligations of the Trust in accordance with Section 3808(e) of the Business Trust Act, shall be distributed on a Pro Rata basis to the Holders of the Securities in exchange for such Securities. The Sponsor, as the Holder of all of the Common Securities, has the right at any time to dissolve the Trust (including without limitation upon the occurrence of a Tax Event, an Investment Company Event or a Capital Treatment Event), subject to the receipt by the Debenture Issuer of prior approval from the Office of Thrift Supervision (the "OTS"), if then required under applicable capital guidelines or policies of the OTS and, after satisfaction of liabilities to creditors of the Trust, cause the Debentures to be distributed to the Holders of the Securities on a Pro Rata basis in accordance with the aggregate stated liquidation amount thereof. The Trust shall dissolve on the first to occur of (i) December 8, 2036, the expiration of the term of the Trust, (ii) a Bankruptcy Event with respect to the Sponsor, Trust or the Debenture Issuer, (iii) (other than in connection with a merger, consolidation or similar transaction not prohibited by the Indenture, this Declaration or the Guarantee, as the case may be) the filing of a certificate of dissolution of the Sponsor or upon the revocation of the charter of the Sponsor and the expiration of 90 days after the date of revocation without a reinstatement thereof, (iv) the distribution to the Holders of the Securities of the Debentures, upon exercise of the right of the Holder of all of the outstanding Common Securities to dissolve the Trust as described above, (v) the entry of a decree of a judicial dissolution of the Sponsor or the Trust, or (vi) 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. As soon as practicable after the dissolution of the Trust and upon completion of the winding up of the Trust, the Trust shall terminate upon the filing of a certificate of cancellation with the Secretary of State of the State of Delaware. A-I-5 If a Liquidation of the Trust occurs as described in clause (i), (ii), (iii) or (v) in the immediately preceding paragraph, the Trust shall be liquidated by the Institutional Trustee of the Trust as expeditiously as such Trustee determines to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to the Holders of the Securities, the Debentures on a Pro Rata basis to the extent not satisfied by the Debenture Issuer, unless such distribution is determined by the Institutional Trustee not to be practical, in which event such Holders will be entitled to receive out of the assets of the Trust available for distribution to the Holders, after satisfaction of liabilities to creditors of the Trust to the extent not satisfied by the Debenture Issuer, an amount equal to the Liquidation Distribution. An early Liquidation of the Trust pursuant to clause (iv) of the immediately preceding paragraph shall occur if the Institutional Trustee determines that such Liquidation is possible by distributing, after satisfaction of liabilities to creditors of Trust, to the Holders of the Securities on a Pro Rata basis, the Debentures, and such distribution occurs. If, upon any such Liquidation the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then the amounts payable directly by the Trust on such Capital Securities shall be paid to the Holders of the Securities on a pro rata basis, except that if an Event of Default has occurred and is continuing, the Capital Securities shall have a preference over the Common Securities with regard to such distributions. Upon any such Liquidation of the Trust involving a distribution of the Debentures, if at the time of such Liquidation, the Capital Securities were rated by at least one nationally-recognized statistical rating organization, the Debenture Issuer will use its reasonable best efforts to obtain from at least one such or other rating organization a rating for the Debentures. After the date for any distribution of the Debentures upon dissolution of the Trust, (i) the Securities of the Trust will be deemed to be no longer outstanding, (ii) any certificates representing the Capital Securities will be deemed to represent undivided beneficial interests in such of the Debentures as have an aggregate principal amount equal to the aggregate stated liquidation amount of, with an interest rate identical to the distribution rate of, and bearing accrued and unpaid interest equal to accrued and unpaid distributions on, the Securities until such certificates are presented to the Debenture Issuer or its agent for transfer or reissuance (and until such certificates are so surrendered, no payments of interest or principal shall be made to Holders of Securities in respect of any payments due and payable under the Debentures) and (iii) all rights of Holders of Securities under the Capital Securities or the Common Securities, as applicable, shall cease, except the right of such Holders to receive Debentures upon surrender of certificates representing such Securities. 4. Redemption and Distribution. (a) The Debentures will mature on December 8, 2031. The Debentures may be redeemed by the Debenture Issuer, in whole or in part, on any June 8th or December 8th on or after December 8, 2006, at the Redemption Price, upon not less than 30 days nor more than 60 day's notice to Holders of such Debentures. In addition, upon the occurrence and continuation A-I-6 of a Tax Event, an Investment Company Event or a Capital Treatment Event, the Debentures may be redeemed by the Debenture Issuer in whole but not in part, at any time within 90 days following the occurrence of such Tax Event, Investment Company Event or Capital Treatment Event, as the case may be (the "Special Redemption Date"), at the Special Redemption Price, upon not less than 30 nor more than 60 days' notice to Holders of the Debentures so long as such Tax Event, Investment Company Event or Capital Treatment Event, as the case may be, is continuing. In each case, the right of the Debenture Issuer to redeem the Debentures is subject to the Debenture Issuer having received prior approval from the OTS, if then required under applicable capital guidelines or policies of the OTS. "Tax Event" means the receipt by the Debenture Issuer and the Trust of an opinion of 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 (including any private letter ruling, technical advice memorandum, regulatory procedure, notice or announcement (an "Administrative Action")) or judicial decision interpreting or applying such laws or regulations, regardless of whether such Administrative Action or judicial decision is issued to or in connection with a proceeding involving the Debenture Issuer or the Trust and whether or not subject to review or appeal, which amendment, clarification, change, Administrative Action or decision is enacted, promulgated or announced, in each case on or after the date of original issuance of the Debentures, 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) 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. "Investment Company Event" means the receipt by the Company and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of a change in law or regulation or written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that 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 of 1940, as amended, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the original issuance of the Debentures. "Capital Treatment Event" means the receipt by the Debenture Issuer and the Trust of an opinion of counsel experienced in such matters to the effect that, as a result of (a) any amendment to, or change in, the laws, rules or regulations of the United States or any political subdivision thereof or therein, or any rules, guidelines or policies of an applicable regulatory authority for the Company or (b) any official or administrative pronouncement or action or decision interpreting or applying such laws, rules or regulations, which amendment or change is effective or which pronouncement, action or decision is announced on or after the date of A-I-7 original issuance of the Debentures, there is more than an insubstantial risk that the Debenture Issuer will not, within 90 days of the date of such opinion, be entitled to treat an amount equal to the aggregate Liquidation Amount of the Capital Securities as "Tier 1 Capital" (or its then equivalent if the Company were subject to such capital requirement) applied as if the Company (or its successors) were a bank holding company for purposes of the capital adequacy guidelines of the Federal Reserve (or any successor regulatory authority with jurisdiction over bank holding companies), or any capital adequacy guidelines as then in effect and applicable to the Debenture Issuer; 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 Capital Treatment Event unless such Liquidation shall have occurred in connection with a Tax Event or an Investment Company Event. "Special Event" means any of a Capital Treatment Event, a Tax Event or an Investment Company Event. "Redemption Price" means 100% of the principal amount of the Debentures being redeemed plus accrued and unpaid interest on such Debentures to the Redemption Date or, in the case of a redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Special Redemption Date is on or after December 8, 2006. "Special Redemption Price" means (1) if the Special Redemption Date is before December 8, 2006, the greater of (a) 100% of the principal amount of the Debentures being redeemed pursuant to Section 10.02 of the Indenture or (b) as determined by a Quotation Agent, the sum of the present values of the principal amount payable as part of the Redemption Price with respect to a redemption as of December 8, 2006 together with the present value of interest payments calculated at a fixed per annum rate of interest equal to 9.95% over the Remaining Life of such Debentures, discounted to the Special Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 0.50% plus, in the case of either (a) or (b), accrued and unpaid interest on such Debentures to the Special Redemption Date and (2) if the Special Redemption Date is on or after December 8, 2006, the Redemption Price for such Special Redemption Date. "Comparable Treasury Issue" means, with respect to any Special Redemption Date, the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity which is within a period from three months before to three months after December 8, 2006, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (a) the average of five Reference Treasury Dealer Quotations for such Special Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if the Quotation Agent obtains fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations. A-I-8 "Primary Treasury Dealer" shall mean a primary United States Government securities dealer in New York City. "Quotation Agent" means Salomon Smith Barney Inc. and its successors; provided, however, that if the foregoing shall cease to be a Primary Treasury Dealer, the Debenture Issuer shall substitute therefor another Primary Treasury Dealer. "Redemption Date" shall mean the date fixed for the redemption of Capital Securities, which shall be any June 8th or December 8th on or after December 8, 2006. "Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary Treasury Dealer selected by the Debenture Trustee after consultation with the Debenture Issuer. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Special Redemption Date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Debenture Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Special Redemption Date. "Remaining Life" means, with respect to any Debentures the period from the Special Redemption Date for such Debentures to December 8, 2006. "Treasury Rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the date of calculation, appearing in the most recently published statistical release designated H.15 (519) or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities", for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Special Redemption Date. The Treasury Rate shall be calculated on the third Business Day preceding the Special Redemption Date. (b) Upon the repayment in full at maturity or redemption in whole or in part of the Debentures (other than following the distribution of the Debentures to the Holders of the Securities), the proceeds from such repayment or payment shall concurrently be applied to redeem Pro Rata at the applicable Redemption Price, Securities having an aggregate liquidation amount equal to the aggregate principal amount of the Debentures so repaid or redeemed; A-I-9 provided, however, that holders of such Securities shall be given not less than 30 nor more than 60 days' notice of such redemption (other than at the scheduled maturity of the Debentures). (c) If fewer than all the outstanding Securities are to be so redeemed, the Common Securities and the Capital Securities will be redeemed Pro Rata and the Capital Securities to be redeemed will be as described in Section 4(e)(ii) below. (d) The Trust may not redeem fewer than all the outstanding Capital Securities unless all accrued and unpaid Distributions have been paid on all Capital Securities for all semi-annual Distribution periods terminating on or before the date of redemption. (e) Redemption or Distribution Procedures. (i) Notice of any redemption of, or notice of distribution of the 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(e)(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 of such Securities. Each Redemption/Distribution Notice shall be addressed to the Holders of such Securities at the address of each such Holder appearing on the books and records of the Registrar. No defect in the Redemption/Distribution Notice or in the mailing 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 Securities to be redeemed shall be redeemed Pro Rata from each Holder of Capital Securities. (iii) If the Securities are to be redeemed and the Trust gives a Redemption/Distribution Notice, which notice may only be issued if the Debentures are redeemed as set out in this Section 4 (which notice will be irrevocable), then, provided, that the Institutional Trustee has a sufficient amount of cash in connection with the related redemption or maturity of the Debentures, the Institutional Trustee will pay the relevant Redemption Price to the Holders of such Securities by check mailed to the address of each such Holder appearing on the books and records of the Trust on the redemption date. If a Redemption/Distribution Notice shall have been given and funds deposited as required then immediately prior to the close of business on the date of such deposit Distributions will cease to accrue on the Securities so called for redemption and all rights of Holders of such Securities so called for redemption will cease, except the right of the Holders of such Securities to receive the A-I-10 applicable Redemption Price specified in Section 4(a), but without interest on such Redemption Price. If any date fixed for redemption of Securities is not a Business Day, then payment of any such 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) except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date fixed for redemption. If payment of the Redemption Price in respect of any Securities is improperly withheld or refused and not paid either by the Trust or by the Debenture Issuer as guarantor pursuant to the Guarantee, Distributions on such Securities will continue to accrue at the then applicable rate 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. In the event of any redemption of the Capital Securities issued by the Trust in part, the Trust shall not be required to (i) issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before any selection for redemption of the Capital Securities and ending at the close of business on the earliest date on which the relevant notice of redemption is deemed to have been given to all Holders of the Capital Securities to be so redeemed or (ii) register the transfer of or exchange any Capital Securities so selected for redemption, in whole or in part, except for the unredeemed portion of any Capital Securities being redeemed in part. (iv) Redemption/Distribution Notices shall be sent by the Administrators on behalf of the Trust (A) in respect of the Capital Securities, to the Holders thereof, and (B) in respect of the Common Securities, to the Holder thereof. (v) Subject to the foregoing and applicable law (including, without limitation, United States federal securities laws), and provided, that the acquiror is not the Holder of the Common Securities or the obligor under the Indenture, 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) and 7 and as otherwise required by law and the Declaration, the Holders of the Capital Securities will have no voting rights. The Administrators are required to call a meeting of the Holders of the Capital Securities if directed to do so by Holders of not less than 10% in liquidation amount of the Capital Securities. (b) Subject to the requirements of obtaining a tax opinion by the Institutional Trustee in certain circumstances set forth in the last sentence of this paragraph, the Holders of a Majority in liquidation amount of the Capital Securities, voting separately as a class, have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Institutional Trustee, or exercising any trust or power conferred upon the A-I-11 Institutional Trustee under the Declaration, including the right to direct the Institutional Trustee, as holder of the Debentures, to (i) exercise the remedies available under the Indenture as the holder of the Debentures, (ii) waive any past default that is waivable under the Indenture, or (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable or (iv) consent on behalf of all the Holders of the Capital Securities to any amendment, modification or termination of the Indenture or the Debentures where such consent shall be required; provided, however, that, where a consent or action under the Indenture would require the consent or act of the holders of greater than a simple majority in principal amount of Debentures (a "Super Majority") affected thereby, the Institutional Trustee may only give such consent or take such action at the written direction of the Holders of not less than the proportion in liquidation amount of the Capital Securities outstanding which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. If the Institutional Trustee fails to enforce its rights under the Debentures after the Holders of a Majority in liquidation amount of such Capital Securities have so directed the Institutional Trustee, to the fullest extent permitted by law, a Holder of the Capital Securities may institute a legal proceeding directly against the Debenture Issuer to enforce the Institutional Trustee's rights under the Debentures without first instituting any legal proceeding against the Institutional 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 Debenture Issuer to pay interest or principal on the Debentures on the date the interest or principal is payable (or in the case of redemption, the redemption date), then a Holder of record of the Capital Securities may directly institute a proceeding for enforcement of payment, on or after the respective due dates specified in the Debentures, to such Holder directly of the principal of or interest on the Debentures having an aggregate principal amount equal to the aggregate liquidation amount of the Capital Securities of such Holder. The Institutional Trustee shall notify all Holders of the Capital Securities of any default actually known to the Institutional Trustee with respect to the Debentures unless (x) such default has been cured prior to the giving of such notice or (y) the Institutional Trustee determines in good faith that the withholding of such notice is in the interest of the Holders of such Capital Securities, except where the default relates to the payment of principal of or interest on any of the Debentures. Such notice shall state that such Indenture Event of Default also constitutes an Event of Default hereunder. Except with respect to directing the time, method and place of conducting a proceeding for a remedy, the Institutional Trustee shall not take any of the actions described in clause (i), (ii) or (iii) above unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that, as a result of such action, the Trust will not be classified as other than a grantor trust for United States federal income tax purposes. In the event the consent of the Institutional Trustee, as the holder of the Debentures is required under the Indenture with respect to any amendment, modification or termination of the Indenture, the Institutional Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided, however, that where a consent under the Indenture would require the consent of a Super Majority, the Institutional Trustee may only give such consent at the written direction of the Holders of not A-I-12 less than the proportion in liquidation amount of such Securities outstanding which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. The Institutional Trustee shall not take any such action in accordance with the written directions of the Holders of the Securities unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that, as a result of such action, the Trust will not be classified as other than a grantor trust for United States federal income tax purposes. A waiver of an Indenture Event of Default will constitute a waiver of the corresponding Event of Default hereunder. Any required approval or direction of Holders of the Capital Securities may be given at a separate meeting of Holders of the Capital Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Institutional Trustee will cause a notice of any meeting at which Holders of the Capital 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 the Capital Securities. Each such notice will include a statement setting forth the following information (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 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 the 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 entitle the Holder thereof to vote or consent and shall, for purposes of such vote or consent, be treated as if such Capital Securities were not outstanding. In no event will Holders of the Capital Securities have the right to vote to appoint, remove or replace the Administrators, which voting rights are vested exclusively in the Sponsor as the Holder of all of the Common Securities of the Trust. Under certain circumstances as more fully described in the Declaration, Holders of Capital Securities have the right to vote to appoint, remove or replace the Institutional Trustee and the Delaware Trustee. 6. Voting Rights - Common Securities. (a) Except as provided under Sections 6(b), 6(c) and 7 and as otherwise required by law and the Declaration, the Common Securities will have no voting rights. (b) The Holders of the Common Securities are entitled, in accordance with Article IV of the Declaration, to vote to appoint, remove or replace any Administrators. (c) Subject to Section 6.7 of the Declaration and only after each Event of Default (if any) with respect to the Capital Securities has been cured, waived or otherwise eliminated and subject to the requirements of the second to last sentence of this paragraph, the Holders of a Majority in liquidation amount of the Common Securities, voting separately as a class, may direct the time, method, and place of conducting any proceeding for any remedy A-I-13 available to the Institutional Trustee, or exercising any trust or power conferred upon the Institutional Trustee under the Declaration, including (i) directing the time, method, place of conducting any proceeding for any remedy available to the Debenture Trustee, or exercising any trust or power conferred on the Debenture Trustee with respect to the Debentures, (ii) waive any past default and its consequences that are waivable under the Indenture or (iii) exercise any right to rescind or annul a declaration that the principal of all the Debentures shall be due and payable, provided, however, that, where a consent or action under the Indenture would require a Super Majority, the Institutional Trustee may only give such consent or take such action at the written direction of the Holders of not less than the proportion in liquidation amount of the Common Securities which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. Notwithstanding this Section 6(c), the Institutional Trustee shall not revoke any action previously authorized or approved by a vote or consent of the Holders of the Capital Securities. Other than with respect to directing the time, method and place of conducting any proceeding for any remedy available to the Institutional Trustee or the Debenture Trustee as set forth above, the Institutional Trustee shall not take any action described in clause (i), (ii) or (iii) above, unless the Institutional Trustee has obtained an opinion of tax counsel to the effect that for the purposes of United States federal income tax the Trust will not be classified as other than a grantor trust on account of such action. If the Institutional Trustee fails to enforce its rights under the Declaration, to the fullest extent permitted by law any Holder of the Common Securities may institute a legal proceeding directly against any Person to enforce the Institutional Trustee's rights under the Declaration, without first instituting a legal proceeding against the Institutional Trustee or any other Person. Any approval or direction of Holders of the Common Securities may be given at a separate meeting of Holders of the Common Securities convened for such purpose, at a meeting of all of the Holders of the Securities in the Trust or pursuant to written consent. The Administrators will cause a notice of any meeting at which Holders of the 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 the 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 and Indenture. (a) In addition to any requirements under Section 11.1 of the Declaration, if any proposed amendment to the Declaration provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely affect the powers, preferences or special rights of the Securities, whether by way of amendment to the Declaration or otherwise, or (ii) the Liquidation of the Trust, other than as described in Section 7.1 of the Declaration, then the Holders of outstanding Securities, voting together as a single class, will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of not less A-I-14 than a Majority in liquidation amount of the Securities affected thereby; provided, however, if any amendment or proposal referred to in clause (i) above would adversely affect only the Capital Securities or only the Common Securities, then only the affected class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of a Majority in liquidation amount of such class of Securities. (b) In the event the consent of the Institutional Trustee as the holder of the Debentures is required under the Indenture with respect to any amendment, modification or termination of the Indenture or the Debentures, the Institutional Trustee shall request the written direction of the Holders of the Securities with respect to such amendment, modification or termination and shall vote with respect to such amendment, modification, or termination as directed by a Majority in liquidation amount of the Securities voting together as a single class; provided, however, that where a consent under the Indenture would require a Super Majority, the Institutional Trustee may only give such consent at the written direction of the Holders of not less than the proportion in liquidation amount of the Securities which the relevant Super Majority represents of the aggregate principal amount of the Debentures outstanding. (c) Notwithstanding the foregoing, no amendment or modification may be made to the Declaration if such amendment or modification would (i) cause the Trust to be classified for purposes of United States federal income taxation as other than a grantor trust, (ii) reduce or otherwise adversely affect the powers of the Institutional Trustee or (iii) cause the Trust to be deemed an "investment company" which is required to be registered under the Investment Company Act. (d) Notwithstanding any provision of the Declaration, the right of any Holder of the Capital Securities to receive payment of distributions and other payments upon redemption or otherwise, on or after their respective due dates, or to institute a suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. For the protection and enforcement of the foregoing provision, each and every Holder of the Capital Securities shall be entitled to such relief as can be given either at law or equity. 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 of the Securities according to the aggregate liquidation amount of the Securities held by the relevant Holder in relation to the aggregate liquidation amount of all Securities outstanding unless, in relation to a payment, an Event of Default 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 the Capital Securities held by the relevant Holder relative to the aggregate liquidation amount of all Capital Securities outstanding, and only after satisfaction of all amounts owed to the Holders of the Capital Securities, to each Holder of the Common Securities Pro Rata according to the aggregate liquidation amount of the Common Securities held by the relevant Holder relative to the aggregate liquidation amount of all Common Securities outstanding. A-I-15 9. Ranking. The Capital Securities rank pari passu with and payment thereon shall be made Pro Rata with the Common Securities except that, where an Event of Default has occurred and is continuing, the rights of Holders of the Common Securities to receive payment of Distributions and payments upon liquidation, redemption and otherwise are subordinated to the rights of the Holders of the Capital Securities with the result that no payment of any Distribution on, or Redemption Price of, any Common Security, and no other payment on account of redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions on all outstanding Capital Securities for all distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all outstanding Capital Securities then called for redemption, shall have been made or provided for, and all funds immediately available to the Institutional Trustee shall first be applied to the payment in full in cash of all Distributions on, or the Redemption Price of, the Capital Securities then due and payable. 10. Acceptance of Guarantee and Indenture. Each Holder of the Capital Securities and the Common Securities, by the acceptance of such Securities, agrees to the provisions of the Guarantee, including the subordination provisions therein and to the provisions of the Indenture. 11. No Preemptive Rights. The Holders of the Securities shall have no, and the issuance of the Securities is not subject to, 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 Guarantee, and the Indenture to a Holder without charge on written request to the Sponsor at its principal place of business. A-I-16 EXHIBIT A-1 FORM OF CAPITAL SECURITY CERTIFICATE [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 LAWS. 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, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE DEBENTURE ISSUER OR THE TRUST, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER 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, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "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 (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE DEBENTURE ISSUER'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE AMENDED AND RESTATED DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE DEBENTURE ISSUER OR THE TRUST. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. 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 A-I-1 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 THIS SECURITY 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 THIS SECURITY 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. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE AMENDED AND RESTATED DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 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 THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. A-I-2 Certificate Number: [_____] Number of Capital Securities: [_____] [CUSIP NO ___________] Certificate Evidencing Capital Securities of HFC Capital Trust II Floating Rate MMCapS(SM) (liquidation amount $1,000 per Capital Security) HFC Capital Trust II, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that [______________________________________] (the "Holder") is the registered owner of ______ capital securities of the Trust representing undivided beneficial interests in the assets of the Trust, designated the Floating Rate MMCapS(SM) (liquidation amount $1,000 per Capital Security) (the "Capital Securities"). Subject to the Declaration (as defined below), 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 Capital Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of November 28, 2001, among Simone Lagomarsino, Karen Abajian, and Eileen Lyon, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, Hawthorne Financial Corporation, as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Capital Securities as set forth in Annex I to the Declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to the Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this Security, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Security, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of beneficial ownership in the Debentures. This Capital Security is governed by, and shall be construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. A-I-3 IN WITNESS WHEREOF, the Trust has duly executed this certificate. HFC Capital Trust II By: ----------------------------------------- Name: Administrator Dated: -------------------------------------- CERTIFICATE OF AUTHENTICATION This is one of the Capital Securities referred to in the within-mentioned Declaration. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as the Institutional Trustee By: ----------------------------------------- Authorized Officer Dated: -------------------------------------- A-I-4 [FORM OF REVERSE OF SECURITY] Distributions payable on each Capital Security will be payable at a variable per annum rate of interest, reset semi-annually, equal to LIBOR (as defined in the Declaration) plus 3.75% (the "Coupon Rate") (provided, that the applicable Coupon Rate may not exceed 11.0% through the Interest Payment Date in December, 2006) of the stated liquidation amount of $1,000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Except as set forth below in respect of an Extension Period, Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the applicable Coupon Rate for each such semi-annual period (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions, any such compounded distributions and any Additional Interest payable on the Debentures unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available in the Property Account therefor. The amount of Distributions payable for any period will be computed for any full semi-annual Distribution period on the basis of a 360-day year and the actual number of days elapsed in the relevant Distribution period. Except as otherwise described below, Distributions on the Capital Securities will be cumulative, will accrue from the date of original issuance and will be payable semi-annually in arrears on June 8th and December 8th of each year, commencing on June 8, 2002 (each, a "Distribution Payment Date"). The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 10 consecutive semi-annual periods (each, an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at an annual rate equal to the Coupon Rate in effect for each such Extension Period, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by law. No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period, the Debenture Issuer shall pay all Deferred Interest then accrued and unpaid on the Debentures; provided, however, that no Extension Period may extend beyond the Maturity Date. Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Deferred Interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, or, if such date is not a Distribution Payment Date, on the immediately following Distribution Payment Date, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any A-I-5 Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. The Capital Securities shall be redeemable as provided in the Declaration. A-I-6 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to: - ---------------------------------- - ---------------------------------- - ---------------------------------- (Insert assignee's social security or tax identification number) - ---------------------------------- - ---------------------------------- - ---------------------------------- (Insert address and zip code of assignee), and irrevocably appoints ________ ________ as agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for it, him or her. Date: --------------------------- Signature: ---------------------- (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee:(1) ---------------------------------- (1) 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 Security 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 Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-I-7 EXHIBIT A-2 FORM OF COMMON SECURITY CERTIFICATE THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION. EXCEPT AS SET FORTH IN SECTION 8.1(b) OF THE DECLARATION (AS DEFINED BELOW), THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED. A-2-1 Certificate Number: [_____] Number of Common Securities: [____] Certificate Evidencing Common Securities of HFC Capital Trust II HFC Capital Trust II, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that [____________] (the "Holder") is the registered owner of ______ common securities of the Trust representing undivided beneficial interests in the assets of the Trust (the "Common Securities"). The Common Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of November 28, 2001, among Simone Lagomarsino, Karen Abajian and Eileen Lyon, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, the Holder, as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business. As set forth in the Declaration, when an Event of Default has occurred and is continuing, the rights of Holders of Common Securities to payment in respect of Distributions and payments upon Liquidation, redemption or otherwise are subordinated to the rights of payment of Holders of the Capital Securities. Upon receipt of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Certificate, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of undivided beneficial ownership in the Debentures. This Common Security is governed by, and shall be construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. A-2-2 IN WITNESS WHEREOF, the Trust has executed this certificate this ___ day of _________________. HFC Capital Trust II By: -------------------------------------- Name: Administrator A-2-3 [FORM OF REVERSE OF SECURITY] Distributions payable on each Common Security will be identical in amount to the Distributions payable on each Capital Security, which is at a variable per annum rate of interest, reset semi-annually, equal to LIBOR (as defined in the Declaration) plus 3.75% (the "Coupon Rate") (provided, that the applicable Coupon Rate may not exceed 11.0% through the Interest Payment Date in December, 2006) of the stated liquidation amount of $1,000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Except as set forth below in respect of an Extension Period, Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the applicable Coupon Rate for each such semi-annual period (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions, any such compounded distributions and any Additional Interest payable on the Debentures unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available in the Property Account therefor. The amount of Distributions payable for any period will be computed for any full semi-annual Distribution period on the basis of a 360-day year and the actual number of days elapsed in the relevant Distribution period. Except as otherwise described below, Distributions on the Common Securities will be cumulative, will accrue from the date of original issuance and will be payable semi-annually in arrears on June 8th and December 8th of each year, commencing on June 8, 2002 (each, a "Distribution Payment Date"). The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 10 consecutive semi-annual periods (each, an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest would continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at an annual rate equal to the Coupon Rate in effect for each such Extension Period, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, to the extent permitted by law. No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period the Debenture Issuer shall pay all Deferred Interest then accrued and unpaid on the Debentures; provided, however, that no Extension Period may extend beyond the Maturity Date. Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Deferred Interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, or, if such date is not a Distribution Payment Date, on the A-2-4 immediately following Distribution Payment Date, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. The Common Securities shall be redeemable as provided in the Declaration. A-2-5 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Common Security Certificate to: - ---------------------------------- - ---------------------------------- - ---------------------------------- (Insert assignee's social security or tax identification number) - ---------------------------------- - ---------------------------------- - ---------------------------------- (Insert address and zip code of assignee), and irrevocably appoints ________ as agent to transfer this Common 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 Common Security Certificate) Signature Guarantee:(1) ---------------------------------- - ---------------- (1) 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 Security 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 Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. A-2-6 EXHIBIT B FORM OF TRANSFEREE CERTIFICATE TO BE EXECUTED BY TRANSFEREES OTHER THAN QIBS ----------, [ ] Hawthorne Financial Corporation HFC Capital Trust II 2381 Rosecrans Avenue El Segundo, California 90245 Re: Purchase of $1,000 stated liquidation amount of Floating Rate MMCapS(SM)(the "Capital Securities") of HFC Capital Trust II Ladies and Gentlemen: In connection with our purchase of the Capital Securities we confirm that: 1. We understand that the Floating Rate MMCapS(SM) (the "Capital Securities") of HFC Capital Trust II (the "Trust") (including the guarantee (the "Guarantee") of Hawthorne Financial Corporation (the "Company") executed in connection therewith) and the Floating Rate Junior Subordinated Debt Securities due 2031 of the Company (the "Subordinated Debt Securities") (the Capital Securities, the Guarantee and the Subordinated Debt Securities together being referred to herein as "Offered Securities"), have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold except as permitted in the following sentence. We agree on our own behalf and on behalf of any investor account for which we are purchasing the Offered Securities that, if, we decide to offer, sell or otherwise transfer any such Offered Securities, such offer, sale or transfer will be made only (a) to the Company or the Trust, (b) pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a qualified institutional buyer under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A, (c) pursuant to an exemption from registration to an "accredited investor" within the meaning of subparagraph (a) (1), (2), (3) or (7) of Rule 501 under the Securities Act that is acquiring Offered Securities for its own account or for the account of such an accredited investor for investment purposes and not with a view to, or for offer or sale in connection with, any distribution thereof in violation of the Securities Act, or (d) pursuant to another available exemption from the registration requirements of the Securities Act, and in each of the foregoing cases in accordance with any applicable state securities laws and any requirements of law that govern the disposition of our property. The foregoing restrictions on resale will not apply subsequent to the date on which, in the written opinion of counsel, the Capital Securities are not "restricted securities" within the meaning of Rule 144 under the Securities Act. If any resale or other transfer of the Offered Securities is proposed to be made pursuant to clause (c) or (d) above the transferor shall deliver a letter from the transferee substantially in the form of this letter to the Institutional Trustee as Transfer Agent, which shall provide as applicable, among other things, that the transferee is an "accredited investor" within B-1 the meaning of subparagraph (a) (1), (2), (3) or (7) of Rule 501 under the Securities Act that is acquiring such Securities for investment purposes and not for distribution in violation of the Securities Act. We acknowledge on our behalf and on behalf of any investor account for which we are purchasing Securities that the Trust and the Company reserve the right prior to any offer, sale or other transfer pursuant to clause (c) or (d) to require the delivery of any opinion of counsel, certifications and/or other information satisfactory to the Trust and the Company. We understand that the certificates for any Offered Security that we receive will bear a legend substantially to the effect of the foregoing. 2. We are an "accredited investor" within the meaning of subparagraph (a) (1), (2), (3) or (7) of Rule 501 under the Securities Act purchasing for our own account or for the account of such an "accredited investor," and we are acquiring the Offered Securities for investment purposes and not with view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Offered Securities, and we and any account for which we are acting are each able to bear the economic risks of our or its investment. 3. We are acquiring the Offered Securities purchased by us for our own account (or for one or more accounts as to each of which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this letter) and not with a view to any distribution of the Offered Securities, subject, nevertheless, to the understanding that the disposition of our property will at all times be and remain within our control. 4. In the event that we purchase any Capital Securities or any Subordinated Debt Securities, we will acquire such Capital Securities having an aggregate stated liquidation amount of not less than $100,000 or such Subordinated Debt Securities having an aggregate principal amount not less than $100,000, for our own account and for each separate account for which we are acting. 5. We acknowledge that we either (A) are not a fiduciary of a pension, profit-sharing or other employee benefit plan subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (a "Plan"), or an entity whose assets include "plan assets" by reason of any Plan's investment in the entity and are not purchasing the Offered Securities on behalf of or with "plan assets" by reason of any Plan's investment in the entity and are not purchasing the Offered Securities on behalf of or with "plan assets" of any Plan or (B) are eligible for the exemptive relief available under one or more of the following prohibited transaction class exemptions ("PTCEs") issued by the U.S. Department of Labor: PTCE 96-23, 95-60, 91-38, 90-1 or 84-14. 6. We acknowledge that the Trust and the Company and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements and agree that if any of the acknowledgments, representations, warranties and agreements deemed to have been made by our purchase of the Offered Securities are no longer accurate, we shall promptly notify the Placement Agents. If we are acquiring any Offered Securities as a fiduciary or agent for one or more investor accounts, we represent that we have sole discretion with respect to each such investor account and that we have full power to make B-2 the foregoing acknowledgments, representations and agreement on behalf of each such investor account. --------------------------------- (Name of Purchaser) By: ----------------------------- Date: --------------------------- Upon transfer, the Offered Securities would be registered in the name of the new beneficial owner as follows. Name: ---------------------------- Address: ------------------------- Taxpayer ID Number: -------------- B-3 EXHIBIT C FORM OF TRANSFEROR CERTIFICATE TO BE EXECUTED FOR QIBs ----------, [ ] Hawthorne Financial Corporation HFC Capital Trust II 2381 Rosecrans Avenue El Segundo, California 90245 Re: Purchase of $1,000 stated liquidation amount of Floating Rate MMCapS(SM) (the "Capital Securities") of HFC Capital Trust II Reference is hereby made to the Amended and Restated Declaration dated as of November 28, 2001 (the "Declaration") among Simone Lagomarsino, Karen Abajian and Eileen Lyon, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, Hawthorne Financial Corporation, as Sponsor, and the holders from time to time of undivided beneficial interest in the assets of HFC Capital Trust II. Capitalized terms used but not defined herein shall have the meanings given them in the Declaration. This letter relates to $____________ aggregate liquidation amount of Capital Securities which are held in the name of [name of transferor] (the "Transferor"). In connection with such request, and in respect to such Capital Securities, the transferor does hereby certify that such Capital Securities are being transferred in accordance with (i) the transfer restrictions set forth in the Capital Securities and (ii) Rule 144A under the United States Securities Act of 1933, as amended ("Rule 144A"), to a transferee that the Transferor reasonably believes is purchasing the Capital Securities for its own account or an account with respect to which the transferee exercises sole investment discretion and the transferee and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, in a transaction meeting the requirements of Rule 144A and in accordance with applicable securities laws of any state of the United States or any other jurisdiction. C-1 You are entitled to rely upon this letter and 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. -------------------------------- (Name of Transferor) By: -------------------------------- Name: --------------------------- Title: -------------------------- Date: --------------------------- --------------------------- C-2 EX-4.18 6 a80073ex4-18.txt EXHIBIT 4.18 EXHIBIT 4.18 CAPITAL SECURITY CERTIFICATE 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 LAWS. 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, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE DEBENTURE ISSUER OR THE TRUST (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER 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, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1),(2),(3) or (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "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 (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE DEBENTURE ISSUER'S AND THE TRUST'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM IN ACCORDANCE WITH THE AMENDED AND RESTATED DECLARATION OF TRUST, A COPY OF WHICH MAY BE OBTAINED FROM THE DEBENTURE ISSUER OR THE TRUST. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. 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 1 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 THIS SECURITY 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 THIS SECURITY 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. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE AMENDED AND RESTATED DECLARATION TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A LIQUIDATION AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A LIQUIDATION AMOUNT OF LESS THAN $100,000 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 THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. Certificate Number: P-1 Number of Capital Securities: 5,000 Certificate Evidencing Capital Securities of HFC Capital Trust II Floating Rate MMCapS(SM) (liquidation amount $1,000 per Capital Security) HFC Capital Trust II, a statutory business trust created under the laws of the State of Delaware (the "Trust"), hereby certifies that JPMorgan Chase Bank, as Trustee for the benefit of the Noteholders of MM Community Funding II, Ltd (the "Holder"), is the registered owner of 5,000 capital securities of the Trust representing undivided beneficial interests in the assets of the Trust, designated the Floating Rate MMCapS(SM) (liquidation amount $1,000 per Capital Security) (the "Capital Securities"). Subject to the Declaration (as defined below), 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 Capital Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms and provisions of the Capital Securities shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of November 28, 2001, among Simone Lagomarsino, Karen Abajian and Eileen Lyon, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, Hawthorne Financial Corporation, as Sponsor, and the holders from time to time of undivided beneficial interests in the assets of the Trust, including the designation of the terms of the Capital Securities as set forth in Annex I to the Declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Holder is entitled to the benefits of the Guarantee to the extent provided therein. The Sponsor will provide a copy of the Declaration, the Guarantee, and the Indenture to the Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this Security, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Security, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Capital Securities as evidence of beneficial ownership in the Debentures. This Capital Security is governed by, and shall be construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict of laws. IN WITNESS WHEREOF, the Trust has duly executed this certificate. HFC CAPITAL TRUST II By: /s/ Simone Lagomarsino ---------------------------- Simone Lagomarsino Administrator Dated: November 28, 2001 CERTIFICATE OF AUTHENTICATION This is one of the Capital Securities referred to in the within-mentioned Declaration. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as the Institutional Trustee By: /s/ Donald G. MacKelcan ---------------------------- Dated: November 28, 2001 Distributions payable on each Capital Security will be payable at a variable per annum rate of interest, reset semi-annually, equal to LIBOR (as defined in the Declaration) plus 3.75% (the "Coupon Rate") (provided, that the applicable Coupon Rate may not exceed 11.0% through the Interest Payment Date in December, 2006) of the stated liquidation amount of $1,000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Except as set forth below in respect of an Extension Period, Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the applicable Coupon Rate for each such semi-annual period (to the extent permitted by applicable law. The term "Distributions" as used herein includes cash distributions, any such compounded distributions of any Additional Interest payable on The Debentures unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available in the Property Account therefor. The amount of Distributions payable for any period will be computed for any full semi-annual Distribution Period on the basis of a 360 day year and the actual number of days elapsed in the relevant Distribution period. Except as otherwise described below, Distributions on the Capital Securities will be cumulative, will accrue from the date of original issuance and will be payable semi-annually in arrears on June 8th and December 8th of each year, commencing on June 8, 2002 (each, a "Distribution Payment Date"). The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 10 consecutive semi-annual periods (each, an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest will continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest" will accrue at an annual rate equal to the Coupon Rate in effect for each such Extension Period, compounded semi-annually from the date such Deferred Interest would have been payable were if not for the Extension Period, to the extent permitted by law. No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period, the Debenture Issuer shall pay all Deferred Interest then accrued and unpaid on the Debentures; provided, however, that no Extension Period may extend beyond Maturity Date. Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided that such period together will all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Deferred Interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates or, if such date is not a Distribution Payment Date, on the immediately following Distribution Payment Date, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving affect to any Extension Period) to the extent that the Trust funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions out of moneys held by the trust is guaranteed by the Guarantor pursuant to the Guarantee The Capital Securities shall be redeemable as provided in the Declaration. ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Capital Security Certificate to: (Insert assignee's social security or tax identification number) (Insert address and zip code of assignee), and irrevocably appoints __________________ as agent to transfer this Capital Security Certificate on the books of the Trust. The agent may substitute another to act for it, him or her. Date:_______________________________ Signature:__________________________ (Sign exactly as your name appears on the other side of this Capital Security Certificate) Signature Guarantee(1):____________________________________ ____________________ 1 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 Security 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 Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. EX-4.19 7 a80073ex4-19.txt EXHIBIT 4.19 EXHIBIT 4.19 COMMON SECURITY CERTIFICATE THIS COMMON SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS OR ANY OTHER APPLICABLE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EXEMPTION FROM REGISTRATION. EXCEPT AS SET FORTH IN SECTION 8.1(b) OF THE DECLARATION (AS DEFINED BELOW), THIS SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED. Certificate Number: C-1 Number of Common Securities: 155 Certificate Evidencing Common Securities of HFC Capital Trust II HFC Capital Trust II, 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 155 common securities of the Trust representing undivided beneficial interests in the assets of the Trust (the "Common Securities"). The Common Securities represented hereby are issued pursuant to, and the designation, rights, privileges, restrictions, preferences and other terms provisions of the Common Securities represented hereby are issued pursuant to, and shall in all respects be subject to, the provisions of the Amended and Restated Declaration of Trust of the Trust dated as of November 28, 2001, among Simone Lagomarsino, Karen Abajian and Eileen Lyon, as Administrators, Wilmington Trust Company, as Delaware Trustee, Wilmington Trust Company, as Institutional Trustee, the Holder, as Sponsor, and the holders from time to time of undivided beneficial interest in the assets of the Trust, including the designation of the terms of the Common Securities as set forth in Annex I to the Declaration, as the same may be amended from time to time (the "Declaration"). Capitalized terms used herein but not defined shall have the meaning given them in the Declaration. The Sponsor will provide a copy of the Declaration and the Indenture to the Holder without charge upon written request to the Sponsor at its principal place of business. As set forth in the Declaration, when an Event of Default has occurred and is continuing, the rights of Holders of Common Securities to payment in respect of Distributions and payments upon Liquidation, redemption or otherwise are subordinated to the rights of payment of Holders of the Capital Securities. Upon receipt of this Certificate, the Holder is bound by the Declaration and is entitled to the benefits thereunder. By acceptance of this Certificate, the Holder agrees to treat, for United States federal income tax purposes, the Debentures as indebtedness and the Common Securities as evidence of undivided beneficial ownership in the Debentures. This Common Security is governed by, and shall be construed in accordance with, the laws of the State of Delaware, without regard to principles of conflict laws. IN WITNESS WHEREOF, the Trust has executed this certificate this 28th day of November, 2001. HFC CAPITAL TRUST II By: /s/ Simone Lagomarsino --------------------------------- Simone Lagomarsino Administrator Distributions payable on each Common Security will be identical in amount to the Distributions payable on each Capital Security, which is at a variable per annum rate of interest, reset semi-annually, equal to LIBOR (as defined in the Declaration) plus 3.75% (the "Coupon Rate") (provided, that the applicable Coupon Rate may not exceed 11.0% through the Interest Payment Date in December, 2006) of the stated liquidation amount of $1,000 per Capital Security, such rate being the rate of interest payable on the Debentures to be held by the Institutional Trustee. Except as set forth below in respect of an Extension Period, Distributions in arrears for more than one semi-annual period will bear interest thereon compounded semi-annually at the applicable Coupon Rate for each such semi-annual period (to the extent permitted by applicable law). The term "Distributions" as used herein includes cash distributions, any such compounded distributions and any Additional Interest payable on the Debentures unless otherwise stated. A Distribution is payable only to the extent that payments are made in respect of the Debentures held by the Institutional Trustee and to the extent the Institutional Trustee has funds available in the Property Account therefor. The amount of Distributions payable for any period will be computed for any full semi-annual Distribution period on the basis of a 360-day year and the actual number of days elapsed in the relevant Distribution period. Except as otherwise described below, Distributions on the Common Securities will be cumulative, will accrue from the date of original issuance and will be payable semi-annually in arrears on June 8th and December 8th of each year, commencing on June 8, 2002 (each, a "Distribution Payment Date"). The Debenture Issuer has the right under the Indenture to defer payments of interest on the Debentures by extending the interest payment period for up to 10 consecutive semi-annual periods (each, an "Extension Period") at any time and from time to time on the Debentures, subject to the conditions described below, during which Extension period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest would continue to accrue on the Debentures, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at an annual rate equal to the Coupon Rate in effect for each such Extension Period, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, to the Extent permitted by law. No Extension Period may end on a date other than a Distribution Payment Date. At the end of any such Extension Period the Debenture issuer shall pay all Deferred interest then accrued and unpaid on the Debentures; provided, however, that no Extension Period may extend beyond the Maturity Date. Prior to the termination of any Extension Period, the Debenture Issuer may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Debenture Issuer may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Deferred interest. If Distributions are deferred, the Distributions due shall be paid on the date that the related Extension Period terminates, or, if such date is not a Distribution Payment Date, on the immediately following Distribution Payment Date, to Holders of the Securities as they appear on the books and records of the Trust on the record date immediately preceding such date. Distributions on the Securities must be paid on the dates payable (after giving effect to any Extension Period) to the extent that the Trust has funds available for the payment of such distributions in the Property Account of the Trust. The Trust's funds available for Distribution to the Holders of the Securities will be limited to payments received from the Debenture Issuer. The payment of Distributions our of moneys held by the Trust is guaranteed by the Guarantor pursuant to the Guarantee. The Common Securities shall be redeemable as provided in the Declaration. ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Common Security Certificate to: (Insert assignee's social security or tax identification number) (Insert address and zip code of assignee), and irrevocably appoints - ------------- as agent to transfer this Common 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 Common Security Certificate) Signature Guarantee:(1)-------------- ________________ 1 Signature must be guaranteed by an "eligible guarantor institution" that is bank, stockbroker, savings and loan association or credit union, meeting the requirements of the Security 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 Security registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. EX-4.20 8 a80073ex4-20.txt EXHIBIT 4.20 EXHIBIT 4.20 GUARANTEE AGREEMENT HAWTHORNE FINANCIAL CORPORATION Dated as of November 28, 2001 ARTICLE I DEFINITIONS AND INTERPRETATION Section 1.01 Definitions and Interpretation............................................1 ARTICLE II POWERS, DUTIES AND RIGHTS OF GUARANTEE TRUSTEE Section 2.01 Powers and Duties of the Guarantee Trustee................................4 Section 2.02 Certain Rights of Guarantee Trustee.......................................5 Section 2.03 Not Responsible for Recitals or Issuance of Guarantee.....................7 Section 2.04 Events of Default; Waiver.................................................7 Section 2.05 Events of Default; Notice.................................................8 ARTICLE III GUARANTEE TRUSTEE Section 3.01 Guarantee Trustee; Eligibility............................................8 Section 3.02 Appointment, Removal and Resignation of Guarantee Trustee.................9 ARTICLE IV GUARANTEE Section 4.01 Guarantee.................................................................9 Section 4.02 Waiver of Notice and Demand..............................................10 Section 4.03 Obligations Not Affected.................................................10 Section 4.04 Rights of Holders........................................................11 Section 4.05 Guarantee of Payment.....................................................11 Section 4.06 Subrogation..............................................................11 Section 4.07 Independent Obligations..................................................12 Section 4.08 Enforcement..............................................................12 ARTICLE V LIMITATION OF TRANSACTIONS; SUBORDINATION Section 5.01 Limitation of Transactions...............................................12 Section 5.02 Ranking..................................................................13 ARTICLE VI TERMINATION Section 6.01 Termination..............................................................13 ARTICLE VII INDEMNIFICATION Section 7.01 Exculpation..............................................................13 Section 7.02 Indemnification..........................................................14

i Section 7.03 Compensation; Reimbursement of Expenses..................................15 ARTICLE VIII MISCELLANEOUS Section 8.01 Successors and Assigns...................................................15 Section 8.02 Amendments...............................................................16 Section 8.03 Notices..................................................................16 Section 8.04 Benefit..................................................................17 Section 8.05 Governing Law............................................................17 Section 8.06 Counterparts.............................................................17

ii GUARANTEE AGREEMENT This GUARANTEE AGREEMENT (the "Guarantee"), dated as of November 28, 2001, is executed and delivered by Hawthorne Financial Corporation, a savings and loan holding company incorporated in Delaware (the "Guarantor"), and Wilmington Trust Company, a Delaware banking corporation, as trustee (the "Guarantee 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 II, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Declaration of Trust (the "Declaration"), dated as of November 28, 2001, among the trustees named therein of the Issuer, Hawthorne Financial Corporation, 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 securities, having an aggregate liquidation amount of up to $5,000,000, designated the Floating Rate MMCapS(SM) (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 Guarantee, to pay to the Holders of Capital Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein; and NOW, THEREFORE, in consideration of the purchase by each Holder of the Capital Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee for the benefit of the Holders. ARTICLE I DEFINITIONS AND INTERPRETATION Section 1.01 Definitions and Interpretation. In this Guarantee, unless the context otherwise requires: (a) capitalized terms used in this Guarantee but not defined in the preamble above have the respective meanings assigned to them in this Section 1.1; (b) a term defined anywhere in this Guarantee has the same meaning throughout; (c) all references to "the Guarantee" or "this Guarantee" are to this Guarantee as modified, supplemented or amended from time to time; (d) all references in this Guarantee to Articles and Sections are to Articles and Sections of this Guarantee, unless otherwise specified; (e) terms defined in the Declaration as at the date of execution of this Guarantee have the same meanings when used in this Guarantee, unless otherwise defined in this Guarantee or unless the context otherwise requires; and (f) a reference to the singular includes the plural and vice versa. "Beneficiaries" means any Person to whom the Issuer is or hereafter becomes indebted or liable. "Corporate Trust Office" means the office of the Guarantee Trustee at which the corporate trust business of the Guarantee Trustee shall, at any particular time, be principally administered, which office at the date of execution of this Guarantee Agreement is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001. "Covered Person" means any Holder of Capital Securities. "Debentures" means the junior subordinated debentures of Hawthorne Financial Corporation, designated the Floating Rate Junior Subordinated Debt Securities due 2031, held by the Institutional Trustee (as defined in the Declaration) of the Issuer. "Event of Default" has the meaning set forth in Section 2.4. "Guarantee Payments" means the following payments or distributions, without duplication, with respect to the Capital Securities, to the extent not paid or made by the Issuer: (i) any accrued and unpaid Distributions (as defined in the Declaration) which are required to be paid on such Capital Securities to the extent the Issuer shall have funds available in the Property Account (as defined in the Declaration) therefor at such time, (ii) the Redemption Price (as defined in the Indenture) to the extent the Issuer has funds available in the Property Account therefor at such time, with respect to any Capital Securities called for redemption by the Issuer, (iii) the Special Redemption Price (as defined in the Indenture) to the extent the Issuer has funds available in the Property Account therefor at such time, with respect to Capital Securities called for redemption upon the occurrence of a Special Event (as defined in the Indenture), and (iv) upon a voluntary or involuntary liquidation, dissolution, winding-up or termination of the Issuer (other than in connection with the distribution of Debentures to the Holders of the Capital Securities in exchange therefor as provided in the Declaration), the lesser of (a) the aggregate of the liquidation amount and all accrued and unpaid Distributions on the Capital Securities to the date of payment, to the extent the Issuer shall have funds available in the Property Account therefor at such time, and (b) the amount of assets of the Issuer remaining available for distribution to Holders in liquidation of the Issuer after satisfaction of liabilities to creditors of the Issuer as required by applicable law (in either case, the "Liquidation Distribution"). "Guarantee Trustee" means Wilmington Trust Company, until a Successor Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Guarantee and thereafter means each such Successor Guarantee Trustee. "Holder" means 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 Affiliate of the Guarantor. "Indemnified Person" means the Guarantee Trustee, any Affiliate of the Guarantee Trustee (including in its individual capacity), or any officers, directors, shareholders, members, partners, employees, representatives, nominees, custodians or agents of the Guarantee Trustee. 2 "Indenture" means the Indenture dated as of November 28, 2001, between the Guarantor and Wilmington Trust Company, not in its individual capacity but solely as trustee, and any indenture supplemental thereto pursuant to which the Debentures are to be issued to the Institutional Trustee of the Issuer. "Liquidation Distribution" has the meaning set forth in the definition of "Guarantee Payments" herein. "Majority in liquidation amount of the Capital Securities" means Holder(s) of outstanding Capital Securities, voting together as a class, but separately from the holders of Common Securities, of more than 50% of the aggregate liquidation amount (including the stated amount that would be paid on redemption, liquidation or otherwise, plus accrued and unpaid Distributions to, but excluding, the date upon which the voting percentages are determined) of all Capital Securities then outstanding. "Obligations" means any costs, expenses or liabilities (but not including liabilities related to taxes) of the Issuer, other than obligations of the Issuer to pay to holders of any Trust Securities the amounts due such holders pursuant to the terms of the Trust Securities. "Officer's Certificate" means, with respect to any Person, a certificate signed by one Authorized Officer of such Person. Any Officer's Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee shall include: (a) a statement that each officer signing the Officer's Certificate has read the covenant or condition 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 Officer's 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, in the opinion of each such officer, such condition or covenant has been complied with. "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. "Responsible Officer" means, with respect to the Guarantee Trustee, any officer within the Corporate Trust Office of the Guarantee Trustee with direct responsibility for the administration of any matters relating to this Guarantee, including any Vice President, Assistant Vice President, Secretary, Assistant Secretary or any other officer of the Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers and also, with respect to a particular corporate trust matter, any other officer to whom 3 such matter is referred because of that officer's knowledge of and familiarity with the particular subject. "Successor Guarantee Trustee" means a successor Guarantee Trustee possessing the qualifications to act as Guarantee Trustee under Section 3.1. "Trust Securities" means the Common Securities and the Capital Securities. ARTICLE II POWERS, DUTIES AND RIGHTS OF GUARANTEE TRUSTEE Section 2.01 Powers and Duties of the Guarantee Trustee. (a) This Guarantee shall be held by the Guarantee Trustee for the benefit of the Holders of the Capital Securities, and the Guarantee Trustee shall not transfer this Guarantee to any Person except a Holder of Capital Securities exercising his or her rights pursuant to Section 4.4 (b) or to a Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee. (b) If an Event of Default actually known to a Responsible Officer of the Guarantee Trustee has occurred and is continuing, the Guarantee Trustee shall enforce this Guarantee for the benefit of the Holders of the Capital Securities. (c) The Guarantee Trustee, before the occurrence of any Event of Default and after curing all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Guarantee, and no implied covenants shall be read into this Guarantee against the Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.4) and is actually known to a Responsible Officer of the Guarantee Trustee, the Guarantee Trustee shall exercise such of the rights and powers vested in it by this 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 Guarantee shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: (A) the duties and obligations of the Guarantee Trustee shall be determined solely by the express provisions of this Guarantee, and the Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Guarantee, and 4 no implied covenants or obligations shall be read into this Guarantee against the Guarantee Trustee; and (B) in the absence of bad faith on the part of the Guarantee Trustee, the 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 Guarantee Trustee and conforming to the requirements of this Guarantee; but in the case of any such certificates or opinions furnished to the Guarantee Trustee, the 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 Guarantee; (ii) the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that such Responsible Officer of the Guarantee Trustee or the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Guarantee 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 written direction of the Holders of not less than 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 Guarantee Trustee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee; and (iv) no provision of this Guarantee shall require the 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 Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds is not reasonably assured to it under the terms of this Guarantee, or security and indemnity, reasonably satisfactory to the Guarantee Trustee, against such risk or liability is not reasonably assured to it. Section 2.02 Certain Rights of Guarantee Trustee. (a) Subject to the provisions of Section 2.1: (i) The 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 Guarantee shall be sufficiently evidenced by an Officer's Certificate. 5 (iii) Whenever, in the administration of this Guarantee, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting any action hereunder, the 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 Officer's Certificate of the Guarantor which, upon receipt of such request, shall be promptly delivered by the Guarantor. (iv) The Guarantee Trustee shall have no duty to see to any recording, filing or registration of any instrument or other writing (or any rerecording, refiling or registration thereof). (v) The 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. Such counsel may be counsel to the Guarantor or any of its Affiliates and may include any of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee from any court of competent jurisdiction. (vi) The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such security and indemnity, reasonably satisfactory to the Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses and the expenses of the 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 Guarantee Trustee; provided, however, that nothing contained in this Section 2.2(a)(vi) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee. (vii) The Guarantee 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 Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (viii) The 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 Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. 6 (ix) Any action taken by the Guarantee Trustee or its agents hereunder shall bind the Holders of the Capital Securities, and the signature of the Guarantee Trustee or its agents alone shall be sufficient and effective to perform any such action. No third party shall be required to inquire as to the authority of the Guarantee Trustee to so act or as to its compliance with any of the terms and provisions of this Guarantee, both of which shall be conclusively evidenced by the Guarantee Trustee's or its agent's taking such action. (x) Whenever in the administration of this Guarantee the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Guarantee Trustee (A) may request instructions from the Holders of a Majority in liquidation amount of the Capital Securities, (B) may refrain from enforcing such remedy or right or taking such other action until such instructions are received and (C) shall be protected in conclusively relying on or acting in accordance with such instructions. (xi) The Guarantee Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Guarantee. (xii) No provision of this Guarantee shall be deemed to impose any duty or obligation on the 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 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 Guarantee Trustee shall be construed to be a duty. Section 2.03 Not Responsible for Recitals or Issuance of Guarantee. The recitals contained in this Guarantee shall be taken as the statements of the Guarantor, and the Guarantee Trustee does not assume any responsibility for their correctness. The Guarantee Trustee makes no representation as to the validity or sufficiency of this Guarantee. Section 2.04 Events of Default; Waiver. (a) An Event of Default under this Guarantee will occur upon the failure of the Guarantor to perform any of its payment or other obligations hereunder. (b) The Holders of a Majority in liquidation amount of Capital Securities may, voting or consenting as a class, 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 shall be deemed to have been cured, for every purpose of this Guarantee, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. 7 Section 2.05 Events of Default; Notice. (a) The Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders of the Capital Securities, notices of all Events of Default actually known to a Responsible Officer of the Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, however, that the Guarantee Trustee shall be protected in withholding such notice if and so long as a Responsible Officer of the 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 Guarantee Trustee shall not be charged with knowledge of any Event of Default unless the Guarantee Trustee shall have received written notice thereof from the Guarantor or a Holder of the Capital Securities, or a Responsible Officer of the Guarantee Trustee charged with the administration of this Guarantee shall have actual knowledge thereof. ARTICLE III GUARANTEE TRUSTEE Section 3.01 Guarantee Trustee; Eligibility (a) There shall at all times be a Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor; 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 Person authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least 50 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 3.1(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 Guarantee Trustee shall cease to be eligible to so act under Section 3.1(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 3.2(c). (c) If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee shall either eliminate such interest or resign to the extent and in the manner provided by, and subject to this Guarantee. 8 Section 3.02 Appointment, Removal and Resignation of Guarantee Trustee. (a) Subject to Section 3.2(b), the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor except during an Event of Default. (b) The Guarantee Trustee shall not be removed in accordance with Section 3.2(a) until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor. (c) The Guarantee Trustee appointed to office shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by an instrument in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee. (d) If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 3.2 within 60 days after delivery of an instrument of removal or resignation, the Guarantee Trustee resigning or being removed may petition any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee. (e) No Guarantee Trustee shall be liable for the acts or omissions to act of any Successor Guarantee Trustee. (f) Upon termination of this Guarantee or removal or resignation of the Guarantee Trustee pursuant to this Section 3.2, the Guarantor shall pay to the Guarantee Trustee all amounts owing to the Guarantee Trustee under Sections 7.2 and 7.3 accrued to the date of such termination, removal or resignation. ARTICLE IV GUARANTEE Section 4.01 Guarantee. (a) 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 (except as defense of payment by the Issuer), 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. 9 (b) The Guarantor hereby also agrees to assume any and all Obligations of the Issuer and in the event any such Obligation is not so assumed, subject to the terms and conditions hereof, the Guarantor hereby irrevocably and unconditionally guarantees to each Beneficiary the full payment, when and as due, of any and all obligations to such Beneficiaries. This Agreement is intended to be for the Beneficiaries who have received notice hereof. Section 4.02 Waiver of Notice and Demand. The Guarantor hereby waives notice of acceptance of this 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 4.03 Obligations Not Affected. The obligations, covenants, agreements and duties of the Guarantor under this 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, Special 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 (other than an extension of time for payment of Distributions, Redemption Price, Special Redemption Price, Liquidation Distribution or other sum payable that results from the extension of any interest payment period on the Debentures or any extension of the maturity date of the Debentures permitted by the Indenture); (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 10 (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 4.3 that the obligations of the Guarantor hereunder 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 4.04 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 Guarantee Trustee in respect of this Guarantee or to direct the exercise of any trust or power conferred upon the Guarantee Trustee under this Guarantee; provided, however, that (subject to Sections 2.1 and 2.2) the Guarantee Trustee shall have the right to decline to follow any such direction if the Guarantee Trustee shall determine that the actions so directed would be unjustly prejudicial to the Holders not taking part in such direction or if the Guarantee Trustee being advised by counsel determines that the action or proceeding so directed may not lawfully be taken or if the Guarantor Trustee in good faith by its board of directors or trustees, executive committees or a trust committee of directors or trustees and/or Responsible Officers shall determine that the action or proceedings so directed would involve the Guarantee Trustee in personal liability. (b) Any Holder of Capital Securities may institute a legal proceeding directly against the Guarantor to enforce the Guarantee Trustee's rights under this Guarantee, without first instituting a legal proceeding against the Issuer, the Guarantee Trustee or any other Person. The Guarantor waives any right or remedy to require that any such action be brought first against the Issuer, the Guarantee Trustee or any other Person before so proceeding directly against the Guarantor. Section 4.05 Guarantee of Payment. This Guarantee creates a guarantee of payment and not of collection. Section 4.06 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 Guarantee; provided, however, that the Guarantor shall not (except to the extent required by applicable 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 Guarantee, if, after giving effect to any such payment, any amounts are due and unpaid under this 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. 11 Section 4.07 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 Guarantee notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 4.3 hereof. Section 4.08 Enforcement. A Beneficiary may enforce the obligations of the Guarantor contained in Section 4.1(b) directly against the Guarantor, and the Guarantor waives any right or remedy to require that any action be brought against the Issuer or any other person or entity before proceeding against the Guarantor. The Guarantor shall be subrogated to all rights (if any) of any Beneficiary against the Issuer in respect of any amounts paid to the Beneficiaries by the Guarantor under this Guarantee; provided, however, that the Guarantor shall not (except to the extent required by applicable provisions of law) be entitled to enforce or exercise any rights 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 Guarantee, if, after giving effect to such payment, any amounts are due and unpaid under this Guarantee. ARTICLE V LIMITATION OF TRANSACTIONS; SUBORDINATION Section 5.01 Limitation of Transactions. So long as any Capital Securities remain outstanding, if (a) there shall have occurred and be continuing an Event of Default or (b) the Guarantor shall have selected an Extension Period as provided in the Declaration and such period, or any extension thereof, shall have commenced and be continuing, then the Guarantor may not (x) 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 or (y) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Guarantor that rank pari passu in all respects with or junior in interest to the Debentures (other than (i) payments under this Guarantee, (ii) repurchases, redemptions or other acquisitions of shares of capital stock of the Guarantor (A) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors, or consultants, (B) in connection with a dividend reinvestment or stockholder stock purchase plan or (C) in connection with the issuance of capital stock of the Guarantor (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to occurrence of the Event of Default or the applicable Extension Period, (iii) as a result of any exchange of conversion of any class or series of the Guarantor's capital stock (or any capital stock of a subsidiary of the Guarantor) for any class or series of the Guarantor's capital stock or of any class or series of the Guarantor's indebtedness for any class or series of the Guarantor's capital stock, (iv) the purchase of fractional interests in 12 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, (v) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (vi) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). Section 5.02 Ranking. This Guarantee will constitute an unsecured obligation of the Guarantor and will rank subordinate and junior in right of payment to all present and future Senior Indebtedness (as defined in the Indenture) of the Guarantor. By their acceptance thereof, each Holder of Capital Securities agrees to the foregoing provisions of this Guarantee and the other terms set forth herein. The right of the Guarantor to participate in any distribution of assets of any of its subsidiaries upon any such subsidiary's liquidation or reorganization or otherwise is subject to the prior claims of creditors of that subsidiary, except to the extent the Guarantor may itself be recognized as a creditor of that subsidiary. Accordingly, the Guarantor's obligations under this Guarantee will be effectively subordinated to all existing and future liabilities of the Guarantor's subsidiaries, and claimants should look only to the assets of the Guarantor for payments thereunder. This Guarantee does not limit the incurrence or issuance of other secured or unsecured debt of the Guarantor, including Senior Indebtedness of the Guarantor, under any indenture or agreement that the Guarantor may enter into in the future or otherwise. ARTICLE VI TERMINATION Section 6.01 Termination. This Guarantee shall terminate as to the Capital Securities (i) upon full payment of the Redemption Price or the Special Redemption Price, as the case may be, of all Capital Securities then outstanding, (ii) upon the distribution of all of the Debentures to the Holders of all of the Capital Securities or (iii) upon full payment of the amounts payable in accordance with the Declaration upon dissolution of the Issuer. This 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 Guarantee. ARTICLE VII INDEMNIFICATION Section 7.01 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 13 Indemnified Person in good faith in accordance with this 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 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 Issuer or the Guarantor and upon such information, opinions, reports or statements presented to the Issuer or 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, if selected by such Indemnified Person, has been selected with reasonable care by such Indemnified Person, 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 7.02 Indemnification. (a) The Guarantor agrees to indemnify each Indemnified Person for, and to hold each Indemnified Person harmless against, any and all loss, liability, damage, claim or expense incurred without negligence or willful misconduct on the part of the Indemnified Person, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including but not limited to the costs and expenses (including reasonable legal fees and expenses) of the Indemnified Person defending itself against, or investigating, any claim or liability in connection with the exercise or performance of any of the Indemnified Person's powers or duties hereunder. The obligation to indemnify as set forth in this Section 7.2 shall survive the resignation or removal of the Guarantee Trustee and the termination of this Guarantee. (b) Promptly after receipt by an Indemnified Person under this Section 7.2 of notice of the commencement of any action, such Indemnified Person will, if a claim in respect thereof is to be made against the Guarantor under this Section 7.2, notify the Guarantor in writing of the commencement thereof; but the failure so to notify the Guarantor (i) will not relieve the Guarantor from liability under paragraph (a) above unless and to the extent that the Guarantor did not otherwise learn of such action and such failure results in the forfeiture by the Guarantor of substantial rights and defenses and (ii) will not, in any event, relieve the Guarantor from any obligations to any Indemnified Person other than the indemnification obligation provided in paragraph (a) above. The Guarantor shall be entitled to appoint counsel of the Guarantor's choice at the Guarantor's expense to represent the Indemnified Person in any action for which indemnification is sought (in which case the Guarantor shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the Indemnified Person or Persons except as set forth below); provided, however, that such counsel shall be satisfactory to the Indemnified Person. Notwithstanding the Guarantor's election to appoint counsel to represent the Guarantor in an action, the Indemnified Person shall have the right to employ separate counsel (including local counsel), and the Guarantor 14 shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the Guarantor to represent the Indemnified Person would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the Indemnified Person and the Guarantor and the Indemnified Person shall have reasonably concluded that there may be legal defenses available to it and/or other Indemnified Persons which are different from or additional to those available to the Guarantor, (iii) the Guarantor shall not have employed counsel satisfactory to the Indemnified Person to represent the Indemnified Person within a reasonable time after notice of the institution of such action or (iv) the Guarantor shall authorize the Indemnified Person to employ separate counsel at the expense of the Guarantor. The Guarantor will not, without the prior written consent of the Indemnified Persons, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Indemnified Persons are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each Indemnified Person from all liability arising out of such claim, action, suit or proceeding. Section 7.03 Compensation; Reimbursement of Expenses The Guarantor agrees: (a) to pay to the Guarantee Trustee from time to time such compensation for all services rendered by it hereunder as the parties shall agree to from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); and (b) except as otherwise expressly provided herein, to reimburse the Guarantee Trustee upon request for all reasonable expenses, disbursements and advances incurred or made by it in accordance with any provision of this Guarantee (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or willful misconduct. The provisions of this Section 7.3 shall survive the resignation or removal of the Guarantee Trustee and the termination of this Guarantee. ARTICLE VIII MISCELLANEOUS Section 8.01 Successors and Assigns. All guarantees and agreements contained in this 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. Except in connection with any merger or consolidation of the Guarantor with or into another entity or any sale, transfer or lease of the Guarantor's assets to another entity, in each case, to the extent permitted under the Indenture, the Guarantor may not assign its rights or delegate its obligations under this Guarantee 15 without the prior approval of the Holders of not less than a Majority in liquidation amount of the Capital Securities. Section 8.02 Amendments. Except with respect to any changes that do not adversely affect the rights of Holders of the Capital Securities in any material respect (in which case no consent of Holders will be required), this Guarantee may be amended only with the prior approval of the Holders of not less than a Majority in liquidation amount of the Capital Securities. The provisions of the Declaration with respect to amendments thereof shall apply equally with respect to amendments of the Guarantee. Section 8.03 Notices. All notices provided for in this 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 Guarantee Trustee, at the Guarantee Trustee's mailing address set forth below (or such other address as the 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 Telecopy: 302-651-8882 Telephone: 302-651-1000 (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 Capital Securities and to the Guarantee Trustee): Hawthorne Financial Corporation 2381 Rosecrans Avenue El Segundo, California 90245 Attention: Eileen Lyon Telecopy: 310-643-8304 Telephone: 310-725-1878 (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 16 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 8.04 Benefit. This Guarantee is solely for the benefit of the Holders of the Capital Securities and, subject to Section 2.1(a), is not separately transferable from the Capital Securities. Section 8.05 Governing Law. THIS GUARANTEE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. Section 8.06 Counterparts. This Guarantee may contain more than one counterpart of the signature page and this Guarantee may be executed by the affixing of the signature of the Guarantor and the Guarantee Trustee to any 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. 17 THIS GUARANTEE is executed as of the day and year first above written. Hawthorne Financial Corporation, as Guarantor By: ------------------------------------- Simone Lagomarsino President and Chief Executive Officer WILMINGTON TRUST COMPANY, as Guarantee Trustee By: ------------------------------------- Name: Title: EXHIBIT A FORM OF FLOATING RATE JUNIOR SUBORDINATED DEBT SECURITY DUE 2031 [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 LAWS. 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, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER 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, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "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 (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. 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 THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR A-1-1 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 THIS SECURITY 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. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A PRINCIPAL AMOUNT OF LESS THAN $100,000 SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"). THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF DEPOSITORS AND THE CLAIMS OF GENERAL AND SECURED CREDITORS OF THE COMPANY, IS INELIGIBLE AS COLLATERAL FOR A LOAN BY THE COMPANY OR ANY OF ITS SUBSIDIARIES AND IS NOT SECURED. A-1-2 Floating Rate Junior Subordinated Debt Security due 2031 of HAWTHORNE FINANCIAL CORPORATION Hawthorne Financial Corporation, a Delaware corporation (the "Company"), for value received promises to pay to ________________ (the "Holder") or registered assigns, the principal sum of [ ] ($[ ]) on December 8, 2031, and to pay interest on said principal sum from November 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, 2002, at a variable per annum rate equal to LIBOR (as defined in the Indenture) plus 3.75% (the "Interest Rate") (provided, that the applicable Interest Rate may not exceed 11.0% through the Interest Payment Date in December, 2006) until the principal hereof shall have become due and payable, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at an annual rate equal to the Interest Rate in effect for each such Extension Period compounded semi-annually. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. In the event that any date on which the principal or interest is payable on this Debt Security is not a Business Day, then 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 Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. 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 Debt 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, except that interest and any Deferred Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such regular record date and may be paid to the Person in whose name this Debt Security (or one or more Predecessor Debt Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Debt Securities not less than 10 days prior to such special record date, all as more fully provided in the Indenture. The principal of and interest on this Debt Security shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) 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 may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Debt Security Register or by wire transfer to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debt Security is the Institutional Trustee, the payment of the principal of and interest on this Debt Security will be made in immediately available funds at such place and to such account as may be designated by the Trustee. A-1-3 So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, to defer payments of interest on the Debt Securities by extending the interest payment period on the Debt Securities at any time and from time to time during the term of the Debt Securities, for up to 10 consecutive semi-annual periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest will continue to accrue on the Debt Securities, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at the Interest Rate, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, both to the extent permitted by law. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all Deferred Interest then accrued and unpaid on the Debt Securities; provided, however, that no Extension Period may extend beyond the Maturity Date and provided, further, however, during any such Extension Period, the Company may 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 Company's capital stock or (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Debt Securities (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company (I) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (II) in connection with a dividend reinvestment or stockholder stock purchase plan or (III) in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock, (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). Prior to the termination of any Extension Period, the Company may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Deferred Interest. The Company must give the Trustee notice of its election to begin such Extension Period at least one Business Day prior to the earlier of (i) the date interest on the Debt Securities would have been payable except for the election to begin A-1-4 such Extension Period or (ii) the date such interest is payable, but in any event not later than the related regular record date. The indebtedness evidenced by this Debt Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debt Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debt Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on such holder's behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee such holder's attorney-in-fact for any and all such purposes. Each holder hereof, by such holder's 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. The Company waives demand, presentment for payment, notice of nonpayment, notice of protest, and all other notices. This Debt Security shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debt Security are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. A-1-5 IN WITNESS WHEREOF, the Company has duly executed this certificate. Hawthorne Financial Corporation By: ------------------------------------- Name: Title: Dated: --------------------- CERTIFICATE OF AUTHENTICATION This is one of the Debt Securities referred to in the within-mentioned Indenture. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as the Trustee By: ------------------------------------- Authorized Officer Dated: --------------------- A-1-6 [FORM OF REVERSE OF SECURITY] This Debt Security is one of a duly authorized series of Debt Securities of the Company, all issued or to be issued pursuant to an Indenture (the "Indenture") dated as of November 28, 2001, duly executed and delivered between the Company and Wilmington Trust Company, as Trustee (the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debt Securities (referred to herein as the "Debt Securities") of which this Debt Security is a part. The summary of the terms of this Debt Security contained herein does not purport to be complete and is qualified by reference to the Indenture. Upon the occurrence and continuation of a Tax Event, an Investment Company Event or a Capital Treatment Event, this Debt Security may become due and payable, in whole but not in part, at any time, within 90 days following the occurrence of such Tax Event, Investment Company Event or Capital Treatment Event (the "Special Redemption Date"), as the case may be, at the Special Redemption Price. The Company shall also have the right to redeem this Debt Security at the option of the Company, in whole or in part, on any June 8th or December 8th on or after December 8, 2006 (a "Redemption Date"), at the Redemption Price. Any redemption pursuant to the preceding paragraph will be made, subject to the receipt by the Company of prior approval from the Office of Thrift Supervision (the "OTS") if then required under applicable capital guidelines or policies of the OTS, upon not less than 30 days' nor more than 60 days' notice. If the Debt Securities are only partially redeemed by the Company, the Debt Securities will be redeemed pro rata or by lot or by any other method utilized by the Trustee. "Redemption Price" means 100% of the principal amount of the Debt Securities being redeemed plus accrued and unpaid interest on such Debt Securities to the Redemption Date, or, in the case of a redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Special Redemption Date is on or after December 8, 2006. "Special Redemption Price" means (1) if the Special Redemption Date is before December 8, 2006, the greater of (a) 100% of the principal amount of the Debt Securities being redeemed pursuant to Section 10.02 of the Indenture or (b) as determined by a Quotation Agent, the sum of the present values of the principal amount payable as part of the Redemption Price with respect to a redemption as of December 8, 2006, together with the present value of interest payments calculated at a fixed per annum rate of interest equal to 9.95% over the Remaining Life of such Debt Securities, discounted to the Special Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus .50%, plus, in the case of either (a) or (b), accrued and unpaid interest on such Debt Securities to the Special Redemption Date and (2) if the Special Redemption Date is on or after December 8, 2006, the Redemption Price for such Special Redemption Date. "Comparable Treasury Issue" means with respect to any Special Redemption Date the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in A-1-1 accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity which is within a period from three months before to three months after December 8, 2006, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (a) the average of five Reference Treasury Dealer Quotations for such Special Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if the Trustee receives fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations. "Primary Treasury Dealer" shall mean a primary United States Government securities dealer in New York City. "Quotation Agent" means Salomon Smith Barney Inc. and its successors; provided, however, that if the foregoing shall cease to be a Primary Treasury Dealer, the Company shall substitute therefor another Primary Treasury Dealer. "Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Special Redemption Date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Special Redemption Date. "Treasury Rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the date of calculation, appearing in the most recently published statistical release designated H.15 (519) or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities", for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Special Redemption Date. The Treasury Rate shall be calculated on the third Business Day preceding the Special Redemption Date. A-1-2 In the event of redemption of this Debt Security in part only, a new Debt Security or Debt Securities for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Debt Securities may be declared due and payable, and upon such declaration of acceleration 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 Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debt Securities at the time outstanding affected thereby, as specified 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 any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; provided, however, that no such supplemental indenture shall, among other things, without the consent of the holders of each Debt Security then outstanding and affected thereby (i) extend the fixed maturity of the Debt Securities, or reduce the principal amount thereof or any redemption premium thereon, or reduce the rate or extend the time of payment of interest thereon, or make the principal of, or any interest or premium on, the Debt Securities payable in any coin or currency other than that provided in the Debt Securities, or impair or affect the right of any holder of Debt Securities to institute suit for the payment thereof, or (ii) reduce the aforesaid percentage of Debt 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 Debt Securities at the time outstanding, on behalf of all of the holders of the Debt 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 payment of the principal of or premium, if any, or interest on any of the Debt Securities. Any such consent or waiver by the registered holder of this Debt 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 Debt Security and of any Debt 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 Debt Security. No reference herein to the Indenture and no provision of this Debt Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Debt Security at the time and place and at the rate and in the money herein prescribed. As provided in the Indenture and subject to certain limitations herein and therein set forth, this Debt Security is transferable by the registered holder hereof on the Debt Security Register of the Company, upon surrender of this Debt Security for registration of transfer at the office or agency of the Trustee in Wilmington, Delaware accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder hereof or such holder's attorney duly authorized in writing, and thereupon one or more new Debt 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 A-1-3 made for any such registration of transfer, but the Company 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 Debt Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and the Debt Security registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debt Security shall be overdue and notwithstanding any notice of ownership or writing hereon) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debt Security registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Debt 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, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, 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. The Debt Securities are issuable only in registered certificated form without coupons. As provided in the Indenture and subject to certain limitations herein and therein set forth, Debt Securities are exchangeable for a like aggregate principal amount of Debt Securities of a different authorized denomination, as requested by the holder surrendering the same. All terms used in this Debt Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THE DEBT SECURITIES, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. A-1-4 EX-4.21 9 a80073ex4-21.txt EXHIBIT 4.21 EXHIBIT 4.21 JUNIOR SUBORDINATED DEBT 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 LAWS. NEITHER THIS SECURITY NOR 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, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY ONLY (A) TO THE COMPANY, (B) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON THE HOLDER 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 144 ? (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (a)(1),(2),(3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN "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 (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (C) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO IT IN ACCORDANCE WITH THE INDENTURE, A COPY OF WHICH MAY BE OBTAINED FROM THE COMPANY. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL COMPLY WITH THE FOREGOING RESTRICTIONS. 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 1 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 THIS SECURITY 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 ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE OR HOLDING. ANY PURCHASER OR HOLDER OF THIS SECURITY 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. IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS MAY BE REQUIRED BY THE INDENTURE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING RESTRICTIONS. THIS SECURITY WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF. ANY ATTEMPTED TRANSFER OF THIS SECURITY IN A BLOCK HAVING A PRINCIPAL AMOUNT OF LESS THAN $100,000 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 THIS SECURITY FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF DISTRIBUTIONS ON THIS SECURITY, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN THIS SECURITY. THIS OBLIGATION IS NOT A DEPOSIT AND IS NOT INSURED BY THE UNITED STATES OR ANY AGENCY OR FUND OF THE UNITED STATES, INCLUDING THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC"). THIS OBLIGATION IS SUBORDINATED TO THE CLAIMS OF DEPOSITORS AND THE CLAIMS OF GENERAL AND SECURED CREDITORS OF THE COMPANY, IS INELIGIBLE AS COLLATERAL FOR A LOAN BY THE COMPANY OR ANY OF ITS SUBSIDIARIES AND IS NOT SECURED. Floating Rate Junior Subordinated Debt Security due 2031 of Hawthorne Financial Corporation Hawthorne Financial Corporation, a Delaware corporation (the "Company"), for value received promises to pay to Wilmington Trust Company, not in its individual capacity but solely as Institutional Trustee for HFC Capital Trust II (the "Holder") or registered assigns, the principal sum of Five Million One Hundred Fifty-Five Thousand Dollars ($5,155,000) on December 8, 2031, and to pay interest on said principal sum from November 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, 2002, at a variable per annum rate equal to LIBOR (as defined in the Indenture) plus 3.75% (the "Interest Rate") (provided, that the applicable Interest Rate may not exceed 11.0% through the Interest Payment Date in December, 2006) until the principal hereof shall have become due and payable, and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at an annual rate equal to the Interest Rate in effect for each such Extension Period compounded semi-annually. The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. In the event that any date on which the principal or interest is payable on this Debt Security is not a Business Day, then 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 Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. 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 Debt 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, except that interest and any Deferred Interest payable on the Maturity Date shall be paid to the Person to whom principal is paid. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such regular record date and may be paid to the Person in whose name this Debt Security (or one or more Predecessor Debt Securities) is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of the Debt Securities not less than 10 days prior to such special record date, all as more fully provided in the Indenture. The principal of and interest on this Debt Security shall be payable at the office or agency of the Trustee (or other paying agent appointed by the Company) 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 may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Debt Security Register or by wire transfer to an account appropriately designated by the holder hereof. Notwithstanding the foregoing, so long as the holder of this Debt Security is the Institutional Trustee, the payment of the principal of and interest on this Debt Security will be made in immediately available funds at such place and to such account as may be designated by the Trustee. So long as no Event of Default has occurred and is continuing, the Company shall have the right, from time to time, to defer payments of interest on the Debt Securities by extending the interest payment period on the Debt Securities at any time and from time to time during the term of the Debt Securities, for up to 10 consecutive semi-annual periods (each such extended interest payment period, an "Extension Period"), during which Extension Period no interest shall be due and payable (except any Additional Interest that may be due and payable). During any Extension Period, interest will continue to accrue on the Debt Securities, and interest on such accrued interest (such accrued interest and interest thereon referred to herein as "Deferred Interest") will accrue at the Interest Rate, compounded semi-annually from the date such Deferred Interest would have been payable were it not for the Extension Period, both to the extent permitted by law. No Extension Period may end on a date other than an Interest Payment Date. At the end of any such Extension Period the Company shall pay all Deferred Interest then accrued and unpaid on the Debt Securities; provided, however, that no Extension Period may extend beyond the Maturity Date and provided, further, however, during any such Extension Period, the Company may 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 Company's capital stock or (ii) make any payment of principal of or interest or premium, if any, on or repay, repurchase or redeem any debt securities of the Company that rank pari passu in all respects with or junior in interest to the Debt Securities (other than (a) repurchases, redemptions or other acquisitions of shares of capital stock of the Company (I) in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of one or more employees, officers, directors or consultants, (II) in connection with a dividend reinvestment or stockholder stock purchase plan or (III) in connection with the issuance of capital stock of the Company (or securities convertible into or exercisable for such capital stock), as consideration in an acquisition transaction entered into prior to the applicable Extension Period, (b) as a result of any exchange or conversion of any class or series of the Company's capital stock (or any capital stock of a subsidiary of the Company) for any class or series of the Company's capital stock or of any class or series of the Company's indebtedness for any class or series of the Company's capital stock (c) the purchase of fractional interests in shares of the Company's capital stock pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (d) any declaration of a dividend in connection with any stockholder's rights plan, or the issuance of rights, stock or other property under any stockholder's rights plan, or the redemption or repurchase of rights pursuant thereto, or (e) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock). Prior to the termination of any Extension Period, the Company may further extend such period, provided, that such period together with all such previous and further consecutive extensions thereof shall not exceed 10 consecutive semi-annual periods, or extend beyond the Maturity Date. Upon the termination of any Extension Period and upon the payment of all Deferred Interest, the Company may commence a new Extension Period, subject to the foregoing requirements. No interest or Deferred Interest shall be due and payable during an Extension Period, except at the end thereof, but each installment of interest that would otherwise have been due and payable during such Extension Period shall bear Deferred Interest. The Company must give the Trustee notice of its election to begin such Extension Period at least one Business Day prior to the earlier of (i) the date interest on the Debt Securities would have been payable except for the election to begin such Extension Period or (ii) the date such interest is payable, but in any event not later than the related regular record date. The indebtedness evidenced by this Debt Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Indebtedness, and this Debt Security is issued subject to the provisions of the Indenture with respect thereto. Each holder of this Debt Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on such holder's behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee such holder's attorney-in-fact for any and all such purposes. Each holder hereof by such holder's 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. The Company waives demand, presentment for payment, notice of nonpayment, notice of protest, and all other notices. This Debt Security shall not be entitled to any benefit under the Indenture hereinafter referred to, be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been signed by or on behalf of the Trustee. The provisions of this Debt Security are continued on the reverse side hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. IN WITNESS WHEREOF, the Company has duly executed this certificate. HAWTHORNE FINANCIAL CORPORATION By: /s/ Simone Lagomarsino ---------------------------- Simone Lagomarsino President and Chief Executive Officer Dated: November 28, 2001 CERTIFICATE OF AUTHENTICATION This is one of the Debt Securities referred to in the within-mentioned Indenture. WILMINGTON TRUST COMPANY, not in its individual capacity but solely as the Trustee By: /s/ Donald G. MacKelcan --------------------------- Authorized Officer Dated: November 28, 2001 This Debt Security is one of a duly authorized series of Debt Securities of the Company, all issued or to be issued pursuant to an Indenture (the "Indenture") dated as of November 28, 2001, duly executed and delivered between the Company and Wilmington Trust Company, as Trustee (the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Debt Securities (referred to herein as the "Debt Securities") of which this Debt Security is a part. The summary of the terms of this Debt Security contained herein does not purport to be complete and is qualified by reference to the Indenture. Upon the occurrence and continuation of a Tax Event, and Investment Company Event or a Capital Treatment Event, this Debt Security may become due and payable, in whole but not in part, at any time, within 90 days following the occurrence of such Tax Event, Investment Company Event or Capital Treatment Event (the "Special Redemption Date"), as the case may be, at the Special Redemption Price. The Company shall also have the right to redeem this Debt Security at the option of the Company, in whole or in part, on any June 8th or December 8th on or after December 8, 2000 (a "Redemption Date"), at the Redemption Price. Any redemption pursuant to the preceding paragraph will be made, subject to the receipt by the Company of prior approval from the Office of Thrift Supervision (the "OTS") if then required under applicable capital guidelines or policies of the OTS, upon not less than 30 days' nor more than 60 days' notice. If the Debt Securities are only partially redeemed by the Company, the Debt Securities will be redeemed pro rata or by lot or by any other method utilized by the Trustee. "Redemption Price" means 100% of the principal amount of the Debt Securities being redeemed plus accrued and unpaid interest on such Debt Securities to the Redemption Date or, in the case of a redemption due to the occurrence of a Special Event, to the Special Redemption Date if such Special Redemption Date is on or after December 8, 2006. "Special Redemption Price" means (1) if the Special Redemption Date is before December 8, 2006, the greater of (a) 100% of the principal amount of the Debt Securities being redeemed pursuant to Section 10.02 of the Indenture or (b) as determined by a Quotation Agent, the sum of the present values of the principal amount payable as part of the Redemption Price with respect to a redemption as of December 8, 2006, together with the present value of interest payments calculated at a fixed per annum rate of interest equal to 9.95% over the Remaining Life of such Debt Securities, discounted to the Special Redemption Date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 0.50%, plus, in the case of either (a) or (b), accrued and unpaid interest on such Debt Securities to the Special Redemption Date and (2) if the Special Redemption Date is on or after December 8, 2006, the Redemption Price for such Special Redemption Date. "Comparable Treasury Issue" means with respect to any Special Redemption Date the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the Remaining Life that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the Remaining Life. If no United States Treasury security has a maturity which is within a period from three months before to three months after December 8, 2006, the two most closely corresponding United States Treasury securities shall be used as the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or extrapolated on a straight-line basis, rounding to the nearest month using such securities. "Comparable Treasury Price" means (a) the average of five Reference Treasury Dealer Quotations for such Special Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (b) if the Trustee receives fewer than five such Reference Treasury Dealer Quotations, the average of all such Quotations. "Primary Treasury Dealer" shall mean a primary United States Government securities dealer in New York City. "Quotation Agent" means Salomon Smith Barney Inc. and its successors; provided, however, that if the foregoing shall cease to be a Primary Treasury Dealer, the Company shall substitute therefor another Primary Treasury Dealer. "Reference Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary Treasury Dealer selected by the Trustee after consultation with the Company. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Special Redemption Date, the average, as determined by the Quotation Agent, of the bid and asked prices for the Comparable Treasury issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Special Redemption Date. "Treasury Rate" means (i) the yield, under the heading which represents the average for the week immediately prior to the date of calculation, appearing in the most recently published statistical release designated H.15 (519) or any successor publication which is published weekly by the Federal Reserve and which establishes yields on actively traded United States Treasury securities adjusted to constant maturity under the caption "Treasury Constant Maturities", for the maturity corresponding to the Remaining Life (if no maturity is within three months before or after the Remaining Life, yields for the two published maturities most closely corresponding to the Remaining Life shall be determined and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month) or (ii) if such release (or any successor release) is not published during the week preceding the calculation date or does not contain such yields, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Special Redemption Date. The Treasury Rate shall be calculated on the third Business Day preceding the Special Redemption Date. In the event of redemption of this Debt Security in part only, a new Debt Security or Debt Securities for the unredeemed portion hereof will be issued in the name of the holder hereof upon the cancellation hereof. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of all of the Debt Securities may be declared due and payable, and upon such declaration of acceleration 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 Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Debt Securities at the time outstanding affected thereby, as specified 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 any supplemental indenture or of modifying in any manner the rights of the holders of the Debt Securities; PROVIDED, HOWEVER, that no such supplemental indenture shall, among other things, without the consent of the holders of each Debt Security then outstanding and affected thereby (i) extend the fixed maturity of the Debt Securities, or reduce the principal amount thereof or any redemption premium thereon, or reduce the rate or extend the time of payment of interest thereon, or make the principal of, or any interest or premium on, the Debt Securities payable in any coin or currency other than that provided in the Debt Securities, or impair or affect the right of any holder of Debt Securities to institute suit for the payment thereof, or (ii) reduce the aforesaid percentage of Debt 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 Debt Securities at the time outstanding, on behalf of all of the holders of the Debt 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 payment of the principal of or premium, if any, or interest on any of the Debt Securities. Any such consent or waiver by the registered holder of this Debt 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 Debt Security and of any Debt 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 Debt Security. No reference herein to the Indenture and no provision of this Debt Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Debt Security at the time and place and at the rate and in the money herein prescribed. As provided in the Indenture and subject to certain limitations herein and therein set forth, this Debt Security is transferable by the registered holder hereof on the Debt Security Register of the Company, upon surrender of this Debt Security for registration of transfer at the office or agency of the Trustee in Wilmington, Delaware accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder hereof or such holder's attorney duly authorized in writing, and thereupon one or more new Debt 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 Company 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 Debt Security, the Company, the Trustee, any Authenticating Agent, any paying agent, any transfer agent and the Debt Security registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Debt Security shall be overdue and notwithstanding any notice of ownership or writing hereon) for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any Authenticating Agent nor any paying agent nor any transfer agent nor any Debt Security registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Debt Security, or for any claim based hereon or otherwise in respect hereof, or based on or in respect of the Indenture, against any ??, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, 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. The Debt Securities are issuable only in registered certificated form without coupons. As provided in the Indenture and subject to certain limitations herein and therein set forth, Debt Securities are exchangeable for a like aggregate principal amount of Debt Securities of a different authorized denomination, as requested by the holder surrendering the same. All terms used in this Debt Security that are defined in the Indenture shall have the meanings assigned to them in the Indenture. THE LAW OF THE STATE OF NEW YORK SHALL GOVERN THE INDENTURE AND THE DEBT SECURITIES, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES THEREOF. EX-4.22 10 a80073ex4-22.txt EXHIBIT 4.22 EXHIBIT 4.22 $5,000,000 Floating Rate MMCapS(SM) HFC Capital Trust II PLACEMENT AGREEMENT New York, New York November 14, 2001 SANDLER O'NEILL & PARTNERS, L.P. 9 West 57th Street 19th Floor New York, New York 10019 Ladies and Gentlemen: HFC Capital Trust II (the "Trust"), a statutory business trust organized under the Delaware Business Trust Act, 12 Del. C. Section 3801 et seq. (the "Delaware Act"), and Hawthorne Financial Corporation, a Delaware corporation (the "Company" and together with the Trust, the "Offerors"), confirm their agreement (the "Agreement") with Sandler O'Neill & Partners, L.P., as agent of the Offerors (the "Placement Agent"), with respect to the issue and sale by the Trust and the placement by the Placement Agent of $5,000,000 Floating Rate MMCapS(SM) (liquidation amount of $1,000 per security) of the Trust bearing a variable distribution rate per annum, reset semi-annually, equal to LIBOR (as defined in the Indenture (as defined below)) plus 3.75% provided, that the applicable interest rate may not exceed 11.0% through the interest payment date in December, 2006 (the "Capital Securities"). The Capital Securities will be guaranteed by the Company to the extent provided in the Guarantee Agreement, to be dated as of the Closing Time (as defined in Section 2 hereof) (the "Guarantee Agreement"), between the Company and Wilmington Trust Company, as trustee (the "Guarantee Trustee"), with respect to distributions and payments upon liquidation, redemption and otherwise. The entire proceeds from the sale of the Capital Securities will be combined with the entire proceeds from the sale by the Trust to the Company of its common securities (the "Common Securities"), and will be used by the Trust to purchase $5,155,000 aggregate principal amount of Floating Rate Junior Subordinated Debt Securities due December 8, 2031 (the "Subordinated Debt Securities") issued by the Company. The Capital Securities and the Common Securities will be issued pursuant to the Amended and Restated Declaration of Trust, to be dated as of the Closing Time (the "Declaration"), among the Company, as sponsor, the Administrators named therein (the "Administrators"), Wilmington Trust Company, as institutional trustee (the "Institutional Trustee"), Wilmington Trust Company, as Delaware trustee (the "Delaware Trustee"), and the holders, from time to time, of undivided beneficial interests in the assets of the Trust. The Subordinated Debt Securities will be issued pursuant to the Indenture, to be dated as of the Closing Time (the "Indenture"), between the Company and Wilmington Trust Company, as indenture trustee (the "Indenture Trustee"). The Indenture, the Guarantee Agreement, the Declaration, this Agreement and the Subscription Agreement (as defined in Section 2(a) hereof) are hereinafter referred to collectively as the "Operative Documents." SECTION 1. Representations and Warranties. (a) The Trust and the Company, jointly and severally, represent and warrant to the Placement Agent and the Purchaser (as defined in Section 2(a) hereof) of Capital Securities as of the date hereof and as of the Closing Time, and agree with the Placement Agent and the Purchaser, as follows: (i) Similar Offerings. The Offerors have not, directly or indirectly, solicited any offer to buy or offered to sell, and will not, directly or indirectly, solicit any offer to buy or offer to sell, in the United States or to any United States citizen or resident, any security which is or would be integrated with the sale of the Capital Securities in a manner that would require the Capital Securities to be registered under the Securities Act of 1933, as amended (the "Act"). (ii) Incorporated Documents. The documents of the Company filed with the Securities and Exchange Commission (the "Commission") in accordance with the Securities Exchange Act of 1934, as amended (the "1934 Act"), from and including the commencement of the fiscal year covered by the Company's most recent Annual Report on Form 10-K, at the time they were or hereafter are filed by the Company with the Commission (collectively, the "1934 Act Reports"), complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, at the date of this Agreement and at the Closing Time, do not and will 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, in the light of the circumstances under which they were made, not misleading; and other than such instruments, agreements, contracts and other documents as are filed as exhibits to the Company's annual report on Form 10-K, quarterly reports on Form 10-Q or current reports on Form 8-K, there are no instruments, agreements, contracts or documents of a character described in Item 601 of Regulation S-K promulgated by the Commission to which the Company or any of its subsidiaries is a party. (iii) Independent Accountants. The accountants of the Company who certified the financial statements included in the 1934 Act Reports are independent public accountants of the Company and its subsidiaries within the meaning of the 1933 Act and the rules and regulations of the Commission thereunder (the "1933 Act Regulations"). (iv) Financial Statements and Information. The consolidated historical financial statements of the Company, together with the related schedules and notes, included in the 1934 Act Reports present fairly, in all material respects, the respective consolidated financial positions of the Company and its consolidated subsidiaries at the respective dates indicated, and the consolidated statements of income, changes in stockholders' equity and cash flows of the Company and its consolidated subsidiaries for the respective periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis throughout the periods 2 involved, except as disclosed in the notes to such financial statements; the supporting schedules, if any, included in the 1934 Act Reports present fairly, in all material respects, the information required to be stated therein and any pro forma financial statements and the related notes thereto included in the 1934 Act Reports present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (v) No Material Adverse Change. Since the respective dates as of which information is given in the 1934 Act Reports, there has not been (A) any material adverse change in the condition, financial, regulatory or otherwise, or in the earnings, business affairs or business prospects of the Trust or of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect") or (B) any dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vi) Regulatory Enforcement Matters. Neither the Company or any of its subsidiaries is subject or is party to, or has received any notice or advice that any of them may become subject or party to, any investigation with respect to, any cease-and-desist order, agreement, consent agreement, memorandum of understanding or other regulatory enforcement action, proceeding or order with or by, or, other than as disclosed in Schedule 1(a)(vi) attached hereto, is a party to any commitment letter or similar undertaking to, or is subject to any directive by, or has been, a recipient of any supervisory letter from, or has adopted any board resolutions at the request of, any Regulatory Agency (as defined below) that currently restricts in any material respect the conduct of their business or that in any material manner relates to their capital adequacy, their credit policies, their management or their business (each, a "Regulatory Agreement") nor has the Company or any of its subsidiaries been advised by any Regulatory Agency that it is considering issuing or requesting any such Regulatory Agreement; and there is no unresolved violation, criticism or exception by any Regulatory Agency with respect to any report or statement relating to any examinations of the Company or any of its subsidiaries which, in the reasonable judgment of the Company, is expected to result in a Material Adverse Effect. As used herein, the term "Regulatory Agency" means any federal or state agency charged with the supervision or regulation of depositary institutions or holding companies of depositary institutions, or engaged in the insurance of depositary institution deposits, or any court, administrative agency or commission or other governmental agency, authority or instrumentality having supervisory or regulatory authority with respect to the Company or any of its subsidiaries. (vii) No Undisclosed Liabilities. Neither the Company nor any of its subsidiaries has any material liability, whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for taxes (and there is no past or present fact, situation, circumstance, condition or other basis for any present or future action, suit, proceeding, hearing, charge, complaint, claim or demand against the Company or its subsidiaries giving rise to any such liability), except (i) for liabilities set forth in the financial statements referred to in section 1(a)(iv) above and (ii) normal fluctuations in the amount of the 3 liabilities referred to in clause (i) above occurring in the ordinary course of business of the Company and all of its subsidiaries since the date of the most recent balance sheet included in such financial statements. (viii) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has full power and authority under such laws to own, lease and operate its properties and to conduct its business and to enter into and perform its obligations under each of the Operative Documents to which it is a party; and the Company is duly registered as a savings and loan holding company under the Home Owners' Loan Act of 1933, as amended. (ix) Good Standing of the Subsidiaries. Each "significant subsidiary" (as defined in Rule 1-02 of Regulation S-X) of the Company (a "Significant Subsidiary") has been duly organized and is validly existing as an entity in good standing under the laws of the jurisdiction in which it is chartered and has full power and authority under such laws to own, lease and operate its properties and to conduct its current and contemplated business; and the deposit accounts of each of the Company's subsidiary banks are insured up to the applicable limits by the Savings Association Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC") to the fullest extent permitted by law and the rules and regulations of the FDIC, and no proceeding for the revocation or termination of such insurance is pending or, to the knowledge of the Company, threatened. (x) Foreign Qualifications. The Company and its subsidiaries are each duly qualified as a foreign corporation to transact business and are each in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing, in the reasonable judgment of the Company, is not expected to result in a Material Adverse Effect. (xi) Capital Stock Duly Authorized and Validly Issued. All of the issued and outstanding capital stock of the Company has been duly authorized and validly issued and is fully paid and nonassessable; all of the issued and outstanding capital stock of each subsidiary of the Company has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equitable right; and none of the issued and outstanding capital stock of the Company or its Significant Subsidiaries was issued in violation of any preemptive or similar rights arising by operation of law, under the charter, by-laws or code of regulations of the Company or any of its Significant Subsidiaries or under any agreement to which the Company or any of its Significant Subsidiaries is a party. (xii) Good Standing of the Trust. The Trust has been duly created and is validly existing in good standing as a business trust under the Delaware Act with the power and authority to own property and to conduct its business as provided in the Declaration, to enter into and perform its obligations under the Operative Documents to which it is a party, as applicable, and to issue the Capital Securities and the Common Securities; the Trust is not a party to or otherwise bound by any agreement other than the Operative Documents to 4 which it is a party; and the Trust is, and will be, under current law, classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation. (xiii) Authorization of Common Securities. At the Closing Time, the Common Securities will have been duly authorized for issuance by the Trust pursuant to the Declaration and, when duly issued and executed in accordance with the Declaration and delivered by the Trust to the Company against payment therefor in accordance with the subscription agreement therefor, will be validly issued and fully paid and nonassessable undivided common beneficial ownership interests in the assets of the Trust; the issuance of the Common Securities is not subject to preemptive or other similar rights; and at the Closing Time, all of the issued and outstanding Common Securities of the Trust will be owned directly by the Company, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equitable right. (xiv) Authorization of Capital Securities. At the Closing Time, the Capital Securities will have been duly authorized for issuance by the Trust pursuant to the Declaration, and when duly issued, executed and authenticated in accordance with the Declaration and delivered by the Trust against payment therefor as provided herein and in the Subscription Agreement, will be validly issued and fully paid and nonassessable undivided preferred beneficial ownership interests in the assets of the Trust; the issuance of the Capital Securities will not be subject to preemptive or other similar rights; and the Capital Securities will be in the form contemplated by, and entitled to the benefits of, the Declaration. (xv) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by each of the Offerors. (xvi) Authorization of Declaration. The Declaration has been duly authorized by the Company and, at the Closing Time, will have been duly executed and delivered by the Company and the Administrators, and assuming due authorization, execution and delivery of the Declaration by the Institutional Trustee and the Delaware Trustee, the Declaration will be, at the Closing Time, a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity) (collectively, the "Enforceability Exceptions"). (xvii) Authorization of Guarantee Agreement. The Guarantee Agreement has been duly authorized by the Company; and, at the Closing Time, the Guarantee Agreement will have been duly executed and delivered by the Company and will constitute a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforceability may be limited by the Enforceability Exceptions. (xviii) Authorization of Indenture. The Indenture has been duly authorized by the Company and, at the Closing Time, will have been duly executed and delivered by the Company and will constitute a valid, legal and binding agreement of the 5 Company, enforceable against the Company in accordance with its terms, except to the extent that enforceability may be limited by the Enforceability Exceptions. (xix) Authorization of Subordinated Debt Securities. The Subordinated Debt Securities have been duly authorized by the Company; at the Closing Time, the Subordinated Debt Securities will have been duly executed by the Company and, when authenticated in the manner provided for in the Indenture and delivered by the Company to the Trust against payment therefor as contemplated in the subscription agreement therefor, will constitute valid, legal and binding obligations of the Company, enforceable against the Company in accordance with their terms, except to the extent that enforceability may be limited by the Enforceability Exceptions; the Subordinated Debt Securities will be in the form contemplated by, and entitled to the benefits of, the Indenture; and the Company has no present intention to exercise its option to defer payments of interest on the Subordinated Debt Securities as provided in the Indenture. (xx) Authorization of Administrators. Each of the Administrators of the Trust is an officer or employee of the Company and has been duly authorized by the Company to execute and deliver the Declaration. (xxi) Not an Investment Company. Neither the Trust nor the Company is, and immediately following consummation of the transactions contemplated hereby and the application of the net proceeds therefrom neither the Trust nor the Company will be, an "investment company" required to be registered under the Investment Company Act of 1940, as amended (the "1940 Act"). (xxii) Absence of Defaults and Conflicts. The Trust is not in violation of the trust certificate of the Trust filed with the State of Delaware (the "Trust Certificate") or the Declaration, and neither the Company nor any of its Significant Subsidiaries is in violation of its charter, by-laws or code of regulations; none of the Trust, the Company or any subsidiary of the Company is in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which it is a party or by which it or any of them may be bound or to which any of its properties or assets is subject (collectively, "Agreements and Instruments"), except for such defaults under Agreements and Instruments that, in the reasonable judgment of the Company, are not expected to result in a Material Adverse Effect; and the execution, delivery and performance of the Operative Documents by the Trust or the Company, as the case may be, the issuance, sale and delivery of the Capital Securities and the Subordinated Debt Securities, the consummation of the transactions contemplated by the Operative Documents, and compliance by the Offerors with the terms of the Operative Documents to which they are a party have been duly authorized by all necessary corporate action on the part of the Company and, at the Closing Time, will have been duly authorized by all necessary action on the part of the Trust, and do not and will not, whether with or without the giving of notice or passage of time or both, violate, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any, security interest, mortgage, pledge, lien, charge, encumbrance, claim or equitable right upon any properties or assets of the Trust, the Company or any of its Significant Subsidiaries pursuant to any of the Agreements and Instruments, nor will such action result in 6 any violation of the provisions of the charter, by-laws or code of regulations of the Company or any of its Significant Subsidiaries or the Declaration or the Trust Certificate, or violation by the Company or any of its Significant Subsidiaries of any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government authority, agency or instrumentality or court, domestic or foreign, having jurisdiction over the Trust or the Company or any of its Significant Subsidiaries or their respective properties or assets (collectively, "Governmental Entities"). As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Trust or the Company or any of its Significant Subsidiaries prior to its scheduled maturity. (xxiii) Absence of Labor Dispute. No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the executive officers of the Company, is imminent, which, in the reasonable judgment of the Company, is expected to result in a Material Adverse Effect. (xxiv) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any Governmental Entity, now pending, or, to the knowledge of the Trust or the Company, threatened, against or affecting the Trust or the Company or any of its subsidiaries, which, in the reasonable judgment of the Trust or the Company, is expected to result in a Material Adverse Effect or materially and adversely affect the consummation of the transactions contemplated by the Operative Documents or the performance by the Trust or the Company of its obligations hereunder or thereunder; and the aggregate of all pending legal or governmental proceedings to which the Trust or the Company or any of its subsidiaries is a party or of which any of their respective properties or assets is the subject, including ordinary routine litigation incidental to the business, are not, in the reasonable judgment of the Company or the Trust, expected to result in a Material Adverse Effect. (xxv) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Governmental Entity, other than those that have been made or obtained, is necessary or required for the performance by the Trust or the Company of their obligations under the Operative Documents, as applicable, or the consummation by the Trust and the Company of the transactions contemplated by the Operative Documents. (xxvi) Possession of Licenses and Permits. Each of the Trust, the Company and the subsidiaries of the Company possesses such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate Governmental Entities necessary to conduct the business now operated by them that is material to the Trust or the Company and its subsidiaries considered as one enterprise; each of the Trust, the Company and the subsidiaries of the Company is in compliance with the terms and conditions of all of its Governmental Licenses, except where the failure so to comply, in the reasonable judgment of the Company, is not expected to, singularly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect, in the reasonable judgment of the Company, is not 7 expected to have a Material Adverse Effect; and none of the Trust, the Company or any subsidiary of the Company has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singularly or in the aggregate, in the reasonable judgment of the Company or the Trust, is expected to result in a Material Adverse Effect. (xxvii) Title to Property. Each of the Trust, the Company and the subsidiaries of the Company has good and marketable title to all of their respective real and personal properties, in each case free and clear of all liens, encumbrances and defects, except such as, in the reasonable judgment of the Trust or the Company, singularly or in the aggregate, are not expected to result in a Material Adverse Effect; and all of the leases and subleases under which the Trust, the Company or any subsidiary of the Company holds properties, are in full force and effect, except when the failure of such leases and subleases to be in full force and effect, in the reasonable judgment of the Company, singularly or in the aggregate, is not expected to have a Material Adverse Effect, and none of the Trust, the Company or any subsidiary of the Company has any notice of any claim of any sort that has been asserted by anyone adverse to the rights of the Trust, the Company or any subsidiary of the Company under any of the leases or subleases under which the Trust, the Company or any subsidiary of the Company holds properties, or affecting or questioning the rights of such entity to the continued possession of the leased or subleased premises under any such lease or sublease, except when such claim, in the reasonable judgment of the Company, singularly or in the aggregate, is not expected to have a Material Adverse Effect. (xxviii) Stabilization. The Company has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Capital Securities. (xxix) No General Solicitation. Neither the Trust or the Company nor any of their Affiliates (as defined in Rule 501(b) under the 1933 Act) or any person acting on its or any of their behalf (other than the Placement Agent, as to whom the Offerors make no representation) has engaged or will engage, in connection with the offering of the Capital Securities, in any form of general solicitation or general advertising within the meaning of Rule 502(c) under the 1933 Act. (xxx) No Directed Selling Efforts. Neither the Trust or the Company nor any of their Affiliates or any person acting on its or any of their behalf (other than the Placement Agent, as to whom the Offerors make no representation) has engaged or will engage in any directed selling efforts within the meaning of Regulation S under the 1933 Act ("Regulation S") with respect to the offering of the Capital Securities. (xxxi) No Registration. Subject to compliance by the Placement Agent with the relevant provisions of Section 6 hereof, it is not necessary in connection with the offer, sale and delivery of the Capital Securities by the Trust in the manner contemplated by this Agreement to register the Capital Securities, the guarantee as described in the Guarantee Agreement or the Subordinated Debt Securities under the 1933 Act or to qualify the Declaration, the Guarantee Agreement or the Indenture under the Trust Indenture Act of 1939, as amended. 8 (xxxii) No Integration. Within the period of the preceding six months prior to the date hereof, neither the Company or the Trust nor any other person acting on behalf of the Company or the Trust has offered or sold to any person any Capital Securities, or any securities of the same or a similar class as the Capital Securities, other than the Capital Securities referred to herein. (b) Any certificate signed by any Trustee of the Trust or any duly authorized officer of the Company or any of its subsidiaries and delivered to you or to counsel for the Placement Agent shall be deemed a representation and warranty by the Trust or the Company, as the case may be, to the Placement Agent as to the matters covered thereby. SECTION 2. Sale and Delivery through Placement Agent; Closing. (a) The Offerors propose to issue and sell the Capital Securities on November 28, 2001 (or such other time mutually agreed to by the Offerors and the Placement Agent) (the "Closing Time") to MM Community Funding II, Ltd, a newly formed company with limited liability incorporated under the laws of the Cayman Islands (the "Purchaser"), pursuant to the terms of the Capital Securities Subscription Agreement, to be entered into on or prior to the Closing Time (the "Subscription Agreement"), between the Offerors and the Purchaser. The Offerors agree to execute the Subscription Agreement with the Purchaser and to return the same to the Placement Agent. In addition, the Offerors agree that the Purchaser shall be entitled to the benefit of, and to rely on, the provisions of this Agreement to the extent such provisions address or relate to the Purchaser or the Capital Securities to be purchased by the Purchaser. (b) The Offerors hereby grant to the Placement Agent the exclusive right to arrange the placement of the Capital Securities with the Purchaser on their behalf. The Placement Agent accepts such right and agrees to use its best efforts, on and prior to the Closing Time, to effect such placement. (c) Deliveries of certificates for the Capital Securities shall be made by the Trust to or on behalf of the Purchaser at the offices of Cleary, Gottlieb, Steen & Hamilton in The City of New York, and payment of the purchase price for the Capital Securities shall be made by the Purchaser to the Trust by wire transfer of immediately available funds to a bank designated by the Company contemporaneous with closing at the Closing Time. Certificates for the Capital Securities in the aggregate liquidation amount thereof shall be registered in the name of the Purchaser. (d) As compensation to the Placement Agent for its placement of the Capital Securities and in view of the fact that the proceeds of the sale of the Capital Securities will be used to purchase the Subordinated Debt Securities of the Company, the Company hereby agrees to pay at the Closing Time to the Placement Agent in immediately available funds a commission of $30.00 per Capital Security to be delivered by the Trust hereunder at the Closing Time. (e) In performing its duties under this Agreement, the Placement Agent shall be entitled to rely upon any notice, signature or writing which the Placement Agent 9 shall in good faith believe to be genuine and to be signed or presented by a proper party or parties. The Placement Agent may rely upon any opinions or certificates or other documents delivered by the Offerors or their counsel or designees either to it or the Purchaser. In addition, in connection with the performance of its duties under this Agreement, the Placement Agent shall not be liable for any error of judgment or any action taken or omitted to be taken unless it was grossly negligent or engaged in willful misconduct in connection with such performance or non-performance. No provision of this Agreement shall require the Placement Agent to expend or risk its own funds or otherwise incur any financial liability on behalf of the Purchaser in connection with the performance of any of its duties hereunder. The Placement Agent shall be under no obligation to exercise any of the rights or powers vested in it by this Agreement. SECTION 3. Notice of Material Events. The Offerors covenant with the Placement Agent and the Purchaser that prior to the completion of the initial placement of the Capital Securities through the Placement Agent, the Offerors will immediately notify the Placement Agent, and confirm such notice in writing, of any event or development that, in the reasonable judgment of the Company, is expected to result in a Material Adverse Effect. SECTION 4. Payment of Expenses. Whether or not this Agreement or the Subscription Agreement is terminated or the sale of the Capital Securities is consummated, the Company, as borrower under the Subordinated Debt Securities, will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, issuance and delivery of the certificates for the Capital Securities and Subordinated Debt Securities, (ii) the fees and disbursements of the Company's counsel, accountants and other advisors, and (iii) the fees and expenses of any trustee appointed under any of the Operative Documents, including the fees and disbursements of counsel for such trustees. SECTION 5. Conditions of Placement Agent's Obligations. The obligations of the Placement Agent and the Purchaser at the Closing Time are subject to the accuracy of the representations and warranties of the Offerors contained in Section 1 hereof or in certificates of any Administrator of the Trust or any officer of the Company or any of its subsidiaries delivered pursuant to the provisions hereof, to the performance by the Offerors of their obligations hereunder, and to the following further conditions: (a) Opinion of Counsel for Offerors. At the Closing Time, the Placement Agent shall have received the favorable opinion, dated as of the Closing Time, of Thacher Proffitt & Wood, special counsel to the Offerors, in substantially the form set out in Annex A hereto, in form and substance reasonably satisfactory to counsel for the Placement Agent. Such counsel may state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of Administrators of the Trust, officers of the Company or any of its subsidiaries and public officials. (b) Opinion of Special Delaware Counsel for the Trust. At the Closing Time, the Placement Agent shall have received the favorable opinion, dated as of the Closing Time, of Morris, James, Hitchens & Williams LLP, special Delaware counsel for the Company and the Trust, in substantially the form set out in Annex B hereto, in form and substance reasonably satisfactory to counsel for the Placement Agent. 10 (c) Opinion of Special Tax Counsel for the Offerors. At the Closing Time, the Placement Agent shall have received an opinion, dated as of the Closing Time, of Thacher Proffitt & Wood, special tax counsel to the Offerors that (i) the Trust will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation and (ii) the Subordinated Debt Securities will constitute indebtedness of the Company for United States federal income tax purposes, in substantially the form set out in Annex C hereto. Such opinion may be conditioned on, among other things, the initial and continuing accuracy of the facts, financial and other information, covenants and representations set forth in certificates of officers of the Company and other documents deemed necessary for such opinion. (d) Opinion of Counsel to the Guarantee Trustee, the Institutional Trustee, the Delaware Trustee and the Indenture Trustee. At the Closing Time, the Placement Agent shall have received the favorable opinion, dated as of the Closing Time, of Morris, James, Hitchens & Williams LLP, counsel for the Guarantee Trustee, the Institutional Trustee, the Delaware Trustee and the Indenture Trustee, in substantially the form set out in Annexes D and E hereto, in form and substance reasonably satisfactory to counsel for the Placement Agent. (e) Certificates. At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the 1934 Act Reports, any Material Adverse Effect, and the Placement Agent shall have received a certificate of the Chairman, the Chief Executive Officer, the President, any Senior Vice President or any Vice President of the Company and of the Chief Financial Officer or Chief Accounting Officer of the Company and a certificate of an Administrator of the Trust, dated as of the Closing Time, to the effect that (i) there has been no such Material Adverse Effect, (ii) the representations and warranties in Section 1 hereof were true and correct when made and are true and correct with the same force and effect as though expressly made at and as of the Closing Time, and (iii) the Offerors have complied with all agreements and satisfied all conditions on their part to be performed or satisfied at or prior to the Closing Time. (f) Maintenance of Ratings. Between the date of this Agreement and the Closing Time, there shall not have occurred a downgrading in or withdrawal of the rating assigned to the Company's debt securities or preferred stock by any nationally recognized statistical rating organization, and no such organization shall have publicly announced that it has under surveillance or review its rating of the Company's debt securities or preferred stock. (g) Sale of Securities. The Purchaser shall have sold securities issued by it in such an amount that the net proceeds therefrom shall be available at the Closing Time and shall be sufficient to purchase the Capital Securities and all other capital securities contemplated in agreements similar to this Agreement and the Subscription Agreement. (h) Additional Documents. At the Closing Time, the Placement Agent and the Purchaser shall have been furnished such documents and opinions as they may reasonably request in connection with the issue, sale and placement of the Capital Securities; and all proceedings taken by the Offerors in connection with the issuance, sale and placement of the Capital Securities shall be satisfactory in form and substance to the Placement Agent and the Purchaser. 11 (i) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by the Placement Agent by notice to the Offerors at any time at or prior to the Closing Time, and such termination shall be without liability of any party to any other party except as provided in Section 4 hereof and except that Sections 7 and 8 hereof shall survive any such termination and remain in full force and effect. SECTION 6. Offers and Sales of the Capital Securities. (a) Offer and Sale Procedures. The Placement Agent and the Offerors hereby establish and agree to observe the following provisions with respect to the offer, issue, sale and placement of the Capital Securities: (i) Offers and Sales only to the Purchaser. Offers and sales of the Capital Securities will be made in the United States or pursuant to Regulation S outside the United States only to the Purchaser in a transaction not requiring registration under the 1933 Act. (ii) No General Solicitation. No general solicitation or general advertising (within the meaning of Rule 502(c) under the 1933 Act) will be used in connection with the offering of the Capital Securities. (iii) No Directed Selling Efforts. No directed selling efforts (within the meaning of Regulation S) will be used with respect to the offering of the Capital Securities. (iv) Purchaser Notification. Prior to or contemporaneously with the purchase of the Capital Securities by the Purchaser, the Placement Agent will take reasonable steps to inform the Purchaser that the Capital Securities (A) have not been and will not be registered under the 1933 Act, (B) are being sold to them without registration under the 1933 Act in accordance with an exemption from registration under the 1933 Act and (C) may not be offered, sold or otherwise transferred except (1) to the Company or (2) in accordance with (x) Rule 144A to a person whom the seller reasonably believes is a Qualified Institutional Buyer (as defined in Rule 144A under the Securities Act ("Rule 144A")) that is purchasing such Securities for its own account or for the account of a Qualified Institutional Buyer to whom notice is given that the offer, sale or transfer is being made in reliance on Rule 144A, (y) Regulation S to a non-U.S. person in an offshore transaction or (z) any other available exemption from registration under the 1933 Act (including the exemption provided by Rule 144). (b) Covenants of the Offerors. Each of the Offerors, jointly and severally, covenant with the Placement Agent and the Purchaser as follows: (i) Due Diligence. In connection with the initial placement of the Capital Securities, the Offerors agree that, prior to any offer or sale of the Capital Securities through the Placement Agent, the Placement Agent and the Purchaser shall have the right to make reasonable inquiries into the business of the Trust, the Company and the subsidiaries of the Company. The Offerors also agree to provide answers to the Placement Agent and the Purchaser, if requested, concerning the Trust, the Company and the subsidiaries of the Company 12 (to the extent that such information is available or can be acquired and made available without unreasonable effort or expense and to the extent the provision thereof is not prohibited by applicable law) and the terms and conditions of the offering of the Capital Securities and the Subordinated Debt Securities. (ii) Integration. The Offerors agree that they will not, and will cause their Affiliates not to, make any offer or sale of securities of the Offerors of any class if, as a result of the doctrine of "integration" referred to in Rule 502 under the 1933 Act, such offer or sale would render invalid the exemption from the registration requirements of the 1933 Act provided by Section 4(2) thereof or by Rule 144A or otherwise. (iii) Restriction on Repurchases. Until the expiration of two (2) years (or such shorter period as may hereafter be referred to in Rule 144(k) (or similar successor rule)) after the original issuance of the Capital Securities, the Offerors will not, and will cause their Affiliates not to, purchase or agree to purchase or otherwise acquire any Capital Securities which are "restricted securities" (as such term is defined under Rule 144(a)(3) under the 1933 Act), whether as beneficial owner or otherwise unless, immediately upon any such purchase, the Offerors or any Affiliate shall submit such Capital Securities to the Institutional Trustee for cancellation. SECTION 7. Indemnification. (a) Indemnification of the Placement Agent and the Purchaser. The Offerors agree, jointly and severally, to indemnify and hold harmless: (x) the Placement Agent and the Purchaser, (y) each person, if any, who controls (within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act) the Placement Agent or the Purchaser (each such person, a "controlling person") and (z) the respective partners, directors, officers, employees and agents of the Placement Agent and the Purchaser or any such controlling person, as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, relating to or arising out of, or based upon, in whole or in part, (A) any untrue statement or alleged untrue statement of a material fact included in the 1934 Act Reports, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (B) any untrue statement or alleged untrue statement of material fact contained in any information (whether written or oral) or documents executed in favor of or furnished or made available to the Placement Agent or the Purchaser by the Offerors; (C) any omission or alleged omission to state in any information (whether written or oral) or documents executed in favor of or furnished or made available to the Placement Agent or the Purchaser by the Offerors a material fact necessary to make the statements therein not misleading; or (D) the breach or alleged breach of any representation, warranty and agreement of any Offeror contained herein or in the Subscription Agreement; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or 13 any such alleged untrue statement or omission or breach or alleged breach of any such representation, warranty or agreement; provided that (subject to Section 7(c) hereof) any such settlement is effected with the written consent of the Offerors; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by the Placement Agent), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, or breach or alleged breach of any such representation, warranty or agreement, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that the Company shall indemnify and hold harmless the Trust against any and all loss, liability, claim, damage and expense whatsoever, as incurred, which is due from the Trust pursuant to the foregoing. (b) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof, and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. Counsel to the indemnified parties shall be selected by the Placement Agent. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 7 or Section 8 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (c) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have validly requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 7(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into 14 and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement, provided, however, that an indemnifying party shall not be liable for any such settlement effected without its consent if such indemnifying party (1) reimburses such indemnified party with respect to those fees and expenses of counsel that it determines in good faith are reasonable and (2) provides written notice within ten (10) days after receipt of the request for reimbursement to the indemnified party substantiating the unpaid balance as unreasonable, in each case prior to the date of such settlement. SECTION 8. Contribution. In order to provide for just and equitable contribution in circumstances under which the indemnification provided for in Section 7 hereof is for any reason held to be unenforceable for the benefit of an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Offerors, on the one hand, and the Placement Agent, on the other hand, from the offering of the Capital Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Offerors, on the one hand, and the Placement Agent, on the other hand, in connection with the statements, omissions or breaches which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Offerors, on the one hand, and the Placement Agent, on the other hand, in connection with the offering of the Capital Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Capital Securities pursuant to this Agreement (before deducting expenses) received by the Offerors and the total commission received by the Placement Agent bear to the aggregate of such net proceeds and commissions. The Offerors and the Placement Agent agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement, omission or alleged omission or breach or alleged breach. Notwithstanding the provisions of this Section 8, the Placement Agent shall not be required to contribute any amount in excess of the total commissions received by it. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 15 For purposes of this Section 8, the Purchaser, each person, if any, who controls the Placement Agent or the Purchaser within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and the respective partners, directors, officers, employees and agents of the Placement Agent, the Purchaser or any such controlling person shall have the same rights to contribution as the Placement Agent, while each officer and director of the Company, each Trustee of the Trust and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Offerors. SECTION 9. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or Trustees of the Trust submitted pursuant hereto shall remain operative and in full force and effect, and shall survive delivery of the Capital Securities by the Trust. SECTION 10. Termination of Agreement. (a) Termination; General. The Placement Agent may terminate this Agreement, by notice to the Offerors, at any time at or prior to the Closing Time if, since the time of execution of this Agreement or, in the case of (i), since the respective dates as of which information is given in the 1934 Act Reports, (i) there has occurred any Material Adverse Effect, or (ii) there has occurred any material adverse change in the financial markets in the United States, any outbreak of hostilities or escalation thereof or any other calamity or crisis, or any change or development involving political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Placement Agent, impracticable to market the Capital Securities or to enforce contracts for the sale of the Capital Securities, or (iii) trading in any securities of the Company has been suspended or limited by the Commission or any national stock exchange or market on or in which such securities are traded or quoted, or if trading generally on the American Stock Exchange, the New York Stock Exchange or the Nasdaq National Market has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers or any other governmental authority, or (iv) a banking moratorium has been declared by United States federal, Delaware or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 7 and 8 hereof shall survive such termination and remain in full force and effect. SECTION 11. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Placement Agent shall be directed to Sandler O'Neill & Partners, L.P., as follows: to date until March 1, 2002, 9 West 57th Street, 19th Floor, New York, New York 10019, Attention: Thomas W. Killian, Principal, and on and after March 1, 2002, 919 3rd Avenue, 6th Floor, New York, New York 10022, Attention: Thomas W. Killian, Principal, in each case with a copy to Cleary, Gottlieb, Steen & Hamilton, 2000 Pennsylvania 16 Avenue, N.W., Washington, D.C. 20006, Attention: Kenneth L. Bachman, Esq.; and notices to the Offerors shall be directed to Hawthorne Financial Corporation, 2381 Rosecrans Avenue, El Segundo, California 90245, Attention: Eileen Lyon, with a copy to Thacher Proffitt & Wood, 11 West 42nd Street, New York, New York 10036, Attention: Robert C. Azarow. SECTION 12. Parties. This Agreement shall inure to the benefit of and be binding upon each of the Placement Agent and the Offerors and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Placement Agent, the Purchaser and the Offerors, and their respective successors and the controlling persons and other persons referred to in Sections 1, 7 and 8 hereof and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the Placement Agent, the Purchaser and the Offerors and their respective successors, and said controlling persons and other persons and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. SECTION 13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. EACH OF THE TRUST AND THE COMPANY, ON BEHALF OF ITSELF AND ITS SUBSIDIARIES (INCLUDING, WITHOUT LIMITATION, THE TRUST), HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE CITY OF NEW YORK IN CONNECTION WITH ANY SUIT, ACTION OR PROCEEDING RELATED TO THIS AGREEMENT OR ANY OF THE MATTERS CONTEMPLATED HEREBY, IRREVOCABLY WAIVES ANY DEFENSE OF LACK OF PERSONAL JURISDICTION AND IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT. EACH OF THE TRUST AND THE COMPANY, ON BEHALF OF ITSELF AND ITS SUBSIDIARIES (INCLUDING, WITHOUT LIMITATION, THE TRUST), IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SECTION 14. Effect of Headings. The Article and Section headings herein are for convenience only and shall not affect the construction hereof. 17 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Placement Agent and the Offerors in accordance with its terms. Very truly yours, HAWTHORNE FINANCIAL CORPORATION By: ------------------------------------- Simone Lagomarsino President and Chief Executive Officer HFC CAPITAL TRUST II By: ------------------------------------- Simone Lagomarsino Administrator CONFIRMED AND ACCEPTED, as of the date first above written: SANDLER O'NEILL & PARTNERS, L.P. By: Sandler O'Neill & Partners Corp., the sole general partner By: ---------------------------------- Catherine A. Lawton Vice President SCHEDULE 1(a)(vi) TO THE PLACEMENT AGREEMENT BY AND AMONG HAWTHORNE FINANCIAL CORPORATION, HFC CAPITAL TRUST II AND SANDLER O'NEILL & PARTNERS, L.P. In response to the Office of Thrift Supervision's Year 2000 Examination of Hawthorne Savings, F.S.B., a subsidiary of the Company (the "Bank"), the OTS requested and the Bank committed to providing prior notification to the OTS if management or the Board decides to reduce the Bank's internal capital requirements below the 6.50% core capital and 11.0% risk-based capital ratios. This agreement is not a written capital directive from the OTS, but an oral mutual agreement between the OTS and the Bank, and it does not currently restrict in any material respect the conduct of the Bank's business and, in the reasonable judgment of the Company, is not expected to result in a Material Adverse Effect. At September 30, 2001, the Bank's core capital ratio was 7.93%, and its risk-based capital ratio was 12.23%. ANNEX A Pursuant to Section 5(a) of the Placement Agreement, counsel to the Company shall deliver an opinion in substantially the following form: 1. The Company is incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. 2. The Company has corporate power and authority to (i) execute and deliver, and to perform its obligations under, the Operative Documents to which it is a party and (ii) issue and perform its obligations under the Subordinated Debt Securities. 3. The Company is registered as as a savings and loan holding company under the Home Owners' Loan Act of 1933, as amended. 4. (i) The Bank is validly existing and in good standing under the laws of the jurisdiction of its organization, and (ii) to the best of our knowledge, all of the issued and outstanding shares of capital stock of the Bank are owned of record by the Company, directly or through subsidiaries. 5. The deposit accounts of the Bank are insured by the Federal Deposit Insurance Company up to the maximum amount allowable under applicable law. 6. No consent, approval, authorization or order of or filing, registration or qualification with any Governmental Entity is required in connection with the execution and delivery by the Company of the Operative Documents and the consummation of the transactions contemplated thereby except as have already been obtained or made. 7. The Trust has been created and is validly existing and in good standing as a business trust under the Delaware Business Trust Act. 8. Under the Delaware Business Trust Act and the Amended Declaration, the Trust has the requisite power and authority to (i) own its current properties and conduct its current business (all as described in the Amended Declaration), (ii) execute and deliver, and to perform its obligations under, the Operative Documents to which it is a party, (iii) issue and perform its obligations under the Capital Securities and the Common Securities and (iv) purchase and hold the Subordinated Debt Securities. 9. Under the Delaware Business Trust Act and the Amended Declaration, the execution and delivery by the Trust of the Operative Documents to which it is a party, and the performance by the Trust of its obligations thereunder, have been duly authorized by the requisite trust action on the part of the Trust. 10. The issuance and sale by the Trust of the Capital Securities and Common Securities, the execution, delivery and performance by the Trust of the Operative Documents to which it is a party, the consummation by the Trust of the transactions contemplated thereby and compliance by the Trust with its obligations thereunder are not prohibited by (i) the Amended 1 Declaration or (ii) any applicable statute, governmental rule or regulation of the State of Delaware. 11. No authorization, approval, consent or order of any Delaware court or Delaware governmental authority or Delaware agency is required to be obtained by the Trust solely as a result of the issuance and sale of the Capital Securities and the Common Securities or the performance by the Trust of its obligations under the Operative Documents to which it is a party. 12. Assuming that the Trust derives no income from or in connection with sources within the State of Delaware and has no assets, activities (other than maintaining the Delaware Trustee and the filing of documents with the Secretary of State of the State of Delaware) or employees in the State of Delaware, the holders of the Capital Securities (other than those holders of Capital Securities who reside or are domiciled in the State of Delaware) will have no liability for income taxes imposed by the State of Delaware solely as a result of their participation in the Trust, and the Trust will not be liable for any income tax imposed by the State of Delaware. 13. Each of the Placement Agreement and the Capital Securities Subscription Agreement has been duly authorized, executed and delivered by each of the Company and the Trust. 14. The Amended Declaration has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company and the Administrative Trustees, enforceable against each such party in accordance with its terms. 15. The Capital Securities and the Common Securities have been duly authorized for issuance by the Amended Declaration; and the Capital Securities, when duly issued, executed and authenticated in the manner provided for in the Amended Declaration and delivered against payment therefor in accordance with the Capital Securities Subscription Agreement and the Amended Declaration, will be validly issued and, subject to the qualifications set forth in paragraph 16 below, fully paid and nonassessable undivided beneficial interests in the assets of the Trust and will entitle the holders thereof to the benefits of the Amended Declaration. 16. The holders of the Capital Securities, as beneficial owners of the Trust, will 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; it being understood, however, that the holders of the Capital Securities may be obligated, pursuant to the Amended Declaration, to provide (i) indemnity and/or security in connection with and pay taxes or governmental charges arising from transfers or exchanges of certificates evidencing such capital securities ("Capital Security Certificates") and the issuance of replacement Capital Security Certificates, and (ii) security or indemnity in connection with requests of or directions to the Institutional Trustee to exercise its rights and powers under the Amended Declaration. 2 17. Under the Delaware Business Trust Act and the Amended Declaration, the issuance of the Capital Securities and the Common Securities by the Trust will not be subject to preemptive rights. 18. The Common Securities, when duly issued and executed in accordance with the Amended Declaration and delivered against payment therefor in accordance with the Amended Declaration and the Common Securities Subscription Agreement, will be validly issued undivided beneficial interests in the assets of the Trust. 19. Each of the Operative Documents to which the Trust is a party (other than the Placement Agreement and the Capital Securities Subscription Agreement, as to which we have opined in paragraph 13 above) has been duly authorized, executed and delivered by the Trust and constitutes a valid and binding agreement of the Trust, enforceable against the Trust in accordance with its terms. 20. The Guarantee Agreement has been duly authorized, executed, and delivered by the Company and, assuming the due authorization, execution and delivery by the Trustee, constitutes a valid and binding instrument of the Company, enforceable against the Company in accordance with its terms. 21. Each of the Operative Documents to which the Company is a party (other than the Placement Agreement and the Capital Securities Subscription Agreement, the Amended Declaration and the Guarantee Agreement, as to which we have opined in paragraphs 13, 14 and 20 above) has been duly authorized, executed and delivered by the Company and constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms. 22. The Subordinated Debt Securities have been duly authorized for issuance by the Company pursuant to the Indenture and, when executed, authenticated and delivered in the manner provided for in the Indenture and paid for in accordance with the Debenture Subscription Agreement, will constitute valid and binding obligations of the Company and will entitle the holders thereof to the benefits of the Indenture, enforceable against the Company in accordance with their terms. 23. The execution, delivery and performance of the Operative Documents, as applicable, by the Company and the Trust and the consummation by the Company and the Trust of the transactions contemplated by the Operative Documents, as applicable, will not result in any violation of the charter or bylaws of the Company or the Bank or the Amended Declaration or the Certificate of Trust. 24. Assuming (i) the accuracy of the representations and warranties, and compliance with the agreements, contained in the Placement Agreement and the Capital Securities Subscription Agreement and (ii) that the Capital Securities are sold in the manner contemplated by, and in accordance with, the Placement Agreement, the Capital Securities Subscription Agreement and the Amended Declaration, it is not necessary in connection with the offer, sale and delivery of the Capital Securities by the Trust to the Purchaser to register the 3 Capital Securities, the Guarantee Agreement or the Subordinated Debt Securities under the 1933 Act or to qualify an indenture under the Trust Indenture Act of 1939, as amended. 25. Neither the Company nor the Trust is, and, following the issuance of the Capital Securities and the consummation of the transactions contemplated by the Operative Documents and the application of the proceeds therefrom, neither the Company nor the Trust will be, an "investment company" required to be registered under the Investment Company Act of 1940, as amended. In rendering such opinions, such counsel may (A) state that its opinion is limited to the laws of New York, the corporate laws of the State of Delaware and the Federal laws of the United States and (B) rely as to matters involving the application of laws of any jurisdiction other than New York and Delaware or the United States, to the extent deemed proper and specified in such opinion, upon the opinion of other counsel of good standing believed to be reliable and who are satisfactory to you and as to matters of fact, to the extent deemed proper, on certificates of responsible officers of the Company and public officials. 4 ANNEX B Pursuant to Section 5(b) of the Placement Agreement, Morris, James, Hitchens & Williams LLP shall deliver an opinion in the following form. (i) The Trust has been duly created and is validly existing as a business trust in good standing under the Business Trust Act. Under the Business Trust Act and the Declaration of Trust, the Trust has all requisite trust power and authority (i) to execute and deliver, and to perform its obligations under, the Common Securities Subscription Agreement, the Capital Securities Subscription Agreement, the Debenture Subscription Agreement and the Placement Agreement (together, the "Trust Documents") to which it is a party, (ii) to authorize, issue, sell and perform its obligations under its Common Securities and Capital Securities (together, the "Trust Securities"), (iii) to purchase and hold the Subordinated Debt Securities and (iv) to own its property and conduct its business as described in the Declaration of Trust. (ii) Under the Delaware Business Trust Act and the Declaration of Trust, the execution and delivery by the Trust of the Trust Documents to which it is a party, and the performance by the Trust of its obligations hereunder, have been duly authorized by all necessary business trust action on the part of the Trust. (iii) The Declaration of Trust constitutes a valid and binding obligation of the Company and the Trustees, enforceable against the Company and the Trustees, in accordance with its terms, subject, as to enforcement, to the effect upon the Declaration of (a) bankruptcy, insolvency, moratorium, receivership, liquidation, fraudulent conveyance and transfer, reorganization and other similar laws relating to or affecting the remedies and rights of creditors, (b) general principles of equity (regardless of whether considered or applied in a proceeding in equity or at law), (c) considerations of public policy or the effect of applicable law relating to fiduciary duties, and (d) principles of course of dealing or course of performance and standards of good faith, fair dealing, materiality or reasonableness that may be applied by a court to the exercise of rights or remedies. (iv) The Common Securities of the Trust have been duly authorized for issuance by the Trust and when issued and delivered by the Trust to the Company against payment therefor as described in the Declaration of Trust and the terms of the Common Securities Subscription Agreement, will be validly issued undivided beneficial interests in the assets of the Trust. Under the Declaration of Trust and the Business Trust Act, the issuance of the Common Securities is not subject to preemptive or other similar rights; provided, that such counsel may note that the holders of Common Securities may be required to make payment or provide indemnity or security as set forth in the Declaration. (v) The Capital Securities of the Trust have been duly authorized for issuance by the Trust, and, when issued, executed, authenticated and delivered and when paid for in accordance with the terms of the Declaration of Trust and the terms of the Capital Securities Subscription Agreement, will be fully paid and validly issued and, subject to the limitations set forth in this paragraph (v) below, non-assessable undivided beneficial interests in the assets of the Trust and will entitle the holders thereof to the benefits of the Declaration of Trust. Under the Declaration of Trust and the Business Trust Act, the issuance of the Capital Securities of the 1 Trust is not subject to preemptive or other similar rights. The holders of the Capital Securities will 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; provided that such counsel need express no opinion as to any holder of a Capital Security that is, was or becomes a named Trustee of the Trust. Such counsel may note that the holders of the Capital Securities may be required to make payment or provide indemnity or security as set forth in the Declaration. (vi) The issuance and sale by the Trust of its Trust Securities, the execution, delivery and performance by the Trust of the Trust Documents to which it is a party, the consummation by the Trust of the transactions contemplated by the Trust Documents to which it is a party and the compliance by the Trust with its obligations under the Trust Documents to which it is a party do not violate (a) any of the provisions of the Certificate of Trust of the Trust or the Declaration of Trust or (b) any Delaware law or Delaware administrative regulation applicable to the Trust. (vii) Assuming that the Trust derives no income from or connected with sources within the State of Delaware and has no assets, activities (other than having a Delaware trustee as required by the Delaware Business Trust Act and the filing of documents with the Secretary of State of the State of Delaware) or employees in the State of Delaware, no authorization, approval, consent or order of any Delaware court or Delaware governmental authority or Delaware agency is required to be obtained by the Trust solely in connection with the issuance and sale by the Trust of its Trust Securities, the due authorization, execution and delivery of the Trust Documents to which it is a party or the performance by the Trust of its obligations under the Trust Documents to which it is a party. (viii) Assuming that the Trust derives no income from or connected with sources within the State of Delaware and has no assets, activities (other than having a Delaware trustee as required by the Delaware Business Trust Act and the filing of documents with the Secretary of State of the State of Delaware) or employees in the State of Delaware, and assuming that the Trust is treated as a grantor trust for federal income tax purposes and that the holders of the Capital Securities are viewed for federal income tax purposes as owners of either all of, or their liquidation and accrued but unpaid share of, the Subordinated Debt Securities held by the Trust, the holders of Capital Securities (other than those holders of Capital Securities who reside or are domiciled in the State of Delaware) will have no liability for income taxes imposed by the State of Delaware solely as a result of their participation in the Trust, and the Trust will not be liable for any income tax imposed by the State of Delaware (in rendering the opinion expressed in this paragraph (viii), such counsel need express no opinion concerning the securities laws of the State of Delaware). 2 ANNEX C Pursuant to Section 5(c) of the Placement Agreement, counsel to the Company shall deliver an opinion in substantially the following form: Sandler O'Neill & Partners, L.P. 9 West 57th Street New York, New York 10019 Ladies and Gentlemen: We have acted as special tax counsel to Hawthorne Financial Corporation, a Delaware corporation (the "Company"), in connection with the offering by HFC Capital Trust II (the "Trust") of $5,000,000 Floating Rate MMCapS(SM) (liquidation amount $1,000 per capital security) (the "Capital Securities"). The Capital Securities represent undivided beneficial ownership interests in $5,155,000 in aggregate principal amount of Floating Rate Junior Subordinated Debt Securities due 2031 of the Company (the "Subordinated Debt Securities"). This opinion letter is furnished pursuant to Section 5(c) of the Placement Agreement dated November 14, 2001, between the Company, the Trust and you. In arriving at the opinions expressed below we have examined executed copies of (i) the Amended and Restated Trust Agreement of the Trust dated the date hereof (the "Declaration") and (ii) the Indenture relating to the issuance of the Subordinated Debt Securities dated the date hereof (the "Indenture") (together, the "Operative Documents"). In addition, we have made such investigations of law and fact as we have deemed appropriate as a basis for the opinion expressed below. It is our opinion that, under current law and assuming the performance of the Operative Documents in accordance with the terms described therein, the Subordinated Debt Securities will be treated for United States federal income tax purposes as indebtedness of the Company. It is our opinion that the Trust will be classified for United States federal income tax purposes as a grantor trust and not as an association taxable as a corporation. Our opinion is based on the U.S. Internal Revenue Code of 1986, as amended, Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change, possibly on a retroactive basis. In rendering this opinion, we are expressing our views only as to the federal income tax laws of the United States of America. 1 ANNEX D Pursuant to Section 5(d) of the Placement Agreement, counsel to Wilmington Trust Company (the "Trustee") shall deliver an opinion to the effect that: (i) The Trustee is a Delaware banking corporation with trust powers duly organized and validly existing in good standing under the laws of the State of Delaware with all necessary corporate power and authority to execute, deliver and carry out and perform its obligations under the terms of the Guarantee Agreement, the Declaration and the Indenture; (ii) the execution, delivery and performance by the Trustee of the Guarantee Agreement, the Declaration and the Indenture have been duly authorized by all necessary corporate action on the part of the Trustee and each of the Guarantee Agreement, the Declaration and the Indenture has been duly executed and delivered by the Trustee, and constitutes the legal, valid and binding obligation of the Trustee, enforceable against it in accordance with its terms (subject to Bankruptcy and Equity); (iii) the execution, delivery and performance of the Guarantee Agreement, the Declaration and the Indenture by the Trustee do not conflict with or constitute a breach of the charter or by-laws of the Trustee; and (iv) no consent, approval or authorization of, or registration with or notice to, any governmental authority or agency of the United States of America governing the banking or trust powers of the Trustee is required for the execution, delivery or performance by it of the Guarantee Agreement, the Declaration and the Indenture. 1 ANNEX E Pursuant to Section 5(e) of the Placement Agreement, Morris, James, Hitchens & Williams LLP shall deliver an opinion to the following form. 1. The Delaware Trustee has been duly incorporated and is validly existing in good standing as a banking corporation under the laws of the State of Delaware. 2. The Delaware Trustee has the requisite corporate power and authority to execute and deliver each Declaration of Trust, and has taken all necessary corporate action to authorize the execution and delivery of each Declaration of Trust. 3. The Delaware Trustee has duly executed and delivered each Declaration of Trust. 4. Neither the execution, delivery and performance by the Delaware Trustee of each Declaration of Trust, nor the consummation of any of the transactions by the Delaware Trustee contemplated thereby, are in violation of the charter or by-laws of the Delaware Trustee or of any law, governmental rule or regulation of the State of Delaware or the United States governing the banking or trust powers of the Delaware Trustee or, to our knowledge, without independent investigation, of any indenture, mortgage, bank credit agreement, note or bond purchase agreement, long-term lease, license or other agreement or instrument to which the Delaware Trustee is a party or by which it is bound or, to our knowledge, without independent investigation, of any judgment or order applicable to the Delaware Trustee. 5. Neither the execution, delivery and performance by the Delaware Trustee of each Declaration of Trust, nor the consummation of any of the transactions by the Delaware Trustee contemplated thereby, requires the consent or approval of, the withholding of objection on the part of, the giving of notice to, the filing, registration or qualification with, or the taking of any other action in respect of, any governmental authority or agency of the State of Delaware or the United States of America governing the banking or trust powers of the Delaware Trustee, except for the filing of the certificate of trust for each Trust with the Office of the Secretary of State of the State of Delaware pursuant to the Delaware Business Trust Act, 12 Del C. Section 3801, et seq., which filings have been duly made. 1 EX-10.1 11 a80073ex10-1.txt EXHIBIT 10.1 EXHIBIT 10.1 HAWTHORNE FINANCIAL CORPORATION 2001 STOCK INCENTIVE PLAN (AS AMENDED ON MAY 21, 2001) ARTICLE ONE GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 2001 Stock Incentive Plan is intended to promote the interests of Hawthorne Financial Corporation, a Delaware corporation (the "Corporation"), by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the Service of the Corporation. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into two separate equity programs: - the Discretionary Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock and stock appreciation rights; and - the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares, as a bonus for services rendered the Corporation (or any Parent or Subsidiary), or pursuant to share right awards which entitle Participants to receive shares upon the attainment of designated performance goals or Service requirements. B. The provisions of Articles One and Four shall apply to all equity programs under the Plan and shall govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by the Board or one or more committees appointed by the Board, provided that with respect to Section 16 Insiders (i) the Board may administer the Plan in compliance with Rule 16b-3 of the 1934 Act, or (ii) the Primary Committee may, at the Board's discretion, administer the Plan. Administration of the Plan may otherwise, at the Board's discretion, be vested in the Primary Committee or a Secondary Committee. Any discretionary option grants or stock issuances to members of the Board or the Primary Committee must be authorized and approved by a disinterested majority of the Board. B. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determine and may be removed by the Board at any time. The Board may also at any time terminate the functions of the Primary Committee or any Secondary Committee and reassume all powers and authority previously delegated to such committee. C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Discretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, the provisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have an interest in the Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or any option or stock issuance thereunder. D. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine: (i) with respect to the option grants or stock appreciation rights under the Discretionary Option Grant Program, which eligible persons are to receive grants, the time or times when such grants are to be made, the number of shares to be covered by each such grant, the status of a granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding; and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when such issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule applicable to the issued shares and the consideration for such shares. E. The Plan Administrator shall have the absolute discretion either to grant options or stock appreciation rights in accordance with the Discretionary Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. F. Service on the Primary Committee or any Secondary Committee shall constitute service as a Board member, and members of each such committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on such committee. No member of the Primary Committee or any Secondary Committee shall be liable for any act or omission made in good faith with respect to the Plan or any option grants or stock issuances under the Plan. IV. ELIGIBILITY The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) Employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Corporation on the open market. The maximum -2- number of shares of Common Stock initially reserved for issuance over the term of the Plan shall not exceed One Million Eighteen Thousand Nine Hundred (1,018,900) shares. Such authorized reserve consists of (i) the number of shares which remain available for issuance, as of the Plan Effective Date, under the Predecessor Plans, (768,900 shares), consisting of the maximum aggregate number of shares originally reserved for issuance under the Predecessor Plans (1,300,000 shares), less the aggregate number of shares issued upon the exercise of options under the Predecessor Plans as of the Plan Effective Date (531,100 shares), plus (ii) an increase of 250,000 shares authorized by the Board but subject to stockholder approval. No one person participating in the Plan may receive stock options, direct stock issuances and share right awards for more than One Million Eighteen Thousand Nine Hundred (1,018,900) shares of Common Stock in the aggregate per calendar year. B. Shares of Common Stock subject to outstanding options (including options incorporated into this Plan from the Predecessor Plans) shall be available for subsequent issuance under the Plan to the extent (i) those options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently cancelled or repurchased by the Corporation at the original exercise or issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan, shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. In addition, should the exercise price of an option under the Plan be paid with shares of Common Stock or should shares of Common Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred in connection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Common Stock available for issuance under the Plan shall be reduced only by the net number of shares of Common Stock issued to the holder of such option or stock issuance, and not by the gross number of shares for which the option is exercised or which vest under the stock issuance. However, shares of Common Stock underlying one or more stock appreciation rights exercised under Section V of Article Two of the Plan shall not be available for subsequent issuance under the Plan. C. If any change is made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to: (i) the maximum number and/or class of securities issuable under the Plan; (ii) the number and/or class of securities for which any one person may be granted stock options, direct stock issuances and share right awards under this Plan per calendar year; (iii) the number and/or class of securities and the exercise price per share in effect under each outstanding option under the Plan; (iv) the number and/or class of securities and exercise price per share in effect under each outstanding option incorporated into this Plan from the Predecessor Plans; and (v) the maximum number and/or class of securities which may be added to the Plan through the forfeiture, surrender, cancellation or termination of shares issued under the Predecessor Plans. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement or dilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. ARTICLE TWO DISCRETIONARY OPTION GRANT PROGRAM I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that each such document shall comply with the terms specified below. -3- Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such option. A. EXERCISE PRICE. 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date; provided, however, that the Plan Administrator may, in its discretion, fix the exercise price per share for one or more option grants at less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date if (i) the number of shares of Common Stock underlying the Below Fair Market Value Options to be granted under such one or more grants will not cause the limitation set forth in Section VI of this Article Two to be exceeded, or (ii) the Plan Administrator determines at the time of the granting of the option, and the Optionee agrees in writing, under terms and conditions satisfactory to the Plan Administrator, that cash compensation which the Optionee would otherwise receive from the Corporation or any Parent or Subsidiary shall be reduced dollar-for-dollar by the difference between the aggregate exercise price for the shares of Common Stock subject to such Below Fair Market Value Option and the aggregate Fair Market Value of such shares on the grant date of such Below Fair Market Option. Notwithstanding the foregoing, (i) in no event, shall the Plan Administrator grant options with an exercise price per share of less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date and (ii) if a Below Fair Market Value Option is canceled and re-granted pursuant to Section III of this Article Two, the grant of the new option shall not be considered to be the grant of an additional Below Fair Market Option (for purposes of the limitation set forth in Section VI of this Article Two) so long as the percentage of Fair Market Value per share of Common Stock on the new grant date which is used to determine the exercise price for the new option is equal to or greater than the percentage of Fair Market Value per share of Common Stock which was used to determine the exercise price for the canceled option. 2. The exercise price shall become immediately due upon exercise of the option and may, subject to the provisions of Section I of Article Four and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or certified check made payable to the Corporation, (ii) shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the sale complies with all applicable laws relating to the regulation and sale of securities, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable written instructions to: (a) a brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise; and (b) the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. -4- B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shall have a term in excess of ten (10) years measured from the option grant date. C. EFFECT OF TERMINATION OF SERVICE. 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable for such period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. (ii) Any option held by the Optionee at the time of death and exercisable in whole or in part at that time may be subsequently exercised by the personal representative of the Optionee's estate or by the person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent and distribution or by the Optionee's designated beneficiary or beneficiaries of that option. (iii) Except as otherwise determined in the discretion of the Plan Administrator either at the time an option is granted or at any time the option remains outstanding, should the Optionee's Service be terminated for Misconduct or should the Optionee otherwise engage in Misconduct while holding one or more outstanding options under this Article Two, then all those options shall terminate immediately and cease to be outstanding. (iv) During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent the option is not otherwise at that time exercisable for vested shares. 2. The Plan Administrator shall have complete discretion, either at the time an option is granted or at any time while the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Service from the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested had the Optionee continued in Service. -5- D. STOCKHOLDER RIGHTS. The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. REPURCHASE RIGHTS. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, Incentive Options shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. Non-Statutory Options shall be subject to the same limitation, except that a Non-Statutory Option may be assigned in whole or in part during Optionee's lifetime to one or more members of the Optionee's Immediate Family or to a trust established for the exclusive benefit of one or more members of the Optionee's Immediate Family or the Optionee's former spouse, to the extent such assignment is in connection with Optionee's estate plan or pursuant to a domestic relations order. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under this Article Two, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee's death while holding those options. Such beneficiary or beneficiaries shall take the transferred option subject to all the terms and conditions of this Agreement, including (without limitation) the limited time period during which the option may be exercised following the Optionee's death. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Four shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options when issued under the Plan shall NOT be subject to the terms of this Section II. A. ELIGIBILITY. Incentive Options may only be granted to Employees. B. EXERCISE PRICE. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. -6- D. FAILURE TO QUALIFY AS INCENTIVE OPTION. To the extent that any option governed by this Plan does not qualify as an Incentive Option by reason of the dollar limitation described in Section II.C of this Article Two or for any other reason, such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. E. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date, and the option term shall not exceed five (5) years measured from the option grant date. III. CANCELLATION AND REGRANT OF OPTIONS Subject to the limitations set forth below in this Section III, the Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of outstanding options under the Discretionary Option Grant Program (including outstanding options incorporated from the Predecessor Plans) and to grant in substitution new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new grant date. The Plan Administrator shall be permitted to exercise its authority under this Section III only if the cancellation of outstanding options and substitution of new options in each case (i) is authorized by the Plan Administrator, (ii) will fulfill a legitimate corporate purpose as determined by the Plan Administrator, and (iii) will not cause the limitation set forth in Section VI of this Article Two to be exceeded. IV. CHANGE IN CONTROL/HOSTILE TAKE-OVER A. No option outstanding at the time of a Change in Control shall become exercisable on an accelerated basis if and to the extent: (i) that option is, in connection with the Change in Control, assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change in Control transaction, (ii) such option is replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of the Change in Control on the shares of Common Stock for which the option is not otherwise at that time exercisable and provides for subsequent payout in accordance with the same exercise/vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. However, if none of the foregoing conditions are satisfied, then each option outstanding at the time of the Change in Control but not otherwise exercisable for all the shares of Common Stock at that time subject to such option shall automatically accelerate so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all the shares of Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares of Common Stock. B. All of the Corporation's outstanding repurchase rights under the Discretionary Option Grant Program shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change in Control transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Change in Control, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor -7- corporation (or parent thereof) or otherwise expressly continued in full force and effect pursuant to the terms of the Change in Control transaction. D. Each option which is assumed in connection with a Change in Control or otherwise continued in effect shall be appropriately adjusted, immediately after such Change in Control, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Change in Control had the option been exercised immediately prior to such Change in Control. Appropriate adjustments to reflect such Change in Control shall also be made to: (i) the exercise price payable per share under each outstanding option (including options incorporated into this Plan from the Predecessor Plans), provided the aggregate exercise price payable for such securities shall remain the same; (ii) the maximum number and/or class of securities available for issuance over the remaining term of the Plan; (iii) the maximum number and/or class of securities for which any one person may be granted options, direct stock issuances and share right awards under the Plan per calendar year; and (iv) the maximum number and class of securities which may be added to the Plan through the repurchase of shares issued under the Predecessor Plans. To the extent the actual holders of the Corporation's outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control transaction, the successor corporation may, in connection with the assumption of the outstanding options under the Discretionary Option Grant Program, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control transaction. E. The Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall, immediately prior to the effective date of a Change in Control, become exercisable for all the shares of Common Stock at that time subject to such options on an accelerated basis and may be exercised for any or all of such shares as fully vested shares of Common Stock, whether or not those options are to be assumed or otherwise continued in full force and effect or replaced with a cash incentive program pursuant to the express terms of the Change in Control transaction. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall immediately terminate at the time of such Change in Control and shall not be assignable to the successor corporation (or parent thereof), and the shares subject to those terminated rights shall accordingly vest in full at the time of such Change in Control. F. The Plan Administrator shall have full power and authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall vest and become exercisable for all the shares of Common Stock at that time subject to such options on an accelerated basis in the event the Optionee's Service is subsequently terminated by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control in which those options do not otherwise accelerate. Any options so accelerated shall remain exercisable for fully vested shares of Common Stock until the expiration or sooner termination of the option term. In addition, the Plan Administrator may structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall immediately terminate with respect to any shares of Common Stock held by the Optionee at the time of his or her Involuntary Termination, and the shares subject to those terminated repurchase rights shall accordingly vest in full at that time. G. The Plan Administrator shall have the discretionary authority to structure one or more outstanding options under the Discretionary Option Grant Program so that those options shall, immediately prior to the effective date of a Hostile Take-Over, vest and become exercisable for all the shares of Common Stock at that time subject to such options on an accelerated basis and may be exercised -8- for any or all of such shares as fully vested shares of Common Stock. In addition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so that those rights shall terminate automatically upon the consummation of such Hostile Take-Over, and the shares subject to those terminated rights shall thereupon immediately vest in full. Alternatively, the Plan Administrator may condition the automatic acceleration of one or more outstanding options under the Discretionary Option Grant Program and the termination of one or more of the Corporation's outstanding repurchase rights under such program upon the Involuntary Termination of the Optionee's Service within a designated period (not to exceed eighteen (18) months) following the effective date of such Hostile Take-Over. Each option so accelerated shall remain exercisable for fully vested shares of Common Stock until the expiration or sooner termination of the option term. H. The portion of any Incentive Option accelerated in connection with a Change in Control or Hostile Take-Over shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. I. The grant of options under the Discretionary Option Grant Program shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. V. STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have full power and authority to grant to selected Optionees tandem stock appreciation rights and/or limited stock appreciation rights. B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, to elect between the exercise of the underlying option for shares of Common Stock and the surrender of that option in exchange for a payment from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of the number of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion thereof) over (b) the aggregate exercise price payable for such shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actual option surrender or at any earlier time. If the surrender is so approved, then the payment to which the Optionee shall be entitled may be made in shares of Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly in shares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. (iii) If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights the Optionee had under the surrendered option (or surrendered portion thereof) on the option surrender date and may exercise such rights at any time prior to the later of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option is otherwise exercisable in accordance with the terms of the documents -9- evidencing such option, but in no event may such rights be exercised more than five (5) years after the option grant date with respect to an Incentive Option held by a 10% Stockholder and not more than ten (10) years after the option grant date with respect to all other options. C. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Take-Over, each individual holding one or more options with such a limited stock appreciation right shall have the unconditional right (exercisable for a thirty (30)-day period following such Hostile Take-Over) to surrender each such option (or any portion thereof) to the Corporation. In return for the surrendered option, the Optionee shall receive a cash payment from the Corporation in an amount equal to the excess of (A) the Take-Over Price of the shares of Common Stock at the time subject to such option (whether or not the option is otherwise vested and exercisable for those shares) over (B) the aggregate exercise price payable for those shares. Such cash payment shall be paid within five (5) days following the option surrender date. (iii) At the time such limited stock appreciation right is granted, the Plan Administrator shall pre-approve any subsequent exercise of that right in accordance with the terms of this Paragraph C. Accordingly, no further approval of the Plan Administrator or the Board shall be required at the time of the actual option surrender and cash payment. (iv) The balance of the option (if any) shall remain outstanding and exercisable in accordance with the documents evidencing such option. VI. LIMITATION ON NUMBER OF BELOW FAIR MARKET VALUE OPTIONS AND CANCELLATION AND REGRANT OF OPTIONS Notwithstanding any other provision of the Plan, the combined number of shares of Common Stock underlying (i) all Below Fair Market Value Options granted pursuant to clause (i) of Section I.A.1 of this Article Two and (ii) all options cancelled in exchange for the substitution of new options pursuant to Section III of this Article Two shall not exceed, in the aggregate, ten percent (10%) of the maximum number of shares of Common Stock reserved for issuance over the term of the Plan under Section V.A of Article One of the Plan (as such maximum number may be adjusted under Section V.C of Article One of the Plan). The foregoing provisions of this Section VI shall not apply to any Below Fair Market Value Option granted to an Optionee pursuant to clause (ii) of Section I.A.1 of this Article Two. ARTICLE THREE STOCK ISSUANCE PROGRAM I. STOCK ISSUANCES Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to share right awards which entitle -10- the recipients to receive those shares upon the attainment of designated performance goals or Service requirements. II. STOCK ISSUANCE TERMS A. PURCHASE PRICE. 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i) cash or certified check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. VESTING PROVISIONS. 1. Shares of Common Stock issued under the Stock Issuance Program shall vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to shares of Common Stock issued under the Stock Issuance Program shall be determined by the Plan Administrator and incorporated into the Stock Issuance Agreement; provided, however, in no event, shall such shares of Common Stock vest over a period of less than three (3) years from the effective date of the Stock Issuance Agreement, regardless of whether vesting is conditioned on the Participant's period of Service or the attainment of specified performance objectives. Shares of Common Stock may also be issued under the Stock Issuance Program pursuant to share right awards which entitle the recipients to receive those shares upon the attainment of designated performance goals or Service requirements. Upon the attainment of such performance goals or Service requirements, fully vested shares of Common Stock shall be issued upon satisfaction of those share right awards; provided, however, in no event shall shares of Common Stock be issued to a Participant pursuant to any such share right award before one (1) year after the date on which the share right award was granted to such Participant, regardless of whether the vesting or issuance of the shares is conditioned on the attainment of performance goals or Service requirements. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to: (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock; and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. The holder of a share right award shall have no stockholder rights with respect to such award until shares of Common Stock have been issued to such Participant in satisfaction of such award. -11- 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to the surrendered shares. 5. Except as provided in Section III of this Article III, the Plan Administrator shall have no discretionary authority to waive the surrender and cancellation of one or more unvested shares of Common Stock which shall occur upon the cessation of the Participant's Service or the non-attainment of the performance objectives applicable to those shares. 6. Outstanding share right awards under the Stock Issuance Program shall automatically terminate, and no shares of Common Stock shall actually be issued in satisfaction of those awards, if the performance goals or Service requirements established for such awards are not attained. The Plan Administrator shall have no discretionary authority to issue shares of Common Stock under one or more outstanding share right awards as to which the designated performance goals or Service requirements have not been attained. III. CHANGE IN CONTROL/HOSTILE TAKE-OVER A. All of the Corporation's outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control, except to the extent (i) those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the express terms of the Change in Control transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. B. The Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Stock Issuance Program so that those rights shall automatically terminate in whole or in part upon the occurrence of a Change in Control and shall not be assignable to the successor corporation (or parent thereof), and the shares of Common Stock subject to those terminated rights shall immediately vest in full at the time of such Change in Control. C. The Plan Administrator shall also have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Stock Issuance Program so that those rights shall automatically terminate in whole or in part, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, upon the Involuntary Termination of the Participant's Service within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control in which those repurchase rights do not otherwise terminate. D. The Plan Administrator shall also have the discretionary authority to structure one or more of the Corporation's repurchase rights under the Stock Issuance Program so that those rights shall automatically terminate in whole or in part upon the occurrence of a Hostile Take-Over, and the shares of Common Stock subject to those terminated rights shall immediately vest in full at the time of such Hostile Take-Over. -12- ARTICLE FOUR MISCELLANEOUS I. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option Grant Program or the purchase price of shares issued under the Stock Issuance Program by delivering a full-recourse, interest bearing promissory note payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment) shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. II. SHARE ESCROW/LEGENDS Unvested shares issued under the Plan may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. III. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Common Stock upon the exercise of options or the issuance or vesting of such shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Non-Statutory Options or unvested shares of Common Stock under the Plan with the right to use shares of Common Stock in satisfaction of all or part of the Taxes incurred by such holders in connection with the exercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the following formats: 1. Stock Withholding: The election to have the Corporation withhold, from the shares of Common Stock otherwise issuable upon the exercise of such Non-Statutory Option or the vesting of such shares, a portion of those shares with an aggregate Fair Market Value equal to the amount of the Taxes (not to exceed one hundred percent (100%) of such Taxes) to be satisfied in such manner as designated by the holder in writing; or 2. Stock Delivery: The election to deliver to the Corporation, at the time the Non-Statutory Option is exercised or the shares vest, one or more shares of Common Stock previously acquired by such holder (other than in connection with the option exercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the amount of the Taxes (not to exceed one hundred percent (100%) of such Taxes) to be satisfied in such manner as designated by the holder in writing. IV. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan shall become effective immediately upon the Plan Effective Date. Options may be granted under the Discretionary Option Grant at any time on or after the Plan Effective Date. However, no options granted under the Plan may be exercised, and no shares shall be issued under the -13- Plan, until the Plan is approved by the Corporation's stockholders. If such stockholder approval is not obtained within twelve (12) months after the Plan Effective Date, then all options previously granted under this Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. B. The Plan shall serve as the successor to the Predecessor Plans, and no further option grants or direct stock issuances shall be made under the Predecessor Plans after the Plan Effective Date. All options outstanding under the Predecessor Plans on the Plan Effective Date shall be incorporated into the Plan at that time and shall be treated as outstanding options under the Plan. However, each outstanding option so incorporated shall continue to be governed solely by the terms of the documents evidencing such option, and no provision of the Plan shall be deemed to affect or otherwise modify the rights or obligations of the holders of such incorporated options with respect to their acquisition of shares of Common Stock. C. One or more provisions of the Plan, including (without limitation) the option/vesting acceleration provisions of Article Two relating to Changes in Control and Hostile Take-Overs, may, in the Plan Administrator's discretion, be extended to one or more options incorporated from the Predecessor Plans which do not otherwise contain such provisions. D. The Plan shall terminate upon the EARLIEST of (i) the tenth anniversary of the Plan Effective Date, (ii) the date on which all shares available for issuance under the Plan shall have been issued as fully-vested shares or (iii) the termination of all outstanding options in connection with a Change in Control. Upon such plan termination, all outstanding option grants and unvested stock issuances shall thereafter continue to have force and effect in accordance with the provisions of the documents evidencing such grants or issuances. V. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, an amendment or modification of the Plan must be approved by the Corporation's stockholders if such amendment or modification would: 1. Increase the number of shares of Common Stock reserved for issuance over the term of the Plan under Section V.A of Article One of the Plan (other than increases pursuant to Section V.C of Article One of the Plan); 2. Change the number of shares of Common Stock for which any one person participating in the Plan may receive stock options, direct stock issuances and share right awards in the aggregate per calendar year under Section V.A of Article One of the Plan; 3. Change the persons or class of persons eligible to participate in the Plan under Section IV of Article One of the Plan; or 4. Materially increase or enlarge the rights or benefits available to persons participating in the Plan. B. Options to purchase shares of Common Stock may be granted under the Discretionary Option Grant Program and shares of Common Stock may be issued under the Stock Issuance Program -14- that are in each instance in excess of the number of shares then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained any required approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. VI. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. VII. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted under it and the shares of Common Stock issued pursuant to it. B. No shares of Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall have been compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8 registration statement for the shares of Common Stock issuable under the Plan, and all applicable listing requirements of any stock exchange (or the Nasdaq National Market, if applicable) on which Common Stock is then listed for trading. VIII. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -15- APPENDIX The following definitions shall be in effect under the Plan: A. BELOW FAIR MARKET VALUE OPTION shall mean an option granted pursuant to the Plan Administrator's discretionary authority under Section I.A.1 of Article Two of the Plan with an exercise price per share less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. B. BOARD shall mean the Corporation's Board of Directors. C. CHANGE IN CONTROL shall mean a change in ownership or control of the Corporation effected through any of the following transactions: (i) a stockholder-approved merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction; (ii) a sale, transfer or other disposition of all or substantially all of the Corporation's assets; or (iii) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board recommends such stockholders accept. D. CODE shall mean the Internal Revenue Code of 1986, as amended. E. COMMON STOCK shall mean the Corporation's common stock. F. CORPORATION shall mean Hawthorne Financial Corporation, a Delaware corporation, and its successors. G. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option grant program in effect under the Plan. H. EMPLOYEE shall mean an "employee" of the Corporation (or any Parent or Subsidiary) within the meaning of Section 3401(c) of the Code and the regulations thereunder. I. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. J. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question, as such price is reported on the Nasdaq National Market or any successor system. If APPENDIX -1- there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be deemed equal to the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. K. HOSTILE TAKE-OVER shall mean: (i) the acquisition, directly or indirectly, by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than twenty-five percent (25%) of the total combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to the Corporation's stockholders which the Board does not recommend such stockholders to accept; or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that a majority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who either: (a) have been Board members continuously since the beginning of such period; or (b) have been elected or nominated for election as Board members during such period by at least a majority of the Board members described in clause (a) who were still in office at the time the Board approved such election or nomination. L. IMMEDIATE FAMILY shall mean any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, and shall include adoptive relationships. M. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. N. INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her level of responsibility or the level of management to which Optionee reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and participation in any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without the individual's consent. O. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or APPENDIX -2- any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). P. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. Q. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. R. OPTIONEE shall mean any person to whom an option is granted under the Discretionary Option Grant Program. S. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. T. PARTICIPANT shall mean any person who is issued shares of Common Stock or a share right award under the Stock Issuance Program. U. PLAN shall mean the Corporation's 2001 Stock Incentive Plan, as set forth in this document. V. PLAN ADMINISTRATOR shall mean the particular entity, whether the Board, the Primary Committee or the Secondary Committee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one or more classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs with respect to the persons under its jurisdiction. W. PLAN EFFECTIVE DATE shall mean the date on which the Plan was adopted by the Board. X. PREDECESSOR PLANS shall collectively mean the Corporation's 1994 Stock Option Plan and the Corporation's 1995 Stock Option Plan, as in effect immediately prior to the Plan Effective Date hereunder. Y. PRIMARY COMMITTEE shall mean a committee of two (2) or more Board members appointed by the Board to administer the Plan with respect to Section 16 Insiders, which shall be constituted in such a manner as to permit grants under the Plan in compliance with Rule 16b-3 of the 1934 Act. Z. SECONDARY COMMITTEE shall mean a committee of two (2) or more Board members appointed by the Board to administer any aspect of Plan not administered by the Primary Committee. The members of the Secondary Committee may be Board members who are Employees eligible to receive discretionary option grants or direct stock issuances under the Plan or any other stock option, stock appreciation, stock bonus or other stock plan of the Corporation (or any Parent or Subsidiary). AA. SECTION 16 INSIDER shall mean an officer or director of the Corporation subject to the short-swing profit liabilities of Section 16 of the 1934 Act. APPENDIX -3- BB. SERVICE shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant or stock issuance. CC. SHORT TERM FEDERAL RATE shall mean the federal short-term rate in effect under Section 1274(d) of the Code for the period the shares were held in escrow. DD. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. EE. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. FF. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under the Plan. GG. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. HH. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value per share of Common Stock on the date the option is surrendered to the Corporation in connection with a Hostile Take-Over or, if applicable, (ii) the highest reported price per share of Common Stock paid by the tender offeror in effecting the Hostile Take-Over through the acquisition of such Common Stock. However, if the surrendered option is an Incentive Option, the Take-Over Price shall not exceed the price per share described in clause (i) above. II. TAXES shall mean the Federal, state and local income and employment tax liabilities incurred by the holder of Non-Statutory Options or unvested shares of Common Stock in connection with the exercise of those options or the vesting of those shares. JJ. 10% STOCKHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). APPENDIX -4- 2001 Stock Incentive Plan Recommendation for Amendments 1. Article Two, Section I(A) shall be amended to provide that the minimum exercise price of options granted under the Plan will be 100% of fair market value on the date of the grant; provided, however, that the Board may grant discounted options in an amount that does not exceed 10% of the shares reserved for issuance under the Plan, in the aggregate, unless the discount is expressly granted in lieu of cash compensation. In any event, the minimum exercise price will be 85% of fair market value on the date of the grant. 2. Article Two, Section III shall be amended to provide that outstanding options may not be repriced or exchanged, except in limited circumstances authorized by the compensation committee to fulfill a legitimate corporate purpose and, in any event, in an amount that does not exceed 10% of the shares reserved for issuance under the Plan, in the aggregate. 3. Article Three, Section II(B) shall provide: a. that any restricted share grants made under the Plan will have a vesting period of at least three years, and shall not be subject to discretionary lapse or waiver. b. any performance share units granted under the Plan will have a performance period of at least one year, which shall not be subject to discretionary lapse or waiver. 4. Article Four, Section V shall provide that the Plan may not be amended without shareholder approval if such amendment would (a) increase the number of shares reserved under the Plan, (b) modify the eligibility requirements or (c) materially increase the benefits to participants. NOTE: The limitations set forth in paragraphs 1 and 2 are in the aggregate (i.e., no more than 10% of the reserved shares may be used either for discounted options or repriced options.) EX-10.7 12 a80073ex10-7.txt EXHIBIT 10.7 EXHIBIT 10.7 AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG HAWTHORNE FINANCIAL CORPORATION FIRST FIDELITY BANCORP, INC. HAWTHORNE SAVINGS, F.S.B. FIRST FIDELITY INVESTMENT & LOAN ASSOCIATION AND HF MERGER CORP. MARCH __, 2002 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS.............................................................2 ARTICLE II THE MERGERS AND RELATED MATTERS.........................................9 2.1 The Holding Company Merger -- HFC...................................................9 2.2 The Holding Company Merger-Merger Sub..............................................10 2.3 Conversion of Fidelity Stock.......................................................10 2.4 Fractional Shares..................................................................11 2.5 Treatment of Fidelity Options......................................................11 2.6 Election and Proration Procedures..................................................11 2.7 Exchange Procedures................................................................14 2.8 Dissenting Shares..................................................................16 2.9 Adjustments for Dilution and Other Matters.........................................16 2.10 Name of Corporation Surviving the Holding Company Merger...........................17 2.11 Certificate of Incorporation and Bylaws of Corporation Surviving the Holding Company Merger.............................................................17 2.12 Directors and Officers of Corporation Surviving the Holding Company Merger.........17 2.13 Determination of Structure of Holding Company Merger...............................18 ARTICLE III THE CLOSING............................................................18 3.1 Closing Date.......................................................................18 3.2 Execution of Merger Documents......................................................18 3.3 Documents to be Delivered..........................................................18 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF FIDELITY AND THRIFT..................18 4.1 Incorporation, Standing and Power..................................................18 4.2 Liquidation of and Reservation for the Fidelity Subsidiary.........................19 4.3 Capitalization.....................................................................19 4.4 Subsidiaries.......................................................................20 4.5 Financial Statements...............................................................20 4.6 Reports and Filings................................................................20 4.7 Authority of Fidelity and Thrift...................................................20 4.8 Insurance..........................................................................21
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Page ---- 4.9 Title to Assets..................................................................22 4.10 Real Estate......................................................................22 4.11 Litigation.......................................................................22 4.12 Taxes............................................................................22 4.13 Compliance with Laws and Regulations.............................................24 4.14 Performance of Obligations.......................................................26 4.15 Employees........................................................................26 4.16 Registration Obligation..........................................................26 4.17 Brokers and Finders..............................................................26 4.18 Material Contracts...............................................................26 4.19 Certain Material Changes.........................................................28 4.20 Licenses and Permits.............................................................29 4.21 Undisclosed Liabilities..........................................................29 4.22 Employee Benefit Plans...........................................................29 4.23 Corporate Records................................................................32 4.24 Community Reinvestment Act.......................................................32 4.25 Regulatory Actions...............................................................32 4.26 Insider Loans; Other Transactions................................................33 4.27 Accounting Records...............................................................33 4.28 Indemnification..................................................................33 4.29 Offices and ATMs.................................................................33 4.30 Loan Portfolio...................................................................33 4.31 Investment Securities............................................................34 4.32 Derivatives Contracts; Structured Notes; Etc.....................................34 4.33 Power of Attorney................................................................34 4.34 Material Interests of Certain Persons............................................34 4.35 Tax Matters......................................................................34 4.36 Facts Affecting Regulatory Approvals.............................................34 4.37 Disclosure Documents and Applications............................................35 4.38 Corporate and Stockholder Approvals and Takeover Statutes........................35
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Page ---- 4.39 Intellectual Property.......................................................35 4.40 Accuracy and Currentness of Information Furnished...........................36 ARTICLE V REPRESENTATIONS AND WARRANTIES OF HFC AND BANK..................36 5.1 Incorporation, Standing and Power...........................................36 5.2 Authority...................................................................36 5.3 Reports and Filings.........................................................37 5.4 Corporate and Stockholder Approvals.........................................38 5.5 Absence of Certain Changes or Events........................................38 5.6 Facts Affecting Regulatory Approvals........................................38 5.7 Community Reinvestment Act..................................................39 5.8 Litigation..................................................................39 5.9 Taxes.......................................................................39 5.10 Compliance with Laws and Regulations; Licenses and Permits..................39 5.11 Brokers and Finders.........................................................40 5.12 Undisclosed Liabilities.....................................................40 5.13 Regulatory Actions..........................................................40 5.14 Loan Portfolio..............................................................41 5.15 Financial Ability...........................................................41 5.16 Accuracy and Currentness of Information Furnished...........................41 ARTICLE VI COVENANTS OF FIDELITY AND THRIFT PENDING EFFECTIVE TIME OF THE MERGERS...................................41 6.1 Limitation on Fidelity's and Thrift's Conduct Prior to Effective Time.......41 6.2 Affirmative Conduct of Fidelity and Thrift Prior to Effective Time..........46 6.3 Filings.....................................................................48 6.4 Notices; Reports............................................................48 6.5 Fidelity Stockholders' Meeting..............................................48 6.6 Bank Merger.................................................................48 6.7 Affiliates..................................................................49 6.8 Director Resignations.......................................................49 6.9 Accountants' Letters........................................................49
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Page ---- C> 6.10 Accounting Accommodations.................................................49 ARTICLE VII COVENANTS OF HFC AND BANK PENDING EFFECTIVE TIME OF THE MERGERS...........................................49 7.1 Limitation on HFC's and Bank's Conduct Prior to Effective Time............49 7.2 Affirmative Conduct of HFC and Bank Prior to Effective Time...............51 7.3 Applications..............................................................50 7.4 Filings...................................................................51 7.5 Blue Sky..................................................................51 7.6 Notices; Reports..........................................................51 7.7 Removal of Conditions.....................................................51 7.8 HFC Stockholders' Meeting.................................................51 7.9 Nasdaq NMS Listing........................................................52 ARTICLE VIII ADDITIONAL COVENANTS..........................................52 8.1 Commercially Reasonable Efforts...........................................52 8.2 Public Announcements......................................................52 8.3 Access; Information.......................................................52 8.4 Applications..............................................................53 8.5 Employees and Employee Benefits...........................................53 8.6 Environmental Assessment..................................................54 8.7 Indemnification...........................................................55 ARTICLE IX CONDITIONS PRECEDENT TO THE HOLDING COMPANY MERGER................................................56 9.1 Stockholder Approvals.....................................................56 9.2 No Judgments or Orders....................................................56 9.3 Regulatory Approvals......................................................56 9.4 Securities Laws...........................................................56 9.5 Listing...................................................................56 ARTICLE X CONDITIONS PRECEDENT TO THE OBLIGATIONS OF FIDELITY AND THRIFT...........................................56 10.1 Representations and Warranties; Performance of Covenants..................56 10.2 Officers' Certificate.....................................................57
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Page ---- C> 10.3 Absence of Certain Changes................................................57 10.4 Tax Opinion...............................................................57 ARTICLE XI CONDITIONS PRECEDENT TO OBLIGATIONS OF HFC AND BANK...........57 11.1 Representations and Warranties; Performance of Covenants..................57 11.2 Regulatory Approvals and Related Conditions...............................58 11.3 Absence of Certain Changes................................................58 11.4 Officers' Certificate.....................................................58 11.5 Fidelity Senior Notes.....................................................58 11.6 Opinion of HFC's Counsel..................................................58 11.7 Third Party Consents......................................................58 11.8 Fidelity Options and Option Plan..........................................59 11.9 Financial Statements......................................................59 11.10 Earnings..................................................................59 11.11 Gross Loans...............................................................59 11.12 Loan Loss Reserve.........................................................59 ARTICLE XII TERMINATION...................................................60 12.1 Termination...............................................................60 12.2 Effect of Termination.....................................................63 12.3 Force Majeure.............................................................64 ARTICLE XIII MISCELLANEOUS.................................................64 13.1 Expenses and Fees.........................................................64 13.2 Notices...................................................................66 13.3 Material Adverse Effect; Standard.........................................67 13.4 Successors and Assigns....................................................68 13.5 Counterparts..............................................................68 13.6 Effect of Representations and Warranties..................................68 13.7 Third Parties.............................................................68 13.8 Lists; Exhibits; Integration..............................................68 13.9 Knowledge.................................................................68
v TABLE OF CONTENTS (CONTINUED)
Page ---- 13.10 Governing Law.............................................................69 13.11 Captions..................................................................69 13.12 Severability..............................................................69 13.13 Waiver and Modification; Amendment........................................69 13.14 Attorneys' Fees...........................................................69 13.15 Alternative Structure.....................................................69
vi AGREEMENT AND PLAN OF REORGANIZATION This AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made and entered into as of the ___ day of March 2002 by and among Hawthorne Financial Corporation, a Delaware corporation ("HFC"), First Fidelity Bancorp, Inc., a Delaware corporation ("Fidelity"), Hawthorne Savings, F.S.B., a federally chartered savings bank ("Bank") and direct wholly owned subsidiary of HFC, First Fidelity Investment & Loan Association, a California chartered industrial loan company ("Thrift") and wholly owned subsidiary of Fidelity, and HF Merger Corp., a Delaware corporation ("Merger Sub") and direct wholly owned subsidiary of HFC. RECITALS WHEREAS, the parties desire to effect the acquisition of Fidelity by HFC by means of a merger of Fidelity with and into HFC or alternatively by means of a merger of Merger Sub with and into Fidelity in accordance with the terms of this Agreement, and immediately thereafter, the acquisition of Thrift by Bank by means of a merger of Thrift with and into Bank in accordance with the terms of this Agreement and the Agreement of Bank Merger (as defined herein); WHEREAS, the parties intend that the Mergers (as defined herein) will be treated for federal income tax purposes as tax-deferred reorganizations within the meaning of Section 368 of the Code (as defined herein), except as otherwise specified herein; WHEREAS, the respective Boards of Directors of each of the parties have determined that it is in the best interests of their respective companies and stockholders to consummate the Holding Company Merger (as defined herein) and the Bank Merger (as defined herein) provided for herein; WHEREAS, the parties desire to make certain representations, warranties, covenants and agreements in connection with the transactions contemplated by this Agreement; and WHEREAS, as a material inducement to HFC and Bank to enter into this Agreement, each director of Fidelity and Thrift is simultaneously entering into a Stockholder Agreement, substantially in the form of Exhibit B hereto, pursuant to which they have agreed to vote their shares of voting stock of Fidelity in favor of approval of this Agreement; NOW, THEREFORE, on the basis of the foregoing recitals and in consideration of the mutual representations, warranties, covenants and agreements contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS Except as otherwise expressly provided for in this Agreement, or unless the context otherwise requires, as used throughout this Agreement the following terms shall have the respective meanings specified below: "Acquisition" shall have the meaning set forth in Section 13.1(j). "Adjusted Net Earnings of Fidelity" shall have the meaning set forth in Section 11.10. "Affiliate" of, or a Person "Affiliated" with, a specific Person is a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. "Affiliated Group" means, with respect to any entity, a group of entities required or permitted to file consolidated, combined, or unitary Tax Returns. "Agreement of Bank Merger" means the Agreement of Bank Merger to be entered into between Bank and Thrift substantially in the form of Exhibit A hereto, but subject to any changes that may be necessary to conform to the manner of effecting the Holding Company Merger or to any requirements of any Governmental Entity having authority over the Bank Merger. "Bank Merger" means the merger of Thrift with and into Bank. "Bank Stock" means the common stock, par value $10.00 per share, of Bank. "Business Day" means any day other than Saturday, Sunday or any other day which is not a day on which banking institutions in California are authorized or obligated by law or executive order to close. "Cash Proration Factor" has the meaning set forth in Section 2.6(c)(iii)(C). "Certificate" has the meaning set forth in Section 2.7(b). "Certificate of Merger" means that certificate filed with the Delaware Secretary pursuant to Section 252 of the Delaware General Corporation Law to effect the Holding Company Merger. "Closing" means the consummation of the Holding Company Merger followed by consummation of the Bank Merger on the Closing Date at the offices of Manatt, Phelps & Phillips, LLP, 11355 West Olympic Boulevard, Los Angeles, California, or at such other place as the parties may agree upon. 2 "Closing Date" means the fifth Business Day following the last of the following events to occur: (i) the approval of this Agreement and the transactions contemplated hereby by the stockholders of Fidelity and HFC, (ii) the receipt of all approvals, consents or non-objections specified in Section 9.3 hereof, (iii) the expiration of all applicable waiting periods under all laws, or such other date as the parties may agree upon and (iv) the completion of the allocation required under Section 2.6(c); provided, however, if such fifth Business Day occurs earlier than the fifteenth day of a month, then the Closing Date shall be the fifteenth day of the month, or, if not a Business Day, then the first Business Day thereafter, or such other date as the parties may agree upon. "Closing Financial Statements of Fidelity" shall have the meaning set forth in Section 11.9. "Code" means the Internal Revenue Code of 1986, as amended. "Combination Cash Election" has the meaning set forth in Section 2.6(a). "Combination Stock Election" has the meaning set forth in Section 2.6(a). "Competing Transaction" has the meaning set forth in Section 6.1(n). "Confidentiality Agreement" means the Confidentiality Agreement, dated June 22, 2002, between HFC and Fidelity. "Covered Person" has the meaning set forth in Section 4.28. "Delaware Secretary" means the Secretary of State of Delaware. "Deloitte & Touche" means Deloitte & Touche LLP, independent accountants for HFC and Fidelity. "Derivatives Contract" has the meaning set forth in Section 4.32. "DFI" means the Department of Financial Institutions of the State of California. "Dissenting Shares" means any shares of Fidelity Stock that are (a) issued and outstanding immediately prior to the Effective Time of the Holding Company Merger and (b) with respect to which the holder thereof perfects such holder's rights to dissent under Section 262 of the Delaware General Corporation Law. "Effective Time of the Bank Merger" means the date and time the OTS specifies for the Bank Merger pursuant to the OTS Regulations. "Effective Time of the Holding Company Merger" means the date and time specified in the Certificate of Merger as filed with the Delaware Secretary. "Election" has the meaning set forth in Section 2.6(a). "Election Deadline" has the meaning set forth in Section 2.6(b). 3 "Election Form" has the meaning set forth in Section 2.6(a). "Election Form Record Date" has the meaning set forth in Section 2.6(a). "Encumbrance" means any option, pledge, security interest, lien, charge, encumbrance or restriction (whether on voting or disposition or otherwise), whether imposed by agreement, law or otherwise. "Environmental Regulations" has the meaning set forth in Section 4.13(b). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Agent" means such entity selected by HFC to effect the exchange of Fidelity Stock for HFC Stock and/or cash. "Exchange Fund" has the meaning set forth in Section 2.7(a). "Exchange Ratio" means 1.5151, subject to adjustment pursuant to Sections 2.9 and/or 12.1(j). "Expenses" has the meaning set forth in Section 13.1(k). "FDIC" means the Federal Deposit Insurance Corporation. "FHLBSF" means the Federal Home Loan Bank of San Francisco. "Fidelity Award" means any award issued pursuant to the Fidelity Stock Option Plan. "Fidelity Conflicts and Consents List" has the meaning set forth in Section 4.7. "Fidelity Contract List" has the meaning set forth in Section 4.18. "Fidelity Derivatives List" has the meaning set forth in Section 4.32. "Fidelity Director Compensation List" has the meaning set forth in Section 6.1(g). "Fidelity Employee Plan List" has the meaning set forth in Section 4.22. "Fidelity Environmental Compliance List" has the meaning set forth in Section 4.13. "Fidelity Equity List" has the meaning set forth in Section 4.4. "Fidelity Filings" has the meaning set forth in Section 4.6. 4 "Fidelity Indemnification List" has the meaning set forth in Section 4.28. "Fidelity Insurance List" has the meaning set forth in Section 4.8. "Fidelity Intellectual Property List" has the meaning set forth in Section 4.39. "Fidelity Investment Securities List" has the meaning set forth in Section 4.31. "Fidelity List" means any list required to be furnished or other information otherwise required to be provided by Fidelity and/or Thrift to HFC and Bank under this Agreement. "Fidelity Litigation List" has the meaning set forth in Section 4.11. "Fidelity Material Adverse Effect List" has the meaning set forth in Section 4.19. "Fidelity Nonperforming Assets List" has the meaning set forth in Section 4.30(a). "Fidelity Offices List" has the meaning set forth in Section 4.29. "Fidelity Option" means any option issued pursuant to the Fidelity Stock Option Plan. "Fidelity Option List" has the meaning set forth in Section 4.3(a). "Fidelity Permitted Change in Recommendation" shall mean a change in the recommendation of the Board of Directors of Fidelity to the Fidelity stockholders in favor of the adoption and approval of the Agreement or the approval of Holding Company Merger in circumstances where (a) the Board of Directors of Fidelity determines in good faith that a Material Adverse Effect has occurred with respect to HFC and Bank and (b) the Board of Directors of Fidelity has determined in good faith that by reason of its determination in clause (a) the failure to effect such a change in such recommendation would create a substantial probability of violating the fiduciary duties of the Board of Directors of Fidelity. "Fidelity Personal Property List" has the meaning set forth in Section 4.9. "Fidelity Property" has the meaning set forth in Section 4.13(b). "Fidelity Real Property List" has the meaning set forth in Section 4.10. "Fidelity Senior Notes" means the 7% Convertible Senior Notes due 2003 and the 10% Convertible Senior Notes due 2003 of Fidelity. "Fidelity Senior Notes List" has the meaning set forth in Section 4.3(a). "Fidelity Series A Common Stock" means the Series A common stock, par value $0.01 per share, of Fidelity. 5 "Fidelity Series B Common Stock" means the Series B nonvoting common stock, par value $0.01 per share, of Fidelity. "Fidelity Stockholders' Meeting" means the meeting of Fidelity's stockholders referred to in Section 6.5 hereof. "Fidelity Stock" means the Fidelity Series A Common Stock and Fidelity Series B Common Stock. "Fidelity Stock Option Plan" means the Amended and Restated 2000 Stock Option Plan of Fidelity. "Fidelity Subsidiary" means PSP Direct, a California corporation. "Fidelity Subsidiary Reserve Amount" has the meaning set forth in Section 4.2. "Fidelity Tax List" has the meaning set forth in Section 4.12. "Fidelity Termination Fee" has the meaning set forth in Section 13.1(d) "Fidelity Undisclosed Liabilities List" has the meaning set forth in Section 4.21. "Final HFC Stock Price" means the average of the daily closing prices of a share of HFC Stock on the Nasdaq NMS as reported in The Wall Street Journal for the fifteen (15) consecutive trading days ending on the second trading day prior to the Closing Date. "Financial Statements of Fidelity" means the audited consolidated financial statements of Fidelity consisting of the consolidated balance sheets as of December 31, 1999, 2000 and 2001, the related consolidated statements of income, shareholders' equity and cash flow for the years then ended and related notes thereto and related opinions thereon for the years then ended. "Financial Statements of HFC" means the audited consolidated financial statements of HFC consisting of the consolidated balance sheets as of December 31, 1999, 2000 and 2001, the related consolidated statements of income, shareholders' equity and cash flows for the years then ended and related notes thereto and related opinions thereon for the years then ended. "Governmental Entity" means any court or tribunal in any jurisdiction or any United States federal, state, municipal, foreign or other administrative agency, authority or instrumentality. "Hazardous Materials" has the meaning set forth in Section 4.13(b). "HFC Filings" has the meaning set forth in Section 5.3. "HFC List" means any list required to be furnished or other information otherwise required to be provided by HFC to Fidelity and Thrift under this Agreement. 6 "HFC Litigation List" has the meaning set forth in Section 5.8. "HFC Nonperforming Assets List" has the meaning set forth in section 5.14(a). "HFC Permitted Change in Recommendation" shall mean a change in the recommendation of the Board of Directors of HFC to the HFC stockholders in favor of the adoption and approval of the Agreement or the approval of Holding Company Merger in circumstances where (a) the Board of Directors of HFC determines in good faith that a Material Adverse Effect has occurred with respect to Fidelity and Thrift and (b) the Board of Directors of HFC has determined in good faith that by reason of its determination in clause (a) the failure to effect such a change in such recommendation would create a substantial probability of violating the fiduciary duties of the Board of Directors of HFC "HFC Stock" means the common stock, par value $0.01 per share, of HFC. "HFC Stockholders' Meeting" means the meeting of the HFC stockholders referred to in Section 7.8. "HFC Termination Fee" has the meaning set forth in Section 13.1(f). "HFC Undisclosed Liabilities List" has the meaning set forth in Section 5.12. "HOLA" means the Home Owners' Loan Act of 1933, as amended. "Holding Company Merger" means the merger of Fidelity with and into HFC pursuant to this Agreement if Section 2.1 is applicable or the merger of Merger Sub with and into Fidelity pursuant to this Agreement if Section 2.2 is applicable. "Immediate Family" has the meaning set forth in Rule 16a-l(e) promulgated under the Exchange Act. "Indemnified Parties" has the meaning set forth in Section 8.7(a). "Investment Security" means any equity security or debt security as defined in Statement of Financial Accounting Standards No. 115. "IRS" means the Internal Revenue Service. "List" means any one of the Fidelity Lists or the HFC Lists, and "Lists" means both of such Lists. "Mailing Date" has the meaning set forth in Section 2.6(a). "Material Adverse Effect" has the meaning set forth in Section 13.3(a). "Mergers" means the Holding Company Merger and Bank Merger. "Nasdaq NMS" means the Nasdaq National Market. 7 "OREO" means other real estate owned. "OTS" means the Office of Thrift Supervision. "OTS Regulations" means the rules and regulations of the OTS under HOLA. "Person" means any natural person, corporation, trust, association, unincorporated body, partnership, limited liability company, joint venture, other entity or Governmental Entity. "Plans" has the meaning set forth in Section 4.22. "Price Per Share" means $36.6049. "Proxy Statement and Prospectus" means the joint proxy statement and prospectus that is included as part of the S-4 Registration Statement (as defined herein) and used to solicit proxies for the Fidelity Stockholders' Meeting and HFC Stockholders' Meeting, as necessary, and to offer and sell the shares of HFC Stock to be issued in connection with the Holding Company Merger. "Related Group of Persons" means Affiliates, members of an Immediate Family or Persons the obligations of whom would be attributed to another Person pursuant to the regulations promulgated by the SEC. "S-4 Registration Statement" means the Registration Statement on Form S-4 including the Proxy Statement and Prospectus to be mailed to stockholders of Fidelity and HFC, to vote upon the Holding Company Merger and to register the issuance of the shares of HFC Stock to be issued in the Holding Company Merger with the SEC. "Scheduled Contracts" has the meaning set forth in Section 4.18. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Stock Amount" means 1,266,555 shares of HFC Stock, subject to adjustment pursuant to Section 2.9. "Stock Election" has the meaning set forth in Section 2.6(a). "Stock Proration Factor" has the meaning set forth in Section 2.6(c). "Superior Proposal" has the meaning set forth in Section 6.1(n). "Surviving Bank" means the federally chartered savings association surviving the Bank Merger. "Tank" has the meaning set forth in Section 4.13(b). 8 "Taxes" means (i) all federal, state, local or foreign taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property, corporation and estimated taxes, custom duties, fees, assessments and charges of any kind whatsoever; (ii) all interest, penalties, fines, additions to tax or additional amounts imposed by any taxing authority in connection with any item described in clause (i); and (iii) any transferred liability in respect of any items described in clauses (i) and/or (ii). "Tax Return" means all returns, declarations, reports, estimates, information returns and statements required to be filed in respect of any Taxes. "Tax Sharing Agreement" means an agreement (whether or not in writing) pursuant to which tax losses of one entity are made available to another entity of the Affiliated Group or Affiliates for purpose of Taxes. "Thrift Stock" means the common stock, par value $100.00 per share, of Thrift. "Treasury Shares" means shares of Fidelity Stock held by (i) Fidelity or any of its subsidiaries or (ii) HFC or any of its subsidiaries, in each case other than in a fiduciary capacity or as a result of debts previously contracted in good faith. "Triggering Event" has the meaning set forth in Section 12.1. "Undesignated Shares" has the meaning set forth in Section 2.6(a). ARTICLE II THE MERGERS AND RELATED MATTERS 2.1 The Holding Company Merger -- HFC. If Section 2.13 is not applicable, the Holding Company Merger shall be effected in accordance with this Section 2.1. The Holding Company Merger shall become effective upon the date specified in the Certificate of Merger as filed with the Delaware Secretary in accordance with the provisions of the Delaware General Corporation Law. At the Effective Time of the Holding Company Merger, the following transactions will be deemed to have occurred simultaneously without any additional action on the part of the holders of shares of stock of Fidelity and HFC: (a) Fidelity shall be merged with and into HFC and the separate corporate existence of Fidelity shall cease. The Holding Company Merger shall have the effects set forth in Section 259 of the Delaware General Corporation Law. (b) Each share of HFC Stock issued and outstanding immediately prior to the Effective Time of the Holding Company Merger shall remain an issued and outstanding share of common stock of the surviving institution, and shall not be affected by the Holding Company Merger. 9 (c) Each share of Fidelity Stock issued and outstanding immediately prior to the Effective Time of the Holding Company Merger (other than Dissenting Shares and Treasury Shares) shall be converted into the right to receive HFC Stock and/or cash as provided in Section 2.3(a). (d) Any Treasury Shares outstanding shall be canceled and retired at the Effective Time of the Holding Company Merger and no consideration shall be issued in exchange therefor. 2.2 The Holding Company Merger -- Merger Sub. If Section 2.13 is applicable, the Holding Company Merger shall be effected in accordance with this Section 2.2. The Holding Company Merger shall become effective upon the date specified in the Certificate of Merger as filed with the Delaware Secretary in accordance with the provisions of the Delaware General Corporation Law. At the Effective Time of the Holding Company Merger, the following transactions will be deemed to have occurred simultaneously without any additional action on the part of the holders of shares of stock of Fidelity or Merger Sub. (a) Merger Sub shall be merged with and into Fidelity and the separate corporate existence of Merger Sub shall cease. The Holding Company Merger shall have the effects set forth in Section 259 of the Delaware General Corporation Law. (b) Each share of stock of Merger Sub issued and outstanding immediately prior to the Effective Time of the Holding Company Merger shall become and be converted into one share of Fidelity Series A Common Stock as of the Effective Time of the Holding Company Merger. (c) Each share of Fidelity Stock issued and outstanding immediately prior to the Effective Time of the Holding Company Merger shall be converted into the right to receive HFC Stock and/or cash as provided in Section 2.3(a). (d) Any Treasury Shares outstanding shall be cancelled and retired at the Effective Time of the Holding Company Merger and no consideration shall be issued in exchange therefor. 2.3 Conversion of Fidelity Stock. (a) Subject to the other provisions of this Article II, each share of Fidelity Stock issued and outstanding immediately prior to the Effective Time of the Holding Company Merger (other than Dissenting Shares and Treasury Shares) shall, by virtue of the Holding Company Merger, be converted into the right to receive, at the election of the holder thereof as provided in Section 2.6, any of the following: (i) HFC Stock equal to the Exchange Ratio; (ii) cash in the amount of the Price Per Share; or (iii) a combination of HFC Stock and cash in the amounts as set forth in subsections 2.3(a)(i) and (a)(ii) above. 10 (b) At the Effective Time of the Holding Company Merger, the stock transfer books of Fidelity shall be closed as to holders of Fidelity Stock immediately prior to the Effective Time of the Holding Company Merger and no transfer of Fidelity Stock by any such holder shall thereafter be made or recognized. If, after the Effective Time of the Holding Company Merger, certificates are properly presented in accordance with Section 2.7 of this Agreement to the Exchange Agent, such certificates shall be canceled and exchanged for certificates representing the number of whole shares of HFC Stock, if any, and/or a check representing the amount of cash, if any, into which the Fidelity Stock represented thereby was converted in the Holding Company Merger, plus any payment for a fractional share of HFC Stock. 2.4 Fractional Shares. Notwithstanding any other provisions of this Agreement, no fractional shares of HFC Stock shall be issued in the Holding Company Merger. In lieu thereof, each holder of Fidelity Stock who would otherwise be entitled to receive a fractional share of HFC Stock (after taking into account all Certificates delivered by such holder) shall receive an amount in cash (without interest), rounded to the nearest cent, equal to the product obtained by multiplying (a) the Final HFC Stock Price by (b) the fraction (calculated to the nearest ten-thousandth) of the share of HFC Stock to which such holder would otherwise be entitled. No such holder shall be entitled to dividends or other rights in respect of any such fractional shares. 2.5 Treatment of Fidelity Options. Unless exercised prior to the Effective Time of the Holding Company Merger, each Fidelity Option which is outstanding and unexercised immediately prior to the Effective Time of the Holding Company Merger, whether or not then vested and exercisable, shall be terminated immediately prior to the Effective Time of the Holding Company Merger and each grantee thereof shall be entitled to receive, in lieu of each share of Fidelity Stock that would otherwise have been issuable upon exercise thereof, an amount in cash computed by multiplying (a) the excess, if any, between (i) the Price Per Share and (ii) the exercise price of such Fidelity Option by (b) the number of shares of Fidelity Stock subject to the Fidelity Option. Fidelity agrees to take or cause to be taken all action necessary to enter into a written agreement with each holder of a Fidelity Option to provide for such termination and payment effective at or before the Effective Time of the Holding Company Merger. Any payments pursuant to this Section 2.5 shall take place only after the satisfaction or fulfillment or waiver of the conditions to Closing contained in Articles IX, X and XI of this Agreement. 2.6 Election and Proration Procedures. (a) An election form and other appropriate and customary transmittal materials (which shall specify that delivery shall be effected, and risk of loss and title to the certificates theretofore representing shares of Fidelity Stock shall pass, only upon proper delivery of such certificates to the Exchange Agent in such form as HFC and Fidelity shall mutually agree) ("Election Form") shall be mailed by or on behalf of HFC no less than thirty-five (35) days prior to the anticipated Effective Time of the Holding Company Merger, as jointly determined by HFC and Fidelity, or on such other date as HFC and Fidelity shall mutually agree ("Mailing Date") to each holder of record of Fidelity Stock and holder of record of the Fidelity Senior Notes who has submitted to Fidelity and the Exchange Agent a written irrevocable election to convert in full the Fidelity Senior Note held by such person into shares of Fidelity 11 Stock prior to the Effective Time of the Holding Company Merger as of five Business Days prior to the Mailing Date ("Election Form Record Date"). HFC shall make available one or more Election Forms as may be reasonably requested by all persons who become holders (or beneficial owners) (the term "beneficial owner" and "beneficial ownership" for purposes of this Agreement shall have the meaning set forth in Section 13(d) of the Exchange Act) of Fidelity Stock after the Election Form Record Date and prior to the Election Deadline, and Fidelity shall provide to the Exchange Agent all information reasonably necessary for it to perform its obligations as specified herein. Each Election Form shall permit the holder (or the beneficial owner through appropriate and customary documentation and instructions) to elect (an "Election") to receive (i) HFC Stock (a "Stock Election") with respect to all of such holder's Fidelity Stock, or (ii) cash (a "Cash Election") with respect to all of such holder's Fidelity Stock, or (iii) HFC Stock for a specified number of shares of Fidelity Stock (a "Combination Stock Election") and cash for the remaining number of shares of Fidelity Stock held by such holder (a "Combination Cash Election"). Any Fidelity Stock and Fidelity Stock into which the Fidelity Notes will be converted, other than Dissenting Shares and Treasury Shares, with respect to which the Exchange Agent has not received an effective, properly completed Election Form prior to the Election Deadline shall be deemed to be "Undesignated Shares" hereunder. (b) Any Election shall have been properly made and effective only if the Exchange Agent shall have actually received a properly completed Election Form which has not been revoked by 5:00 p.m., Pacific Time, by the 30th day following the Mailing Date (or such other time and date as HFC and Fidelity may mutually agree) (the "Election Deadline"). An Election Form shall be deemed properly completed only if an Election is indicated for each share of Fidelity Stock covered by such Election Form and if accompanied by one or more certificates (or customary affidavits and indemnification regarding the loss or destruction of such certificates or the guaranteed delivery of such certificates) representing all shares of Fidelity Stock covered by such Election Form, together with duly executed transmittal materials included in or required by the Election Form. Any Election Form may be revoked by the person submitting such Election Form at or prior to the Election Deadline, provided that the Exchange Agent shall have actually received prior to the Election Deadline a written notice revoking such Election Form and specifying the shares of Fidelity Stock covered by such revoked Election Form. In the event an Election Form is revoked prior to the Election Deadline, the shares of Fidelity Stock representing such Election Form shall automatically become Undesignated Shares unless and until a new Election is properly made with respect to such shares on or before the Election Deadline, and Fidelity shall cause the certificates representing such shares of Fidelity Stock to be promptly returned without charge to the person submitting the revoked Election Form upon written request to that effect from the holder who submitted such Election Form. Subject to the terms of this Agreement and of the Election Form, the Exchange Agent shall have reasonable discretion to determine whether any Election or revocation has been properly or timely made and to disregard immaterial defects in the Election Forms, and any decisions of Fidelity and HFC required by the Exchange Agent and made in good faith in determining such matters shall be binding and conclusive. Neither HFC nor the Exchange Agent shall be under any obligation to notify any person of any defect in an Election Form. (c) As promptly as practicable but not later than five Business Days prior to the Effective Time of the Holding Company Merger, HFC shall cause the Exchange Agent to 12 effect the allocation among the holders of Fidelity Stock of rights to receive HFC Stock or cash in the Holding Company Merger in accordance with the Election Forms as follows: (i) if the aggregate number of shares of Fidelity Stock as to which Stock Elections and Combination Stock Elections shall have effectively been made times the Exchange Ratio is approximately equal to the Stock Amount, then: (A) Each holder of Fidelity Stock who made an effective Stock Election or Combination Stock Election shall receive the number of shares of HFC Stock which is equal to the product of the Exchange Ratio multiplied by the number of shares of Fidelity Stock covered by such Stock Election or Combination Stock Election; and (B) Each holder of Fidelity Stock who made an effective Cash Election or Combination Cash Election, and each holder of Undesignated Shares shall receive the Price Per Share in cash for each such share of Fidelity Stock or Undesignated Share. (ii) if the aggregate number of shares of Fidelity Stock as to which Stock Elections and Combination Stock Elections shall have effectively been made times the Exchange Ratio exceeds, and is not approximately equal to, the Stock Amount, then: (A) Each holder of Fidelity Stock who made an effective Cash Election or Combination Cash Election shall receive the Price Per Share in cash for each such share of Fidelity Stock; (B) Each holder of Undesignated Shares shall be deemed to have made Cash Elections and shall receive the Price Per Share in cash for each such Undesignated Share; and (C) A stock proration factor (the "Stock Proration Factor") shall be determined by dividing (1) the Stock Amount by (2) the product of the Exchange Ratio and the number of shares of Fidelity Stock with respect to which effective Stock Elections and Combination Stock Elections were made. Each holder of Fidelity Stock who made an effective Stock Election or Combination Stock Election shall be entitled to: (I) the number of shares of HFC Stock equal to the product of (x) the Exchange Ratio, multiplied by (y) the number of shares of Fidelity Stock covered by such Stock Election or Combination Stock Election, multiplied by (z) the Stock Proration Factor, and (II) cash in an amount equal to the product of (x) the Price Per Share, multiplied by (y) the number of shares of Fidelity Stock covered by such Stock Election or Combination Stock Election, multiplied by (z) one minus the Stock Proration Factor. (iii) if the aggregate number of shares of Fidelity Stock as to which Stock Elections and Combination Stock Elections shall have effectively been made times the Exchange Ratio is less than, and is not approximately equal to, the Stock Amount, then: 13 (A) Each holder of Fidelity Stock who made an effective Stock Election or Combination Stock Election shall receive the number of shares of HFC Stock equal to the product of the Exchange Ratio multiplied by the number of shares of Fidelity Stock covered by such Stock Election or Combination Stock Election; (B) The Exchange Agent shall select by random such number of holders of Undesignated Shares (other than holders of Undesignated Shares who delivered a written demand for appraisal to Fidelity before the Fidelity Stockholders' Meeting and who did not vote in favor of the Holding Company Merger as required by Section 262 of the Delaware General Corporation Law prior to the meeting of shareholders to be held pursuant to Section 6.5) to receive HFC Stock as shall be necessary so that the shares of HFC Stock to be received by those holders, when combined with the number of shares for which a Stock Election or Combination Stock Election has been made, multiplied by the Exchange Ratio shall be approximately equal to the Stock Amount. If all of said Undesignated Shares plus all shares as to which Stock Elections and Combination Stock Elections have been made together multiplied by the Exchange Ratio are less than, and not approximately equal to, the Stock Amount, then: (C) A cash proration factor (the "Cash Proration Factor") shall be determined by dividing (1) the amount which is the difference between (x) the number obtained by dividing the Stock Amount by the Exchange Ratio and (y) the sum of the number of shares of Fidelity Stock with respect to which effective Stock Elections and Combination Stock Elections were made and the number of Undesignated Shares selected pursuant to subparagraph (iii)(B) above by (2) the number of shares of Fidelity Stock with respect to which effective Cash Elections and Combination Cash Elections were made. Each holder of Fidelity Stock who made an effective Cash Election or Combination Cash Election shall be entitled to: (I) cash equal to the product of (x) the Price Per Share, multiplied by (y) the number of shares of Fidelity Stock covered by such Cash Election or Combination Cash Election, multiplied by (z) one minus the Cash Proration Factor, and (II) the number of shares of HFC Stock equal to the product of (x) the Exchange Ratio, multiplied by (y) the number of shares of Fidelity Stock covered by such Cash Election or Combination Cash Election, multiplied by (z) the Cash Proration Factor. (iv) The prorata allocation process or the random selection process to be used by the Exchange Agent shall consist of such procedures as HFC and Fidelity shall mutually determine. (d) For purposes of this Section 2.6, the shares of which HFC Stock is to be issued as consideration in the Merger shall be deemed to be "approximately equal" to the Stock Amount if such number is within 10,000 shares of HFC Stock of such amount. 2.7 Exchange Procedures. (a) At the Effective Time of the Holding Company Merger, HFC shall deposit with the Exchange Agent for the benefit of the holders of shares of Fidelity Stock, for exchange in accordance with this Section 2.7, certificates representing the shares of HFC Stock and cash 14 issuable pursuant to Section 2.3 in exchange for shares of Fidelity Stock outstanding immediately prior to the Effective Time of the Holding Company Merger and funds in an amount not less than the amount of cash payable in lieu of fractional shares of HFC Stock which would otherwise be issuable in connection with Section 2.3, but for the operation of Section 2.4 of this Agreement (collectively, the "Exchange Fund"). (b) After the Effective Time of the Holding Company Merger, each holder of a certificate ("Certificate") formerly representing Fidelity Stock (other than Dissenting Shares and Treasury Shares) who surrenders or has surrendered such Certificate (or customary affidavits and indemnification regarding the loss or destruction of such Certificate), together with duly executed transmittal materials included in or required by the Election Form, to the Exchange Agent, shall, upon acceptance thereof, be entitled to (i) a certificate representing HFC Stock and/or (ii) cash into which the shares of Fidelity Stock shall have been converted pursuant to Section 2.3 and Section 2.6, as well as cash in lieu of fractional shares of Fidelity Stock to which such holder would otherwise be entitled, if applicable. The Exchange Agent shall accept such Certificate upon compliance with such reasonable and customary terms and conditions as the Exchange Agent may impose to effect an orderly exchange thereof in accordance with normal practices. Until surrendered as contemplated by this Section 2.7, each Certificate representing Fidelity Stock shall be deemed from and after the Effective Time of the Holding Company Merger to evidence only the right to receive the consideration to which it is entitled hereunder upon such surrender. HFC shall not be obligated to deliver the consideration to which any former holder of Fidelity Stock is entitled as a result of the Holding Company Merger until such holder surrenders his Certificate or Certificates for exchange as provided in this Section 2.7. If any certificate for shares of HFC Stock, or any check representing cash and/or declared but unpaid dividends, is to be issued in a name other than that in which a Certificate surrendered for exchange is issued, the Certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and the person requesting such exchange shall affix any requisite stock transfer tax stamps to the Certificate surrendered or provide funds for their purchase or establish to the satisfaction of the Exchange Agent that such taxes are not payable. (c) No dividends or other distributions declared or made after the Effective Time of the Holding Company Merger with respect to HFC Stock with a record date after the Effective Time of the Holding Company Merger shall be paid to the holder of any unsurrendered Certificate with respect to the shares of HFC Stock represented thereby, and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.4, until the holder of record of such Certificate shall surrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of HFC Stock issued in exchange thereof, without interest, (i) at the time of such surrender, the amount of any cash payable in lieu of a fractional share of HFC Stock to which such holder is entitled pursuant to Section 2.4 and the amount of dividends or other distributions with a record date after the Effective Time of the Holding Company Merger theretofore paid with respect to such whole shares of HFC Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date after the Effective Time of the Holding Company Merger but prior to surrender and a payment date subsequent to surrender payable with respect to such whole shares of HFC Stock. 15 (d) All cash and shares of HFC Stock issued upon the surrender for exchange of shares of Fidelity Stock in accordance with the terms hereof (including any cash paid pursuant to Section 2.4) shall be deemed to have been issued in full satisfaction of all rights pertaining to such shares of Fidelity Stock, and there shall be no further registration of transfers on the stock transfer books of HFC, after the Holding Company Merger, of the shares of Fidelity Stock which were outstanding immediately prior to the Effective Time of the Holding Company Merger. If, after the Effective Time of the Holding Company Merger, Certificates are presented to HFC for any reason, they shall be canceled and exchanged as provided in this Agreement. (e) Any portion of the Exchange Fund, including any interest thereon, which remains undistributed to the stockholders of Fidelity following the passage of nine (9) months after the Effective Time of the Holding Company Merger shall be delivered to HFC, upon demand, and any stockholders of Fidelity who have not theretofore complied with this Section 2.7 shall thereafter look only to HFC for payment of their claim for cash and HFC Stock, any cash in lieu of fractional shares of HFC Stock and any dividends or distributions with respect to HFC Stock. (f) Neither Fidelity nor HFC shall be liable to any holder of shares of Fidelity Stock or HFC Stock, as the case may be, for such shares (or dividends or distributions with respect thereto) or cash from the Exchange Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to the shares of HFC Stock held by it from time to time hereunder, except that it shall receive and hold all dividends or other distributions paid or distributed with respect to such shares of HFC Stock for the account of the Persons entitled thereto. (h) Certificates surrendered for exchange by any Person constituting an "Affiliate" of Fidelity for purposes of Rule 144(a) under the Securities Act shall not be exchanged for certificates representing whole shares of HFC Stock until HFC has received a written agreement from such person as provided in Section 6.7. 2.8 Dissenting Shares. Notwithstanding anything to the contrary contained in this Agreement, any holder of Fidelity Stock who shall be entitled to be paid the "fair value" of such holder's Dissenting Shares of Fidelity Stock, as provided in Section 262 of the Delaware General Corporation Law, shall not be entitled to the consideration to which such holder would otherwise have been entitled pursuant to Section 2.2, unless and until such holder shall have failed to perfect or withdrawn or lost such holder's rights under Section 262 of the Delaware General Corporation Law, and shall be entitled to receive only such payment provided for by Section 262 of the Delaware General Corporation Law. 2.9 Adjustments for Dilution and Other Matters. If prior to the Effective Time of the Holding Company Merger, (a) HFC shall declare a stock dividend or distribution on HFC Stock with a record date prior to the Effective Time of the Holding Company Merger, or subdivide, split up, reclassify or combine HFC Stock, or declare a dividend, or make a distribution, on the HFC Stock in any security convertible into HFC Stock, in each case with a record date prior to the Effective Time of the Holding Company Merger, or (b) the outstanding shares of HFC Stock 16 shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities, in each case as a result of a reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar change in HFC's capitalization, then a proportionate adjustment or adjustments will be made to the Exchange Ratio, the Stock Amount, the Starting Price, and the Average Closing Price, which adjustment or adjustments may include, as appropriate, the issuance of securities, property or cash on the same basis as that on which any of the foregoing shall have been issued, distributed or paid to holders of HFC Stock generally. 2.10 Name of Corporation Surviving the Holding Company Merger. (a) If the Holding Company Merger is effected in accordance with Section 2.1, the name of the corporation surviving the Holding Company Merger shall be "Hawthorne Financial Corporation." (b) If the Holding Company Merger is effected in accordance with Section 2.2, the name of the corporation surviving the Holding Company Merger shall be "First Fidelity Bancorp, Inc." 2.11 Certificate of Incorporation and Bylaws of Corporation Surviving the Holding Company Merger. (a) If the Holding Company Merger is effected in accordance with Section 2.1, the certificate of incorporation and bylaws of HFC, as in effect immediately prior to the Effective Time of the Holding Company Merger, shall be the certificate of incorporation and bylaws of HFC after the Holding Company Merger. (b) If the Holding Company Merger is effected in accordance with Section 2.2, the certificate of incorporation and bylaws of Fidelity, as in effect immediately prior to the Effective Time of the Holding Company Merger, shall be the certificate of incorporation and bylaws of Fidelity after the Holding Company Merger. 2.12 Directors and Officers of Corporation Surviving the Holding Company Merger. (a) If the Holding Company Merger is effected in accordance with Section 2.1, the directors and officers of the corporation surviving the Holding Company Merger shall be as provided in this paragraph (a). At the Effective Time of the Holding Company Merger, the then directors of HFC shall be the directors of HFC, until their successors have been duly elected or appointed and qualified. The officers of HFC immediately prior to the Effective Time of the Holding Company Merger shall be the officers of HFC, until their respective successors are duly appointed. (b) If the Holding Company Merger is effected in accordance with Section 2.2, the directors and officers of the corporation surviving the Holding Company Merger shall be as provided in this paragraph (b). At the Effective Time of the Holding Company Merger, the then directors of the Merger Sub shall be the directors of Fidelity, until their successors have been duly elected or appointed and qualified. The officers of Merger Sub 17 immediately prior to the Effective Time of the Holding Company Merger shall be the officers of Fidelity, until their respective successors are duly appointed. 2.13 Determination of Structure of Holding Company Merger. If on the second day immediately preceding the Effective Time of the Holding Company Merger the opinions contemplated by Sections 10.4 or 11.6(a) cannot be given then (a) the Holding Company Merger shall be effected as set forth in Section 2.2, (b) the conditions set forth in Sections 10.4 and 11.6(a) shall be deemed waived with respect to the Holding Company Merger and (c) the Certificate of Merger shall reflect the foregoing. ARTICLE III THE CLOSING 3.1 Closing Date. The Closing shall take place on the Closing Date. 3.2 Execution of Merger Documents. Prior to the Closing, the Certificate of Merger shall be executed by HFC, if Section 2.1 is applicable, or by Fidelity, if Section 2.2 is applicable, and the Agreement of Bank Merger shall be executed by Bank and Thrift. On or before the Closing Date, the Certificate of Merger shall be duly filed with the Delaware Secretary as required by applicable laws and regulations to render the Holding Company Merger effective as of the Closing Date. 3.3 Documents to be Delivered. At the Closing, the parties hereto shall deliver, or cause to be delivered, such documents or certificates as may be necessary, in the reasonable opinion of counsel for any of the parties, to effect the transactions contemplated by this Agreement. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF FIDELITY AND THRIFT Fidelity and Thrift, jointly and severally, represent and warrant to HFC and Bank as follows; provided that to the extent any representation or warranty relates to Fidelity, Thrift does not make any representations or warranties to such extent: 4.1 Incorporation, Standing and Power. Fidelity is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Thrift is a California chartered industrial loan company duly organized, validly existing and in good standing under the laws of California and is authorized by the DFI to conduct an industrial loan business. The certificate of incorporation and bylaws of Fidelity, and the articles of incorporation and bylaws of Thrift, all as amended to date, are in full force and effect. Thrift's deposits are insured by the FDIC in the manner and to the fullest extent provided by law. Fidelity and Thrift have all requisite corporate power and authority to own, lease and operate their respective properties and assets and to carry on their respective businesses as presently 18 conducted and Fidelity and Thrift have the corporate power and authority to execute and deliver this Agreement and the Agreement of Bank Merger, as the case may be, and to perform their respective obligations hereunder and thereunder, as the case may be, and to consummate the transactions contemplated hereby and thereby, as the case may be. Neither the scope of the business of Fidelity or Thrift nor the location of any of their respective properties requires that Fidelity or Thrift be licensed to do business in any jurisdiction other than the State of California where the failure to be so licensed would, individually or in the aggregate, have a Material Adverse Effect. 4.2 Liquidation of and Reservation for the Fidelity Subsidiary. As of February 8, 2002, the Fidelity Subsidiary was liquidated and dissolved under the laws of California. Fidelity has recorded a reserve in the amount of $289,000 for purposes of winding up the Fidelity Subsidiary (the "Fidelity Subsidiary Reserve Amount") and the Fidelity Subsidiary Reserve Amount is adequate to cover all liabilities and obligations, either accrued or contingent, of the Fidelity Subsidiary. 4.3 Capitalization. (a) As of the date of this Agreement, the authorized capital stock of Fidelity consists of 2,000,000 shares of Fidelity Series A Common Stock, of which 425,000 shares are outstanding; 2,000,000 shares of Fidelity Series B Common Stock, of which 985,935 shares are outstanding; and 2,000,000 shares of serial preferred stock, of which no shares are outstanding. All of the outstanding shares of Fidelity Stock have been duly authorized and validly issued and are fully paid and nonassessable, and subject to no preemptive rights (and were not issued in violation of any preemptive rights). As of the date of this Agreement, except for Fidelity Options covering 88,000 shares of Fidelity Stock granted pursuant to the Fidelity Stock Option Plan and the Fidelity Senior Notes convertible into 404,180 shares of Fidelity Stock, there are no outstanding options, warrants or other rights in or with respect to the unissued shares of Fidelity Stock nor any securities convertible into such stock, and Fidelity is not obligated to issue any additional shares of its common stock or any additional options, warrants or other rights in or with respect to the unissued shares of such stock or any other securities convertible into such stock. Fidelity has furnished HFC a list (the "Fidelity Option List") setting forth the name of each holder of a Fidelity Option or Fidelity Award, the number of shares of Fidelity Stock covered by each such Fidelity Option or Fidelity Award, the vesting schedule of such Fidelity Option or Fidelity Award, and the exercise price per share and the expiration date of each such Fidelity Option or Fidelity Award, as applicable. Fidelity has furnished HFC a list (the "Fidelity Senior Notes List") setting forth the name of each holder of Fidelity Senior Notes, the principal amount outstanding on the Fidelity Senior Notes of each holder, the conversion price per share and the number of shares of Fidelity Stock issuable upon conversion of such Fidelity Senior Notes, and the expiration of each Fidelity Senior Note. (b) As of the date of this Agreement, the authorized capital stock of Thrift consists of 200,000 shares of Thrift Stock, of which 20,000 shares are outstanding and owned of record and beneficially by Fidelity free and clear of any Encumbrance. The outstanding shares of Thrift Stock have been duly authorized and validly issued and are fully paid and nonassessable, and subject to no preemptive rights (and were not issued in violation of any preemptive rights). There are no contracts, commitments, understandings or arrangements 19 relating to Fidelity's rights to vote or to dispose of such securities. There are no outstanding options, warrants or other rights in or with respect to the unissued shares of Thrift Stock or any other securities convertible into such stock, and Thrift is not obligated to issue any additional shares of its common stock or any options, warrants or other rights in or with respect to the unissued shares of its common stock or any other securities convertible into such stock. 4.4 Subsidiaries. Except for Thrift and as set forth on a list furnished by Fidelity and Thrift to HFC (the "Fidelity Equity List"), (i) Fidelity does not own, directly or indirectly, the outstanding stock or equity or other voting interest in any corporation, partnership, joint venture or other entity and (ii) Thrift does not own, directly or indirectly, the outstanding stock or equity or other voting interest in any corporation, partnership, joint venture or other entity. 4.5 Financial Statements. Fidelity has previously furnished to HFC a copy of the Financial Statements of Fidelity. The Financial Statements of Fidelity present fairly the consolidated financial condition of Fidelity as of the respective dates indicated and its consolidated results of operations and changes in cash flows, for the respective periods then ended and have been prepared in accordance with generally accepted accounting principles and/or applicable regulatory accounting principles or banking regulations consistently applied, except as stated therein. 4.6 Reports and Filings. Fidelity, Thrift and the Fidelity Subsidiary have filed all reports, returns, registrations and statements (such reports and filings referred to as "Fidelity Filings"), together with any amendments required to be made with respect thereto, that were required to be filed with (a) the DFI, (b) the FDIC and (c) any other applicable Governmental Entity, including taxing authorities, except where the failure to file such reports, returns, registrations or statements has not had and is not reasonably expected to have a Material Adverse Effect. No material adverse administrative actions have been taken or orders issued in connection with such Fidelity Filings. As of their respective dates, each of such Fidelity Filings complied in all material respects with all applicable laws and regulations (or was amended so as to be in compliance promptly following discovery of any such noncompliance). Any financial statements contained in any of such Fidelity Filings fairly presented, as of their respective dates or for their respective periods, the financial position, results of operations and changes in cash flows, as the case may be, of Fidelity, Thrift or the Fidelity Subsidiary and were prepared in accordance with generally accepted accounting principles and/or applicable regulatory accounting principles or banking regulations consistently applied, except as stated therein, during the periods involved. Fidelity has furnished to HFC true and correct copies of all Fidelity Filings filed by Fidelity, Thrift or the Fidelity Subsidiary with the DFI, FDIC and any other Governmental Entity since January 1, 1999. 4.7 Authority of Fidelity and Thrift. The execution and delivery by Fidelity and Thrift of this Agreement and by Thrift of the Agreement of Bank Merger and, subject to the requisite approval of the stockholders of Fidelity, the consummation of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action on the part of Fidelity and Thrift and by Fidelity in its capacity as the sole stockholder of Thrift, and this Agreement is and the Agreement of Bank Merger will be, upon due execution and delivery by the respective parties thereto, a valid and binding obligation of Fidelity or Thrift or both of them, as the case may be, enforceable in accordance with their 20 respective terms, except as the enforceability thereof may be limited by bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles and by Section 8(b)(6)(D) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b)(6)(D). Except as set forth in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Conflicts and Consents List"), neither the execution and delivery by Fidelity and Thrift of this Agreement or by Thrift of the Agreement of Bank Merger, the consummation of the Holding Company Merger or Bank Merger or the transactions contemplated herein or therein, nor compliance by Fidelity and Thrift with any of the provisions hereof or thereof, will: (a) conflict with or result in a breach of any provision of the Certificate of Incorporation or Bylaws of Fidelity or the Articles of Incorporation or Bylaws of Thrift; (b) constitute a breach of or result in a default (or give rise to any rights of termination, cancellation or acceleration, or any right to acquire any securities or assets) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, franchise, license, permit, agreement or other instrument or obligation to which Fidelity or Thrift is a party, or by which Fidelity or Thrift or any of their respective properties or assets is bound, except as would not, individually or in the aggregate, have a Material Adverse Effect; (c) result in the creation or imposition of any Encumbrance on any of the properties or assets of Fidelity or Thrift, except for Encumbrances that do not materially detract from the value, or interfere with the present use, of the property subject thereto or affected thereby; (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to Fidelity or Thrift or any of their respective properties or assets. Except as set forth in the Fidelity Conflicts and Consents List, no consent of, approval of, notice to or filing with any Governmental Entity, and no consent of, approval of or notice to any other Person, is required in connection with the execution and delivery by Fidelity and Thrift of this Agreement or by Thrift of the Agreement of Bank Merger, the consummation by Fidelity and Thrift of the Holding Company Merger or Bank Merger or the transactions contemplated hereby or thereby, except (i) the approval of this Agreement by the stockholders of Fidelity and the approval of the Agreement of Bank Merger and the Bank Merger by Fidelity in its capacity as the sole stockholder of Thrift; (ii) such approvals or nonobjections as may be required by the DFI, OTS and the FDIC; (iii) the filing and declaration of effectiveness of the S-4 Registration Statement with the SEC; (iv) the filing of the Certificate of Merger with the Delaware Secretary pursuant to the Delaware General Corporation Law; (v) such filings with California authorities and the OTS as may be required to effect the Bank Merger; and (vi) any required approval of the Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. 4.8 Insurance. Except as set forth in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Insurance List"): (a) Fidelity and Thrift have and have had since July 1, 1999, and the Fidelity Subsidiary had since July 1, 1999, policies of insurance and bonds with respect to their respective assets and businesses against such casualties and contingencies and in such amounts, types and forms as are customary for their respective businesses, operations, properties and assets; (b) no insurer under any policy or bond maintained by Fidelity, Thrift or the Fidelity Subsidiary has canceled or indicated an intention to cancel or not to renew any such policy or bond or generally disclaimed liability thereunder and all such policies and bonds are in full force and effect; and (c) neither Fidelity nor Thrift is in default under any such policy or bond and all material claims thereunder have been filed in a timely fashion. Set forth in the Fidelity Insurance List is a list of all policies of insurance carried and owned by Fidelity and Thrift showing, as of December 31, 2001, the name of the insurance company, the nature of the coverage, the policy 21 limit, the annual premiums and the expiration dates. There has been delivered to HFC a copy of each such policy of insurance. 4.9 Title to Assets. Fidelity and Thrift have good and marketable title to all their respective material, non-real estate, properties and assets, owned or stated to be owned by Fidelity or Thrift, free and clear of all Encumbrances except: (a) as set forth in the Financial Statements of Fidelity; (b) for Encumbrances for current Taxes not yet due; (c) for Encumbrances incurred in the ordinary course of business; (d) for Encumbrances that are not substantial in character, amount or extent and that do not materially detract from the value, or interfere with present use, of the property subject thereto or affected thereby, or otherwise materially impair the conduct of business of Fidelity on a consolidated basis; or (e) as set forth in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Personal Property List"). 4.10 Real Estate. Fidelity and Thrift have furnished HFC a list (the "Fidelity Real Property List") of real property, including leaseholds and all other interests in real property (other than security interests), owned by Fidelity or Thrift. Fidelity has duly recorded or caused to be recorded, in the appropriate county, all recordable interests in such real property. Fidelity or Thrift have good and marketable title to the real property, and valid leasehold interests in the leaseholds, described in the Fidelity Real Property List, free and clear of all Encumbrances, except: (a) for rights of lessors, co-lessees or sublessees in such matters that are reflected in the lease; (b) for Taxes not yet due; (c) for such Encumbrances, if any, as do not materially detract from the value of or materially interfere with the present use of such property; and (d) as described in the Fidelity Real Property List. Fidelity has furnished HFC with true and correct copies of all leases included in the Fidelity Real Property List, all title insurance policies and all documents evidencing Fidelity's or Thrift's interest in real property included in the Fidelity Real Property List. 4.11 Litigation. Except as set forth in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Litigation List"), there is no private or governmental suit, claim, action or proceeding pending, nor to Fidelity's or Thrift's knowledge, threatened, against Fidelity or Thrift or against any of their respective directors, officers or employees relating to the performance of their duties in such capacities or against or affecting any properties of Fidelity or Thrift. Also, except as disclosed in the Fidelity Filings or in the Fidelity Litigation List, there are no material judgments, decrees, stipulations or orders against Fidelity or Thrift or enjoining either of them or any of their respective directors, officers or employees in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area. 4.12 Taxes. (a) Except as set forth in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Tax List"), (A) all material Tax Returns required to be filed by or on behalf of Fidelity, Thrift or the Fidelity Subsidiary or the Affiliated Group(s) of which any of them is or was a member, have been duly and timely filed with the appropriate taxing authorities in all jurisdictions in which such Tax Returns are required to be filed (after giving effect to any valid extensions of time in which to make such filings), and all such Tax Returns were true, complete and correct in all material respects; (B) all Taxes payable by or on behalf of Fidelity, Thrift or 22 the Fidelity Subsidiary, either directly, as part of an Affiliated Group Tax Return, or otherwise, have been fully and timely paid, except to the extent adequately reserved therefor in accordance with accounting principles generally accepted in the United States of America and/or applicable regulatory accounting principles or banking regulations consistently applied on the Fidelity balance sheet, and adequate reserves or accruals for Taxes have been provided in the Fidelity balance sheet with respect to any period through the date thereof for which Tax Returns have not yet been filed or for which Taxes are not yet due and owing; and (C) no agreement, waiver or other document or arrangement extending or having the effect of extending the period for assessment or collection of Taxes (including, but not limited to, any applicable statute of limitation) has been executed or filed with any taxing authority by or on behalf of Fidelity, Thrift or the Fidelity Subsidiary, or any Affiliated Group(s) of which any of them is or was a member. (b) Fidelity, Thrift and the Fidelity Subsidiary have complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of Taxes and have duly and timely withheld from employee salaries, wages and other compensation and have paid over to the appropriate taxing authorities all amounts required to be so withheld and paid over for all periods under all applicable laws. (c) Fidelity has delivered to HFC complete copies of (i) all material income or franchise Tax Returns of Fidelity, Thrift and the Fidelity Subsidiary relating to the taxable periods since July l, 1999 and (ii) any audit report issued within the last three years relating to any material Taxes due from or with respect to Fidelity, Thrift or the Fidelity Subsidiary, with respect to their respective income, assets or operations. (d) Except as set forth in the Fidelity Tax List, no claim has been made by a taxing authority in a jurisdiction where Fidelity, Thrift or the Fidelity Subsidiary do not file an income or franchise Tax Return such that Fidelity, Thrift or the Fidelity Subsidiary are or may be subject to taxation by that jurisdiction. (e) Except as set forth in the Fidelity Tax List: (i) all deficiencies asserted or assessments made as a result of any examinations by any taxing authority of the Tax Returns of or covering or including Fidelity, Thrift and/or the Fidelity Subsidiary have been fully paid, and there are no other audits or investigations by any taxing authority in progress, nor have Fidelity, Thrift or the Fidelity Subsidiary received any notice from any taxing authority that it intends to conduct such an audit or investigation; (ii) no requests for a ruling or a determination letter are pending with any taxing authority; and (iii) no issue has been raised in writing by any taxing authority in any current or prior examination which, by application of the same or similar principles, could reasonably be expected to result in a proposed deficiency against Fidelity, Thrift or the Fidelity Subsidiary for any subsequent taxable period that could be material. (f) Except as set forth in the Fidelity Tax List, none of Fidelity, Thrift or the Fidelity Subsidiary nor any other Person on behalf of Fidelity, Thrift or the Fidelity Subsidiary has (i) filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by Fidelity, Thrift or the Fidelity Subsidiary, (ii) agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by 23 Fidelity, Thrift or the Fidelity Subsidiary or has any knowledge that the Internal Revenue Service has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of Fidelity, Thrift or the Fidelity Subsidiary, or (iii) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any predecessor provision thereof or any similar provision of state, local or foreign law with respect to Fidelity, Thrift or the Fidelity Subsidiary. (g) Except as set forth in the Fidelity Tax List, no property owned by Fidelity, Thrift or the Fidelity Subsidiary is (i) property required to be treated as being owned by another Person pursuant to provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986, (ii) constitutes "tax exempt use property" within the meaning of Section 168(h)(1) of the Code or (iii) is "tax-exempt bond financed property" within the meaning of Section 168(g) of the Code. (h) Neither Fidelity (except with Fidelity Subsidiary or Thrift) nor the Fidelity Subsidiary nor Thrift (except with Fidelity or one another) is a party to any Tax Sharing Agreement or similar agreement or arrangement (whether written or not written) pursuant to which it will have any obligation to make any payments after the Closing. (i) Except as set forth in the Fidelity Tax List, there is no contract, agreement, plan or arrangement covering any Person that, individually or collectively, could give rise to the payment of any amount that would not be deductible by Fidelity, Thrift or the Fidelity Subsidiary, their respective affiliates or any of their successors by reason of Section 280G of the Code, or would constitute compensation in excess of the limitation set forth in Section 162(m) of the Code. (j) There are no liens as a result of any unpaid Taxes upon any of the assets of Fidelity, Thrift or the Fidelity Subsidiary. (k) Except as set forth in the Fidelity Tax List, Fidelity, Thrift and the Fidelity Subsidiary have no elections in effect for federal income tax purposes under Sections 108, 168, 338, 441, 472, 1017, 1033, or 4977 of the Code. (l) Except as set forth in the Fidelity Tax List, none of the members of Fidelity's Affiliated Group has any net operating loss carryovers. 4.13 Compliance with Laws and Regulations. (a) Neither Fidelity nor Thrift is in default under or in breach or violation of (i) any provision of their respective certificate of incorporation, articles of incorporation or bylaws, or (ii) any law, ordinance, rule or regulation promulgated by any Governmental Entity, except, with respect to this clause (ii), for such violations as would not have, individually or in the aggregate, a Material Adverse Effect. The properties and operations of Fidelity and Thrift are and have been maintained and conducted, and the properties and operations of the Fidelity Subsidiary were maintained and conducted, in all material respects, in compliance with all applicable laws and regulations. 24 (b) Except as set forth on a list furnished by Fidelity and Thrift to HFC (the "Fidelity Environmental Compliance List"), to the best of Fidelity's and Thrift's knowledge: (i) Fidelity and Thrift are in compliance with all Environmental Regulations in all material respects; (ii) there are no Tanks on, under or above Fidelity Property; (iii) there are no Hazardous Materials on, below or above the surface of, or migrating from Fidelity Property above de minimus levels that would require remedial action; (iv) to the best of Fidelity's and Thrift's knowledge, neither Fidelity nor Thrift has any loans outstanding secured by real property of which the real property is not in compliance with Environmental Regulations or which has a Tank or upon which there are Hazardous Materials or from which Hazardous Materials are migrating above de minimus levels that would require remedial action; and (v) without limiting Section 4.10 or the foregoing representations and warranties contained in clauses (i) through (iv), as of the date of this Agreement, there is no claim, action, suit, or proceeding or notice thereof before any Governmental Entity pending against Fidelity or Thrift or, to the best of Fidelity's and Thrift's knowledge, concerning property securing Fidelity or Thrift loans and there is no outstanding judgment, order, writ, injunction, decree, or award against or affecting Fidelity Property or, to the best of Fidelity's and Thrift's knowledge, property securing Fidelity or Thrift loans, relating to the foregoing representations (i) - (iv). For purposes of this Section 4.12(b), the term "Environmental Regulations" shall mean all applicable statutes, regulations, rules, ordinances, codes, licenses, permits, orders, approvals, plans, authorizations, concessions, franchises, and similar items, of all Governmental Entities and all applicable judicial, administrative, and regulatory decrees, judgments, and orders relating to the protection of human health or the environment, including, without limitation: all requirements, including, but not limited to those pertaining to reporting, licensing, permitting, investigation, and remediation of emissions, discharges, releases, or threatened releases of Hazardous Materials, chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials or wastes whether solid, liquid, or gaseous in nature, into the air, surface water, groundwater, or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of chemical substances, pollutants, contaminants, or hazardous or toxic substances, materials, or wastes, whether solid, liquid, or gaseous in nature and all requirements pertaining to the protection of the health and safety of employees or the public. "Fidelity Property" shall mean real estate owned, leased, or otherwise used by Fidelity or Thrift, or in which Fidelity or Thrift has an investment (by sale and leaseback or otherwise) in each case, which real estate is owned, leased, or otherwise used on the date of this Agreement, including, without limitation, properties under foreclosure and properties held by Fidelity or Thrift in its respective capacity as a trustee or otherwise. "Tank" shall mean treatment or storage tanks, sumps, gas or oil wells and associated piping transportation devices. "Hazardous Materials" shall mean any substance the presence of which requires investigation or remediation under any federal, state or local statute, regulation, ordinance, order, action, policy or common law; or which is defined as a hazardous waste, hazardous substance, hazardous material, used oil, pollutant or contaminant under any federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601, et seq.); the Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.); the Clean Air Act, as amended (42 U.S.C. Section 7401, et seq.); the Federal Water Pollution Control Act, as amended (33 U.S.C. Section 1251, et seq.); the Toxic Substances Control Act, as amended (15 U.S.C. Section 9601, et seq.); the Occupational Safety and Health Act, as amended (29 U.S.C. Section 651 et seq.); the Emergency Planning and 25 Community Right-to-Know Act of 1986 (42 U.S.C. Section 11001, et seq.); the Mine Safety and Health Act of 1977, as amended (30 U.S.C. Section 801, et seq.); the Safe Drinking Water Act (42 U.S.C. Section 300f, et seq.); and all comparable state and local laws, including without limitation, the Carpenter-Presley-Tanner Hazardous Substance Account Act (State Superfund), the Porter-Cologne Water Quality Control Act, Section 25140, 25501(j) and (k), 25501.1, 25281 and 25250.1 of the California Health and Safety Code and/or Article I of Title 22 of the California Code of Regulations, Division 4, Chapter 30; or which contains gasoline, diesel fuel or other petroleum hydrocarbons, polychlorinated biphenyls (PCBs), asbestos or ureaformaldehyde foam insulation. (c) Fidelity and Thrift have provided to HFC phase I environmental assessments with respect to each interest in real property set forth on the Fidelity Real Property List as to which such a phase I environmental investigation has been prepared by or on behalf of Fidelity or Thrift. The Fidelity Real Property list discloses each such property as to which such an assessment has not been prepared on behalf of Fidelity or Thrift. 4.14 Performance of Obligations. Fidelity, Thrift and the Fidelity Subsidiary have (or had) performed in all material respects all of the obligations required to be performed by them to date of any covenant, contract, lease, indenture or any other covenant to which any of them is a party, or to which any of them or any of their respective properties is subject or by which any of them or any of their respective properties are otherwise bound, and none of them are in default under or in breach of any term or provision of any such covenant, contract, lease, indenture or any other such covenant, and no event has occurred that, with the giving of notice or the passage of time or both, would constitute such default or breach, where such defaults and breaches would, individually or in the aggregate, have a Material Adverse Effect. Except for loans made by Thrift in the ordinary course of business, to Fidelity's and Thrift's knowledge, no other party to any such covenant, contract, lease or indenture or any other covenant is in material default or breach thereunder. 4.15 Employees. Except as set forth in the Fidelity Litigation List, there are no material controversies pending or threatened between Fidelity or Thrift and any of their respective employees. Neither Fidelity nor Thrift is a party to any collective bargaining agreement with respect to any of their respective employees or any labor organization to which their respective employees or either of them belong. 4.16 Registration Obligation. Neither Fidelity nor Thrift is under any obligation, contingent or otherwise, to register any of their respective securities under the Securities Act. 4.17 Brokers and Finders. Neither Fidelity nor Thrift is a party to or obligated under any agreement with any broker or finder relating to the transactions contemplated hereby, and neither the execution of this Agreement nor the consummation of the transactions provided for herein or therein will result in any liability to any broker or finder. 4.18 Material Contracts. Except as set forth in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Contract List") (all items listed or required to be listed in such Fidelity Contract List being referred to herein as "Scheduled Contracts"), neither Fidelity nor Thrift is 26 party to, nor are either of Fidelity or Thrift or any of their respective properties subject to, nor are any of them or any of their respective properties bound by, any of the following: (a) any employment, deferred compensation, bonus or consulting contract that (i) has a remaining term, as of the date of this Agreement, of more than one year in length of obligation on the part of Fidelity or Thrift and is not terminable by Fidelity or Thrift within one year without penalty or (ii) requires payment by Fidelity or Thrift of $25,000 or more per annum; (b) any advertising, brokerage, licensing, dealership, representative or agency relationship or contract requiring payment by Fidelity or Thrift of $25,000 or more per annum; (c) any contract or agreement that restricts Fidelity or Thrift (or would restrict any Affiliate of either of them (including HFC and its subsidiaries) after the Effective Time of the Holding Company Merger) from competing in any line of business with any Person or using or employing the services of any Person; (d) any lease of real or personal property providing for annual lease payments by or to Fidelity or Thrift in excess of $25,000 per annum other than (A) financing leases entered into in the ordinary course of business in which Fidelity or Thrift is lessor and (B) leases of real property presently used by Thrift as banking or loan production offices; (e) any mortgage, pledge, conditional sales contract, security agreement, option, or any other similar agreement with respect to any interest of Fidelity or Thrift (other than as mortgagor or pledgor in the ordinary course of their banking business or as mortgagee, secured party or deed of trust beneficiary in the ordinary course of their business) in personal property having a value of $25,000 or more; (f) other than as described in the Fidelity Filings or as set forth in the Fidelity Employee Plan list, any stock purchase, stock option, stock bonus, stock ownership, profit sharing, group insurance, bonus deferred compensation, severance pay, pension, retirement, savings or other incentive, welfare or employment plan or material agreement providing benefits to any present or former employees, officers or directors of Fidelity or Thrift; (g) any agreement to acquire equipment or any commitment to make capital expenditures of $50,000 or more; (h) other than agreements entered into in the ordinary course of business, including sales of other real estate owned, any agreement for the sale of any property or assets in which Fidelity or Thrift has an ownership interest or for the grant of any preferential right to purchase any such property or asset; (i) any agreement for the borrowing of any money (other than liabilities or interbank borrowings made in the ordinary course of their banking business and reflected in the financial records of Fidelity or Thrift); (j) any restrictive covenant contained in any deed to or lease of real property owned or leased by Fidelity or Thrift (as lessee) that materially restricts the use, transferability or value of such property; 27 (k) any guarantee or indemnification which involves the sum of $25,000 or more, other than letters of credit or loan commitments issued in the normal course of business; (l) any supply, maintenance or landscape contracts not terminable by Fidelity or Thrift without penalty on thirty (30) days or less notice and which provides for payments in excess of $25,000 per annum; (m) any material agreement which would be terminable other than by Fidelity or Thrift as a result of the consummation of the transactions contemplated by this Agreement; (n) any contract of participation with any other financial institution in any loan in excess of $25,000 or any sales of assets of Fidelity or Thrift with recourse of any kind to Fidelity or Thrift except the sale of mortgage loans, servicing rights, repurchase or reverse repurchase agreements, securities or other financial transactions in the ordinary course of business; (o) any agreement providing for the sale or servicing of any loan or other asset which constitutes a "recourse arrangement" under applicable regulation or policy promulgated by a Governmental Entity (except for agreements for the sale of guaranteed portions of loans guaranteed in part by the U.S. Small Business Administration and related servicing agreements); (p) any contract relating to the provision of data processing services to Fidelity or Thrift; and (q) any other agreement of any other kind which involves future payments or receipts or performances of services or delivery of items requiring payment of $50,000 or more to or by Fidelity or Thrift other than payments made under or pursuant to loan agreements, participation agreements and other agreements for the extension of credit in the ordinary course of their business. True copies of all Scheduled Contracts, including all amendments and supplements thereto, have been delivered to HFC. 4.19 Certain Material Changes. Except as set forth in a list delivered by Fidelity and Thrift to HFC (the "Fidelity Material Adverse Effect List"), since December 31, 2001, there has not been, occurred or arisen: (a) any change in any of the assets, liabilities, permits, methods of accounting or accounting practices, business, or manner of conducting business, of Fidelity, Thrift or the Fidelity Subsidiary, or any other event or development that individually or taken together with all other events and circumstances has had or may reasonably be expected to have a Material Adverse Effect; (b) any direct or indirect redemption, purchase or other acquisition by Fidelity, Thrift or the Fidelity Subsidiary of any equity securities or any declaration, setting aside or payment of any dividend or other distribution on or in respect of Fidelity Stock whether consisting of money, other personal property, real property or other things of value; or 28 (c) any redemption or repurchase by Fidelity, Thrift or the Fidelity Subsidiary of the Fidelity Senior Notes or any other notes or similar obligations, whether through payment of cash, securities, property or otherwise. 4.20 Licenses and Permits. Fidelity and Thrift have all material licenses and permits that are necessary for the conduct of their respective businesses, and such licenses are in full force and effect. The respective properties, assets, operations and businesses of Fidelity and Thrift are and have been maintained and conducted, in all material respects, in compliance with all applicable licenses and permits. 4.21 Undisclosed Liabilities. Neither Fidelity nor Thrift has any liabilities or obligations, either accrued or contingent, that are material to Fidelity on a consolidated basis and that have not been: (a) reflected or disclosed in the Financial Statements of Fidelity; (b) disclosed in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Undisclosed Liabilities List") or on any other Fidelity List; or (c) incurred in the ordinary course of business consistent with past practices. Neither Fidelity nor Thrift knows of any reasonable basis for the assertion against either of them of any liability, obligation or claim (including, without limitation, that of any regulatory authority) that is likely to result in or cause a Material Adverse Effect that is not accurately reflected in the Financial Statements of Fidelity or otherwise disclosed in this Agreement. 4.22 Employee Benefit Plans. (a) For purposes of this Agreement, the term "Plans" shall mean (i) all "employee benefit plans" (as such term is defined in Section 3(3) of ERISA) of which Fidelity or any member of the same controlled group of corporations, trades or businesses as Fidelity within the meaning of Section 4001(a)(14) of ERISA, including, but not limited to, Thrift and Fidelity Subsidiary (for purposes of this Section, an "ERISA Affiliate") is a sponsor or participating employer or as to which Fidelity or any of its ERISA Affiliates makes contributions or is required to make contributions and (ii) any employment, severance or other agreement, plan, arrangement or policy of Fidelity or of any of its ERISA Affiliates (whether written or oral) providing for insurance coverage (including self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, or for profit sharing, deferred compensation, bonuses, stock options, stock appreciation, stock awards, stock based compensation or other forms of incentive compensation or post-termination insurance, compensation or benefits. Except as set forth in the list delivered by Fidelity and Thrift to HFC (the "Fidelity Employee Plan List"), (i) neither Fidelity nor any of its ERISA Affiliates maintains or sponsors, or makes or is required to make contributions to, any Plans, (ii) none of the Plans is a "multiemployer plan," as defined in Section 3(37) of ERISA, (iii) none of the Plans is a "defined benefit pension plan" within the meaning of Section 3(35) of ERISA, and (iv) each of the Plans has been administered and maintained, and is, in material compliance with, all provisions of ERISA, the Code, the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and all other applicable laws. Notwithstanding any statement or indication in this Agreement to the contrary, and except as disclosed in the Fidelity Employee Plan List, there are no Plans as to which Fidelity or any of its ERISA Affiliates will be required to make any contributions, whether on behalf of any of the current employees of Fidelity or any of its ERISA Affiliates or on behalf of any other person, after the Closing. With respect to each of 29 such Plans, at the Closing there will be no liabilities with respect to the establishment, implementation, operation, administration or termination of any such Plan, or the termination of the participation in any such Plan by the Fidelity or any of its ERISA Affiliates, except those set forth in the Financial Statements of Fidelity. Neither Fidelity nor any ERISA Affiliate has any formal plan or commitment, whether legally binding or not, to create any additional Plan, or modify or change any existing Plan that would affect any employee or terminated employee of Fidelity or any ERISA Affiliate, except as set forth in the Fidelity Employee Plan List. Except as set forth in the Fidelity Employee Plan List, the consummation of the transactions contemplated by this Agreement will not (i) entitle any employees of Fidelity, Thrift or the Fidelity Subsidiary to severance pay, (ii) accelerate the funding, time of payment or vesting or trigger any payment of compensation or benefits under, increase the amount payable or trigger any other material obligation pursuant to, any of the Plans or (iii) result in any breach or violation of, or default under, any of the Plans. Fidelity has delivered to HFC true and complete copies of: (i) each of the Plans and any related funding and service agreements thereto (including insurance contracts, investment managing agreements, subscription and participation agreements and recordkeeping contracts) including all amendments, all of which are legally valid and binding and in full force and effect and there are no defaults thereunder, (ii) the currently effective summary plan description, summary of material modifications and all material employee communications pertaining to each of the Plans, (iii) the three most recent annual reports for each of the Plans (including all relevant schedules), (iv) the most recently filed PBGC Form 1 (if applicable); and (v) the most recent Internal Revenue Service determination letter for each Plan which is intended to constitute a qualified plan under Section 401 of the Code and each amendment to each of the foregoing documents and any requests for rulings, determinations, or opinions pending with the Internal Revenue Service or any other governmental agency. (b) The present value of all "benefit liabilities," as defined in Section 4001(a)(16) of ERISA, under any Plan subject to Title IV of ERISA (as determined on the basis of the actuarial assumptions contained in the Plan's most recent actuarial valuation) shall not, as of the Closing Date, exceed the value of the assets of such Plan allocated to such benefit liabilities. With respect to each Plan that is subject to Title IV of ERISA (i) no amount is due or owing from Fidelity or its ERISA Affiliates to the Pension Benefit Guaranty Corporation or to any "multiemployer plan" as defined in Section 3(37) of ERISA on account of any withdrawal therefrom and (ii) no such Plan has been terminated other than in accordance with ERISA or at a time when the Plan was not sufficiently funded. The transactions contemplated hereunder, including without limitation the termination of the Plans at or prior to the Closing, shall not result in any such withdrawal or other liability under any applicable laws. (c) None of the Plans, nor any trust created thereunder nor any trustee, fiduciary or administrator thereof, has engaged in any transaction which might subject Fidelity, Thrift or the Fidelity Subsidiary to any tax or penalty on prohibited transactions imposed by Section 4975 of the Code or Section 406 of ERISA or to any civil penalty imposed by Section 502 of ERISA. None of the Plans subject to Title IV of ERISA has been completely or partially terminated nor has there been any "reportable event," as such term is defined in Section 4043(b) of ERISA, with respect to any of such Plans for which the 30-day reporting requirement has not been waived, nor has any notice of intent to terminate been filed or given with respect to any such Plan. There has been no (i) withdrawal by Fidelity or any of its ERISA Affiliates that is a 30 substantial employer from a single-employer plan which is a Plan and which has two or more contributing sponsors at least two of whom are not under common control, as referred to in Section 4063(b) of ERISA, or (ii) cessation by Fidelity or any of its ERISA affiliates of operations at a facility causing more than 20% of Plan participants to be separated from employment, as referred to in Section 4062(f) of ERISA. (d) None of the Plans nor any trust created thereunder has incurred any "accumulated funding deficiency" as such term is defined in Section 412 of the Code, whether or not waived. Furthermore, neither Fidelity nor any of its ERISA Affiliates has provided or is required to provide security to any Plan pursuant to Section 401(a)(29) of the Code. Each of the Plans that is intended to be a qualified plan under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service and Fidelity does not know of any fact which could adversely affect the qualified status of any such Plan. All contributions required to be made to each of the Plans under the terms of the Plan, ERISA, the Code, or any other applicable laws have been timely made. The Financial Statements of Fidelity properly reflect all amounts required to be accrued as liabilities to date under each of the Plans. Except as set forth in the Fidelity Employee Plan List, there is no Plan or other contract, agreement or benefit arrangement covering any employee of Fidelity or Thrift which, individually or collectively, could give rise to the payment of any amount which would constitute an "excess parachute payment" (as defined in Section 280G of the Code). (e) There have occurred and there exists (i) no pending litigation or controversies against the Plans or against Fidelity or any of its ERISA Affiliates as the "employer" or "sponsor" under the Plans or against the trustee, fiduciaries or administrators of any of the Plans and (ii) no pending or, to Fidelity's knowledge, threatened investigations, proceedings, lawsuits, disputes, actions or controversies involving the Plans, the administrator or trustee of any of the Plans with any of the Internal Revenue Service, Department of Labor, Pension Benefit Guaranty Corporation, any participant in the Plans or any other person whatsoever. Without limiting the generality of the foregoing, there are no lawsuits or other claims, pending or, to Fidelity's knowledge, threatened (other than routine claims for benefits under a Plan) against (i) any Plan, or (ii) any "fiduciary" of such Plan (within the meaning of Section 3(21)(a) of ERISA) brought on behalf of any participant, beneficiary or fiduciary thereunder. (f) None of Fidelity or Thrift or any of their ERISA Affiliates has used the services of (i) workers who have been provided by a third party contract labor supplier for more than six months or who may otherwise be eligible to participate in any of the Plans or to an extent that would reasonably be expected to result in the disqualification of any of the Plans or the imposition of penalties or excise taxes with respect to the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or any other Governmental Entity, (ii) temporary employees who have worked for any of Fidelity, Thrift, the Fidelity Subsidiary or any of their ERISA Affiliates for more than six months or who may otherwise be eligible to participate in any of the Plans or to an extent that would reasonably be expected to result in the disqualification of any of the Plans or the imposition of penalties or excise taxes with respect to the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or any other Governmental Entity, (iii) individuals who have provided services to Fidelity, Thrift, the Fidelity Subsidiary or any of their ERISA Affiliates as independent contractors for more than six months or who may 31 otherwise be eligible to participate in the Plans or to an extent that would reasonably be expected to result in the disqualification of any of the Plans or the imposition of penalties or excise taxes with respect to the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation or any other Governmental Entity or (iv) leased employees, as that term is defined in section 414(n) of the Code. (g) Except as set forth in the Fidelity Employee Plan List, with respect to each Plan that is funded wholly or partially through an insurance policy, there will be no liability of Fidelity or Thrift or any of their ERISA Affiliates, as of the Closing Date, under any such insurance policy or ancillary agreement with respect to such insurance policy in the nature of a retroactive rate adjustment, loss sharing arrangement or other actual or contingent liability arising wholly or partially out of events occurring prior to the Closing Date or the termination of the Plan as of the Closing Date. 4.23 Corporate Records. The minute books of Fidelity, Thrift and the Fidelity Subsidiary accurately reflect in all material respects all actions taken to this date by the respective stockholders, boards of directors and committees of Fidelity, Thrift and the Fidelity Subsidiary. 4.24 Community Reinvestment Act. Thrift received a rating of "Satisfactory" in its most recent examination or interim review with respect to the Community Reinvestment Act. Neither Fidelity nor Thrift has been advised of any supervisory concerns regarding any of Thrift's compliance with the Community Reinvestment Act. 4.25 Regulatory Actions. (a) Fidelity and Thrift are in compliance in all material respects with all applicable material federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable thereto or to the employees conducting such businesses, including, without limitation, the Equal Credit Opportunity Act, the Bank Secrecy Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Americans with Disabilities Act, and all other applicable fair lending laws or other laws relating to discrimination, and to Fidelity's and Thrift's knowledge, none of Fidelity, Thrift or the Fidelity Subsidiary are the subject of a referral to either the United States Department of Justice or the Department of Housing and Urban Development for alleged violations of the Fair Lending Acts. (b) Each material violation, criticism, or exception by any Governmental Entity with respect to any examinations of Fidelity, Thrift or the Fidelity Subsidiary, if any, has been responded to or is in the process of being responded to, and none of Fidelity, Thrift or the Fidelity Subsidiary has been advised by any Governmental Entity that its response is inadequate. (c) Neither Fidelity nor Thrift is a party to any cease and desist order, written agreement or memorandum of understanding with, or a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or is a recipient of any extraordinary supervisory letter from, or has adopted any board resolutions at the request of, any Governmental Entity nor has it been advised by any Governmental Entity that it is contemplating issuing or 32 requesting (or is considering the appropriateness of issuing or requesting) any such order, directive, written agreement, memorandum of understanding, extraordinary supervisory letter, commitment letter, board resolutions or similar undertaking. 4.26 Insider Loans; Other Transactions. Fidelity has previously provided HFC with a listing, current as of January 31, 2002, of all extensions of credit made by Fidelity, Thrift or the Fidelity Subsidiary to each of its executive officers and directors and their related interests (all as defined under Federal Reserve Board Regulation O), all of which have been made in compliance with Regulation O, which listing is true, correct and complete in all material respects. Neither Fidelity nor Thrift owes any amount to, or has any contract or lease with or commitment to, any of the present executive officers or directors of Fidelity or Thrift (other than for compensation for current services not yet due and payable, reimbursement of expenses arising in the ordinary course of business, options or awards available under the Fidelity Stock Option Plan, or any amounts due pursuant to Fidelity's Plans). 4.27 Accounting Records. Fidelity, Thrift and the Fidelity Subsidiary maintain accounting records which fairly and accurately reflect, in all material respects, their transactions and accounting controls exist sufficient to provide reasonable assurances that such transactions are, in all material respects, (a) executed in accordance with their management's general or specific authorization, and (b) recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting procedures and/or applicable regulatory accounting principles or banking regulations consistently applied. Such records, to the extent they contain important information pertaining to Fidelity, Thrift and the Fidelity Subsidiary which is not easily and readily available elsewhere, have been stored and maintained in compliance with applicable regulation. 4.28 Indemnification. Other than pursuant to the provisions of its respective certificate of incorporation, charter or bylaws, neither Fidelity nor Thrift is a party to any indemnification agreement with any of its present directors, officers, employees, agents or other persons who serve or served in any other capacity with any other enterprise at the request of Fidelity (a "Covered Person"), and to the knowledge of Fidelity, there are no claims for which any Covered Person would be entitled to indemnification under Section 8.7 if such provisions were deemed in effect, except as set forth in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Indemnification List"). 4.29 Offices and ATMs. Fidelity and Thrift have furnished to HFC a list (the "Fidelity Offices List") setting forth the headquarters of Thrift (identified as such) and each of the offices and automated teller machines ("ATMs") maintained and operated by Thrift (including, without limitation, representative and loan production offices and operations centers) and the location thereof. Except as set forth on the Fidelity Offices List, Thrift maintains no other office or ATM and conducts business at no other location, and Thrift has not applied for nor received permission to open any additional branch nor operate at any other location. 4.30 Loan Portfolio. (a) Fidelity and Thrift have furnished to HFC a list (the "Fidelity Nonperforming Assets List") that sets forth as of December 31, 2001 (i) any loan under the terms 33 of which the obligor is 30 or more days delinquent in payment of principal or interest, or to the knowledge of Fidelity and Thrift, in default of any other material provision thereof; (ii) each loan which has been classified as "substandard," "doubtful," "loss" or "special mention" (or words of similar import) by Fidelity or Thrift or any Governmental Entity; and (iii) a listing of the OREO acquired by foreclosure or by deed-in-lieu of foreclosure, including the book value thereof. (b) Each loan, other than loans the aggregate amount of which to any one borrower and its related interests reflected as an asset on Fidelity's most recent balance sheet does not exceed $25,000, and each balance sheet date subsequent thereto (i) is evidenced by notes, agreements or other evidence of indebtedness which are true, genuine and what they purport to be, and (ii) is the legal, valid and binding obligation of the obligor named therein, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. 4.31 Investment Securities. Fidelity and Thrift have furnished to HFC a list (the "Fidelity Investment Securities List") setting forth a description of each Investment Security held by Fidelity, Thrift or the Fidelity Subsidiary on December 31, 2001. The Fidelity Investment Securities List sets forth, with respect to each such Investment Security: (a) the issuer thereof; (b) the outstanding balance or number of shares; (c) the maturity, if applicable; (d) the title of issue; and (e) the classification under Statement of Financial Accounting Standards No. 115. Neither Fidelity nor Thrift currently holds any Investment Security classified as trading. 4.32 Derivatives Contracts; Structured Notes; Etc. Except as set forth in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Derivatives List"), neither Fidelity nor Thrift is a party to or has agreed to enter into an exchange traded or over-the-counter equity, interest rate, foreign exchange or other swap, forward, future, option, cap, floor or collar or any other contract that is not included on the balance sheet and is a derivative contract (including various combinations thereof) (each, a "Derivatives Contract") or owns securities that are referred to generically as "structured notes," "high risk mortgage derivatives," "capped floating rate notes," or "capped floating rate mortgage derivatives." 4.33 Power of Attorney. Neither Fidelity nor Thrift has granted any Person a power of attorney or similar authorization that is presently in effect or outstanding. 4.34 Material Interests of Certain Persons. No officer or director of Fidelity or Thrift, or any associate thereof (as such term is defined in Rule 12b-2 under the Exchange Act), has any material interest in any material contract or property (real or personal) tangible or intangible, used in or pertaining to the business of Fidelity or Thrift. 4.35 Tax Matters. None of Fidelity, Thrift or the Fidelity Subsidiary, nor, to the knowledge of Fidelity or Thrift, any of their respective Affiliates, has taken or agreed to take any action that would prevent the business combinations to be effected by the Mergers from qualifying as reorganizations under Section 368 of the Code. 4.36 Facts Affecting Regulatory Approvals. To the knowledge of Fidelity and Thrift, there is no fact, event or condition applicable to Fidelity, Thrift or the Fidelity Subsidiary which 34 will, or reasonably could be expected to, adversely affect the likelihood of securing the requisite approvals or consents of any Governmental Entity to the Mergers and other transactions contemplated by this Agreement. 4.37 Disclosure Documents and Applications. None of the information supplied or to be supplied by or on behalf of Fidelity, Thrift or the Fidelity Subsidiary ("Fidelity Supplied Information") for inclusion or incorporation by reference in (a) the S-4 Registration Statement and the Proxy Statement and Prospectus to be mailed to the stockholders of Fidelity in connection with obtaining the approval of the stockholders of Fidelity and HFC of this Agreement, the Holding Company Merger and the other transactions contemplated hereby, or any amendment or supplement thereto, as required, and (b) any other documents to be filed with the SEC, the OTS, the DFI, the FDIC or any other Governmental Entity in connection with the transactions contemplated in this Agreement, will, at the respective times such documents are filed or become effective, or with respect to the Proxy Statement and Prospectus when mailed, 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, in light of the circumstances under which they were made, not misleading. 4.38 Corporate and Stockholder Approvals and Takeover Statutes. (a) The affirmative vote of the holders of a majority of the outstanding shares of Fidelity Series A Common Stock is required to adopt this Agreement and approve the Holding Company Merger and the other transactions contemplated hereby. No other vote of the stockholders of Fidelity is required by law, the Certificate of Incorporation or Bylaws of Fidelity or otherwise to adopt this Agreement and approve the Holding Company Merger and the other transactions contemplated hereby. (b) The Board of Directors of Fidelity has, by resolutions duly adopted by unanimous vote (excluding abstentions) at a meeting of all directors duly called and held, (i) as of the date hereof, determined that the Holding Company Merger is fair to, and in the best interests of, Fidelity and its stockholders and declared the Holding Company Merger to be advisable, (ii) approved this Agreement, (iii) taken all actions so that the restrictions contained in Section 203 of the Delaware General Corporation Law applicable to "business combinations" (as defined in Section 203) and any other similar legal requirements will not apply to HFC during the pendency of this Agreement, including the execution, delivery or performance of this Agreement and the consummation of the transactions contemplated hereby, (iv) in its capacity as sole stockholder of Thrift, approved the Agreement of Bank Merger and the Bank Merger, and (v) as of the date hereof, recommended that the Fidelity stockholders approve and adopt this Agreement and approve the Holding Company Merger and directed that such matter be submitted to the Fidelity Stockholders at the Fidelity Stockholders' Meeting. (c) The Board of Directors of Thrift has, by resolutions duly adopted by unanimous vote at a meeting of all directors duly called and held, approved this Agreement and the Agreement of Bank Merger and the transactions contemplated hereby and thereby. 4.39 Intellectual Property. Except as set forth in a list furnished by Fidelity and Thrift to HFC (the "Fidelity Intellectual Property List"), Fidelity and Thrift own or possess valid and 35 binding licenses and other rights to use without payment all material patents, copyrights, trade secrets, trade names, service marks and trademarks used in their respective businesses; and neither Fidelity nor Thrift has received any notice with respect thereto that asserts the rights of others. Fidelity and Thrift have in all material respects performed all the obligations required to be performed by them, and neither Fidelity nor Thrift is not in default in any material respect under any license, contract, agreement, arrangement or commitment relating to any of the foregoing. 4.40 Accuracy of Information Furnished. The representations and warranties made by Fidelity and Thrift hereby or in the Lists or schedules hereto, when considered as a whole, do not contain any untrue statement of a material fact or omit to state any material fact which is necessary under the circumstances under which they were made to prevent the statements contained herein or in such Lists or schedules from being misleading. ARTICLE V REPRESENTATIONS AND WARRANTIES OF HFC AND BANK HFC and Bank, jointly and severally, represent and warrant to Fidelity and Thrift as follows, provided that to the extent any representation or warranty relates to HFC or Merger Sub, Bank does not make any representations or warranties to such extent: 5.1 Incorporation, Standing and Power. Each of HFC and Merger Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, has all requisite corporate power and authority to own, lease and operate its properties and assets and to carry on its business as presently conducted and to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. HFC is duly registered as a savings and loan holding company under HOLA. Bank is a federal savings bank duly incorporated, validly existing and in good standing under the laws of the United States and is authorized by the OTS to conduct a federal savings bank business. The Certificate of Incorporation and Bylaws of HFC and Merger Sub and the Federal Stock Charter and Bylaws of Bank, each as amended to date, are in full force and effect. Bank's deposits are insured by the FDIC in the manner and to the fullest extent provided by law. Each of HFC and Bank is duly qualified and in good standing as a foreign corporation, and authorized to do business, in all states or other jurisdictions in which such qualification or authorization is necessary, except where the failure to be so qualified or authorized would not, individually or in the aggregate, have a Material Adverse Effect. 5.2 Authority. The execution and delivery by each of HFC, Bank and Merger Sub of this Agreement and by Bank of the Agreement of Bank Merger and, subject to the requisite approval of the stockholders of HFC, the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action on the part of HFC, Bank and Merger Sub and by HFC in its capacity as the sole stockholder of Bank and Merger Sub, and this Agreement is and the Agreement of Bank Merger will be upon execution by all parties, a valid and binding obligation of HFC, Bank or Merger Sub or any of them, enforceable in accordance with their respective terms, except as the enforceability thereof may 36 be limited by bankruptcy, liquidation, receivership, conservatorship, insolvency, moratorium or other similar laws affecting the rights of creditors generally and by general equitable principles and by Section 8(b)(6)(D) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(b)(6)(D). All of the shares of HFC Stock to be issued pursuant to the Holding Company Merger will be duly authorized, validly issued, fully paid and nonassessable and are not, or will not be, subject to any preemptive rights. Neither the execution and delivery by HFC or Bank of this Agreement or the Agreement of Bank Merger, as the case may be, the consummation of the transactions contemplated herein or thereby by HFC or Bank, as the case may be, nor compliance by HFC or Bank with any of the provisions hereof or thereof, will (a) conflict with or result in a breach of any provision of the Certificate of Incorporation or Bylaws of HFC or the Federal Stock Charter or Bylaws of Bank; (b) constitute a breach of or result in a default (or give rise to any rights of termination, cancellation or acceleration, or any right to acquire any securities or assets) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, franchise, license, permit, agreement or other instrument or obligation to which HFC or Bank is a party, or by which HFC or Bank or any of their respective properties or assets is bound, except as would not, individually or in the aggregate, have a Material Adverse Effect; (c) result in the creation or imposition of any Encumbrance on any of the properties or assets of HFC or Bank, except for Encumbrances that do not materially detract from the value, or interfere with the present use, of the property subject thereto or affected thereby; or (d) violate any order, writ, injunction, decree, statute, rule or regulation applicable to HFC or Bank or any of their respective properties or assets. Except as set forth in the HFC Conflicts and Consents List, no consent of, approval of, notice to or filing with any Governmental Entity having jurisdiction over any aspect of the business or assets of HFC, and no consent or approval of any other Person, is required in connection with the execution and delivery by HFC of this Agreement, or the consummation by HFC of the transactions contemplated hereby or thereby, except (i) the requisite approval of the stockholders of HFC of this Agreement and the approval of this Agreement and the Agreement of Bank Merger and the transactions contemplated hereby and thereby by HFC in its capacity as the sole stockholder of Bank and Merger Sub; (ii) such approvals as may be required by the DFI, OTS and the FDIC; (iii) filing of the Certificate of Merger with the Delaware Secretary pursuant to the Delaware General Corporation Law; (iv) the filing and declaration of effectiveness by the SEC of the S-4 Registration Statement; (v) such approvals as may be required by the NASDAQ NMS to approve for inclusion on the NASDAQ NMS the HFC Stock to be issued in the Holding Company Merger; (vi) such filings with the OTS and California authorities as may be required to effect the Bank Merger; and (vii) any required approval of the Federal Trade Commission pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. 5.3 Reports and Filings. HFC and Bank have filed all reports, returns, registrations and statements (such reports and filings referred to as "HFC Filings"), together with any amendments required to be made with respect thereto, that were required to be filed with (a) the SEC, (b) the OTS, (c) the FDIC and (d) any other applicable Governmental Entity, including taxing authorities, except where the failure to file such reports, returns, registrations or statements has not had and is not reasonably expected to have a Material Adverse Effect. No material adverse administrative actions have been taken or orders issued in connection with such HFC Filings. As of their respective dates, each of such HFC Filings (y) complied in all material respects with all applicable laws and regulations (or was amended so as to be in compliance promptly following discovery of any such noncompliance); and (z) with respect to the HFC 37 Filings made with the SEC did not contain any 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, in light of the circumstances under which they were made, not misleading. Any financial statements contained in any of such HFC Filings fairly presented, as of their respective dates or for their respective periods, the consolidated financial position, consolidated results of operations and consolidated changes in cash flows, as the case may be, of HFC and were prepared in accordance with generally accepted accounting principles and/or applicable regulatory accounting principles or banking regulations consistently applied, except as stated therein, during the periods involved. HFC has furnished to Fidelity true and correct copies of all HFC Filings filed by HFC with the SEC, OTS and the FDIC since January 1, 1999. 5.4 Corporate and Stockholder Approvals. (a) Because the structure of the Holding Company Merger will not be known until a short period prior to the Closing Date, HFC agrees and acknowledges that the affirmative vote of the holders of a majority of the outstanding shares of HFC Stock is necessary to approve this Agreement and the transactions contemplated hereby on behalf of HFC. Other than as set forth in the preceding sentence, no other vote of the stockholders of HFC is required by law, the certificate of incorporation or bylaws of HFC or otherwise to approve this Agreement and the Holding Company Merger and the other transactions contemplated hereby, including without limitation the issuance of HFC Stock in the Holding Company Merger. (b) The Board of Directors of HFC has, by resolutions duly adopted by unanimous vote (excluding abstentions) at a meeting of all directors duly called and held (i) as of the date hereof, determined that the Holding Company Merger is fair to, and in the best interests of, HFC and its stockholders and declared the Holding Company Merger to be advisable, (ii) approved this Agreement and the transactions contemplated hereby, (iii) in HFC's capacity as sole stockholder of Bank and Merger Sub, approved this Agreement and the Agreement of Bank Merger and the transactions contemplated hereby and thereby, and (iv) as of the date hereof, recommended that the HFC stockholders approve and adopt this Agreement and approve the Holding Company Merger and directed that such matter be submitted to the HFC stockholders at the HFC Stockholders' Meeting. (c) The Boards of Directors of Bank and Merger Sub have, by resolutions duly adopted by the unanimous vote (excluding abstentions) at a meeting of all directors duly called and held, approved this Agreement and the Agreement of Bank Merger and the transactions contemplated hereby and thereby. 5.5 Absence of Certain Changes or Events. Except as otherwise contemplated by this Agreement, since December 31, 2001, there has not been, occurred or arisen any event or circumstance that, individually or taken together with all other events and circumstances, has had or may reasonably be expected to have a Material Adverse Effect. 5.6 Facts Affecting Regulatory Approvals. To the best knowledge of HFC and Bank, there is no fact, event or condition applicable to HFC or Bank or any of their respective subsidiaries which will, or reasonably could be expected to, adversely affect the likelihood of securing the requisite approvals or consents of any Governmental Entity to the Mergers and 38 transactions contemplated by this Agreement, in each case without the imposition of any condition of the type referred to in Section 11.2. 5.7 Community Reinvestment Act. Bank received a rating of "outstanding" in its most recent examination or interim review with respect to the Community Reinvestment Act. To the best of HFC's and Bank's knowledge, neither HFC nor Bank or any of their respective subsidiaries is the subject of a referral to either the United States Department of Justice or the Department of Housing and Urban Development for alleged violations of the federal fair lending acts. 5.8 Litigation. Except as set forth in an HFC Filing filed prior to the date hereof, or a list furnished by HFC and Bank to Fidelity (the "HFC Litigation List"), there is no private or governmental suit, claim, action or proceeding pending, nor to HFC's and Bank's knowledge, threatened, against HFC or Bank or against any of their respective directors, officers or employees relating to the performance of their duties in such capacities or against or affecting any properties of HFC or Bank, which, if adversely determined, would have or could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect. Also, except as disclosed in the HFC Filings or in the HFC Litigation List, there are no material judgments, decrees, stipulations or orders against HFC or Bank or enjoining either of them or any of their respective directors, officers or employees in respect of, or the effect of which is to prohibit, any business practice or the acquisition of any property or the conduct of business in any area. 5.9 Taxes. (A) All material Tax Returns required to be filed by or on behalf of HFC and Bank or the Affiliated Group(s) of which any of them is or was a member, have been duly and timely filed with the appropriate taxing authorities in all jurisdictions in which such Tax Returns are required to be filed (after giving effect to any valid extensions of time in which to make such filings), and all such Tax Returns were true, complete and correct in all material respects; (B) all Taxes payable by or on behalf of HFC and Bank, either directly, as part of an Affiliated Group Tax Return, or otherwise, have been fully and timely paid, except to the extent adequately reserved therefor in accordance with accounting principles generally accepted in the United States of America and/or applicable regulatory accounting principles or banking regulations consistently applied on the HFC balance sheet, and adequate reserves or accruals for Taxes have been provided in the HFC balance sheet with respect to any period through the date thereof for which Tax Returns have not yet been filed or for which Taxes are not yet due and owing; and (C) no agreement, waiver or other document or arrangement extending the period for assessment or collection of Taxes (including, but not limited to, any applicable statute of limitation) has been executed or filed with any taxing authority by or on behalf of HFC or Bank or any Affiliated Group(s) of which either of them is or was a member (except that an oral agreement has been made with the Internal Revenue Service which extends the period for assessment or collection of federal taxes for the tax years 1998 and 1999). 5.10 Compliance with Laws and Regulations; Licenses and Permits. (a) Neither HFC nor Bank is in default under or in breach or violation of (i) any provision of their respective certificate of incorporation, charter or bylaws or (ii) any law, ordinance, rule or regulation promulgated by any Governmental Entity, except, with respect to 39 this clause (ii), for such violations as would not have, individually or in the aggregate, a Material Adverse Effect. The properties and operations of HFC and Bank are and have been maintained and conducted, in all material respects, in compliance with all applicable laws and regulations. (b) HFC and Bank have all material licenses and permits that are necessary for the conduct of their respective businesses, and such licenses are in full force and effect. The respective properties, assets, operations and businesses of HFC and Bank are and have been maintained and conducted, in all material respects, in compliance with all applicable licenses and permits. 5.11 Brokers and Finders. Neither HFC nor the Bank has entered into any agreements or otherwise undertaken any obligations with any broker or finder that would create any obligation on the part of Fidelity or Thrift. 5.12 Undisclosed Liabilities. Except as set forth in a list furnished by HFC and Bank to Fidelity (the "HFC Undisclosed Liabilities List"), neither HFC nor Bank has any liabilities or obligations, either accrued or contingent, that are material to HFC on a consolidated basis and that have not been: (a) reflected or disclosed in the Financial Statements of HFC, or (b) incurred in the ordinary course of business consistent with past practices. Neither HFC nor Bank knows of any reasonable basis for the assertion against either of them of any liability, obligation or claim (including, without limitation, that of any regulatory authority) that is likely to result in or cause a Material Adverse Effect that is not accurately reflected in the Financial Statements of HFC or otherwise disclosed in this Agreement. 5.13 Regulatory Actions. (a) HFC and Bank are in compliance in all material respects with all applicable material federal, state, local and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or decrees applicable thereto or to the employees conducting such businesses, including, without limitation, the Equal Credit Opportunity Act, the Bank Secrecy Act, the Fair Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act, the Americans with Disabilities Act, and all other applicable fair lending laws or other laws relating to discrimination, and to HFC's and Bank's knowledge, neither HFC nor Bank is the subject of a referral to either the United States Department of Justice or the Department of Housing and Urban Development for alleged violations of the Fair Lending Acts. (b) Each material violation, criticism or exception by any Governmental Entity with respect to any examinations of HFC or Bank has been responded to or is in the process of being responded to, and neither HFC nor Bank has been advised by any Governmental Entity that its response is inadequate. (c) Neither HFC nor Bank is a party to any cease and desist order, written agreement or memorandum of understanding with, or a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or is a recipient of any extraordinary supervisory letter from, or has adopted any board resolutions at the request of, any Governmental Entity, except that the Bank has agreed to notify the OTS prior to reducing the Bank's internal guidelines to maintain capital ratios above 6.5% core capital and 11.0% risk-based capital, nor 40 has it been advised by any Governmental Entity that it is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such order, directive, written agreement, memorandum of understanding, extraordinary supervisory letter, commitment letter, board resolutions or similar undertaking. 5.14 Loan Portfolio. (a) HFC and Bank have furnished to Fidelity a list (the "HFC Nonperforming Assets List") that sets forth as of December 31, 2001 (i) any loan under the terms of which the obligor is 60 or more days delinquent in payment of principal or interest, or to the knowledge of HFC and Bank, in default of any other material provision thereof; (ii) each loan which has been classified as "substandard," "doubtful," "loss" or "special mention" (or words of similar import) by HFC or Bank or any Governmental Entity; and (iii) a listing of the OREO acquired by foreclosure or by deed-in-lieu of foreclosure, including the book value thereof. (b) Each loan, other than loans the aggregate amount of which to any one borrower and its related interests reflected as an asset on HFC's most recent balance sheet does not exceed $25,000, and each balance sheet date subsequent thereto (i) is evidenced by notes, agreements or other evidence of indebtedness which are true, genuine and what they purport to be, and (ii) is the legal, valid and binding obligation of the obligor named therein, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent conveyance and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. 5.15 Financial Ability. At the Effective Time of the Holding Company Merger, HFC will have funds necessary to pay the cash (i) issuable pursuant to Section 2.3 in exchange for shares of Fidelity Stock outstanding immediately prior to the Effective Time of the Holding Company Merger and (ii) issuable in lieu of fractional share interests pursuant to Section 2.4. 5.16 Accuracy of Information Furnished. The representations and warranties made by HFC and Bank hereby or in the Lists or schedules hereto, when considered as a whole, do not contain any untrue statement of material fact or omit to state any material fact which is necessary under the circumstances to prevent the statements contained herein or in such Lists or schedules from being misleading. ARTICLE VI COVENANTS OF FIDELITY AND THRIFT PENDING EFFECTIVE TIME OF THE MERGERS Fidelity and Thrift covenant and agree with HFC and Bank as follows: 6.1 Limitation on Fidelity's and Thrift's Conduct Prior to Effective Time. Between the date hereof and the Effective Time of the Holding Company Merger, except as contemplated by this Agreement and subject to requirements of law and regulation generally applicable to 41 California chartered industrial loan companies, Fidelity and Thrift agree to conduct their respective businesses in the ordinary course in substantially the manner heretofore conducted and in accordance with sound banking practices, and Fidelity and Thrift shall not, without prior written consent of the President and Chief Executive Officer of HFC or with respect to Section 6.1(j) the prior written consent of the President and Chief Executive Officer or Chief Credit Officer of the Bank: (a) issue, sell or grant any Fidelity Stock (except pursuant to the exercise of Fidelity Options or conversion of the Fidelity Senior Notes outstanding as of the date hereof), Fidelity preferred stock, Thrift Stock, any other securities (including long term debt, but excluding deposits in the ordinary course of business) of Fidelity or Thrift or any rights, options or securities to acquire any Fidelity Stock, Fidelity preferred stock, Thrift Stock, or any other securities (including long term debt, but excluding deposits in the ordinary course of business) of Fidelity or Thrift; (b) declare, set aside or pay any dividend or make any other distribution upon or adjust, split, combine or reclassify any shares of capital stock or other securities of Fidelity or Thrift (other than dividends from Thrift to Fidelity); (c) purchase, redeem or otherwise acquire any capital stock or other securities of Fidelity or Thrift or any rights, options, or securities to acquire any capital stock or other securities of Fidelity or Thrift; provided, however, that Fidelity may cancel outstanding Fidelity Options and pay the holders of such Fidelity Options an amount not greater than an amount of cash computed in accordance with Section 2.5; (d) redeem or repurchase the Fidelity Senior Notes or any other notes or similar obligations; (e) amend their certificate of incorporation, articles of incorporation or bylaws; (f) grant any general or uniform increase in the rate of pay of employees or employee benefits, except to provide merit increases to employees whose regularly scheduled performance review date falls before the Closing Date and to provide for promotional increases to employees if such promotion occurs before the Closing Date; (g) grant any: (i) bonus, incentive compensation or related employee benefits to any Person except for those (A) granted in the ordinary course of business and consistent with past practices or (B) or as required by an existing written employment agreement or other Plan; (ii) increase in salary except as set forth in Section 6.1(f) hereof; or (iii) compensation or other benefits to any director in excess of the amounts previously disclosed to HFC and Bank and as identified on a list delivered by Fidelity to HFC (the "Fidelity Director Compensation List"); (h) make any capital expenditure or commitments with respect thereto in excess of $25,000 in the aggregate for any specific project or purpose, except as reflected in the budgets delivered to HFC or for ordinary repairs, renewals and replacements; 42 (i) compromise or otherwise settle or adjust any assertion or claim of a deficiency in Taxes of $75,000 or more (including any interest thereon or penalties in connection therewith), extend the statute of limitations with any tax authority or file any pleading in court in any tax litigation or any appeal from an asserted deficiency, or file or amend any federal, foreign, state or local tax return, or make any tax election; (j) grant or commit to grant any extension of credit if such extension of credit, together with all other credit then outstanding to the same Person and all Affiliated Persons: (i) if unsecured, would exceed $25,000, or, (ii) if secured by a lien on real estate (excluding any government insured loans), would exceed $2 million or have a loan-to-value ratio in excess of the percentages set forth in Fidelity's loan-to-value policy dated July 2001; (k) change its tax or accounting policies and procedures or any method or period of accounting unless and until required by generally accepted accounting principles or a Governmental Entity; (l) close any offices at which business is conducted or open any new offices; (m) adopt or enter into any new employment agreement or other employee benefit plan or arrangement or amend or modify any employment agreement or employee benefit plan or arrangement of any such type except for such amendments as are required by law and except as otherwise permitted by this Agreement; (n) initiate, solicit, or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal which constitutes, or may reasonably be expected to lead to, any Competing Transaction (as such term is defined below), or negotiate with any person in furtherance of such inquiries or to obtain a Competing Transaction, or agree to or endorse any Competing Transaction, or authorize or permit any of its officers, directors, or employees or any investment banker, financial advisor, attorney, accountant, or other representative retained by Fidelity, Thrift or any of their Affiliates to take any such action. As promptly as practicable after receipt of any proposal involving a Competing Transaction or any request for nonpublic information or inquiry which it reasonably believes would lead to a Competing Transaction, Fidelity shall provide HFC with oral and written notice of the material terms and conditions of such proposal, request or inquiry, and the identity of the Person or group making any such proposal, request or inquiry and a copy of all written materials provided in connection with such request or inquiry. Fidelity shall provide HFC as promptly as practicable oral and written notice setting forth all such information as is reasonably necessary to keep HFC informed in all material respects of the status and details (including material amendments or proposed material amendments) of any such proposal, request or inquiry and shall promptly provide to HFC hereto a copy of all written materials subsequently provided in connection with such proposal, request or inquiry. For purposes of this Agreement, "Competing Transaction" shall mean any transaction or series of transactions involving: any merger, consolidation, share exchange or other business combination involving Fidelity, Thrift or any of their subsidiaries; a sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets of Fidelity, Thrift or any of their subsidiaries representing ten percent (10%) or more of the consolidated assets of Fidelity; a sale of shares of capital stock (or securities convertible or exchangeable into or otherwise 43 evidencing, or any agreement or instrument evidencing, the right to acquire capital stock), representing ten percent (10%) or more of the total outstanding voting securities of Fidelity, Thrift or any of their subsidiaries; a tender offer or exchange offer for ten percent (10%) or more of the total outstanding voting securities of Fidelity; any liquidation or dissolution of Fidelity; a solicitation of proxies in opposition to approval of the Holding Company Merger by Fidelity's stockholders; or a public announcement of a bona fide proposal, plan, or intention to do any of the foregoing. Fidelity and Thrift will immediately cease and cause to be terminated any existing activities, discussions or negotiations with any parties (other than HFC and Bank) conducted heretofore with respect to any of the foregoing. Fidelity and Thrift shall take the necessary steps to inform promptly the appropriate individuals or entities referred to above of the obligations undertaken in this Section. Fidelity and Thrift agree that they shall notify HFC and Bank immediately if any such inquiries, proposals or offers are received by, any such information is requested from, or any such negotiations or discussion are sought to be initiated or continued with Fidelity or Thrift. Fidelity and Thrift also agree that they shall promptly request each other person, other than HFC and Bank, that has heretofore executed a confidentiality agreement in connection with its consideration of acquiring Fidelity or Thrift to return all confidential information heretofore furnished to such person by or on behalf of Fidelity or Thrift and enforce any such confidentiality agreements. Notwithstanding any other provision in this Section 6.1(n), nothing in this Agreement shall prevent Fidelity from (i) complying with its disclosure obligations under federal or state law, (ii) engaging in any discussions or negotiations with, or providing any information to, any Person in response to an unsolicited bona fide written proposal concerning a Competing Transaction by any such Person or (iii) recommending such an unsolicited bona fide written proposal concerning a Competing Transaction to the holders of Fidelity Stock if, and only if, prior to participating in each case referenced in clause (ii) or (iii) above, (A) the Board of Directors of Fidelity determines in good faith after consulting with outside legal counsel that participating in any such action is necessary for it to act in a manner not inconsistent with its fiduciary duties under applicable law, (B) the Board of Directors of Fidelity concludes in good faith following receipt of advice from its financial advisor that the Competing Transaction, if consummated, would result in a transaction more favorable to holders of Fidelity Stock from a financial point of view than the transaction contemplated by this Agreement (any such more favorable Competing Transaction being referred to in this Agreement as a "Superior Proposal"); and (C) at least forty-eight (48) hours prior to providing any information or date to any Person or entering into discussions or negotiations with any Person, the Board of Directors of Fidelity notifies HFC and Bank of such inquiries, proposals or offers received by, any such information requested from, or any such discussions or negotiations sought to be initiated or continued with Fidelity or any subsidiary thereof. (o) other than in the ordinary course of business, consistent with past practice, incur any indebtedness for borrowed money or assume, guarantee, endorse or otherwise as an accommodation become responsible for the obligations of any other person; (p) other than as may be required by a Governmental Entity, change any of Fidelity's or Thrift's basic policies and practices with respect to liquidity management and cash flow planning, marketing, deposit origination, lending, budgeting, profit and tax planning, personnel practices or any other material aspect of Fidelity's business or operations on a consolidated basis; 44 (q) grant any Person a power of attorney or similar authority; (r) make any investment by purchase of stock or securities (including an Investment Security but excluding deposits in the ordinary course of business), contributions to capital, property transfers or otherwise in any other Person, except (i) federal funds sold, not to exceed $40 million cumulatively at any point in time, to any one counterparty and for a term not to exceed 30 days, (ii) obligations, as a direct issuer or explicit guarantor, including Mortgage Backed Securities passthroughs and Real Estate Mortgage Investment Conduits/Collateralized Mortgage Obligations of the following entities: (A) United States Treasury (including the Government National Mortgage Association), (B) the Federal National Mortgage Association, (C) Federal Home Loan Mortgage Corporation or (D) Federal Home Loan Bank, (iii) repurchase agreements with a final maturity not to exceed one year, and collateralized only by obligations listed in (ii) above, and (iv) required equity investments in the Federal Home Loan Bank of San Francisco; provided, however, that in each case all transactions must be consistent with Thrift's investment policy, undertaken in the ordinary course of business consistent with past practices and concern assets which are not designated as trading account assets under generally accepted accounting principles; (s) settle any claim, action or proceeding involving any liability of Fidelity or Thrift for money damages in excess of $75,000 exclusive of insurance coverage, or involving restrictions upon the operations of Fidelity or Thrift; (t) other than as may be required by a Governmental Entity, terminate, amend or modify any Scheduled Contract or enter into any agreement or contract that would be a Scheduled Contract under Section 4.18; (u) waive or release any material right or collateral or cancel or compromise any extension of credit or other debt or claim, except for actions taken in the resolution of extensions of credit or other debts or claims that do not result in a reduction in excess of $50,000 of the amount Fidelity is otherwise entitled to pursuant to such right, collateral, credit or other debt or claim, and in a manner consistent with past practice; (v) enter into any new activities or lines of business, or cease to conduct any material activities or lines of business that it conducts on the date hereof, or conduct any material business activity not consistent with past practice; (w) sell, transfer, mortgage, encumber or otherwise dispose of any assets or release or waive any claim if such sale, transfer, mortgage, encumbrance, release or waiver is below book value or in an aggregate amount in excess of $2 million; (x) take any action which would or is reasonably likely to (i) adversely affect the ability of HFC or Bank to obtain any necessary approval of any Governmental Entity required for the transactions contemplated hereby; (ii) adversely affect Fidelity's or Thrift's ability to perform its covenants and agreements under this Agreement; or (iii) result in any of the conditions to the performance of Fidelity's or Thrift's obligations hereunder, as set forth in Articles IX or X herein, not being satisfied; 45 (y) make any special or extraordinary payments to any Person, except as otherwise permitted by this Agreement; (z) reclassify any Investment Security from hold-to-maturity or available for sale to trading; (aa) sell any security other than in the ordinary course of business; (bb) take title to any real property without conducting prior thereto an environmental investigation (which, at a minimum, shall consist of a phase I environmental report), which investigation shall disclose the absence of any suspected environmental contamination, except with respect to real property on which there is locate a 1-4 family residence (unless Fidelity or Thrift has reasonable cause to believe any Hazardous Materials may exist on such property); (cc) take or cause to be taken any action which would disqualify the Mergers as "reorganizations" within the meaning of Section 368 of the Code or as a qualified stock purchase within the meaning of Section 338 of the Code; or (dd) agree or make any commitment to take any actions prohibited by this Section 6.1. 6.2 Affirmative Conduct of Fidelity and Thrift Prior to Effective Time. Between the date hereof and the Effective Time of the Holding Company Merger, except as otherwise expressly permitted by this Agreement Fidelity and Thrift shall: (a) use their respective commercially reasonable efforts consistent with this Agreement to maintain and preserve intact their respective present business organizations and to maintain and preserve their respective relationships and goodwill with account holders, borrowers, employees and others having business relationships with Fidelity or Thrift; (b) use their respective commercially reasonable efforts to keep in full force and effect all of the existing material permits and licenses of Fidelity and Thrift; (c) use their respective commercially reasonable efforts to maintain insurance coverage at least equal to that now in effect on all properties for which they are responsible and on their respective business operations; (d) perform their respective material contractual obligations and not become in material default on any such obligations; (e) duly observe and conform to all lawful requirements applicable to their respective businesses in all material respects; (f) maintain their respective assets and properties in good condition and repair, normal wear and tear excepted; 46 (g) promptly advise HFC in writing of any event or any other transaction within Fidelity's or Thrift's knowledge whereby any Person or Related Group of Persons acquires, directly or indirectly, record or beneficial ownership or control (as defined in Rule 13d-3 promulgated by the SEC under the Exchange Act) of five percent (5%) or more of the outstanding Fidelity Stock prior to the record date fixed for the Fidelity Stockholders' Meeting or any adjourned meeting thereof to approve this Agreement and the transactions contemplated herein; (h) promptly notify HFC regarding receipt from any tax authority of any notification of the commencement of an audit, any request to extend the statute of limitations, any statutory notice of deficiency, any revenue agent's report, any notice of proposed assessment, or any other similar notification of potential adjustments to the tax liabilities of Fidelity, Thrift or the Fidelity Subsidiary, or any actual or threatened collection enforcement activity by any tax authority with respect to tax liabilities of Fidelity, Thrift or the Fidelity Subsidiary, and make available to HFC the calculation work papers for federal income tax estimated payments; (i) make available to HFC (i) monthly unaudited consolidated balance sheets and consolidated income statements of Fidelity and (ii) an update of the information specified in Section 4.30(a) within twenty-five (25) days after the close of each calendar month; (j) amend or supplement the Fidelity Lists as of the Closing Date, if necessary, to reflect any additional information that needs to be included in the Fidelity Lists; (k) use their respective commercially reasonable efforts to obtain any third party consent with respect to any contract, agreement, lease, license, amendment, permit or release that is material to the business of Fidelity on a consolidated basis or that is contemplated in this Agreement as required in connection with the Holding Company Merger or Bank Merger; (l) cooperate, with tax counsel in furnishing reasonable and customary written tax representations to tax counsel for purposes of supporting tax counsel's opinion as contemplated in Sections 10.4 and 11.6 hereof; (m) maintain an allowance for loan and lease losses consistent with practices and methodology as in effect on the date of the execution of this Agreement; and (n) use their respective commercially reasonable efforts to take such actions as HFC shall reasonably request with respect to the Fidelity and Thrift Plans; provided, however, without limiting the foregoing, if so requested by HFC, Fidelity and its ERISA Affiliates shall take any actions reasonably necessary (to the extent permissible under the Plans and applicable laws and regulations) to cause the termination of any or all of the Plans (as the term is defined in Section 4.21 of the Agreement) maintained by Fidelity or any ERISA Affiliate which cover employees and/or directors of Fidelity and/or its ERISA Affiliates, such termination to be effective as of the Closing Date, or in the case of Fidelity's 401(k) Plan one business day prior to the Closing Date, or such later date as HFC may specify in its request; provided, further, that HFC shall not take any action, nor request Fidelity or its ERISA Affiliates to take any action, with respect to the Fidelity and Thrift Plans that would be contrary to any other provision in this 47 Agreement, including, without limitation, the provisions set forth in Sections 8.5(b) and (d) of this Agreement. 6.3 Filings. Fidelity and Thrift agree that through the Effective Time of the Holding Company Merger, each of the respective reports, registrations, statements and other filings required to be filed by Fidelity, Thrift or the Fidelity Subsidiary with any applicable Governmental Entity shall comply in all material respects with all applicable statutes, rules and regulations and none shall, as of their filing or effective date or, in the case of the Proxy Statement and Prospectus (but only with respect to information supplied by Fidelity for inclusion or incorporation by reference therein), the mailing date, contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any such report, registration, statement or other filing that is intended to present the financial position, results of operations or changes in cash flows, as the case may be, of the entity or entities to which it relates will fairly present the financial position, results of operations or changes in cash flows, as the case may be, of such entities or entity and will be prepared in accordance with generally accepted accounting principles and/or applicable regulatory accounting principles or banking regulations consistently applied during the periods involved. 6.4 Notices; Reports. Fidelity and Thrift will promptly notify HFC and Bank of any event of which Fidelity or Thrift obtains knowledge which has had or may have a Material Adverse Effect or in the event that Fidelity or Thrift determines that either is unable to fulfill any of the conditions to the performance of HFC's or Bank's obligations hereunder, as set forth in Articles IX or XI herein, and Fidelity and Thrift will furnish HFC as soon as available all proxy statements, information statements, financial statements, reports, letters and communications sent by Fidelity to its stockholders or other security holders as a class, and all reports filed by Fidelity, Thrift or the Fidelity Subsidiary with, or received by Fidelity, Thrift or the Fidelity Subsidiary from, the SEC, DFI, FDIC or any other Governmental Entity. 6.5 Fidelity Stockholders' Meeting. Promptly after the execution of this Agreement, Fidelity will take action necessary in accordance with applicable law and its Certificate of Incorporation and Bylaws to convene a meeting of its stockholders to consider and vote upon this Agreement and the transactions contemplated hereby. The Board of Directors of Fidelity shall, subject to its fiduciary duties, recommend that its stockholders approve this Agreement and the transactions contemplated hereby, and the Board of Directors of Fidelity shall, subject to its fiduciary duties, use its best efforts to obtain the requisite approval of the holders of the outstanding Fidelity Series A Common Stock of this Agreement and the transactions contemplated hereby. 6.6 Bank Merger. Fidelity and Thrift shall, at the request of HFC (a) take all necessary corporate and other action, to adopt and approve the Bank Merger; (b) execute, deliver and, where appropriate, file any and all documents necessary or desirable to permit the Bank Merger immediately following consummation of the Holding Company Merger; and (c) take and cause to be taken any other action to permit the consummation of any transactions contemplated in connection with the Bank Merger. Neither Fidelity nor Thrift shall take any action that would 48 prevent performance of the Agreement of Bank Merger or any other transactions contemplated in connection with the Bank Merger. 6.7 Affiliates. Within fifteen (15) days of the date of this Agreement, and again on the date this Agreement is submitted for approval to the stockholders of Fidelity, Fidelity shall deliver to HFC a letter identifying all persons who are "affiliates" of Fidelity for purposes of Rule 145 under the Securities Act. Fidelity shall use reasonable efforts to cause each such affiliate to deliver to HFC no less than thirty (30) days prior to the Effective Time of the Holding Company Merger a written "Affiliates" agreement, in the form attached hereto as Exhibit C, providing that such person shall dispose of the HFC Stock to be received by such person in the Holding Company Merger only in accordance with applicable law. 6.8 Director Resignations. Fidelity and Thrift shall use reasonable efforts to deliver or cause to be delivered to HFC at the Closing, the resignations of the members of the Board of Directors of Fidelity and Thrift effective at the Closing. 6.9 Accountants' Letters. Fidelity shall use its commercially reasonable efforts to cause to be delivered to HFC a letter of Deloitte & Touche dated (a) the date on which the S-4 Registration Statement shall become effective and (b) a date shortly prior to the Effective Time of the Holding Company Merger, in form and substance customary for "comfort" letters delivered by independent accountants in accordance with Statement of Financial Accounting Standards No. 72. 6.10 Accounting Accommodations. On a basis mutually satisfactory to Fidelity and HFC, Fidelity and Thrift shall take any charge-offs or additions to the allowance for loan loss or other financial adjustments made at the reasonable request of HFC and for the convenience of HFC so as to permit treatment on a basis consistent with that of HFC; provided, however, that no such charge-offs, additions or adjustments need be made prior to the satisfaction of the conditions set forth in Sections 9.1 and 9.3 or to the extent that they are inconsistent with generally accepted accounting principles or applicable regulatory requirements; and further provided that the taking of any such charge-offs, additions or adjustments shall in no event constitute or be deemed to be a breach, violation of or failure to satisfy any representation, warranty, covenant, agreement condition or other provision of this Agreement or otherwise be considered in determining whether any such breach, violation or failure to satisfy shall have occurred. ARTICLE VII COVENANTS OF HFC AND BANK PENDING EFFECTIVE TIME OF THE MERGERS HFC and Bank covenant and agree with Fidelity and Thrift as follows: 7.1 Limitation on HFC's and Bank's Conduct Prior to Effective Time. Between the date hereof and the Effective Time of the Holding Company Merger, except as contemplated by this Agreement and subject to requirements of law and regulation generally applicable to 49 federally chartered savings banks and savings and loan holding companies, HFC and Bank shall not, without prior written consent of Fidelity: (a) take any action which would or is reasonably likely to (i) adversely affect the ability of HFC or Bank to obtain any necessary approval of any Governmental Entity required for the transactions contemplated hereby; (ii) adversely affect HFC's or Bank's ability to perform its covenants and agreements under this Agreement; or (iii) result in any of the conditions to the performance of HFC's or Bank's obligations hereunder, as set forth in Articles IX or XI herein, not being satisfied; (b) take or cause to be taken any action which would disqualify the Mergers as "reorganizations" within the meaning of Section 368 of the Code; (c) amend HFC's certificate of incorporation or bylaws in any respect which would materially and adversely affect the rights and privileges attendant to the HFC Stock; or (d) agree or make any commitment to take any actions prohibited by this Section 7.1. 7.2 Affirmative Conduct of HFC and Bank Prior to Effective Time. Between the date hereof and the Effective Time of the Holding Company Merger, HFC and Bank shall: (a) duly observe and conform to all lawful requirements applicable to their respective businesses in all material respects; (b) use their respective commercially reasonable efforts to obtain any third party consent with respect to any contract, agreement, lease, license, arrangement, permit or release that is material to the business of HFC on a consolidated basis or that is contemplated in this Agreement as required in connection with the Holding Company Merger and the Bank Merger; (c) promptly notify Fidelity regarding receipt from any tax authority of any notification of the commencement of an audit, any request to extend the statute of limitations, any statutory notice of deficiency, any revenue agent's report, any notice of proposed assessment, or any other similar notification of potential adjustments to the tax liabilities of HFC or Bank, or any actual or threatened collection enforcement activity by any tax authority with respect to tax liabilities of HFC or Bank; (d) make available to Fidelity (i) monthly unaudited consolidated balance sheets and consolidated income statements and (ii) an update of the information specified in Section 5.14(a) within twenty-five (25) days after the close of each calendar month; (e) cooperate, with tax counsel in furnishing reasonable and customary written tax representations to tax counsel for purposes of supporting tax counsel's opinion as contemplated in Sections 10.4 and 11.6 hereof; and (f) amend or supplement the HFC Lists as of the Closing Date if necessary to reflect any additional information that needs to be included in the HFC Lists. 50 7.3 Applications. HFC and Bank will promptly prepare and file or cause to be prepared and filed (a) applications for approval of the Holding Company Merger and Bank Merger and the transactions contemplated hereby with the OTS, (b) in conjunction with Fidelity, the S-4 Registration Statement, including the Proxy Statement and Prospectus with the SEC, and (c) any other applications necessary to consummate the transactions contemplated hereby. HFC shall afford Fidelity a reasonable opportunity to review the S-4 Registration Statement and all such applications and all amendments and supplements thereto before the filing thereof. HFC and Bank will use their respective commercially reasonable efforts to obtain all regulatory approvals or consents necessary to effect the Holding Company Merger and Bank Merger. 7.4 Filings. HFC and Bank agree that through the Effective Time of the Holding Company Merger, each of the respective reports, registrations, statements and other filings required to be filed by HFC and Bank with any applicable Governmental Entity shall comply in all material respects with all applicable statutes, rules and regulations and none shall, as of their filing or effective date or, in the case of the Proxy Statement and Prospectus (other than with respect to information supplied by Fidelity for inclusion or incorporation by reference therein), the mailing date, contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Any financial statement contained in any such report, registration, statement or other filing that is intended to present the financial position, results of operations or changes in cash flows, as the case may be, of the entity or entities to which it relates will fairly present the financial position, results of operations or changes in cash flows, as the case may be, of such entities or entity and will be prepared in accordance with generally accepted accounting principles and/or applicable regulatory accounting principles or banking regulations consistently applied during the periods involved. 7.5 Blue Sky. HFC agrees to use commercially reasonable efforts to comply with all applicable notice provisions of the securities laws of each jurisdiction in which stockholders of Fidelity reside in connection with the issuance of HFC Stock in the Holding Company Merger. 7.6 Notices; Reports. HFC and Bank will promptly notify Fidelity and Thrift of any event of which HFC or Bank obtains knowledge which has had or may have a Material Adverse Effect or in the event that HFC or Bank determines that it is unable to fulfill any of the conditions to the performance of Fidelity's and Thrift's obligations hereunder, as set forth in Articles IX or X herein, and HFC and Bank will furnish Fidelity as soon as available all proxy statements, information statements, financial statements, reports, letters and communications sent by HFC to its stockholders or other security holders as a class, and all reports filed by HFC or Bank with, or received by HFC or Bank from, the SEC, OTS, FDIC or any other Governmental Entity. 7.7 Removal of Conditions. In the event of the imposition of a condition to any regulatory approval which HFC deems to materially adversely affect it or to be materially burdensome as provided in Section 11.2 hereof, HFC shall use its commercially reasonable efforts for purposes of obtaining the removal of such condition. 7.8 HFC Stockholders' Meeting. Promptly after the execution of this Agreement, HFC will take action necessary in accordance with applicable law and its certificate of 51 incorporation and bylaws to convene a meeting of its stockholders to consider and vote upon the Holding Company Merger. The Board of Directors of HFC shall solicit the approval of the holders of a majority of the outstanding shares of HFC Common Stock of this Agreement and the Holding Company Merger, and, subject to its fiduciary duties, shall recommend that the stockholders of HFC adopt and approve this Agreement and the Holding Company Merger and use its best efforts to obtain the foregoing approval of the stockholders of HFC. 7.9 Nasdaq NMS Listing. HFC shall use its commercially reasonable efforts to cause the shares of HFC Stock to be issued in the Holding Company Merger to be approved for listing on the Nasdaq NMS, subject to official notice of issuance, prior to the Effective Time of the Holding Company Merger. ARTICLE VIII ADDITIONAL COVENANTS The parties hereto hereby mutually covenant and agree with each other as follows: 8.1 Commercially Reasonable Efforts. Subject to the terms and conditions of this Agreement, each party will use its commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the transactions contemplated by this Agreement as promptly as practicable. None of HFC, Bank, Fidelity or Thrift shall take, or cause, or to the best of its ability permit to be taken, any action that would substantially delay or impair the prospects of completing the Mergers pursuant to this Agreement and the Agreement of Bank Merger. 8.2 Public Announcements. No press release or other public disclosure of matters related to this Agreement or any of the transactions contemplated hereby shall be made by HFC or Bank, on the one hand, or Fidelity or Thrift, on the other hand, unless the other parties shall have provided their prior consent to the form and substance thereof; provided, however, that nothing herein shall be deemed to prohibit any party hereto from making any disclosure which its counsel deems necessary or advisable in order to fulfill such party's disclosure obligations imposed by law. 8.3 Access; Information. (a) HFC and Bank, on the one hand, and Fidelity and Thrift, on the other hand, shall keep each other advised of all material developments relating to their respective businesses, and to consummation of the Mergers, and each shall provide to the other, upon request, reasonable details of any such development. (b) During the period prior to the Effective Time of the Holding Company Merger, Fidelity and Thrift shall afford, and Fidelity shall cause the Fidelity Subsidiary to afford, upon reasonable notice, to HFC and its officers, employees, counsel, accountants and other authorized representatives, reasonable access, during normal business hours, to all of their respective businesses, operations, books, files and records (including, without limitation tax 52 returns and work papers of independent auditors), and during such period shall make available all information concerning the same as may be reasonably requested. (c) During the period prior to the Effective Time of the Holding Company Merger, HFC and Bank shall afford, upon reasonable notice, to Fidelity and its officers, employees, counsel, accountants and other authorized representatives, reasonable access, during normal business hours, to the executive officers of HFC and Bank, and during such period HFC and Bank shall make available all information as may be reasonably requested. (d) Each party agrees that it will not, and will cause its representatives not to, use any information obtained pursuant to this Section 8.3 (as well as any other information obtained prior to the date hereof in connection with the entering into of this Agreement) for any purpose unrelated to the consummation of the transactions contemplated by this Agreement. Subject to the requirements of law, each party shall keep confidential, and shall cause its representatives to keep confidential, all information and documents in accordance with the terms of the Confidentiality Agreement. In the event that this Agreement is terminated or the transactions contemplated by this Agreement shall otherwise fail to be consummated, each party shall promptly cause all copies of documents or extracts thereof containing information and data as to another party hereto to be returned to the party which furnished the same. (e) No investigation by any party of the business and affairs of any other party shall affect or be deemed to modify or waive any representation, warranty, covenant or agreement in this Agreement or the conditions to any party's obligation to consummate the transactions contemplated by this Agreement. 8.4 Applications. The parties hereto shall cooperate with each other in the preparation of the S-4 Registration Statement, including the Proxy Statement and Prospectus, and all other notices or applications required to be filed to obtain the necessary regulatory approvals to consummate the transactions contemplated by this Agreement and the Agreement of Bank Merger. HFC and Fidelity agree to use commercially reasonable efforts to cause the S-4 Registration Statement to be declared effective under the Securities Act as promptly as practicable after filing thereof. After the S-4 Registration Statement is declared effective under the Securities Act, HFC and Fidelity shall thereafter promptly mail the Proxy Statement and Prospectus to their respective stockholders. HFC and Fidelity covenant and agree that all information supplied by it for inclusion or incorporation by reference in the S-4 Registration Statement and in all applications or statements filed with the appropriate regulatory authorities for approval of, or consent to, the Holding Company Merger and Bank Merger will comply in all material respects with the provisions of applicable law, and will not, as of their respective filing or effective dates and, in the case of the Proxy Statement and Prospectus, as of its mailing date, contain any untrue statement of material fact or omit to state material fact required to be stated therein or necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading. 8.5 Employees and Employee Benefits. (a) HFC agrees that the employees of Fidelity and Thrift who are retained by HFC after the consummation of the Mergers will be provided with benefits under employee 53 benefit plans which in the aggregate are substantially comparable to those currently provided by HFC to its current employees. HFC will cause each employee benefit plan of HFC in which employees of Fidelity or Thrift are eligible to participate to take into account for purposes of eligibility and vesting thereunder the service of such employees with Fidelity or Thrift as if such service were with HFC, to the same extent that such service was credited under a comparable plan of Fidelity or Thrift. (b) HFC and Bank shall honor, and HFC and Bank shall continue to be obligated to perform, in accordance with their terms, all benefit obligations to, and contractual rights of, current and former employees of Fidelity and Thrift existing as of the Effective Time of the Holding Company Merger, as well as all employment, severance, deferred compensation or "change-in-control" agreements, plans or policies of Fidelity and Thrift disclosed on the Fidelity Lists. HFC and Bank acknowledge that the consummation of the Holding Company Merger will constitute a "change-in-control" of Fidelity and Thrift for purposes of all Plans (as defined in Section 4.22 hereof). (c) If employees of Fidelity and Thrift become eligible to participate in a medical, dental or health plan of HFC or Bank, HFC or Bank shall take commercially reasonable actions to cause each such plan to (i) waive any preexisting condition limitations to the extent such conditions are covered under the applicable medical, health or dental plans of HFC and Bank, (ii) provide full credit under such plans for any deductibles, co-payment and out-of-pocket expenses incurred by the employees and their beneficiaries during the portion of the calendar year prior to such participation to the extent permitted by the insurers of such plans, and (iii) waive any waiting period limitation or evidence of insurability requirement which would otherwise be applicable to such employee on or after the Effective Time of the Holding Company Merger to the extent such employee had satisfied any similar limitation or requirement under an analogous Plan prior to the Effective Time of the Holding Company Merger. (d) An employee of Fidelity or Thrift (other than an employee who is party to a severance agreement) whose employment is involuntarily terminated other than for cause following the Effective Time of the Holding Company Merger shall be entitled to receive severance benefits in accordance with, and to the extent provided in, the Fidelity Merger Severance Plan, a copy of which HFC acknowledges has been provided to it by Fidelity, and key employees of Fidelity or Thrift who remain such through the Effective Time of the Holding Company Merger shall be paid a retention bonus in accordance with the Fidelity Merger Severance Plan; provided, however, that the total payments pursuant to this Section 8.5(d) shall not exceed $250,000. 8.6 Environmental Assessment. HFC may cause to be prepared at HFC's sole cost and expense within sixty (60) days of the date of this Agreement one or more phase I environmental investigations with respect to any property on the Fidelity Real Property List. In the event any such phase I environmental investigation report, or any similar report submitted to HFC pursuant to Section 4.13(c) of this Agreement, or any information from a Governmental Entity discloses facts which, in the sole discretion of HFC, warrant further investigation, HFC shall provide written notice to Fidelity and Thrift, and Fidelity and Thrift shall use commercially reasonable efforts to cause to be completed within sixty (60) days of such written notice, at the sole cost and expense of HFC, a phase II environmental investigation and report with respect to 54 such property. HFC agrees to keep confidential and not to disclose any nonpublic information obtained in the course of such environmental investigation relating to environmental contamination or suspected contamination of any property. 8.7 Indemnification. (a) HFC agrees that following consummation of the Holding Company Merger, to the greatest extent permitted by the Delaware General Corporation Law or the banking laws and regulations applicable to, and organizational documents or bylaws of, Fidelity or Thrift as in effect on the date hereof, it shall indemnify, defend and hold harmless each present and former director and officer of Fidelity or Thrift, determined as of the Effective Time of the Holding Company Merger (the "Indemnified Parties"), for any claim or loss arising out of their actions while a director or officer, including any acts relating to the negotiation, execution and performance of this Agreement or any of the transactions contemplated hereby, and shall pay the expenses, including reasonable attorneys' fees, of such individuals in advance of the final resolution of any claim, provided such individuals shall first execute an undertaking acceptable to HFC to return such advances in the event it is finally concluded such indemnification is not allowed under applicable law. Without limiting the foregoing, HFC also agrees that limitations on liability existing in favor of the Indemnified Parties as provided in the certificate of incorporation and bylaws of Fidelity or similar governing documents of Thrift as in effect on the date hereof with respect to matters occurring prior to the Effective Time of the Holding Company Merger shall survive the Holding Company Merger and shall continue in full force and effect from and after the consummation of such transaction. (b) Prior to the Effective Time of the Holding Company Merger, HFC, Fidelity and Thrift shall use commercially reasonable efforts to purchase an extended reporting period endorsement under Fidelity's existing directors' and officers' liability insurance coverage for Fidelity's directors and officers in a form reasonably acceptable to Fidelity, or purchase other insurance coverage for such period, which shall provide such directors and officers with coverage for six (6) years following the Effective Time of the Holding Company Merger of not less than the existing coverage under, and have other terms no materially less favorable on the whole to, the insured persons than the directors' and officers' liability insurance coverage presently maintained by Fidelity, provided that in no event shall HFC, Fidelity or Thrift be required to expend in any one year an amount in excess of 200% of the annual premiums currently paid by Fidelity for such insurance (the "Insurance Amount"), and further provided that if HFC, Fidelity or Thrift is unable to maintain or obtain the insurance called for by this Section 8.7(b) as a result of the preceding provision, each of HFC, Fidelity and Thrift shall use commercially reasonable efforts to obtain as much comparable insurance as is available for the Insurance Amount with respect to acts or omissions occurring prior to the Effective Time of the Holding Company Merger by such directors and officers in their capacities as such. (c) If HFC or any of its successors or assigns shall consolidate with or merge into any other entity and shall not be the continuing or surviving entity of such consolidation or merger or shall transfer all or substantially all of its assets to any other entity, then and in each case, proper provision shall be made so that the successors and assigns of HFC shall assume the obligations set forth in this Section 8.7. 55 ARTICLE IX CONDITIONS PRECEDENT TO THE HOLDING COMPANY MERGER The obligations of each of the parties hereto to consummate the transactions contemplated herein are subject to the satisfaction or waiver by each of the parties, on or before the Closing Date, of the following conditions: 9.1 Stockholder Approvals. The Agreement and the transactions contemplated hereby shall have received all requisite approvals of the stockholders of Fidelity and HFC. 9.2 No Judgments or Orders. No judgment, decree, injunction, order or proceeding shall be outstanding or threatened by any Governmental Entity which prohibits the effectuation of, or threatens to invalidate or set aside, the Holding Company Merger or Bank Merger substantially in the form contemplated by this Agreement, or would have a Material Adverse Effect, unless counsel to the party against whom such action or proceeding was instituted or threatened renders to the other parties hereto a favorable opinion that such judgment, decree, injunction, order or proceeding is without merit. 9.3 Regulatory Approvals. To the extent required by applicable law or regulation, all approvals or consents or non-objections of any Governmental Entity, including, without limitation, those of the OTS, DFI and FDIC, shall have been obtained or granted for the Holding Company Merger and Bank Merger and the transactions contemplated hereby and the applicable waiting period under all laws shall have expired. All other statutory or regulatory requirements for the valid completion of the transactions contemplated hereby shall have been satisfied. 9.4 Securities Laws. The S-4 Registration Statement shall have been declared effective by the SEC and no stop order suspending the effectiveness of such S-4 Registration Statement shall have been issued and no proceedings for that purpose shall have been initiated. 9.5 Listing. The HFC Stock issuable in the Holding Company Merger shall have been included for listing on the Nasdaq NMS. ARTICLE X CONDITIONS PRECEDENT TO THE OBLIGATIONS OF FIDELITY AND THRIFT All of the obligations of Fidelity and Thrift to effect the transactions contemplated hereby shall be subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in writing by Fidelity or Thrift: 10.1 Representations and Warranties; Performance of Covenants. All covenants, terms and agreements of this Agreement to be complied with and performed by HFC and Bank at or before the Closing Date shall have been complied with and performed in all material respects. Each of the representations and warranties of HFC and Bank contained in Article V hereof, without regard to any statements of materiality that may be contained therein but subject in all cases to the standard set forth in Section 13.3(b), shall be true and correct on and as of the date of 56 this Agreement and on and as of the Closing Date (except to the extent such representations and warranties speak as of an earlier date) with the same effect as though such representations and warranties had been made on and as of the Closing Date. It is understood and acknowledged that the representations being made on and as of the Closing Date shall be made without giving effect to any update with respect to the HFC Lists in accordance with Section 7.2(f). 10.2 Officers' Certificate. There shall have been delivered to Fidelity and Thrift on the Closing Date a certificate executed by an authorized executive officer of HFC and Bank, respectively, certifying, to their knowledge, compliance with all of the provisions of Sections 10.1 and 10.3. 10.3 Absence of Certain Changes. Between the date of this Agreement and the Effective Time of the Holding Company Merger, there shall not have occurred any event, circumstance, change or effect that has had or could reasonably be expected to have, individually or together with all other events, circumstances, changes or effects, a Material Adverse Effect with respect to HFC, whether or not such event, circumstance, change or effect is reflected in the HFC Lists as amended or supplemented after the date of this Agreement. 10.4 Tax Opinion. If the Holding Company Merger is effected in accordance with Section 2.1, Fidelity shall have received an opinion of Elias, Matz, Tiernan & Herrick, LLP, dated the Effective Time of the Holding Company Merger, to the effect that, on the basis of facts, representations and assumptions set forth in such opinion, (i) the Holding Company Merger constitutes a reorganization within the meaning of Section 368 of the Code and (ii) no gain or loss will be recognized by stockholders of Fidelity who receive shares of HFC Stock in exchange for shares of Fidelity Stock, except with respect to cash received pursuant to Article II of this Agreement. In rendering its opinion, Elias, Matz, Tiernan & Herrick, LLP, may require and rely upon representations contained in letters from Fidelity, HFC, Thrift and Bank. ARTICLE XI CONDITIONS PRECEDENT TO OBLIGATIONS OF HFC AND BANK All of the obligations of HFC and Bank to effect the transactions contemplated hereby shall be subject to the satisfaction, on or before the Closing Date, of the following conditions, any of which may be waived in writing by HFC and Bank: 11.1 Representations and Warranties; Performance of Covenants. All covenants, terms and agreements of this Agreement to be complied with and performed by Fidelity or Thrift at or before the Closing Date shall have been complied with and performed in all material respects. Each of the representations and warranties of Fidelity and Thrift contained in Article IV hereof, without regard to any statements of materiality that may be contained therein but subject in all cases to the standard set forth in Section 13.3(b), shall be true and correct on and as of the date of this Agreement and on and as of the Closing Date (except to the extent such representations and warranties speak as of an earlier date) with the same effect as though such representations and warranties had been made on and as of the Closing Date. It is understood and acknowledged that 57 the representations being made on and as of the Closing Date shall be made without giving effect to any update with respect to the Fidelity Lists in accordance with Section 6.2(j). 11.2 Regulatory Approvals and Related Conditions. Any governmental and regulatory approvals and consents which are referred to in this Agreement and are required to consummate the Holding Company Merger and Bank Merger shall have been granted without the imposition of conditions that are or would have become applicable to HFC or Bank and that HFC, in its reasonable opinion, concludes would have a Material Adverse Effect. 11.3 Absence of Certain Changes. Between the date of this Agreement and the Effective Time of the Holding Company Merger and the Effective Time of the Bank Merger, there shall not have occurred any event, circumstance, change or effect that has had or could reasonably be expected to have, individually or together with all other events, circumstances, changes or effects, a Material Adverse Effect with respect to Fidelity, whether or not such event, change, circumstance or effect is reflected in the Fidelity Lists as amended or supplemented after the date of this Agreement. 11.4 Officers' Certificate. There shall have been delivered to HFC on the Closing Date a certificate executed by an authorized executive officer of each of Fidelity and Thrift, respectively, certifying, to their knowledge, compliance with all of the provisions of Sections 11.1 and 11.3. 11.5 Fidelity Senior Notes. All of the holders of outstanding Fidelity Senior Notes shall have converted their Fidelity Senior Notes into Fidelity Stock. 11.6 Opinion of HFC's Counsel. (a) If the Holding Company Merger is effected in accordance with Section 2.1, HFC shall have received an opinion of Manatt, Phelps & Phillips, LLP, counsel to HFC, dated the Effective Time of the Holding Company Merger, to the effect that, on the basis of facts, representations and assumptions set forth in such opinion, the Holding Company Merger constitutes a reorganization under Section 368 of the Code. In rendering its opinion, Manatt, Phelps & Phillips, LLP may require and rely upon representations contained in letters from HFC, Fidelity, Thrift and Bank. (b) If the Holding Company Merger is effected in accordance with Section 2.2, HFC shall have received an opinion of Manatt, Phelps & Phillips, LLP, dated the Effective Time of the Holding Company Merger, to the effect that, on the basis of the facts, representations and assumptions, set forth in such opinion, the Holding Company Merger constitutes a "qualified stock purchase" under Section 338 of the Code. In rendering its opinion, Manatt, Phelps & Philips, LLP may require and rely upon representations contained in letters from HFC, Fidelity, Thrift and Bank. 11.7 Third Party Consents. Fidelity and Thrift shall have obtained all consents of other parties to their respective material mortgages, notes, leases, franchises, agreements, licenses and permits as may be necessary to permit the Holding Company Merger and Bank Merger and the transactions contemplated herein to be consummated without a default, acceleration, breach or 58 loss of rights or benefits thereunder, which, individually or in the aggregate, would or could reasonably be expected to have a Material Adverse Effect with respect to Fidelity. 11.8 Fidelity Options and Option Plan. The Fidelity Option Plan shall have been cancelled and each holder of a Fidelity Option shall have entered into a written option cancellation agreement with Fidelity, in a form approved by HFC, pursuant to which the holders of Fidelity Options shall have agreed to cancel or cash out their Fidelity Options at the Effective Time of the Holding Company Merger, and such option cancellation agreement shall be in full force and effect at the Closing Date. 11.9 Financial Statements. At least four Business Days prior to the Effective Time of the Holding Company Merger, Fidelity shall provide HFC with financial statements of Fidelity, presenting the consolidated financial condition of Fidelity as of the close of business on the last day of the last month ended immediately prior to the Effective Time of the Holding Company Merger and Fidelity's consolidated results of operations for the period from January 1, 2002 through the close of business on the last day of the last month ended immediately prior to the Effective Time of the Holding Company Merger (the "Closing Financial Statements of Fidelity"). The Closing Financial Statements of Fidelity shall have been prepared in all material respects in accordance with accounting principles generally accepted in the United States of America and other applicable legal and accounting requirements, and reflect all period-end accruals and other adjustments. 11.10 Earnings. The Adjusted Net Earnings of Fidelity (as defined below), as reflected on the Closing Financial Statements of Fidelity shall not be less than the amount shown on Exhibit D to this Agreement. "Adjusted Net Earnings of Fidelity" for purposes of this Section 11.10 shall mean the net earnings as reflected on the Closing Financial Statements of Fidelity, adjusted to add back the product of: (a) (i) all severance or retention benefits paid or accrued prior to the date of the Closing Financial Statements of Fidelity (subject to the limitation set forth in Section 8.5(d)); (ii) amounts paid or accrued prior to the date of the Closing Financial Statements of Fidelity for expenses solely related to the Mergers, including, but not limited to, legal, accounting and financial advisory fees; (iii) amounts paid or accrued prior to the date of the Closing Financial Statements of Fidelity with respect to the cancellation of Fidelity Options; (iv) amounts paid or accrued prior to the date of the Closing Financial Statements of Fidelity with respect to adjustments made pursuant to Section 6.10 of this Agreement; (vi) amounts paid or accrued prior to the date of the Closing Financial Statements of Fidelity with respect to any other actions taken by Fidelity or Thrift on the written request of HFC or Bank; and (vii) the $3.3 million loss incurred by Thrift in January 2002 in connection with the sale of trust preferred securities; and (b) 1.00 minus the applicable combined federal and state tax rate of Fidelity. 11.11 Gross Loans. The gross loans of Fidelity, as reflected on the Closing Financial Statements of Fidelity, shall be not less than $475 million. 11.12 Loan Loss Reserve. Fidelity shall have an allowance for loan and lease losses reflected on the Closing Financial Statements of Fidelity and calculated in accordance with the methodology utilized at December 31, 2001 (including the loss factors then utilized), of not less than 1.15% of gross loans and leases. 59 ARTICLE XII TERMINATION 12.1 Termination. This Agreement may be terminated at any time prior to the Effective Time of the Holding Company Merger upon the occurrence of any of the following: (a) By mutual written agreement; (b) By either Fidelity or HFC, if the required approval of the stockholders of Fidelity contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the required vote at a meeting of Fidelity stockholders duly convened therefor or at any adjournment thereof; provided, however, that the right to terminate this Agreement under this Section 12.1(b) shall not be available to Fidelity where the failure to obtain Fidelity stockholder approval shall have been caused by the action or failure to act of Fidelity or a Triggering Event with respect to Fidelity shall have occurred; (c) By either Fidelity or HFC, if the required approval of the stockholders of HFC contemplated by this Agreement shall not have been obtained by reason of the failure to obtain the required vote at a meeting of the HFC stockholders duly convened therefore or at any adjournment thereof; provided, however, that the right to terminate this agreement under this Section 12.1(c) shall not be available to HFC where the failure to obtain HFC stockholder approval shall have been caused by the action or failure to act of HFC; (d) By HFC (at any time prior to the adoption and approval of this Agreement and the Holding Company Merger by the required vote of the stockholders of Fidelity) if a Triggering Event with respect to Fidelity shall have occurred, and by Fidelity (at any time prior to the adoption and approval of this Agreement and the Holding Company Merger by the required vote of the stockholders of HFC) if a Triggering Event with respect to HFC shall have occurred; (e) By Fidelity immediately upon expiration of twenty (20) days from delivery of written notice by Fidelity to HFC of HFC's or Bank's breach of or failure to satisfy any covenant or agreement contained herein resulting in a reduction in the benefits of the transactions contemplated by the Agreement in so significant a manner that Fidelity, in its reasonable, good faith judgment, would not have entered into the Agreement had the inability of HFC or Bank to satisfy such covenant or agreement been known at the time hereof (provided that such breach has not been waived by Fidelity or cured by HFC or Bank prior to expiration of such twenty (20) day period); (f) By HFC immediately upon expiration of twenty (20) days from delivery of written notice by HFC to Fidelity or Thrift of Fidelity's or Thrift's breach of or failure to satisfy any covenant or agreement contained herein resulting in a reduction in the benefits of the transactions contemplated by the Agreement in so significant a manner that HFC, in its reasonable, good faith judgment, would not have entered into the Agreement had the inability of Fidelity or Thrift to satisfy such covenant or agreement been known at the time hereof (provided 60 that such breach has not been waived by HFC or cured by Fidelity or Thrift, as the case may be, prior to expiration of such twenty (20) day period); (g) By Fidelity or HFC, if any Governmental Entity denies or refuses to grant any approval, consent or authorization required to be obtained in order to consummate the transactions contemplated by this Agreement and such denial has become final and nonappealable; provided, however, that such right to terminate this Agreement under this Section 12.1(g) shall not be available to Fidelity or HFC if such party's failure to comply with Sections 7.3 or 8.4, as applicable, was a cause of such action; (h) By Fidelity or HFC, if any condition set forth in Article IX shall not have been met by December 31, 2002, provided, however, that this Agreement shall not be terminated pursuant to this Section 12.1(h) if the relevant condition shall have failed to occur as a result of any act or omission by the party seeking to terminate; (i) By Fidelity, if any of the conditions set forth in Article X shall not have been met, or by HFC if any of the conditions set forth in Article XI shall not have been met, by December 31, 2002, provided, however, that this Agreement shall not be terminated pursuant to this Section 12.1(i) if the relevant condition shall have failed to occur as a result of any act or omission by the party seeking to terminate; or (j) by Fidelity, if its Board of Directors so determines by a vote of a majority of the members of its entire Board, at any time during the five-day period commencing with the Determination Date if both of the following conditions are satisfied: (i) the number obtained by dividing the Average Closing Price by the Starting Price (the "HFC Ratio") shall be less than .80; and (ii) the HFC Ratio shall be less than the number obtained by dividing the Final Index Value by the Index Value on the Starting Date and subtracting 0.20 from the quotient in this clause (ii) (such number being referred to herein as the "Index Ratio"); subject, however, to the following three sentences. If Fidelity elects to exercise its termination right pursuant to this Section 12.1(j), it shall give written notice to HFC. During the five-day period commencing with its receipt of such notice, HFC shall have the option to increase the Exchange Ratio (calculated to the nearest one one-thousandth) to equal the lesser of (x) a number (rounded to the nearest thousandth) obtained by dividing (A) the product of the Starting Price, 0.80 and the Exchange Ratio (as then in effect) by (B) the Average Closing Price and (y) a number (rounded to the nearest one one-thousandth) obtained by dividing (A) the product of the Index Ratio and the Exchange Ratio (as then in effect) by (B) the HFC Ratio. If HFC so elects within such five-day period, it shall give prompt written notice to Fidelity of such election and the revised Exchange Ratio, whereupon no termination shall have occurred pursuant to this Section 12.1(j) and this Agreement shall remain in effect in accordance with its terms (except as the Exchange Ratio shall have been so modified). For purposes of this Section 12.1(j) the following terms shall have the meanings indicated: 61 "Average Closing Price" shall mean the average of the closing prices of a share of HFC Common Stock on the Nasdaq Stock Market's National Market (as reported in The Wall Street Journal, or if not reported therein, in another authoritative source) during the period of twenty (20) consecutive trading days ending on the trading day prior to the Determination Date, rounded to the nearest whole cent. "Determination Date" shall mean the date on which the last required approval of a federal or state banking regulatory authority is obtained with respect to the Mergers, without regard to any requisite waiting period in respect thereof. "Final Index Value" shall mean the average of the Index Values for the twenty (20) consecutive trading days ending on the trading day prior to the Determination Date. "Index Group" shall mean the twenty (20) financial institution holding companies listed below, the common stocks of all of which shall be publicly traded and as to which there shall not have been, since the Starting Date and before the Determination Date, any public announcement of a proposal for such company to be acquired or for such company to acquire another company or companies in transactions with a value exceeding 25% of the acquiror's market capitalization. In the event that the common stock of any such company ceases to be publicly traded or such announcement is made, such company shall be removed from the Index Group and the weights (which were determined based on market capitalization) shall be redistributed proportionately for determining the Index Value.
Ticker Name % Weighting ------ ---- ------------ WFSL Washington Federal, Inc. 27.42% DSL Downey Financial Corp. 22.56% WES Westcorp 12.39% FED FirstFed Financial Corp. 7.18% PFB PFF Bancorp, Inc. 6.52% STSA Sterling Financial Corporation 3.68% QCBC Quaker City Bancorp, Inc. 2.79% ITLA ITLA Capital Corporation 2.28% HRZB Horizon Financial Corp. 1.87% PROV Provident Financial Holdings, Inc. 1.72% HFWA Heritage Financial Corporation 1.62% KFBI Klamath First Bancorp, Inc. 1.56% EVRT EverTrust Financial Group, Inc. 1.53% UPFC United PanAm Financial Corp. 1.32% TSBK Timberland Bancorp, Inc. 1.18% FSMB First Mutual Bancshares, Inc. 1.09% MBBC Monterey Bay Bancorp, Inc. 0.99% RVSB Riverview Bancorp, Inc. 0.97% OTFC Oregon Trail Financial Corp. 0.91% FBNW FirstBank NW Corp. 0.42% 100.00% ======
62 "Index Value," on a given date, shall mean the weighted average (weighted in accordance with the definition of Index Group) of the closing prices on such date of the companies composing the Index Group. If any company belonging to the Index Group effects a stock dividend, reclassification, recapitalization, split-up, combination, exchange of share or similar transaction between the Starting Date and the Determination Date, the prices for the common stock of such company shall be appropriately adjusted for use in determining the Index Value. "Starting Date" shall mean the last trading day immediately preceding the date of the first public announcement of entry into this Agreement. "Starting Price" shall be $24.16. For the purposes of this Agreement, a "Triggering Event," with respect to Fidelity shall be deemed to have occurred if: (i) Fidelity's Board of Directors or any committee thereof shall for any reason have withdrawn or shall have amended or modified in a manner adverse to HFC its recommendation in favor of the adoption and approval of the Agreement or the approval of the Holding Company Merger, (ii) Fidelity shall have failed to include in the Proxy Statement and Prospectus the recommendation of its Board of Directors in favor of the adoption and approval of the Agreement and the approval of the Holding Company Merger, (iii) Fidelity's Board of Directors or any committee thereof shall have approved or recommended any Competing Transaction, (iv) Fidelity's Board of Directors fails to reaffirm (publicly, if so requested by HFC) its recommendation in favor of the adoption and approval of the Agreement and the approval of the Holding Company Merger within fifteen (15) Business Days after HFC requests in writing that such recommendation be reaffirmed, (v) Fidelity shall have exercised a right specified in the last sentence of Section 6.1(n) with respect to a Superior Proposal and shall, directly, or through its agents or representatives continue discussions with any third party concerning such Superior Proposal for more than fifteen (15) Business Days after the date of receipt of such Superior Proposal; or (vi) a tender or exchange offer relating to Fidelity's securities shall have been commenced by a Person unaffiliated with HFC and Fidelity shall not have sent to its securityholders within ten (10) Business Days after such tender or exchange offer is first published, sent or given, a statement disclosing that the Board of Directors of such party recommends rejection of such tender or exchange offer. For the purposes of this Agreement, a "Triggering Event," with respect to HFC shall be deemed to have occurred if: (i) HFC's Board of Directors or any committee thereof shall for any reason have withdrawn or shall have amended or modified in a manner adverse to Fidelity its recommendation in favor of the adoption and approval of the Agreement or the approval of the Holding Company Merger or (ii) HFC shall have failed to include in the Proxy Statement and Prospectus the recommendation of its Board of Directors in favor of the adoption and approval of the Agreement and the approval of the Holding Company Merger. 12.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 12.1, none of the parties shall have any further obligation or liability to any other party except (a) as provided in Section 8.3(d), the last sentence of Section 8.6, this Section 12.2 and Article XIII, each of which shall survive the termination of this Agreement, and the Confidentiality Agreement; and (b) to the extent such termination results from a party's willful 63 breach of the warranties and representations made by it, or willful failure in performance of any of its covenants, agreements or obligations hereunder. 12.3 Force Majeure. Notwithstanding anything to the contrary in this Agreement, in the event this Agreement is terminated as a result of a failure of a condition, which failure is due to a natural disaster or other act of God, or an act of war or terrorism, and provided no party has failed to observe the material obligations of such party under this Agreement, no party shall be obligated to pay to the other party to this Agreement any expenses or otherwise be liable hereunder. ARTICLE XIII MISCELLANEOUS 13.1 Expenses and Fees. (a) Except as set forth in Sections 13.1(b) and (c), all Expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such Expenses whether or not the Holding Company Merger is consummated. (b) HFC hereby agrees that if this Agreement is terminated by Fidelity or HFC pursuant to Section 12.1(c) or by Fidelity pursuant to Section 12.1(e), HFC shall promptly and in any event within ten (10) days after such termination pay Fidelity all Expenses, but not to exceed $500,000. (c) Fidelity hereby agrees that if the Agreement is terminated by HFC or Fidelity pursuant to Section 12.1(b), or by HFC pursuant to Section 12.1(f), Fidelity shall promptly and in any event within ten (10) days after such termination pay HFC all Expenses of HFC, but not to exceed $1,000,000. (d) In the event this Agreement is terminated by HFC pursuant to Section 12.1(d), other than with respect to a Triggering Event which involves a Fidelity Permitted Change in Recommendation, Fidelity shall promptly, but in no event later than two (2) Business Days after the date of such termination, pay to HFC a fee equal to three million three hundred thousand dollars ($3,300,000.00) in immediately available funds (the "Fidelity Termination Fee"). (e) In the event that (i) this Agreement is terminated (A) by HFC pursuant to Section 12.1(f) or (B) by either HFC or Fidelity pursuant to Section 12.1(b), (ii) between the date hereof and prior to the termination of this Agreement, there has been public disclosure of a proposal regarding a Competing Transaction or a request for non-public information or inquiry which Fidelity reasonably believes could lead to a proposal regarding a Competing Transaction and (iii) (A) within twelve (12) months following the termination of this Agreement an Acquisition of Fidelity is consummated or (B) within twelve (12) months following the termination of this Agreement Fidelity enters into an agreement providing for an Acquisition of Fidelity and an Acquisition of Fidelity is consummated within twenty-four (24) months of the termination of this Agreement, then Fidelity shall promptly, but in no event later than two (2) 64 Business Days after the consummation of such Acquisition of Fidelity, pay to HFC the Fidelity Termination Fee in immediately available funds. Any payment previously made by Fidelity to HFC pursuant to Sections 13.1(c) or (d) shall be credited against any amount due under this Section 13.1(e). (f) In the event this Agreement is terminated by Fidelity pursuant to Section 12.1(d), other than with respect to a Triggering Event which involves an HFC Permitted Change in Recommendation, HFC shall promptly, but in no event later than two (2) Business Days after the date of such termination, pay to Fidelity a fee equal to three million three hundred thousand dollars ($3,300,000.00) in immediately available funds (the "HFC Termination Fee"). (g) In the event that (i) this Agreement is terminated (A) by Fidelity or HFC pursuant to Section 12.1(c) or (B) by Fidelity pursuant to Section 12.1 (e), (ii) between the date hereof and prior to the termination of the Agreement there has been public disclosure of a proposal for an Acquisition of HFC which includes as a condition precedent to such transaction the termination of this Agreement if clause (i)(A) is applicable, or the Board of Directors of HFC shall have received such a proposal if clause (i)(B) is applicable, and (iii) (A) within twelve (12) months following the termination of this Agreement an Acquisition of HFC is consummated or (B) within twelve (12) months following the termination of this Agreement HFC enters into an agreement providing for an Acquisition of HFC and an Acquisition of HFC is consummated within twenty-four (24) months of the termination of this Agreement, then HFC shall promptly, but in no event later than two (2) Business Days after the consummation of such Acquisition of HFC, pay to Fidelity the HFC Termination Fee in immediately available funds. Any payment previously made by HFC to Fidelity pursuant to Sections 13.1(b) or (f) shall be credited against any amount due under this Section 13.1(g). (h) Fidelity acknowledges that the agreements contained in this Section 13.1 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, HFC would not enter into this Agreement; accordingly, if Fidelity fails to pay in a timely manner the amount(s) due pursuant to Sections 13.1 (c), (d) or (e), and, in order to obtain such payment, HFC makes a claim that results in a judgment against Fidelity for any unpaid amount(s) set forth in Sections 13.1(c), (d) or (e), Fidelity shall pay to HFC its reasonable costs and expenses (including reasonable attorneys' fees and expenses) in connection with such suit, together with interest on the unpaid amount(s) pursuant to Sections 13.1(c), (d) or (e), at the prime rate of Citibank, N.A. in effect on the date such payment was required to be made. Payment of the Fidelity Termination Fee shall not be in lieu of damages incurred in the event of breach of this Agreement. (i) HFC acknowledges that the agreements contained in this Section 13.1 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Fidelity would not enter into this Agreement; accordingly, if HFC fails to pay in a timely manner the amount(s) due pursuant to Section 13.1 (b), (f) or (g), and, in order to obtain such payment, Fidelity makes a claim that results in a judgment against HFC for any unpaid amount(s) set forth in Section 13.1(b), (f) or (g), HFC shall pay to Fidelity its reasonable costs and expenses (including reasonable attorneys' fees and expenses) in connection with such suit, together with interest on the unpaid amount(s) pursuant to Sections 13.1(b), (f) or (g), at the prime rate of Citibank, N.A. in effect on the date such payment was required to be made. 65 Payment of the HFC Termination Fee shall not be in lieu of damages incurred in the event of breach of this Agreement. (j) For the purposes of this Section 13.1 only, "Acquisition" with respect to Fidelity or HFC shall mean any of the following transactions (other than the transactions contemplated by this Agreement): (i) a merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving Fidelity or HFC, as applicable, pursuant to which the stockholders of Fidelity or HFC, as applicable, immediately preceding such transaction hold less than fifty percent (50%) of the aggregate equity interests in the surviving or resulting entity of such transaction or any direct or indirect parent thereof, (ii) a sale or other disposition by Fidelity or HFC, as applicable, or its subsidiaries of assets representing in excess of fifty percent (50%) of the aggregate fair market value of Fidelity's or HFC's, as applicable, business immediately prior to such sale, or (iii) the acquisition by any Person or group (including by way of a tender offer or an exchange offer or issuance by the party or such person or group), directly or indirectly, of beneficial ownership or a right to acquire beneficial ownership of shares representing in excess of fifty percent (50%) of the voting power of the then outstanding shares of capital stock of Fidelity or HFC, as applicable. (k) For purposes of this Section 13.1, "Expenses" shall include all reasonable out-of-pocket expenses (including all fees and expenses of attorneys, accountants, investment bankers, experts and consultants to the party and its Affiliates) incurred by the party or on its behalf in connection with the consummation of the transactions contemplated by this Agreement. 13.2 Notices. Any notice, request, instruction or other document to be given hereunder by any party hereto to another shall be in writing and delivered personally or by confirmed facsimile transmission or sent by overnight courier, registered or certified mail, postage prepaid, with return receipt requested, addressed as follows: To Fidelity or Thrift: First Fidelity Bancorp, Inc. 3061 Edinger Avenue Tustin, California 92780 Attention: Charles W. Thomas Facsimile Number: (949) 936-1888 With a copy to: Elias, Matz, Tiernan & Herrick L.L.P. 734 15th Street, NW. Washington, DC 20005 Attention: Timothy B. Matz, Esq. Facsimile Number: (202) 347-2172 66 To HFC or Bank: Hawthorne Financial Corporation 2381 Rosecrans Avenue, 2nd Floor El Segundo, CA 90218 Attention: Simone Lagomarsino Facsimile Number: (310) 725-5038 With a copy to: Manatt, Phelps & Phillips, LLP 11355 West Olympic Boulevard Los Angeles, CA 90064 Attention: William T. Quicksilver, Esq. Facsimile Number: (310) 312-4224 Any such notice, request, instruction or other document shall be deemed received on the date delivered personally or delivered by confirmed facsimile transmission, or on the third Business Day after it was sent by registered or certified mail, postage prepaid. Any of the persons shown above may change its address for purposes of this section by giving notice in accordance herewith. 13.3 Material Adverse Effect; Standard. (a) For purposes of this Agreement, the term "Material Adverse Effect" shall mean any material adverse effect on (a) the business, financial condition or results of operations of HFC, Bank and their respective subsidiaries taken as a whole, on the one hand, and Fidelity, Thrift and their respective subsidiaries taken as a whole, on the other hand, as the context may dictate; or (b) the ability of Fidelity and Thrift, on the one hand, and HFC or Bank, on the other hand, or any of them, to perform their respective material obligations hereunder, or otherwise materially impedes consummation of the Mergers; provided, however, that in determining whether a Material Adverse Effect has occurred there shall be excluded any effect the cause of which is: (i) any change, which is made or becomes effective after the date hereof, in banking or similar laws of general applicability or interpretations thereof by courts or Governmental Entities; (ii) any change, which is made or becomes effective after the date hereof, in generally accepted accounting principles and/or applicable regulatory accounting principles or banking regulations consistently applied, and applicable to savings associations or savings and loan holding companies; (iii) any action or omission of HFC or Bank, on the one hand, or Fidelity or Thrift, on the other hand, taken with the prior written consent of the other, as applicable, or as permitted by this Agreement, in contemplation of the Mergers; (iv) any changes in general economic conditions affecting financial institutions generally, including, without limitation, changes in interest rates; and (v) all expenses solely related to the Mergers, including but not limited to, legal, accounting and financial advisory fees, and further provided that any decline in the stock price or trading volume of the HFC Stock shall not be deemed to be a Material Adverse Effect in and of itself. 67 (b) Notwithstanding any provision of this Agreement to the contrary, no representation or warranty of Fidelity and Thrift contained in Article IV (other than the representations and warranties contained in Section 4.3(a) and (b)) or HFC and Bank contained in Article V shall be deemed untrue or incorrect, and no party hereto shall be deemed to have breached a representation or warranty, as a consequence of the existence of any fact, event or circumstance unless such fact, event or circumstance, individually or taken together with all other facts, events or circumstances inconsistent with any representation or warranty contained in Article IV or Article V, as applicable, has had or is reasonably likely to have a Material Adverse Effect on the party making such representation or warranty. 13.4 Successors and Assigns. All terms and conditions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective transferees, successors and assigns; provided, however, that this Agreement and all rights, privileges, duties and obligations of the parties hereto may not be assigned or delegated by any party hereto and any such attempted assignment or delegation shall be null and void. 13.5 Counterparts. This Agreement and any exhibit hereto may be executed in one or more counterparts, all of which, taken together, shall constitute one original document and shall become effective when one or more counterparts have been signed by the appropriate parties and delivered to each party hereto. 13.6 Effect of Representations and Warranties. The representations and warranties contained in this Agreement or in any List shall terminate at the Effective Time of the Holding Company Merger. 13.7 Third Parties. Except for the Indemnified Parties' rights to enforce HFC's obligations under Section 8.7, which are expressly intended to be for the irrevocable benefit of, and shall be enforceable by, each Indemnified Party and his or her heirs and representatives, each party hereto intends that this Agreement shall not benefit or create any right or cause of action to any person other than parties hereto. As used in this Agreement the term "parties" shall refer only to Fidelity, HFC, Thrift, Bank, or Merger Sub as the context may require. 13.8 Lists; Exhibits; Integration. Each List, exhibit and letter delivered pursuant to this Agreement shall be in writing and shall constitute a part of the Agreement, although Lists and letters need not be attached to each copy of this Agreement. This Agreement, together with the Exhibits hereto, the Lists and the Confidentiality Agreement, constitute the entire agreement between the parties pertaining to the subject matter hereof and supersede all prior agreements and understandings of the parties in connection therewith. 13.9 Knowledge. Whenever any statement herein or in any List, certificate or other document delivered to any party pursuant to this Agreement is made "to the knowledge" of any party or another Person, such knowledge shall mean facts and other information which any director, executive officer or controller knows as a result of the performance of his or her duties and includes such diligent inquiry as is reasonable under the circumstances. 68 13.10 Governing Law. This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of Delaware without regard to the conflict of law principles thereof. 13.11 Captions. The section headings contained in this Agreement are for convenience of reference only and do not form a part of this Agreement and shall not affect the interpretation hereof. 13.12 Severability. If any portion of this Agreement shall be deemed by a court of competent jurisdiction to be unenforceable, the remaining portions shall be valid and enforceable only if, after excluding the portion deemed to be unenforceable, the remaining terms hereof shall provide for the consummation of the transactions contemplated herein in substantially the same manner as originally set forth at the date this Agreement was executed. 13.13 Waiver and Modification; Amendment. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision or condition of this Agreement. Except as otherwise required by law, this Agreement and the Agreement of Bank Merger, when executed and delivered, may be modified or amended by action of the Boards of Directors of Fidelity, HFC, Thrift, Bank and Merger Sub without action by their respective stockholders. This Agreement may be modified or amended only by an instrument of equal formality signed by the parties or their duly authorized agents. 13.14 Attorneys' Fees. If any legal action or any arbitration upon mutual agreement is brought for the enforcement of this Agreement or because of an alleged dispute, controversy, breach, or default in connection with this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and other costs and expenses incurred in that action or proceeding, in addition to any other relief to which it may be entitled. 13.15 Alternative Structure. Notwithstanding any provision of this Agreement to the contrary, HFC and Bank may elect, subject to the filing of all necessary applications and the receipt of all required regulatory approvals, to modify the structure of the Holding Company Merger or the Bank Merger, as set forth herein, subject to the prior written consent of Fidelity, which consent shall not be unreasonably withheld, provided that any such modification may be effected only if (a) the consideration to be paid to the holders of Fidelity Stock is not thereby changed in kind or reduced in amount as a result of such modification and (b) such modification will not materially delay or jeopardize consummation of the transactions contemplated by this Agreement. 69 IN WITNESS WHEREOF, the parties to this Agreement have duly executed this Agreement as of the day and year first above written. HAWTHORNE FINANCIAL CORPORATION By: ----------------------------------- President and Chief Executive Officer HAWTHORNE SAVINGS, F.S.B. By: ---------------------------------- President and Chief Executive Officer FIRST FIDELITY BANCORP, INC. By: --------------------------------------- President and Chief Operating Officer FIRST FIDELITY INVESTMENT & LOAN ASSOCIATION By: --------------------------------------- President and Chief Executive Officer HF MERGER SUB By: ----------------------------------- President 70 EXHIBIT LIST A AGREEMENT OF BANK MERGER B FORM OF STOCKHOLDER'S AGREEMENT C FORM OF AFFILIATE LETTER D EARNINGS REQUIREMENTS 71 EXHIBIT A AGREEMENT OF BANK MERGER This AGREEMENT OF BANK MERGER is made by and between Hawthorne Savings, F.S.B., a federally chartered savings bank (the "Bank"), and First Fidelity Investment & Loan Association, a California chartered industrial loan company (the "Thrift"), in connection with the transactions described in the Agreement and Plan of Reorganization dated as of March ___, 2002 (the "Reorganization Agreement"), entered into by and among Hawthorne Financial Corporation, a Delaware corporation ("HFC"), First Fidelity Bancorp, Inc., a Delaware corporation ("Fidelity"), the Bank, the Thrift, and HF Merger Corp., a Delaware corporation ("Merger Sub"). Terms not otherwise defined herein shall have the respective meanings given to them in the Reorganization Agreement. As of the date hereof, Bank has authorized capital of 20,000 shares of common stock, par value $10.00 per share ("Bank Stock"), 15,000 of which are issued and outstanding, and all of which are directly owned by HFC. As of the date hereof, Thrift has authorized capital of 200,000 shares of common stock, $10.00 par value per share, ("Thrift Stock"), of which 20,000 shares are outstanding, and all of which are directly owned by Fidelity. Immediately prior to the Effective Date (as hereinafter defined), Fidelity will merge with and into HFC (the "Parent Merger"), so that, as of the Effective Date, HFC shall own directly all of the issued and outstanding Bank Stock and all of the issued and outstanding Thrift Stock. Bank and Thrift hereby agree as follows: 1. MERGER. Subject to the terms and conditions of this Agreement of Bank Merger, at the Effective Date (as defined in Section 2 hereof), Thrift shall merge with and into Bank under the laws of the United States and the State of California (the "Bank Merger"), the separate corporate existence of Thrift shall cease and Bank shall survive and continue to exist as a corporation incorporated under the laws of the United States (Bank, as the surviving corporation in the Bank Merger, sometimes being referred to herein as the "Surviving Bank"). 2. EFFECTIVE DATE. The Bank Merger shall become effective on the date and at the time articles of combination executed by Bank and Thrift are filed with and endorsed by the Office of Thrift Supervision ("OTS") pursuant to 12 C.F.R. Section 552.13(k), unless a later date and time is specified is such articles of combination (the "Effective Date"). [Add any other filing required under California law.] 3. NAME. The name of the Surviving Bank shall continue to be "Hawthorne Savings, F.S.B." 4. DIRECTORS AND OFFICERS. The directors and officers of the Bank immediately prior to the Effective Date shall continue to serve as the directors and officers of the Bank after the Effective Date. The Bank, as the Surviving Bank, has seven (7) directors. At each annual 1 meeting of stockholders of Bank, directors are elected for one-year terms and until their successors are elected and qualified. The name and residential address of each director is set forth below: NAME RESIDENTIAL ADDRESS Marilyn Garton Amato 1565 Granvia Altmira Palos Verdes, CA 90274 Gary W. Brummett 5931 Rustling Oak Drive Agoura Hills, CA 91301 Timothy R. Chrisman Chrisman & Company, Inc. 350 S. Figueroa Street, Ste. 550 Los Angeles, CA 90071 Simone F. Lagomarsino 1891 Pradera Road Camarillo, CA 93012 Anthony W. Liberati 109 Grouse Lane Sewickley, PA 15143 Harry F. Radcliffe 40 Wiggins Lane or P. O. Box 974 Uniontown, PA 15401 Howard E. Ritt 6524 Bedford Avenue Los Angeles, CA 90056 5. OFFICES. The location of the home office of the Surviving Bank shall continue to be El Segundo, California, and the offices of the Surviving Bank shall be as reflected in Exhibit A to this Agreement of Bank Merger, which is incorporated herein by reference. 6. EFFECT ON SHARES OF STOCK. On the Effective Date: (a) Each share of Thrift Stock outstanding immediately prior to the Effective Date shall as of the Effective Date be cancelled. (b) Each share of Bank Stock issued and outstanding immediately prior to the Effective Date shall remain outstanding and unchanged and shall continued to be owned by HFC. (c) The Bank, as the Surviving Bank, may issue additional capital stock to HFC or any HFC subsidiary. 2 7. CHARTER AND BYLAWS. On and after the Effective Date, the Charter and Bylaws of the Bank as in effect immediately prior to the Effective Date shall continue to be the Charter and Bylaws of the Surviving Bank until amended in accordance with law. 8. RIGHTS AND DUTIES OF THE SURVIVING BANK. The business of the Surviving Bank shall be that of a federal savings bank chartered under the laws of the United States of America and as provided for in the Charter of the Bank now existing, and such business shall be continued at the Bank's head office and at its legally established branches and other offices. After the Effective Date, the Surviving Bank will continue to issue savings accounts on the same basis as immediately prior to the Effective Date. All assets, rights, privileges, powers, franchises and property (real, personal, mixed and intangible) shall be automatically transferred to and vested in the Surviving Bank by virtue of the Bank Merger without any deed or other document of transfer. The Surviving Bank, without order or action on the part of any court or otherwise and without any documents of assumption or assignment, shall hold and enjoy all of the properties, franchises and interests, including appointments, powers, designations, nominations and all other rights and interests as agent or other fiduciary in the same manner and to the same extent as such rights, franchises, interests and powers were held or enjoyed by Bank and Thrift immediately prior to the Effective Date, including liabilities for all debts, savings accounts, deposit obligations and contracts of Bank and Thrift, respectively, matured or unmatured, whether accrued, absolute, contingent or otherwise and whether or not reflected or reserved against on balance sheets, books, accounts or records of either Bank or Thrift. All rights of creditors and other obligees and all liens on property of either Bank or Thrift shall be preserved and shall not be released or impaired by virtue of the Bank Merger. 9. GOVERNING LAW. This Agreement of Bank Merger shall be governed in all respects, including, but not limited to, validity, interpretation, effect and performance, by the laws of the State of California, except as otherwise provided by the laws of the United States. 10. AMENDMENT. This Agreement of Bank Merger may be amended, modified or supplemented only by written agreement of Bank and Thrift at any time prior to the Effective Date. 11. WAIVER. Subject to applicable law, any of the terms or conditions of this Agreement of Bank Merger may be waived at any time by whichever of the parties hereto is, or the shareholders of which are, entitled to the benefit thereof by action taken by the Board of Directors of such party. 12. SUCCESSORS AND ASSIGNS. This Agreement of Bank Merger may not be assigned by any party hereto without the prior written consent of the other party. Subject to the foregoing, this Agreement of Bank Merger shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 13. TERMINATION. This Agreement of Bank Merger shall terminate upon the termination of the Reorganization Agreement in accordance with its terms. This Agreement of Bank Merger also may be terminated at any time prior to the Effective Date by mutual consent of Bank and Thrift in a written instrument, if and to the extent authorized by the respective Boards of Directors of Bank and Thrift. In the event of the termination of this Agreement of Bank 3 Merger as provided in this Section 13, this Agreement of Bank Merger shall forthwith become null and void and of no further force or effect and there shall be no liability or obligation under this Agreement of Bank Merger on the part of any of the parties hereto or any of their respective directors, officers or affiliates. 14. PROCUREMENT OF APPROVALS. Bank and Thrift shall proceed expeditiously and cooperate fully in the procurement of any consents and approvals and the satisfaction of all other requirements prescribed by law or otherwise necessary for consummation of the Bank Merger on the terms provided herein, including without limitation the preparation and submission of such applications, notices or other filings relating to the Bank Merger to the OTS and any other applicable regulatory authority as may be required by applicable laws and regulations. 15. CONDITIONS PRECEDENT. The obligations of the parties under this Agreement of Bank Merger shall be subject to: (i) the approval of this Agreement of Bank Merger by the affirmative vote of the sole shareholder of each of Bank and Thrift; (ii) receipt of approval of the Bank Merger from the OTS and any other governmental and banking authority whose approval is required; (iii) receipt of any necessary regulatory approval to operate the main office of Thrift and the branch offices of Thrift as branch offices of the Surviving Bank; and (iv) the consummation of the Parent Merger pursuant to the Reorganization Agreement on or before the Effective Date. 16. EXECUTION. This Agreement of Bank Merger may be executed in any number of counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same instrument. Dated as of _______________ ___, 2002. HAWTHORNE SAVINGS, F.S.B. By: --------------------------------------- Simone Lagomarsino President and Chief Executive Officer By: --------------------------------------- Eileen Lyon Secretary 4 FIRST FIDELITY INVESTMENT & LOAN ASSOCIATION By: --------------------------------------- Name: Title: By: --------------------------------------- Name: Title: 5 EXHIBIT A HOME OFFICE OF SURVIVING BANK 2381 Rosecrans Avenue El Segundo, CA 90245 OTHER OFFICES AND ATM LOCATIONS* OF SURVIVING BANK 2041 Rosecrans Avenue* 1727 W. Artesia Boulevard El Segundo, CA 90245 Gardena, CA 90248 740 182nd Street* 13001 Hawthorne Boulevard Gardena, CA 90248 Hawthorne, CA 90250 14603 Ocean Gate Avenue* 4440 W. 126th Street* Hawthorne, CA 90250 Hawthorne, CA 90250 1309 Hermosa Avenue 3721 S. La Brea* Hermosa Beach, CA 90254 Los Angeles, CA 90016 2600 Sepulveda Boulevard 19275 W. Jefferson Boulevard* Manhattan Beach, CA 90266 Marina Del Rey, CA 90292 1409-A West Chapman Avenue 405 N. Pacific Coast Hwy.* Orange, CA 92868-2743 Redondo Beach, CA 90277 1765 S. Elena Avenue 3550-D Rosecrans Street Redondo Beach, CA 90277 San Diego, CA 92110-3228 3890 Valley Center Drive, Suite 103 2115 N. Gaffey* San Diego, CA 92130-3309 San Pedro, CA 90731 19300 Ventura Boulevard 24451 Crenshaw Boulevard* Tarzana, CA 91356 Torrance, CA 90503 21370 S. Hawthorne Boulevard 2655 Pacific Coast Hwy.* Torrance, CA 90503 Torrance, CA 90503 3061 Edinger Avenue 7151 W. Manchester Boulevard Tustin, CA 92780-7204 Westchester, CA 90045 973 S. Westlake Boulevard Westlake Village, CA 91361 * ATM Locations 6 ARTICLES OF COMBINATION HAWTHORNE SAVINGS, F.S.B. FIRST FIDELITY INVESTMENT & LOAN ASSOCIATION Pursuant to and as required by 12 C.F.R. Section 552.13(j), these Articles of Combination set forth the pertinent facts related to the merger of HAWTHORNE SAVINGS, F.S.B. (the "Bank") of El Segundo, California, with and into FIRST FIDELITY INVESTMENT & LOAN ASSOCIATION (the "Thrift"), of Tustin, California. 1. PLAN OF COMBINATION. Hawthorne Financial Corporation, a Delaware corporation ("HFC"), First Fidelity Bancorp, Inc., a Delaware corporation ("Fidelity"), HF Merger Corp., a Delaware corporation ("Merger Sub"), Bank and Thrift entered into an Agreement and Plan of Reorganization dated as of March ___, 2002 (the "Agreement"), pursuant to which Fidelity will merge into HFC (the "Holding Company Merger") and: (i) each share of HFC common stock (the "HFC Stock") issued and outstanding immediately prior to the consummation of the Holding Company Merger shall remain an issued and outstanding share of common stock of the surviving institution, and (ii) each share of Fidelity common stock (the "Fidelity Common Stock") issued and outstanding immediately prior to the consummation of the Holding Company Merger (other than shares of common stock owned by holders who dissent from the Holding Company Merger in accordance with Delaware law and any treasury shares of Fidelity) shall be converted into the right to receive shares of HFC Stock and/or cash as provided in the Agreement. Immediately following the Holding Company Merger, Thrift will merge with and into the Bank (the "Bank Merger"). The Bank Merger will be effected pursuant to the Agreement of Bank Merger, dated as of March ___, 2002, between Bank and Thrift (the "Merger Agreement"), a copy of which is attached hereto as Exhibit A and is incorporated by reference herein for all purposes. 2. SHARES OUTSTANDING. Prior to the Effective Date, as that term is defined in the Merger Agreement, (a) the Bank has 15,000 shares of common stock, par value $10.00 per share, issued and outstanding (the "Bank Stock"), and (b) the Thrift has 20,000 shares of common stock, no par value per share, issued and outstanding (the "Thrift Stock"). 3. APPROVALS. The consent of the shareholders owning 100% of Bank Stock was given, viz: fifteen thousand (15,000) shares of Bank Stock voted in favor of, and zero (0) shares of Bank Stock voted against the Bank Merger. The consent of the shareholders owning 100% of Thrift Stock was given, viz: twenty thousand (20,000) shares of Thrift Stock voted in favor of, and zero (0) shares of Thrift Stock voted against the Bank Merger. 4. EXECUTION. These Articles of Combination may be executed in any number of counterparts, each of which shall be deemed and original, and all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, each party hereto has caused these Articles of Combination to be executed on its behalf by its duly authorized officer as of the ____ day of _________, 2002. HAWTHORNE SAVINGS, F.S.B. By: ------------------------------------------ Simone Lagomarsino President and Chief Executive Officer By: ------------------------------------------ Eileen Lyon Secretary FIRST FIDELITY INVESTMENT & LOAN ASSOCIATION By: ------------------------------------------ Name: Title: By: ------------------------------------------ Name: Title: 2 VERIFICATIONS BY AFFIDAVIT STATE OF CALIFORNIA ) ) COUNTY OF LOS ANGELES ) Simone Lagomarsino, being duly sworn, deposes and says that she has read the foregoing Articles of Combination, knows the contents thereof, and, as to Hawthorne Savings, F.S.B., knows that the statements contained therein are true and correct. ------------------------------------- Simone Lagomarsino President and Chief Executive Officer SUBSCRIBED AND SWORN TO before me this ______ day of __________, 2002. ------------------------------------- Notary Public, State of California 3 VERIFICATIONS BY AFFIDAVIT STATE OF CALIFORNIA ) ) COUNTY ORANGE ) _____________________, being duly sworn, deposes and says that he has read the foregoing Articles of Combination, knows the contents thereof, and, as to First Fidelity Investment & Loan Association, knows that the statements contained therein are true and correct. ------------------------------------- President and Chief Executive Officer SUBSCRIBED AND SWORN TO before me this ______ day of __________, 2002. ------------------------------------- Notary Public, State of California 4 ENDORSEMENT These Articles of Combination were filed with the Office of Thrift Supervision and endorsed thereby pursuant to 12 C.F.R. Section 552.13(j), effective as of __:__ _.m., on the _____ day of _________, 2002. ------------------------------------- Nadine Washington Corporate Secretary 5 EXHIBIT B STOCKHOLDER AGREEMENT This STOCKHOLDER AGREEMENT ("Stockholder Agreement") is made and entered into as of March __, 2002 by and between Hawthorne Financial Corporation, a Delaware corporation ("HFC"), and the person signatory hereto (the "Stockholder"). WHEREAS, HFC, First Fidelity Bancorp, Inc. a Delaware corporation ("Parent"), Hawthorne Savings, F.S.B., First Fidelity Investment & Loan Association and HF Merger Corp. have entered into an Agreement and Plan of Reorganization, dated as of March ___, 2002 (the "Agreement"), pursuant to which Parent will be merged with and into HFC or HF Merger Corp. will be merged with and into Parent (the "Merger"), whereupon each share of Parent Series A common stock ("Parent Series A Common Stock") and Parent Series B common stock, which are voting and non-voting shares, respectively, will be converted into the right to receive the consideration set forth in the Agreement; and WHEREAS, as a condition to its willingness to enter into the Agreement, HFC has required that each director of Parent, as an owner of Parent Series A Common Stock, enter into, and the Stockholder has agreed to enter into, this Stockholder Agreement. NOW, THEREFORE, in consideration of the foregoing, for good and valuable consideration, the parties hereby agree as follows: 1. Representations and Warranties of the Stockholder. The Stockholder hereby represents and warrants to HFC as follows: (a) Authority; No Violation. The Stockholder has all necessary power and authority to enter into and perform all of such Stockholder's obligations hereunder. The execution, delivery and performance of this Stockholder Agreement by the Stockholder will not violate any other agreement to which such Stockholder is a party, including any voting agreement, stockholders' agreement, trust agreement or voting trust. This Stockholder Agreement has been duly and validly executed and delivered by the Stockholder (and the Stockholder's spouse, if the Stock (as defined below) constitute community property) and constitutes a valid and binding agreement of the Stockholder and such spouse, enforceable against the Stockholder and the Stockholder's spouse in accordance with its terms. (b) Ownership of Stock. The Stockholder is the beneficial owner or record holder of the number of shares of Parent Series A Common Stock indicated under the Stockholder's name on the signature page hereto (the "Existing Stock", and together with any shares of Parent Series A Common Stock acquired by the Stockholder after the date hereof, the "Stock") and, as of the date hereof, the Existing Stock constitutes all the shares of Parent Series A Common Stock owned of record or beneficially by the Stockholder. With respect to the Existing Stock, subject to applicable community property laws, the Stockholder has sole voting power and sole power to issue instructions with respect to the matters set forth in Section 2 hereof, sole power of disposition, sole power to demand appraisal rights and sole power to engage in actions set forth in Section 2 hereof, with no restrictions on the voting rights, rights of disposition or otherwise, subject to applicable laws and the terms of this Agreement. 1 (c) No Conflicts. Neither the execution and delivery of this Stockholder Agreement nor the consummation by the Stockholder of the transactions contemplated hereby will conflict with or constitute a violation of or default under any contract, commitment, agreement, arrangement or restriction of any kind to which such Stockholder is a party or by which the Stockholder is bound. 2. Voting Agreement, Proxy and Agreement Not to Transfer. (a) The Stockholder hereby agrees to vote all of the Stock held by the Stockholder (i) in favor of the Merger, the Agreement and the transactions contemplated by the Agreement; (ii) against any action or agreement that would result in a breach in any material respect of any covenant, representation or warranty or any other obligation or agreement of Parent under the Agreement; and (iii) except with the prior written consent of HFC, against the following actions (other than the Merger and the transactions contemplated by the Agreement): (A) any extraordinary corporate transactions, such as a merger, consolidation or other business combination involving Parent; (B) any sale, lease or transfer of a material amount of the assets of Parent; (C) any change in the majority of the board of Parent; (D) any material change in the present capitalization of Parent; (E) any amendment of Parent's Certificate of Incorporation; (F) any other material change in Parent's corporate structure; or (G) any other action which is intended, or could reasonably be expected to, impede, interfere with, delay, postpone, discourage or materially adversely affect the contemplated economic benefits to HFC of the transactions contemplated by the Agreement. The Stockholder shall not enter into any agreement or understanding with any person or entity prior to the Termination Date (as defined below) to vote or give instructions after the Termination Date in any manner inconsistent with clauses (i), (ii) or (iii) of the preceding sentence. (b) The Stockholder hereby agrees not to (i) sell, transfer, assign or otherwise dispose of any of his or her Stock without the prior written consent of HFC (which shall not be unreasonably withheld), other than Stock sold or surrendered to pay the exercise price of any stock options or to pay taxes or satisfy Parent's withholding obligations with respect to any taxes resulting from such exercise or (ii) pledge, mortgage or encumber such Stock. Any permitted transferee of Stock must become a party to this Agreement and any purported transfer of Stock to a person or entity that has not become a party hereto shall be null and void. 3. Cooperation. The Stockholder agrees that (s)he will not directly or indirectly solicit any inquiries or proposals from any person relating to any proposal or transaction for the disposition of the business or assets of Parent or any of its subsidiaries, or the acquisition of voting securities of Parent or any subsidiary of Parent or any business combination between Parent or any subsidiary of Parent and any person other than HFC and Hawthorne Savings, F.S.B. 4. Stockholder Capacity. The Stockholder is entering this Stockholder Agreement in his or her capacity as the record or beneficial owner of the Stockholder's Stock, and not in his or her capacity as an executive officer or director of Parent. Nothing in this Stockholder Agreement shall be deemed in any manner to limit the discretion of any Stockholder to take any action, or fail to take any action, in his or her capacity as an executive officer or director of Parent, that 2 may be required of such Stockholder in the exercise of his or her duties and responsibilities as an executive officer or director of Parent. 5. Termination. The obligations of the Stockholder shall terminate upon the consummation of the Merger. If the Merger is not consummated, the obligations of the Stockholder hereunder shall terminate upon the termination of the Agreement. 6. Specific Performance. The Stockholder acknowledges that damages would be an inadequate remedy to HFC for an actual or prospective breach of this Agreement and that the obligations of the Stockholder hereto shall be specifically enforceable. 8. Miscellaneous. (a) Definitional Matters. (i) Unless the context otherwise requires, "person" shall mean a corporation, association, partnership, joint venture, organization, business, individual, trust, estate or any other entity or group (within the meaning of Section 13(d)(3) of the Exchange Act). (ii) All capitalized terms used but not defined in this Stockholder Agreement shall have the respective meanings that the Agreement ascribes to such terms. (iii) The descriptive headings herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Stockholder Agreement. (b) Entire Agreement. This Stockholder Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. (c) Parties in Interest. This Stockholder Agreement shall be binding upon and inure solely to the benefit of each party hereto and their respective successors, assigns, heirs, executors, administrators and other legal representatives. Nothing in this Stockholder Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Stockholder Agreement. (d) Assignment. This Stockholder Agreement shall not be assigned without the prior written consent of the other party hereto. (e) Modifications. This Stockholder Agreement shall not be amended, altered or modified in any manner whatsoever, except by a written instrument executed by the parties hereto. 3 (f) Governing Law. This Stockholder Agreement shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of California without regard to the conflicts of law principles thereof. (g) Validity. The invalidity or unenforceability of any provision of this Stockholder Agreement shall not affect the validity or enforceability of any other provision of this Stockholder Agreement, each of which shall remain in full force and effect. (h) Counterparts. This Stockholder Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. (i) Notices. Any notices or other communications required or permitted hereunder shall be in writing and shall be deemed duly given upon (i) transmitter's confirmation of a receipt of a facsimile transmission, (ii) confirmed delivery by a standard overnight carrier or (iii) the expiration of five business days after the day when mailed by certified or registered mail, postage prepaid, addressed at the following addresses (or at such other address as the parties hereto shall specify by like notice): If to HFC, to: Hawthorne Financial Corporation 2381 Rosecrans Avenue, 2nd Floor El Segundo, California 90218 Telecopy: (310) 725-5038 Attention: Simone Lagomarsino with a copy to: Manatt, Phelps & Phillips, LLP 11355 W. Olympic Boulevard Los Angeles, CA 90064 Telecopy: (310) 312-4204 Attention: William T. Quicksilver, Esq. If to the Stockholder, to the address noted on the signature page hereto. [SIGNATURES FOLLOW ON NEXT PAGE] 4 IN WITNESS WHEREOF, the parties hereto have executed this Stockholder Agreement as of the date first above written. HAWTHORNE FINANCIAL CORPORATION By: Name: Title: STOCKHOLDER: - -------------------------------- Name: --------------------------- Number of shares of Stock: - -------------------------------- Address for Notices: - -------------------------------- - -------------------------------- 5 EXHIBIT C Hawthorne Financial Corporation 2381 Rosecrans Avenue 2nd Floor El Segundo, California 90218 Ladies and Gentlemen: I have been advised that as of the date hereof I may be deemed to be an "affiliate" of First Fidelity Bancorp, Inc. a Delaware corporation ("FFB") as the term "affiliate" is (i) defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"). I have been further advised that pursuant to the terms of the Agreement and Plan of Reorganization, dated as of March ___, 2002 (the "Merger Agreement"), by and among Hawthorne Financial Corporation, a Delaware corporation ("HFC"), FFB, Hawthorne Savings, F.S.B., First Fidelity Investment & Loan Association and HF Merger Corp, FFB will be merged with and into HFC or a direct or indirect subsidiary of HFC will be merged with FFB (the "Merger"), and that as a result of the Merger, I may receive shares of HFC Stock (as defined in the Merger Agreement) in exchange for shares of FFB Stock (as defined in the Merger Agreement), owned by me. I hereby represent, warrant and covenant to HFC that in the event I receive any HFC Stock pursuant to the Merger: A. I shall not make any sale, transfer or other disposition of the HFC Stock in violation of the Securities Act or the Rules and Regulations. B. I have carefully read this letter and the Merger Agreement and discussed its requirements and other applicable limitations upon my ability to sell, transfer or otherwise dispose of HFC Stock to the extent I believed necessary, with my counsel or with counsel for FFB. C. I have been advised that the issuance of HFC Stock to me pursuant to the Merger Agreement will be registered with the Commission on a registration statement on Form S-4. However, I have also been advised that, since at the time the Merger will be submitted to the shareholders of FFB for approval, I may be an "affiliate" of FFB, any sale or disposition by me of any of the HFC Stock, may, under current law, only be made in accordance with the provisions of paragraph (d) of Rule 145 under the Securities Act, pursuant to an effective registration statement under the Securities Act or pursuant to an exemption thereunder. I agree that I will not sell, transfer, or otherwise dispose of HFC Stock issued to me in the Merger unless (i) such sale, transfer or other disposition has been registered under the Securities Act; (ii) such sale, transfer or other disposition is made in conformity with the volume and other limitations of Rule 145 promulgated by the Commission under the Securities Act, or (iii) in the opinion of counsel, which counsel shall be reasonably acceptable to HFC, such sale, transfer or other disposition is otherwise exempt from registration under the Securities Act. 1 D. I understand that HFC is under no obligation to register the sale, transfer or other disposition of the HFC Stock by me or in my behalf or to take any other action necessary to make compliance with an exemption from registration available. E. I understand that stop-transfer instructions will be given to HFC's transfer agents with respect to HFC Stock and that there will be placed on the certificates for the HFC Stock issued to me, or any substitutions therefor, a legend stating in substance: "The securities represented by this certificate have been issued in a transaction to which Rule 145 promulgated under the Securities Act of 1933, as amended (the "Securities Act"), applies and may be sold or otherwise transferred only in compliance with the requirements of Rule 145 or pursuant to a registration statement under the Securities Act or an exemption from such registration." F. I also understand that unless the transfer by me of my HFC Stock has been registered under the Securities Act or is a sale made in conformity with the provisions of Rule 145, HFC reserves the right to put the following legend on the certificates issued to my transferee: "The sale of the shares represented by this certificate has not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and the shares were acquired from a person who received such shares in a transaction to which Rule 145 promulgated under the Securities Act applies. The shares have been acquired by the holder not with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act and may not be sold, pledged or otherwise transferred except in accordance with an exemption from the registration requirements of the Securities Act." It is understood and agreed that this letter agreement shall terminate and be of no further force and effect and the legends set forth in E or F, as the case may be, above shall be removed by delivery of substitute certificates without such legend, and the related stop-transfer of restrictions shall be lifted forthwith, if (i) any such shares of HFC Stock shall have been registered under the Securities Act for sale, transfer or other disposition by me or on my behalf and are sold, transferred or otherwise disposed of, or (ii) any such shares of HFC Stock are sold in accordance with the provisions of paragraphs (c), (e), (f) and (g) of Rule 144 promulgated under the Securities Act, or (iii) I am not at the time an affiliate of HFC and have been the beneficial owner of the HFC Stock for at least one year (or such other period as may be prescribed by the Securities Act and the Rules and Regulations), and HFC has filed with the Commission all of the reports it is required to file under the Securities Exchange Act of 1934, as amended, during the preceding 12 months, or (iv) I am not and have not been for at least three months an affiliate of HFC and have been the beneficial owner of the HFC Stock for at least two years (or such other period as may be prescribed by the Securities Act and the Rules and Regulations), or (v) HFC shall have received a letter from the Staff of the Commission, or a 2 written opinion of counsel, which counsel shall be reasonably acceptable to HFC, to the effect that the stock transfer restrictions and the legend are not required. Very truly yours, -------------------------- Accepted this ___ day of ___________, 2002. Hawthorne Financial Corporation By: ------------------------------------ Name: Title: 3 EXHIBIT D EARNINGS REQUIREMENTS For the purposes of Section 11.10 of the Agreement, the Adjusted Net Earnings of Fidelity shall exceed the following applicable amount: - $ 2,060,630 if the Effective Time of the Holding Company Merger occurs in May 2002 - $ 2,643,171 if the Effective Time of the Holding Company Merger occurs in June 2002. - $ 3,173,713, if the Effective Time of the Holding Company Merger occurs in July 2002. - $ 3,689,054 if the Effective Time of the Holding Company Merger occurs in August 2002. - $ 4,208,396 if the Effective Time of the Holding Company Merger occurs in September 2002. - $ 4,709,337 if the Effective Time of the Holding Company Merger occurs in October 2002. - $ 5,245,478 if the Effective Time of the Holding Company Merger occurs in November 2002. - $ 5,755,220 if the Effective Time of the Holding Company Merger occurs in December 2002. EX-21.1 13 a80073ex21-1.txt 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% HFC Capital Trust II, a Delaware business trust -- 100% EX-23.1 14 a80073ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of Hawthorne Financial Corporation on Form S-8 (Nos. 33-74800, 333-23587, 333-59879 and 333-59875) of our report dated January 29, 2002 (March 20, 2002 as to Note 20), appearing in the Annual Report on Form 10-K of Hawthorne Financial Corporation for the year ended December 31, 2001. /s/ Deloitte & Touche LLP Los Angeles, California March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .


Delaware		95-2085671
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2381 Rosecrans Avenue, 2nd Floor El Segundo, California		90245
(Address of principal executive offices)		(Zip Code)


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 4A. Executive Officers
PART II
	Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosure about Market Risks
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management
	Item 13. Certain Relationships and Related Transactions
PART IV
	Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
		INDEPENDENT AUDITORS’ REPORT
		CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONSOLIDATED STATEMENTS OF INCOME
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXHIBIT 4.15
EXHIBIT 4.16
EXHIBIT 4.17
EXHIBIT 4.18
EXHIBIT 4.19
EXHIBIT 4.20
EXHIBIT 4.21
EXHIBIT 4.22
EXHIBIT 10.1
EXHIBIT 10.7
EXHIBIT 21.1
EXHIBIT 23.1


		Page

PART I
Item 1.	Business		1
Item 2.	Properties		27
Item 3.	Legal Proceedings		28
Item 4.	Submission of Matters to a Vote of Security Holders		28
Item 4A.	Executive Officers		29

PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		30
Item 6.	Selected Financial Data		31
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 7A.	Quantitative and Qualitative Disclosure about Market Risks		52
Item 8.	Financial Statements and Supplementary Data		53
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		53

PART III
Item 10.	Directors and Executive Officers of the Registrant		54
Item 11.	Executive Compensation		54
Item 12.	Security Ownership of Certain Beneficial Owners and Management		54
Item 13.	Certain Relationships and Related Transactions		54

PART IV
Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		54



		Tangible Capital					Core Capital					Risk-based Capital

		Balance		%			Balance		%			Balance			%
(Dollars in thousands)
Stockholders’ equity		$	154,981		—		$	154,981		—		$	154,981			—
Adjustments:
	General reserves		—		—			—		—			16,787			—
	Other(1)		—		—			—		—			(2,490	)		—

Regulatory capital			154,981		8.36	%		154,981		8.36	%		169,278			12.70	%
Regulatory capital requirement			27,807		1.50			74,153		4.00			106,619			8.00

Excess capital		$	127,174		6.86	%	$	80,828		4.36	%	$	62,659			4.70	%

Adjusted assets(2)		$	1,853,831				$	1,853,831				$	1,332,742



												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, 2001:
	Total capital to risk weighted assets	$	169,278		12.70	%	$	106,619		8.00	%	$	133,274		10.00	%
	Core capital to adjusted tangible assets		154,981		8.36	%		74,153		4.00	%		92,692		5.00	%
	Tangible capital to adjusted tangible assets		154,981		8.36	%		27,807		1.50	%		n/a		n/a
	Tier 1 capital to risk weighted assets		154,981		11.63	%		n/a		n/a			79,965		6.00	%
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	%



		December 31,


		2001						2000						1999						1998						1997

		Balance			%			Balance			%			Balance			%			Balance			%			Balance			%
(Dollars in thousands)
Single family residential		$	918,877			49.12	%	$	888,416			49.17	%	$	683,250			40.99	%	$	576,032			35.88	%	$	396,629			41.00	%
Income property:
	Multi-family(1)		255,183			13.64			253,039			14.00			222,616			13.36			250,876			15.62			225,738			23.33
	Commercial(1)		248,092			13.26			200,372			11.09			232,938			13.98			222,558			13.86			111,893			11.57
	Development(2)		227,190			12.14			203,894			11.28			148,092			8.88			78,425			4.88			7,310			0.76
Single family construction:
	Single family residential(3)		159,224			8.51			195,983			10.85			274,697			16.48			275,888			17.18			107,989			11.16
	Tract		—			—			3,495			0.19			24,056			1.44			85,942			5.35			68,653			7.10
Land(4)			50,984			2.72			46,520			2.57			59,095			3.55			69,581			4.33			39,475			4.08
Other			11,482			0.61			15,390			0.85			22,053			1.32			46,615			2.90			9,698			1.00

Gross loans receivable(5)			1,871,032			100.00	%		1,807,109			100.00	%		1,666,797			100.00	%		1,605,917			100.00	%		967,385			100.00	%

Less:
	Undisbursed funds		(137,484	)					(171,789	)					(196,249	)					(256,096	)					(108,683	)
	Deferred (fees) and costs, net		6,337						2,197						(1,295	)					(5,919	)					(7,177	)
	Allowance for credit losses		(30,602	)					(29,450	)					(24,285	)					(17,111	)					(13,274	)

Net loans receivable		$	1,709,283					$	1,608,067					$	1,444,968					$	1,326,791					$	838,251



			Year Ended December 31,


			2001					2000

			No. of		Gross			No. of		Gross
			Loans		Commitment			Loans		Commitment
(Dollars in thousands)
Loans in excess of $10.0 million:
	Income property:
		Commercial		2	$	22,699			2	$	22,027
		Development		5		56,477			5		59,707

				7	$	79,176			7	$	81,734

		Percentage of total gross loans				4.23	%				4.52	%
Loans between $5.0 and $10.0 million:
	Single family residential			4	$	25,036			5	$	33,073
	Income property:
		Multi-family		1		7,651			—		—
		Commercial		10		74,078			8		55,568
		Development		12		76,545			13		90,672
	Single family construction:
		Single family residential		2		12,915			2		14,300
	Land			2		11,200			1		6,501
	Other			—		—			1		7,500

				31	$	207,425			30	$	207,614

		Percentage of total gross loans				11.09	%				11.49	%
Loans less than $5.0 million					$	1,584,431				$	1,517,761

		Gross loans receivable			$	1,871,032				$	1,807,109



				December 31, 2001					December 31, 2000

				Balance		Percent			Balance		Percent
(Dollars in thousands)
Single family residential				$	913,255		52.68	%	$	883,814		54.04	%
Income property:
	Multi-family				254,530		14.68	%		251,995		15.41	%
	Commercial				235,156		13.57	%		187,680		11.48	%
	Development
		Multi-family			102,682		5.92	%		70,999		4.34	%
		Commercial			68,431		3.95	%		59,264		3.63	%
Single family construction:
	Single family residential				104,158		6.01	%		127,630		7.80	%
Land					48,719		2.81	%		45,450		2.78	%
Other					6,617		0.38	%		8,488		0.52	%

			Total	$	1,733,548		100.00	%	$	1,635,320		100.00	%



			Principal Balance

			Fixed Rate		Adjustable Rate		Total
(Dollars in thousands)
Interval:
	<3 months		$	26,585	$	1,326,057	$	1,352,642
	>3 to 6 months			1,733		357,980		359,713
	>6 to 12 months			5,179		21,831		27,010
	>1 to 2 years			2,152		—		2,152
	>2 to 5 years			8,303		—		8,303
	>5 to 10 years			19,526		—		19,526
	>10 to 20 years			14,876		—		14,876
	More than 20 years			86,810		—		86,810

		Gross loans receivable	$	165,164	$	1,705,868	$	1,871,032



		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		$	1,579	$	31,529	$	148,059	$	737,710	$	918,877
Income property:
	Multi-family		12,481		42,960		86,166		113,576		255,183
	Commercial		41,639		85,887		117,419		3,147		248,092
	Development		160,566		66,624		—		—		227,190
Single family construction:
	Single family residential		125,235		33,989		—		—		159,224
	Tract		—		—		—		—		—
Land			29,414		18,959		2,409		202		50,984
Other			4,310		3,076				4,096		11,482

Gross loans receivable(1)		$	375,224	$	283,024	$	354,053	$	858,731		1,871,032

Less:
	Undisbursed funds										(137,484	)
	Deferred (fees) and costs, net										6,337
	Allowance for estimated credit losses										(30,602	)

Net loans receivable										$	1,709,283


		Nonaccrual		Other
		Loans		Classified Loans		Total
(Dollars in thousands)
Single family residential		$	6,438	$	8,857	$	15,295
Income property:
	Commercial		—		16,123		16,123
	Development		11,469		8,498		19,967
Single family construction:
	Single family residential		2,187		2,499		4,686
Land			572		1,364		1,936

	Gross classified loans	$	20,666	$	37,341	$	58,007


			Expiration		Renewal		Monthly		Square		Net
			of term		Options		Rental		Feet		Book Value

Leased:
	El Segundo Corporate			11/30/05		One 5-year	$	105,348		61,190	$	472,274
	Torrance Branch(1)			12/31/01		One 5-year		18,578		7,343		—
	Torrance Branch(2)			08/31/05		N/A		8,600		4,300		159,859
	Westlake Branch			06/30/10		Two 5-year		15,113		7,700		100,523
	Manhattan Beach Branch			10/30/10		Four 5-year		4,590		4,590		26,605
	Warehouse			06/30/01		Two 3-year		4,100		10,000		60,637
	Tarzana Branch			01/31/05		Five 5-year		3,589		3,352		2,050
	Redondo Beach Branch			04/30/04		Two 5-year		4,128		1,403		62,562
	Hermosa Beach Branch			09/01/05		Four 5-year		2,413		588		59,736

		Total					$	166,459		100,466	$	944,246

Owned:
	Hawthorne Branch									10,000	$	141,594
	Westchester Branch									8,800		327,554
	Manhattan Beach Branch (building only)(3)									4,590		26,605
	Tarzana Branch (building only)(3)									3,352		2,050

		Total								26,742	$	497,803


Item 4.	*Submission of Matters to a Vote of Security Holders*


Name	Age		Position with the Company and Prior Experience

Simone Lagomarsino		40	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 Hawthorne Financial and Hawthorne Savings, F.S.B., 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		39	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.
Jacqueline Calhoun		32	Senior Vice President and Chief Credit Officer of Hawthorne Savings, F.S.B., since October 2001. Senior Consultant of Unicon Financial Services, Inc. from January 2000 to October 2001. Senior Vice President of American International Bank from January 1998 to January 2000. Credit Administration consultant from January 1997 to January 1998.
Gerald Carruthers		59	Executive Vice President and Chief Lending Officer of Hawthorne Savings, F.S.B., since December 2001. Senior Vice President of Washington Mutual from 1997 to 2000. Senior Vice President of First Interstate Bank from 1986 to 1996.
David L. Hardin		48	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		44	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.
Marilyn J. Momeny		49	Senior Vice President and Human Resources Manager of Hawthorne Savings, F.S.B., since February 2002. Human Resource consultant from 1999 through 2002. Vice President of Automatic Data Processing, Inc., from 1998 to 1999. Human Resources Director of Automatic Data Processing, Inc., from 1993 through 1998.
Charles B. Stoneburg		59	Executive Vice President and Chief Operating Officer 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.
Carol Ward		47	Senior Vice President of Hawthorne Savings, F.S.B., since November 2001. Independent consultant from March 1999 to November 2001. Executive Vice President of Mercantile National Bank from June 1996 to March 1999.


	General


	Regulation of the Company


	USA Patriot Act of 2001


	Financial Services Modernization Legislation


	High		Low

Year ended December 31, 2001
First quarter	$	17.00	$	14.50
Second quarter		18.20		15.56
Third quarter		20.42		17.65
Fourth quarter		20.00		18.03

Year ended December 31, 2000
First quarter	$	11.50	$	7.64
Second quarter		8.75		7.38
Third quarter		12.00		7.75
Fourth quarter		15.00		11.00



			At or for the Year Ended December 31,

			2001			2000			1999			1998			1997
(In thousands, except per share data)
Consolidated statements of income:
	Interest revenues		$	147,686		$	148,988		$	132,747		$	106,992		$	75,616
	Interest costs			(85,670	)		(88,682	)		(73,626	)		(61,874	)		(43,825	)

	Net interest income			62,016			60,306			59,121			45,118			31,791
	Provision for credit losses			(3,400	)		(6,000	)		(12,000	)		(7,135	)		(5,137	)

	Net interest income after provision for credit losses			58,616			54,306			47,121			37,983			26,654
	Noninterest revenues			5,630			8,094			7,820			4,653			3,588
	Income/(loss) from real estate operations, net			205			(924	)		324			1,909			229
	General and administrative expenses			(34,427	)		(34,328	)		(32,363	)		(28,802	)		(22,009	)
	Other non-operating (expense)/income			(110	)		(2,196	)		(4,672	)		(31	)		112

		Total noninterest expenses		(34,537	)		(36,524	)		(37,035	)		(28,833	)		(21,897	)
	Income before income tax (provision)/ benefit and extraordinary item			29,914			24,952			18,230			15,712			8,574
	Income tax (provision)/benefit			(12,612	)		(10,668	)		(8,030	)		(4,674	)		2,577

	Income before extraordinary item			17,302			14,284			10,200			11,038			11,151
	Extraordinary item (net of taxes)			(469	)(1)		—			—			—			(1,534	)(2)

	Net income		$	16,833		$	14,284		$	10,200		$	11,038		$	9,617

	Net income available for common stock		$	16,833		$	14,284		$	10,200		$	11,038		$	5,254

Per share amounts:
	Basic earnings per share before extraordinary item		$	3.27		$	2.69		$	1.93		$	2.64		$	2.35
	Extraordinary item (net of taxes)			(0.09	)		—			—			—			(0.53	)

	Basic earnings per share after extraordinary item		$	3.18		$	2.69		$	1.93		$	2.64		$	1.82

	Diluted earnings per share before extraordinary item		$	2.29		$	1.94		$	1.33		$	1.65		$	1.30
	Extraordinary item (net of taxes)			(0.06	)		—			—			—			(0.30	)

	Diluted earnings per share after extraordinary item		$	2.23		$	1.94		$	1.33		$	1.65		$	1.00

	Diluted book value per share			16.00			13.91			12.10			10.43			7.67
Balance sheet data at period end:
	Total assets		$	1,856,197		$	1,753,395		$	1,581,153		$	1,412,434		$	928,197
	Cash and cash equivalents			98,583			99,919			86,722			45,449			51,620
	Investment securities			—			—			—			—			578
	Loans receivable, net			1,709,283			1,608,067			1,444,968			1,326,791			838,251
	Real estate owned, net			1,312			2,859			5,587			4,070			9,859
	Deposits			1,199,645			1,214,856			1,086,635			1,019,450			799,501
	Senior notes due 2004			25,778			39,358			40,000			40,000			40,000
	Capital securities			14,000			—			—			—			—
	FHLB advances			484,000			384,000			349,000			264,000			40,000
	Stockholders’ equity			120,449			104,161			92,304			81,424			42,319
	Allowance for credit losses			30,602			29,450			24,285			17,111			13,274



		Years Ended December 31, 2001 and 2000												Years Ended December 31, 2000 and 1999
		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)	$	13,658		$	(10,658	)	$	(1,030	)	$	1,970		$	12,177		$	2,051		$	197		$	14,425
	Cash and cash equivalents		(1,057	)		(2,342	)		397			(3,002	)		(55	)		1,392			(15	)		1,322
	Investment in capital stock of Federal Home Loan Bank		85			(336	)		(19	)		(270	)		119			335			40			494

			12,686			(13,336	)		(652	)		(1,302	)		12,241			3,778			222			16,241

Interest-bearing liabilities:
	Deposits		2,986			(6,186	)		(291	)		(3,491	)		5,352			6,632			698			12,682
	FHLB advances		3,539			(2,351	)		(412	)		776			196			2,165			24			2,385
	Senior notes		(1,025	)		7			(1	)		(1,019	)		(11	)		—			—			(11	)
	Capital securities		—			—			722			722			—			—			—			—

			5,500			(8,530	)		18			(3,012	)		5,537			8,797			722			15,056

Change in net interest income		$	7,186		$	(4,806	)	$	(670	)	$	1,710		$	6,704		$	(5,019	)	$	(500	)	$	1,185



		Years Ended December 31,

		2001			2000			1999
(Dollars in thousands)
Expenses associated with real estate operations:
	Repairs, maintenance and renovation	$	(22	)	$	(294	)	$	(219	)
	Insurance and property taxes		(10	)		(18	)		(132	)

			(32	)		(312	)		(351	)
Net income/(loss) from sales of REO			106			(166	)		754
Property operations, net			131			30			1
Charge-off/provision for losses on REO			—			(476	)		(80	)

Income/(loss) from real estate operations, net		$	205		$	(924	)	$	324



			Years Ended December 31,


			2001 and 2000							2000 and 1999

			2001		2000		Change			2000		1999		Change
(Dollars in thousands)
Employee			$	18,320	$	17,391	$	929		$	17,391	$	14,822	$	2,569
Operating				6,409		6,092		317			6,092		6,393		(301	)
Occupancy				4,015		3,758		257			3,758		3,889		(131	)
Professional				2,857		4,255		(1,398	)		4,255		4,035		220
Technology				1,897		1,939		(42	)		1,939		1,988		(49	)
SAIF premiums and
	OTS assessments			929		893		36			893		1,236		(343	)

		Total	$	34,427	$	34,328	$	99		$	34,328	$	32,363	$	1,965



												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, 2001:
	Total capital to risk weighted assets	$	169,278		12.70	%	$	106,619		8.00	%	$	133,274		10.00	%
	Core capital to adjusted tangible assets		154,981		8.36	%		74,153		4.00	%		92,692		5.00	%
	Tangible capital to adjusted tangible assets		154,981		8.36	%		27,807		1.50	%		n/a		n/a
	Tier 1 capital to risk weighted assets		154,981		11.63	%		n/a		n/a			79,965		6.00	%

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	%



			December 31, 2001

						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)		$	82,613		$	—		$	—		$	—		$	—		$	82,613
	Investments and FHLB Stock			24,464			—			—			—			—			24,464
	Loans(2)			1,218,298			358,284			27,011			10,430			119,525			1,733,548

Total interest-earning assets			$	1,325,375		$	358,284		$	27,011		$	10,430		$	119,525		$	1,840,625

Interest-bearing liabilities:
	Deposits:
		Non-certificates of deposit	$	338,829		$	—		$	—		$	—		$	—		$	338,829
		Certificates of deposit		452,964			120,572			180,104			71,542			—			825,182
	FHLB advances			329,000			30,000			50,000			75,000			—			484,000
	Senior notes			—			—			—			25,778			—			25,778
	Capital securities			—			5,000			—			—			9,000			14,000

Total interest-bearing liabilities			$	1,120,793		$	155,572		$	230,104		$	172,320		$	9,000		$	1,687,789

Interest rate sensitivity gap			$	204,582		$	202,712		$	(203,093	)	$	(161,890	)	$	110,525		$	152,836
Cumulative interest rate sensitivity gap				204,582			407,294			204,201			42,311			152,836			152,836
As percentage of total interest-earning assets				11.11	%		22.13	%		11.09	%		2.30	%		8.30	%		8.30	%


Item 7A.	*Quantitative and Qualitative Disclosure about Market Risks*



			Net Portfolio Value

	Change				$ Change from						Change from
	in Rates		$ Amount		Basecase			Ratio			Basecase
(Dollars in thousands)
		+300 bp	$	184,058	$	(4,511	)		9.89	%		-01 bp
		+200 bp		182,932		(5,637	)		9.77	%		-13 bp
		+100 bp		182,142		(6,427	)		9.66	%		-24 bp
		0 bp		188,569					9.90	%
		-100 bp		190,522		1,953			9.92	%		+02 bp
		-200 bp		n/a		n/a			n/a			n/a
		-300 bp		n/a		n/a			n/a			n/a


Item 9.	*Changes in and Disagreements with Accountants on Accounting and Financial Disclosure*


Item 10.	*Directors and Executive Officers of the Registrant*


Item 12.	*Security Ownership of Certain Beneficial Owners and Management*


Item 13.	*Certain Relationships and Related Transactions*


Item 14.	*Exhibits, Financial Statement Schedules and Reports on Form 8-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(2)
	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(3)
	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)(3)
	4.4	Form of Warrants to purchase an aggregate of 2,512,188 shares of Common Stock(2)
	4.5	Registration Rights Agreement among the Company and certain investors(2)
	4.6	Unit Purchase Agreement among the Company and the investors named therein(2)
	4.7	Indenture dated as of March 28, 2001 between Hawthorne Financial Corporation and Wilmington Trust Company, as Trustee(2)
	4.8	Certificate of Trust of HFC Capital Trust I(2)
	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(2)
	4.10	Capital Securities Certificate of HFC Capital Trust I(2)
	4.11	Common Securities Certificate of HFC Capital Trust I(2)
	4.12	Capital Securities Guarantee Agreement between Hawthorne Financial Corporation and Wilmington Trust Company, dated as of March 28, 2001(2)
	4.13	Common Securities Guarantee Agreement between Hawthorne Financial Corporation and Wilmington Trust Company, dated as of March 28, 2001(2)
	4.14	10.18% Junior Subordinated Deferrable Interest Debentures due June 8, 2031(2)
	4.15	Indenture dated as of November 28, 2001 between Hawthorne Financial Corporation and Wilmington Trust Company, as Trustee
	4.16	Certificate of Trust of HFC Capital Trust II
	4.17	Amended and Restated Trust Agreement of HFC Capital Trust II, among Hawthorne Financial Corporation, Wilmington Trust Company and the Administrative Trustees named therein dated as of November 28, 2001
	4.18	Capital Securities Certificate of HFC Capital Trust II
	4.19	Common Securities Certificate of HFC Capital Trust II
	4.20	Capital Securities Guarantee Agreement between Hawthorne Financial Corporation and Wilmington Trust Company, dated as of November 28, 2001
	4.21	Floating Rate Junior Subordinated Debt Securities due December 8, 2031
	4.22	HFC Capital Trust II Placement Agent Agreement
	10.1	Hawthorne Financial Corporation 2001 Stock Incentive Plan*
	10.2	Lease of corporate headquarters(4)
	10.3	Change in Control Agreements between Company and Simone Lagomarsino(5)*
	10.4	Change in Control Employment Agreement(5)*
	10.5	Deferred Compensation Plan(2)*
	10.6	Deferred Compensation Loan Agreement between Hawthorne and Karen Abajian(2)*


Signature		Date

/s/ SIMONE LAGOMARSINO Simone Lagomarsino Director, President, and Chief Executive Officer (Principal Executive Officer)		March 25, 2002
/s/ KAREN C. ABAJIAN Karen C. Abajian Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)		March 25, 2002
/s/ TIMOTHY R. CHRISMAN Timothy R. Chrisman Chairman of the Board		March 25, 2002
/s/ MARILYN G. AMATO Marilyn G. Amato Director		March 25, 2002
/s/ GARY W. BRUMMETT Gary W. Brummett Director		March 25, 2002
/s/ ANTHONY W. LIBERATI Anthony W. Liberati Director		March 25, 2002
/s/ HARRY F. RADCLIFFE Harry F. Radcliffe Director		March 25, 2002
/s/ HOWARD E. RITT Howard E. Ritt Director		March 25, 2002


						Capital in								Loan to
						Excess of								Employee
	Number of					Par Value-								Stock			Total
	Common			Common		Common		Retained			Treasury			Ownership			Stockholders’			Comprehensive
	Shares			Stock		Stock		Earnings			Stock			Plan			Equity			income
(In thousands)
Balance at January 1, 1999		5,190		$	52	$	40,349	$	41,150		$	(48	)	$	(79	)	$	81,424
Exercised stock options		110			1		576		—			—			—			577
Exercised warrants		26			—		56		—			—			—			56
Net income					—		—		10,200			—			—			10,200		$	10,200
Other					—		—		(32	)		—			—			(32	)
Repayments					—		—		—			—			79			79

Comprehensive Income					—		—		—			—			—			—		$	10,200

Balance at December 31, 1999		5,326			53		40,981		51,318			(48	)		—			92,304
Exercised stock options		236			3		1,114		—			—			—			1,117
Treasury stock		(387	)		—		—		—			(3,544	)		—			(3,544	)
Net income					—		—		14,284			—			—			14,284		$	14,284

Comprehensive Income					—		—		—			—			—			—		$	14,284

Balance at December 31, 2000		5,175			56		42,095		65,602			(3,592	)		—			104,161
Exercised stock options		84			—		443		—			—			—			443
Exercised warrants		269			3		15		—			—			—			18
Tax benefit for stock options exercised					—		1,971		—			—			—			1,971
Treasury stock		(168	)		—		—		—			(2,977	)		—			(2,977	)
Net income					—		—		16,833			—			—			16,833		$	16,833

Comprehensive Income					—		—		—			—			—			—		$	16,833

Balance at December 31, 2001		5,360		$	59	$	44,524	$	82,435		$	(6,569	)	$	—		$	120,449


	Use of Estimates in the Preparation of Financial Statements


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


		Principal		Original		Modified		Recognized
		Balance		Interest		Interest		Interest
(Dollars in thousands)
Year ended December 31, 2001:
	Permanent loans	$	4,702	$	469	$	381	$	381

Year ended December 31, 2000:
	Permanent loans	$	18,787	$	2,049	$	1,804	$	1,273

Year ended December 31, 1999:
	Development loans	$	5,072	$	684	$	681	$	392
	Permanent loans		29,766		3,319		2,842		1,636

		$	34,838	$	4,003	$	3,523	$	2,028